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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22495
PEROT SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 75-2230700
(State of incorporation) (I.R.S. Employer Identification No.)
12404 PARK CENTRAL DRIVE
DALLAS, TEXAS 75251
(Address of principal executive offices) (Zip Code)
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(REGISTRANT'S TELEPHONE NUMBER) (972) 340-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class A Common Stock New York Stock Exchange
Par Value $0.01 per share
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1999, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported on the New York Stock Exchange, was
approximately $1,822,438,500 (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding as of March 15,
1999: 86,587,543.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 1999 Annual Meeting of Stockholders.
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FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 25
Signatures.............................................................. 27
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ITEM 1. BUSINESS
OVERVIEW
This report 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," "forecasts," "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.
Perot Systems Corporation ("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 include 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 their 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.
Ross Perot and eight associates founded the Company in June 1988. Since
then, the Company has grown to over 6,000 associates with operations worldwide
as of December 31, 1998.
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. 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 its clients'
business objectives, and ultimately generate higher value for its 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.
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 and change control.
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 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 of
and planning for 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
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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.
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 provide
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.
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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.
- 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 it
typically delivers 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.
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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 employed
approximately 700 associates as of December 31, 1998, also serve as a location
to provide technology training and staffing pools for the Company's long-term
relationships.
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 personnel and leadership training through its TRAIN (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 December 31, 1998, the Company employed approximately 6,000
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 AG ("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
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an agreed annual fee, subject to bonuses and penalties of up to 15% of such fee
based on the Company's 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 27.3% and 27.2% of the Company's revenues were earned in
connection with services performed on behalf of UBS and its affiliates for the
years ended December 31, 1998 and 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 100,000 shares of Class B Common Stock
for $3.65 a share and 7,234,320 options to purchase shares of Class B Common
Stock for $1.125 an option (the "UBS Options"). UBS can exercise the UBS Options
at any time for $3.65 a share, subject to United States bank regulatory limits
on UBS's shareholdings. UBS exercised options to purchase 834,320 shares of
Class B Common Stock in September 1998. In addition to other limits set forth in
the Stock Agreement, the number of shares of 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 63,906 shares per month until January 1, 2002
and a rate of 58,334 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. 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. UBS cannot sell Class B Common
Stock, except for limited sales to UBS affiliates, until February 5, 2000.
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 that began
on January 1, 1997.
TERMINATION OF EAST MIDLANDS ELECTRICITY AGREEMENT
The Company has been providing services for East Midlands Electricity (IT)
Limited (together with its parent company, East Midlands Electricity plc, "EME")
under an Information Technology Services Agreement initially entered into on
April 8, 1992 (as amended, the "EME Agreement"). In July 1998, PowerGen plc
("PowerGen") acquired EME from Dominion Resources, Inc. Pursuant to EME's right
to terminate the EME Agreement following a change in control of EME, PowerGen
and EME have notified the Company that EME is terminating the EME Agreement
effective in October 1999. The Company does not expect the termination of the
EME Agreement to have a material effect on the Company's financial position,
results of operations or liquidity in 1999 and future years.
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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
DaimlerChrysler), 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.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See Note 12 to the Consolidated Financial Statements included elsewhere in
this report.
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.
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RISK FACTORS
You should carefully consider the following risk factors and warnings. 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
and 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 report, including our
consolidated financial statements and the related notes.
Loss of Major Clients Could Adversely Affect Our Business
Our ten largest clients accounted for approximately 65.7% of our revenue
for the year ended December 31, 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 1998.
Our largest client is UBS. Approximately 27.3% of our revenue came from
services performed on behalf of UBS for the year ended December 31, 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 11.7% of our revenue came from services performed on behalf
of East Midlands Electricity for the year ended December 31, 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. East Midlands Electricity has given us
notice that it is terminating the EME Agreement in October 1999. See
"Termination of East Midlands Electricity Agreement".
After UBS and East Midlands Electricity, our next eight largest customers
accounted for approximately 26.7% of our revenue in 1998. Our success depends
substantially upon the retention of UBS 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 December 31, 1998, no contracts expired in 1998, one contract
(representing approximately $23 million in revenue during 1998) will expire in
1999, one contract (representing approximately $13 million in revenue during
1998) is scheduled to expire in 2000, and one contract (representing
approximately $30 million in revenue during 1998) is scheduled to expire in
2001. We do not expect that the long term contract that expires in 1999 will be
renewed. The contract that expires in 2001 was originally a short term agreement
expiring in 1998 that was extended for two years. 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 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
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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 "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 require 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 have issued a substantial number of options to purchase shares of Class
A Common Stock to our associates. We expect to continue to issue options to our
associates to reward performance and encourage retention. The exercise of any
additional options issued by us could adversely affect the prevailing market
price of the Class A Common Stock.
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.
Ross Perot's Stock Ownership Provides Substantial Control over Our Company
Ross Perot, our Chairman, President, and Chief Executive Officer, is the
managing general partner of HWGA, Ltd., a partnership that owned 31,705,000
shares of our Class A Common Stock as of March 15, 1999. Mr. Perot also owns
44,000 shares of our Class A Common Stock directly. Accordingly Mr. Perot,
primarily through HWGA, Ltd., controls approximately 34.8% 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 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.
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 those 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.
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<PAGE> 12
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 standards. In such situations, we are exposed to the
risk that we will incur significant unforeseen costs or such penalties in
performing the contract.
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 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 have taken steps to plan
for such costs, including setting up reserves and negotiating contract
provisions to address the issues. We cannot guarantee that these steps will be
sufficient, our estimates are accurate, or our reserves adequate. 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.
We expect to identify and resolve all Year 2000 Problems that could
materially adversely affect our business operations. However, our management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting us or our 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, our management believes that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies
for us and our clients that will divert management's time and attention
and financial and human resources from ordinary business activities;
- a lesser number of serious system failures that will require significant
efforts by us or our 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 our clients, which will be
resolved in the ordinary course of business; and
- a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Issues."
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.
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<PAGE> 13
Significant Unallocated Net Proceeds From Initial Public Offering
We have not designated any specific uses for the net proceeds of our
initial public offering which closed on February 5, 1999. 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 DaimlerChrysler),
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.
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;
- completing client projects;
- hiring, integrating, and utilizing associates;
- timing of new contracts;
- issuance of common shares and options to employees; and
- one time non-recurring and unusual charges.
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
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<PAGE> 14
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.
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 material intellectual property litigation. We may, however, be a
party to intellectual property 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.
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 have adopted 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
or that our Board of Directors determines to be adverse to the interests of the
stockholders. Accordingly, this plan could deter takeover attempts.
Some provisions of our Certificate of Incorporation and Bylaws and of
Delaware General Corporation 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 a 66 2/3% vote to amend our Certificate of Incorporation or
approve any merger or sale, lease, or exchange of all or substantially
all of our property and assets;
- require an 80% vote of the stockholders to amend our Bylaws;
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<PAGE> 15
- 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. Risks that affect
international operations include:
- 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 use forward exchange contracts
and other hedging techniques to help protect us from large swings in currency
exchange rates.
Availability of Significant Amounts of Class A Common Stock for Sale Could
Adversely Affect Its Market Price
Prior to our initial public offering, stockholders holding more than 90% of
the Common Stock then outstanding and approximately 90% of the then exercisable
options to purchase Common Stock executed lock-up agreements that limited their
ability to sell Common Stock. These stockholders have agreed not to sell or
otherwise dispose of any shares of Common Stock until August 1, 1999 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.
ITEM 2. PROPERTIES
As of December 31, 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 900,000 square feet of office
and other facilities and have expiration dates ranging from 1999 to 2016. Upon
expiration of its leases, the Company does not anticipate any significant
difficulty in obtaining renewals or alternative space. In addition to the leased
property referred to above, the Company occupies office space at 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
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<PAGE> 16
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, 1998 are disclosed in Note
13 to the Consolidated Financial Statements.
ITEM 3. 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.
On October 19, 1998, the Robert Plan Corporation ("Robert Plan") filed a
complaint, which was subsequently amended, in New York state court against the
Company and Ross Perot in connection with a September 1, 1990 contract under
which the Company provides data processing and software development needs for
some of Robert Plan's operations. The complaint, as amended, alleges breach of
the 1990 contract, misappropriation of Robert Plan's proprietary information and
business methods in connection with an imaging system, breach of warranty, and
similar claims relating to the contract. Although the complaint seeks
substantial monetary awards and injunctive relief, the 1990 contract
substantially limits each party's liability except in limited circumstances,
including for "wanton or willful misconduct." Accordingly, Robert Plan has
alleged that the Company has acted in a "wanton" and "willful" fashion, even
though Robert Plan has used and continues to use the services of the Company
under the 1990 contract. The Company believes that it has meritorious defenses
to Robert Plan's claims and intends to vigorously defend the lawsuit. The
Company does not believe that the outcome of this litigation will have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the New York Stock
Exchange. There was no public trading of the Company's Class A Common Stock
prior to February 2, 1999. At March 15, 1999 there were approximately 2,364
record holders of the Company's Class A Common Stock. All per share and common
stock data have been adjusted to reflect a two for one stock split effected in
the form of a stock dividend in January 1999. The Company has never paid
dividends on shares of its Class A Common Stock and has no current intention of
paying such dividends in the future.
The Company had its initial public offering (the "Offering") in February
1999. On February 1, 1999, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1, Registration No. 333-60755 (the
"Registration Statement"), relating to the Offering effective. The Offering
commenced on February 2, 1999. All of the shares of Class A Common Stock
registered pursuant to the Registration Statement were sold and the Offering has
been terminated. The managers for the Offering were Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce Fenner & Smith Incorporated, Warburg Dillon
Read LLC, Bear, Stearns & Co. Inc. and Hambrecht & Quist LLC.
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<PAGE> 17
The Company registered 7,475,000 shares (including 975,000 shares subject
to the over-allotment option) of its Class A Common Stock for sale in the
Offering. The Company has sold for its account all of the shares registered in
the Offering at a price of $16.00 per share. The total value (calculated using
the offering price) of all shares of Class A Common Stock registered was $119.6
million. The net proceeds of the Offering to the Company (after underwriting
commissions and discounts and other expenses) were approximately $109.3 million.
The effective date of the Registration Statement was after the ending date of
the reporting period covered by this Annual Report on Form 10-K. Therefore, no
expenses were incurred and proceeds of the Offering were not used between the
effective date of the Registration Statement and the ending date of the
reporting period covered hereby.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1998, 1997, 1996, 1995, and 1994 have been derived from the
Company's Consolidated Financial Statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors. 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 related Notes to the Consolidated Financial Statements, which are
included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Revenue............................................... $993.6 $781.6 $599.4 $342.3 $292.2
Direct cost of services............................... 787.9 636.3 461.2 268.6 239.4
------ ------ ------ ------ ------
Gross profit.......................................... 205.7 145.3 138.2 73.7 52.8
Selling, general and administrative expenses.......... 140.3 125.7 92.9 52.8 41.9
Goodwill impairment................................... 4.1 -- -- -- --
Purchased research and development.................... -- 2.0 4.0 -- --
------ ------ ------ ------ ------
Operating income...................................... 61.3 17.6 41.3 20.9 10.9
Interest income, net.................................. 4.2 0.6 0.8 1.3 --
Equity in earnings/(losses) of unconsolidated
affiliates.......................................... 7.9 4.1 (0.3) -- --
Write-down of nonmarketable equity securities......... -- (3.9) -- -- --
Other income/(expense)................................ 2.8 1.1 (1.6) (2.0) (0.8)
------ ------ ------ ------ ------
Income before taxes................................... 76.2 19.5 40.2 20.2 10.1
Provision for income taxes............................ 35.7 8.3 19.7 9.4 3.8
------ ------ ------ ------ ------
Net income............................................ $ 40.5 $ 11.2 $ 20.5 $ 10.8 $ 6.3
====== ====== ====== ====== ======
Basic earnings per common share(2).................... $ 0.53 $ 0.14 $ 0.27 $ 0.17 $ 0.10
Weighted average common shares outstanding(2)......... 76.9 78.3 74.1 62.3 61.4
Diluted earnings per common share(2).................. $ 0.42 $ 0.12 $ 0.24 $ 0.16 $ 0.09
Weighted average diluted common shares
outstanding(2)...................................... 97.1 95.2 84.3 66.7 64.6
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................. $144.9 $ 35.3 $ 27.5 $ 17.4 $ 9.2
Total assets.......................................... 382.1 267.1 232.2 130.5 90.3
Long-term debt(3)..................................... 1.5 2.9 5.2 6.1 10.0
Stockholders' equity.................................. 142.6 93.3 70.8 42.9 32.7
OTHER DATA:
Capital expenditures.................................. $ 25.7 $ 46.1 $ 27.5 $ 18.3 $ 10.3
</TABLE>
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<PAGE> 18
- ---------------
(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 herein.
(2) All common share numbers and per common share data reflect a two for one
stock split effected in January 1999.
(3) Amounts classified as long-term debt consist primarily of current and
long-term capital lease obligations.
ITEM 7. 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 which are included 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
include 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 1994 through 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. 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 $80.1 million for
1998.
The Company's top ten clients accounted for approximately 65.7% of total
revenue for the year ended December 31, 1998, 64.1% for the year ended December
31, 1997, and 68.3% for the year ended December 31, 1996. Approximately 35.5% of
the Company's total revenue was derived from international operations for the
year ended December 31, 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-effort"), 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 computing minutes
consumed ("unit-price"). Many of the Company's contracts combine more than one
of these types of provisions. The majority of revenue for the years ended
December 31, 1998 and 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
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<PAGE> 19
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.
Year 2000 engagements do not comprise a substantial portion of the
Company's business. For one Year 2000 project, the Company uses a zero estimate
of profit with equal amounts of revenue and cost recognized until the final
outcome of the engagement can be estimated more precisely because of the
inherent uncertainties regarding testability in the existing system environment
and client acceptance.
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 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 1998. A
significant portion of the growth in 1996 resulted from the Company's entry into
a strategic relationship with UBS AG ("UBS") in January 1996. The Company's
operating UBS relationship comprises two main components, a long-term
level-of-effort contract (the "IT Services Agreement") and various project
assignments. During the years ended December 31, 1998, 1997 and 1996,
approximately 24.0%, 21.7% and 22.9%, respectively, of the Company's revenues
were earned in connection with services performed under the IT Services
Agreement, and 3.3%, 5.5% and 5.3%, respectively, of the Company's revenues were
earned in connection with the various projects 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 14.1% in 1998.
The Company has been providing services for East Midlands Electricity (IT)
Limited (together with its parent company, East Midlands Electricity plc, "EME")
under an Information Technology Services Agreement initially entered into on
April 8, 1992 (as amended, the "EME Agreement"). In July 1998, PowerGen plc
("PowerGen") acquired EME from Dominion Resources, Inc. Pursuant to EME's right
to terminate the EME Agreement following a change in control of EME, PowerGen
and EME have notified the Company that EME is terminating the EME Agreement
effective in October 1999. The Company does not expect the termination of the
EME Agreement to have a material effect on the Company's financial position,
results of operations or liquidity in 1999 and future years.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
Revenue increased in 1998 by 27.1% to $993.6 million from $781.6 million in
1997, due to increases of $64.0 million from two significant contracts signed in
the second half of 1997, $58.4 million from UBS, $37.1 million from EME, $32.3
million from other new and existing contracts, $13.7 million from acquired
businesses, and $6.5 million from 1998 contract termination gains. During 1998,
revenue from UBS and EME totaled $270.9 million and $116.5 million,
respectively.
Domestic revenue grew by 23.4% in 1998 to $640.5 million from $519.1
million in 1997, and decreased slightly as a percentage of total revenue to
64.5% from 66.4% over the same period.
Non-domestic revenue, consisting of European and Asian operations, grew by
34.5% in 1998 to $353.1 million from $262.5 million in 1997, and increased as a
percentage of total revenue to 35.5% from 33.6% over the same periods. The
largest components of European operations were the United Kingdom, where revenue
increased by 34.7% in 1998 to $255.6 million from $189.8 million in 1997, and
Switzerland,
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where revenue increased by 15.2% in 1998 to $42.4 million from $36.8 million in
1997. Asian operations generated revenue of $17.8 million, and $9.7 million in
1998 and 1997, respectively.
Direct costs of services increased in 1998 by 23.8% to $787.9 million from
$636.3 million in 1997, due primarily to continued growth in the Company's
business. Gross margin increased to 20.7% in 1998 as compared to 18.6% in 1997.
The increase in gross margin was due in part to certain charges in 1997
including a contract loss provision 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 $4.3 million in
business integration expenses collectively representing a 2.3 percentage point
reduction to 1997 gross margin. In 1998, gross margin was impacted by a $16.0
million charge to address Year 2000 exposures for certain client contracts which
was partially offset by contract termination gains totaling $6.5 million
representing a net 1.0 percentage point reduction in gross margin.
Selling, general and administrative expenses increased in 1998 by 11.6% to
$140.3 million from $125.7 million in 1997, but decreased as a percentage of
total contract revenue to 14.1% from 16.1%, respectively. The most significant
savings in administrative expenses included reductions in executive
compensation, the cancellation of discretionary projects, and reductions in
marketing and promotional expenses, and non-essential travel. Operating income
increased in 1998 to $61.3 million from $17.6 million in 1997, and operating
margin (operating income as a percentage of contract revenue) increased to 6.2%
from 2.3%.
Equity in earnings of unconsolidated affiliates, net, increased in 1998 to
$7.9 million from $4.1 million in 1997 due to improved results at Systor AG
("Systor"), a subsidiary of UBS, and HCL Perot Systems N.V. ("HPS"), a software
joint venture based in India. The equity in earnings for Systor increased to
$5.0 million from $3.6 million and equity in earnings for HPS increased to $2.7
million from $0.5 million in 1998 and 1997, respectively. Other income/(expense)
increased in 1998 to $2.8 million from $1.1 million in 1997 primarily due to a
$3.0 million gain on the sale of the Company's limited partnership interest in a
venture capital fund in 1998, offset in part by the $0.7 million loss on the
sale of a subsidiary and a $0.4 million decrease in foreign exchange gains from
1997 to 1998.
The increase in the effective tax rate to 46.9% in 1998 from 42.5% in 1997
was due primarily to non-deductible goodwill write-downs recorded in 1998.
Excluding the write-downs, the effective rate would have been 44.5%.
Net income increased 261.6% in 1998 to $40.5 million from $11.2 million in
1997 and net income margin increased to 4.1% from 1.4%. The termination of the
EME contract is not expected to have a material impact on the Company's results
of operations in 1999 and future years.
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 UBS, $60.2 million in revenue
representing the inclusion of a full year's results from 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. The largest components of European operations were the United Kingdom,
where revenue increased by 50.5% in 1997 to $189.8 million from $126.1 million
in 1996, and Switzerland, where revenue decreased by 4.1% in 1997 to $36.8
million from $38.4 million in 1996. Asian operations generated revenue of $9.7
million and $7.3 million, 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
18
<PAGE> 21
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 effect 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.
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 by 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%.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, cash and cash equivalents increased 310.5% to $144.9 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 $113.9 million from
$71.0 million in 1998 and 1997, respectively. The increase in cash flow from
operating activities was due primarily to the $53.3 million increase in current
liabilities such as accrued liabilities and accrued compensation, offset in part
by a $28.4 million increase in current assets consisting primarily of increased
accounts receivable.
Net cash used in investing activities was $11.1 million in 1998 compared to
$65.9 million in 1997. Cash expenditures for property, equipment, and software
in 1998 was $25.4 million and was partially offset by $7.9 million in proceeds
from the sale of property, equipment and software and the sale of the Company's
limited partnership interest in a venture capital fund for $5.2 million. In
1997, there were $46.1 million in cash expenditures for property, equipment and
software, $13.7 million in cash used for business acquisitions and $5.6 million
for the acquisition of intellectual property rights. The year-on-year decline of
44.8% in property, equipment and software purchases was due in part to more
rigorous capital expenditure review procedures, which were implemented in the
fourth quarter of 1997.
19
<PAGE> 22
In 1998, net cash provided by financing activities was approximately $4.2
million, compared to $4.4 million in 1997. The Company received proceeds of $8.1
million from the sale of Class B Common Stock options to UBS in 1997 and $3.0
million in proceeds from the exercise of 834,320 of such stock options in 1998.
In addition, the Company received $3.6 million in proceeds from the issuance of
treasury stock in 1998 compared to $1.1 million in 1997 in connection with the
increased exercise of stock options by employees. The principal payments on debt
and capital lease obligations decreased to $1.4 million in 1998 from $3.7
million in 1997.
On February 2, 1999, the Company completed an initial public offering of
7,475,000 shares of Class A Common Stock at an initial public offering price of
$16.00 per share. Net proceeds to the Company were approximately $109.3 million.
As of December 31, 1998, the Company had a $40.0 million undrawn line of
credit with a financial institution that expired on January 31, 1999. The
Company did not renew this line of credit and anticipates that cash flows from
operating activities and proceeds from our initial public offering will provide
sufficient funds to meet its 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 1998, the FASB issued SFAS No. 133 ("Statement 133"), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Statement 133 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. Statement 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management does not believe the implementation of Statement 133 will have a
material effect on the Company's consolidated financial position or results of
operations.
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. Management does not believe the implementation of SOP
98-1 will have a material effect on the Company's consolidated financial
position or results of operations.
YEAR 2000 ISSUES
The following statements and all other statements made herein with respect
to the Company's Year 2000 processing capabilities or readiness are "Year 2000
Readiness Disclosures" in conformance with the Year 2000 Information and
Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386).
Some computers, software, and other equipment include 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 has organized a program team responsible for
monitoring the assessment and remediation status of the Company's Year 2000
20
<PAGE> 23
projects and reporting such status to the Company's Board of Directors. This
project team is currently assessing the potential effect 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 clients. In addition, the
Company is performing Year 2000 assessments and remediation for some other
clients on a project-by-project basis.
For reporting purposes, the Company is using a methodology involving the
following six phases: Discovery, Assessment, Planning, Remediation, Testing, and
Implementation. At February 28, 1999, the discovery and assessment phases were
substantially complete for all program areas. The target completion dates for
priority items by remaining steps are as follows: Planning -- May 1999;
Remediation -- September 1999; Testing -- September 1999; and Implementation --
September 1999.
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, its corrections of Year 2000 Problems, or the costs
associated with these activities. However, the Company's Year 2000 program 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.
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 cost 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 $0.8 million, almost all of which the Company believes will be
incurred during 1999. This estimate is being monitored and will be revised as
additional information becomes available. In addition, the Company recorded a
$16.0 million charge in direct cost of services in 1998 to address Year 2000
expenses for certain client contracts.
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. In addition, the Company has not deferred any
material information technology projects as a result of its Year 2000 Problem
activities.
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. 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 generally 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.
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 clients 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
21
<PAGE> 24
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 clients. 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 believes that the following consequences are possible:
- 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 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 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 is in the process
of preparing contingency plans and expects to complete its contingency plans by
the end of May 1999. 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; 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. In addition, the Company may
accelerate planned purchases of capital assets and increase the number of
unassigned personnel to allow the Company to respond more rapidly to any Year
2000 problems that do arise. 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; 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.
Notwithstanding any contingency plans the Company may develop, prolonged
disruptions in electricity, telecommunications or other utility or
transportation systems will have a material adverse effect on the Company's
financial condition and results of operations.
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 affected by, among
other things, the
22
<PAGE> 25
availability and cost of programming and testing resources, third party
suppliers' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
EFFECT OF EUROPEAN MONETARY UNION
Effective January 1, 1999, the European Union adopted economic and monetary
union in Europe, resulting in the introduction of a single currency called the
EURO. The Company is currently assessing the potential effects of, and costs of
adopting, the EURO conversion for its internal systems and, where the Company is
contractually obligated to take these steps, on systems operated or maintained
on behalf of its clients. For each of these areas, the Company is using the six
phase methodology described above for the Year 2000 Problem. The Company has
substantially completed the discovery phase and the EURO conversion is not
expected to have a material effect on the Company's operations, financial
condition or results of operations.
The discussion of the Company's efforts, and management's expectations,
relating to the EURO conversion are forward-looking statements. The Company's
ability to adapt for the EURO conversion and the level of incremental costs
associated therewith could be adversely affected by, among other things, the
availability and cost of programming and testing resources and unanticipated
problems identified in the ongoing conversion review.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index....................................................... F-1
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997
and 1996.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997
and 1996.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7 to F-32
</TABLE>
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
The Financial Statement Schedule is submitted as Exhibit 99(a) to this
Annual Report on Form 10-K.
Schedules other than that listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the financial statements or related notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All other information required by Items 10, 11, 12, and 13, is incorporated
by reference to the registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on May 17, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998.
24
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) and (2) Financial Statements and Financial Statement Schedule
The consolidated financial statements of Perot Systems Corporation and
subsidiaries and the required financial statement schedule are incorporated
by reference in Part II, Item 8 of this report.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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
4.3* Form of Certificate of Designation, Preferences, and Rights
of Series A Junior Participating Preferred Stock (included
as Exhibit A-1 to the Rights Agreement)
4.4* Form of Certificate of Designation, Preferences, and Rights
of Series B Junior Participating Preferred Stock (included
as Exhibit A-2 to the Rights Agreement)
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 Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ Form of Option Agreement (Advisor Stock Option/Restricted
Stock Incentive Plan)
10.11** Promissory Note in the principal amount of $70,000, dated
March 10, 1996, made by Joseph E. Boyd payable to the
Company.
10.12+ Stock Option Grant dated as of June 27, 1995 by the Company
in favor of James A. Cannavino
10.13+ Employment Agreement dated as of September 16, 1995 by and
between the Company and James A. Cannavino
10.14+ Promissory Note dated December 18, 1995 made by James A.
Cannavino in favor of the Company in the principal amount of
$1,400,000
10.15+ Promissory Note dated January 1, 1996 made by James A.
Cannavino in favor of the Company in the principal amount of
$1,500,000
10.16+ Pledge Agreement made as of December 18, 1995 by James A.
Cannavino in favor of the Company
10.17+ Modification Agreement dated as of March 7, 1997 between the
Company and James A. Cannavino
10.18+ Deed of Trust dated April 15, 1997 made by James A.
Cannavino in favor of the Company
10.19+ Promissory Note dated April 14, 1997 made by James A.
Cannavino in favor of the Company
10.20+ Associate Agreement dated July 8, 1996 between the Company
and James Champy
10.21+ Restricted Stock Agreement dated July 8, 1996 between the
Company and James Champy
10.22+ Letter Agreement dated July 8, 1996 between James Champy and
the Company
10.23+ Promissory Note dated June 17, 1996 made by Guillermo G.
Marmol in favor of the Company
10.24+ Pledge 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.
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.27+ Amended and Restated PSC Stock Option and Purchase Agreement
dated April 24, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.30 to the
Company's Form 10 dated April 30, 1997)
10.28+ Amended and Restated Master Operating Agreement dated
January 1, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.31 to the
Company's Form 10 dated April 30, 1997)
10.29+ Amended and Restated Agreement for EPI Operational
Management Services dated January 1, 1997 (incorporated by
reference to Exhibit 10.32 to the Company's Form 10 dated
April 30, 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* 1999 Employee Stock Purchase Plan
10.33* Form of Amended and Restated 1991 Stock Option Plan
10.34* Form of Amended Stock Option Agreement
10.35** Pledge Agreement dated May 10, 1996, between the Company and
Joseph E. Boyd.
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
10.38* Agreement dated September 26, 1997 among the Company, Ken
Scott, and NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 10.40 to the Company's Registration
Statement on Form S-1, Registration No. 333-60755)
10.39* Promissory Note dated September 26, 1997 made by Ken Scott
in favor of NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1, Registration No. 333-60755)
10.40* Promissory Note dated September 26, 1997 made by Ken Scott
in favor of the Company (incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement on
Form S-1, Registration No. 333-60755)
21** Subsidiaries of the Registrant
23.1** Consent of PricewaterhouseCoopers LLP dated March 22, 1999
23.2** Report of PricewaterhouseCoopers LLP on the financial
statement schedule dated March 4, 1999
27** Financial Data Schedule
27.a** Restated Financial Data Schedule for September 30, 1998
27.b** Restated Financial Data Schedule for June 30, 1998
27.c** Restated Financial Data Schedule for March 31, 1998
99(a)** Schedule VIII -Valuation and Qualifying Accounts
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-60755, to the exhibit of the same number except as
otherwise indicated.
** Filed herewith.
+ Incorporated by reference to the Company's Form 10 dated April 30, 1997 to
the exhibit of the same number except as otherwise indicated.
B. There were no reports on Form 8-K filed during the fourth quarter of 1998.
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEROT SYSTEMS CORPORATION
By: /s/ ROSS PEROT
----------------------------------
Ross Perot,
Chairman, President and
Chief Executive Officer
Dated: March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROSS PEROT Chairman, President and March 22, 1999
- --------------------------------------------- Chief Executive Officer
Ross Perot (Principal Executive Officer)
/s/ JAMES CHAMPY Vice President and Director March 22, 1999
- ---------------------------------------------
James Champy
/s/ TERRY ASHWILL Vice President and Chief Financial March 22, 1999
- --------------------------------------------- Officer (Principal Financial and
Terry Ashwill Accounting Officer)
/s/ STEVEN BLASNIK Director March 22, 1999
- ---------------------------------------------
Steven Blasnik
/s/ ROSS PEROT, JR. Director March 22, 1999
- ---------------------------------------------
Ross Perot, Jr.
/s/ WILLIAM K. GAYDEN Director March 22, 1999
- ---------------------------------------------
William K. Gayden
/s/ CARL HAHN Director March 22, 1999
- ---------------------------------------------
Carl Hahn
</TABLE>
27
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index....................................................... F-1
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997
and 1996.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997
and 1996.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7 to F-32
</TABLE>
F-1
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Perot Systems Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Perot Systems Corporation and Subsidiaries (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 4, 1999
F-2
<PAGE> 32
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $144,907 $ 35,298
Accounts receivable, net.................................. 115,441 105,230
Prepaid expenses and other................................ 15,963 12,578
Deferred income taxes..................................... 32,081 24,962
-------- --------
Total current assets................................... 308,392 178,068
Property, equipment and purchased software, net............. 39,508 50,703
Investments in and advances to unconsolidated affiliates.... 16,324 10,218
Goodwill, net............................................... 5,587 16,596
Other assets................................................ 12,335 11,518
-------- --------
Total assets........................................... $382,146 $267,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and
long-term debt......................................... $ 883 $ 1,367
Accounts payable.......................................... 41,824 35,760
Income taxes payable...................................... 16,420 10,287
Accrued liabilities....................................... 118,147 76,040
Deferred revenue.......................................... 9,397 23,258
Accrued compensation...................................... 49,982 23,449
-------- --------
Total current liabilities.............................. 236,653 170,161
Capital lease obligations and long-term debt, less current
maturities................................................ 661 1,532
Other long-term liabilities................................. 2,249 2,094
-------- --------
Total liabilities...................................... 239,563 173,787
-------- --------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock; par value $.01; authorized
200,000,000 shares; outstanding 77,126,048 and
76,455,414 shares, 1998 and 1997, respectively......... 811 811
Class B Convertible Common Stock; par value $.01;
authorized 24,000,000 shares; issued and outstanding
934,320 and 100,000 shares, 1998 and 1997,
respectively........................................... 9 1
Additional paid-in capital................................ 72,936 61,140
Other stockholders' equity................................ 68,128 32,158
Accumulated other comprehensive income.................... 699 (794)
-------- --------
Total stockholders' equity............................. 142,583 93,316
-------- --------
Total liabilities and stockholders' equity............. $382,146 $267,103
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 33
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue.................................................. $993,589 $781,621 $599,438
Costs and expenses:
Direct cost of services................................ 787,877 636,296 461,192
Selling, general and administrative expenses........... 140,262 125,732 92,997
Goodwill impairment.................................... 4,135 -- --
Purchased research and development..................... -- 2,000 3,948
-------- -------- --------
Operating income......................................... 61,315 17,593 41,301
Interest income.......................................... 4,471 1,916 1,540
Interest expense......................................... (245) (1,282) (770)
Equity in earnings/(losses) of unconsolidated
affiliates............................................. 7,933 4,136 (312)
Write-down of nonmarketable equity securities............ -- (3,900) --
Other income/(expense)................................... 2,732 1,045 (1,608)
-------- -------- --------
Income before taxes...................................... 76,206 19,508 40,151
Provision for income taxes............................... 35,741 8,291 19,652
-------- -------- --------
Net income............................................... $ 40,465 $ 11,217 $ 20,499
======== ======== ========
Basic and diluted earnings per common share:
Basic earnings per common share........................ $ 0.53 $ 0.14 $ 0.27
Weighted average common shares outstanding............. 76,882 78,336 74,110
Diluted earnings per common share...................... $ 0.42 $ 0.12 $ 0.24
Weighted average diluted common shares outstanding..... 97,142 95,192 84,342
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 34
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
COMMON PAID-IN RETAINED TREASURY FROM STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK STOCKHOLDERS OTHER* EQUITY
------ ---------- -------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996..................... $678 $30,761 $ 7,778 -- $(3,658) $ 7,318 $ 42,877
Issuance of Class A shares for business
acquired (2,920,744 shares)................. 29 6,516 -- -- -- -- 6,545
Issuance of Class A shares under incentive
plans (5,285,248 shares).................... 53 6,494 -- -- (3,065) -- 3,482
Exercise of stock options for Class A shares
(3,227,776 shares).......................... 32 1,149 -- -- -- -- 1,181
Exercise of stock options for Class A shares
(408,660 shares)............................ -- -- -- 313 -- -- 313
Shares repurchased (4,000,000 shares)........ -- -- -- -- -- (8,500) (8,500)
Class A shares repurchased (408,660
shares)..................................... -- -- -- (313) 225 -- (88)
Amortization of deferred compensation........ -- -- -- -- -- 150 150
Options issued for contract rights........... -- 4,544 -- -- -- (4,544) --
Amortization of contract rights.............. -- -- -- -- -- 202 202
Dividends paid and accrued................... -- -- (447) -- -- (446) (893)
Note repayments.............................. -- -- -- -- 2,212 -- 2,212
Equity investment............................ -- 706 -- -- -- -- 706
Tax benefit of employee options exercised.... -- 895 -- -- -- -- 895
Net income................................... -- -- 20,499 -- -- -- 20,499
Other comprehensive income
Translation adjustment...................... -- -- -- -- -- 1,181 1,181
--------
Comprehensive income......................... 21,680
---- ------- ------- ------- ------- ------- --------
Balance, December 31, 1996................... $792 $51,065 $27,830 -- $(4,286) $(4,639) $ 70,762
Issuance of Class A shares for business
acquired (740,000 shares)................... 8 2,693 -- -- -- -- 2,701
Issuance of options for business acquired.... -- 1,500 -- -- -- -- 1,500
Issuance of Class A shares under incentive
plans (1,026,942 shares).................... 11 1,930 -- -- (1,427) -- 514
Issuance of Class A shares under incentive
plans (210,000 shares)...................... -- -- -- 263 -- -- 263
Exercise of stock options for Class A shares
(35,000 shares)............................. -- (350) -- -- -- -- (350)
Exercise of stock options for Class A shares
(1,274,040 shares).......................... -- -- -- 1,215 (39) -- 1,176
Class A shares repurchased (6,078,264
shares)..................................... -- -- -- (5,344) 2,603 -- (2,741)
Sale of Class B stock and options to UBS
(100,000 shares)............................ 1 8,502 -- -- -- -- 8,503
Amortization of deferred compensation........ -- -- -- -- -- 256 256
Reversal of deferred compensation............ -- (1,050) -- -- -- 1,050 --
Amortization of contract rights.............. -- -- -- -- -- 196 196
Elimination of contract rights............... -- (4,146) -- -- -- 4,146 --
Note repayments and other.................... -- (125) -- (84) 210 -- 1
Tax benefit of employee options exercised.... -- 1,121 -- -- -- -- 1,121
Net income................................... -- -- 11,217 -- -- -- 11,217
Other comprehensive income
Translation adjustment...................... -- -- -- -- -- (1,803) (1,803)
--------
Comprehensive income......................... 9,414
---- ------- ------- ------- ------- ------- --------
Balance, December 31, 1997................... $812 $61,140 $39,047 $(3,950) $(2,939) $ (794) $ 93,316
Issuance of Class A shares under incentive
plans (16,712 shares)....................... -- 216 -- -- -- -- 216
Issuance of Class A shares under incentive
plans (80,000 shares)....................... -- -- -- 54 -- -- 54
Exercise of stock options for Class A shares
(2,312,902 shares).......................... -- 337 -- 1,825 (192) -- 1,970
Exercise of stock options for Class B shares
(834,320 shares)............................ 8 3,037 -- -- -- -- 3,045
Class A shares repurchased (1,738,980
shares)..................................... -- -- -- (3,755) 1,077 -- (2,678)
Note repayments and other.................... -- 517 -- 11 139 -- 667
Tax benefit of employee options exercised.... -- 3,467 -- -- -- -- 3,467
Deferred compensation, net of amortization... -- 4,222 -- -- -- (3,654) 568
Net income................................... -- -- 40,465 -- -- -- 40,465
Other comprehensive income
Translation adjustment...................... -- -- -- -- -- 1,493 1,493
--------
Comprehensive income......................... 41,958
---- ------- ------- ------- ------- ------- --------
Balance, December 31, 1998................... $820 $72,936 $79,512 $(5,815) $(1,915) $(2,955) $142,583
==== ======= ======= ======= ======= ======= ========
</TABLE>
- ---------------
* The Other balance as of December 31, 1995 includes $8,946 preferred stock,
($172) accumulated other comprehensive income, and ($1,456) deferred
compensation.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 35
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 40,465 $ 11,217 $ 20,499
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 37,514 35,363 18,715
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 --
Loss on sale of business.................................. 646 -- --
Equity in (earnings)/losses of unconsolidated
affiliates.............................................. (7,933) (4,136) 312
Change in deferred income taxes........................... (6,120) (10,423) (16,044)
Other..................................................... 891 455 860
Changes in assets and liabilities (net of effects from
acquisition of businesses):
Accounts receivable....................................... (11,845) 16,039 (43,184)
Prepaid expenses.......................................... (3,508) (3,010) (4,037)
Other assets.............................................. (1,231) 5,843 (837)
Accounts payable and accrued liabilities.................. 45,085 13,244 39,401
Income taxes payable...................................... 9,476 (3,550) 7,998
Deferred revenue.......................................... (13,912) 372 15,388
Accrued compensation...................................... 26,008 3,295 9,852
Other long-term liabilities............................... 53 (3,260) (3,095)
-------- -------- --------
Total adjustments....................................... 73,416 59,755 33,433
-------- -------- --------
Net cash provided by operating activities............... 113,881 70,972 53,932
-------- -------- --------
Cash flows from investing activities:
Purchase of property, equipment and software.............. (25,424) (46,054) (27,534)
Proceeds from sale of property, equipment and software.... 7,852 2,366 713
Proceeds from sale of nonmarketable equity securities..... 5,162 -- --
Proceeds from sale of business............................ 893 -- --
Investments in and advances to minority interests......... 744 (2,891) (5,536)
Acquisition of intellectual property rights............... -- (5,623) --
Acquisition of businesses, net of cash acquired of $665 in
1997 and $149 in 1996................................... -- (13,721) (9,520)
Other..................................................... (372) -- --
-------- -------- --------
Net cash used in investing activities................... (11,145) (65,923) (41,877)
-------- -------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease
obligations............................................. (1,380) (3,725) (2,162)
Proceeds from issuance of common stock.................... 3,045 381 4,686
Proceeds from sale of stock options....................... -- 8,139 --
Repayment of stockholder notes receivable................. 193 266 2,212
Proceeds from issuance of treasury stock.................. 3,582 1,125 197
Purchase of treasury stock................................ (950) (1,834) (88)
Redemption of preferred stock............................. -- -- (8,500)
Dividends paid on preferred stock......................... -- -- (893)
Other..................................................... (307) -- --
-------- -------- --------
Net cash provided by (used in) financing activities..... 4,183 4,352 (4,548)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,690 (1,619) 2,652
-------- -------- --------
Net increase in cash and cash equivalents................... 109,609 7,782 10,159
Cash and cash equivalents at beginning of year.............. 35,298 27,516 17,357
-------- -------- --------
Cash and cash equivalents at end of year.................... $144,907 $ 35,298 $ 27,516
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 36
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. These estimates involve judgments with respect to, among other things,
various future economic factors which are difficult to predict and are beyond
the control of the Company. Therefore, actual amounts could differ from these
estimates.
CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
REVENUE RECOGNITION
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
F-7
<PAGE> 37
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Year 2000 engagements do not comprise a substantial portion of the
Company's business. For one Year 2000 project, the Company uses a zero estimate
of profit with equal amounts of revenue and cost recognized until the final
outcome of the engagement can be estimated more precisely because of the
inherent uncertainties regarding testability in the existing system environment
and client acceptance.
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 comprises 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
$569 and $3,243 in 1998 and 1997, respectively. The 1997 amount included $2,000
related to the write-off of purchased research and development.
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 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
F-8
<PAGE> 38
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 $68,718 at December 31, 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
$149,381 and $114,534, respectively, as of December 31, 1998 and $95,600 and
$73,490, respectively, as of December 31, 1997.
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 currency 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 $360, $736 and ($1,715) for the years ended December 31,
1998, 1997 and 1996, 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 customers that 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. Management does not believe that any single
customer, industry or geographic area represents significant credit risk.
No customers accounted for over 10% of the Company's accounts receivables
at December 31, 1998. One customer accounted for 11% and 27% of the Company's
accounts receivables at December 31, 1997 and 1996, respectively.
F-9
<PAGE> 39
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 and 1996 amounts in the accompanying financial
statements have been reclassified to conform to the current presentation.
Certain stockholders' equity share numbers for 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."
ACCOUNTING STANDARD ISSUED
In June 1998, the FASB issued SFAS No. 133 ("Statement 133") which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Statement 133 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. Statement 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management does not believe the implementation of Statement 133 will have a
material effect on the Company's financial position or results of operations.
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
F-10
<PAGE> 40
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
would have been capitalized had this SOP been in effect when those costs were
incurred. Management does not believe the implementation of SOP 98-1 will have a
material effect on the Company's financial position or results of operations.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Amounts billed.............................................. $ 68,589 $ 77,119
Amounts to be invoiced...................................... 29,999 22,409
Recoverable costs and profits............................... 4,926 2,798
Other....................................................... 13,280 4,089
Allowance for doubtful accounts............................. (1,353) (1,185)
-------- --------
$115,441 $105,230
======== ========
</TABLE>
With regard to amounts billed, allowances for doubtful accounts are
provided based on specific identification where less than full recovery of
accounts receivable is expected. Amounts to be invoiced represent revenue
contractually earned for services performed, which are invoiced to the customer
in the following month. Recoverable costs and profits represent amounts
previously recognized as revenue, that have not yet been billed, in accordance
with the contract terms. In certain cases, the period of recovery may extend
beyond one year. However, classification of these amounts within current assets
has been made in accordance with common industry practice. It is anticipated
that $3,383 of the recoverable costs and profits will be billed in 1999, $1,034
will be billed in 2000, $509 will be billed in 2001.
F-11
<PAGE> 41
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT AND PURCHASED SOFTWARE
Property and equipment and purchased software consist of the following as
of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Owned assets:
Computer equipment........................................ $ 52,242 $ 68,188
Furniture and equipment................................... 23,049 24,193
Leasehold improvements.................................... 16,065 11,070
Automobiles............................................... 640 669
-------- --------
91,996 104,120
Less accumulated depreciation and amortization......... (60,725) (62,808)
-------- --------
31,271 41,312
-------- --------
Assets under capital leases:
Computer equipment........................................ 1,164 1,735
Furniture and equipment................................... 1,582 1,582
-------- --------
2,746 3,317
Less accumulated depreciation and amortization......... (2,486) (2,909)
-------- --------
260 408
-------- --------
Property and equipment, net................................. $ 31,531 $ 41,720
======== ========
Purchased software.......................................... $ 32,094 $ 28,635
Less accumulated amortization............................. (24,117) (19,652)
-------- --------
Purchased software, net..................................... $ 7,977 $ 8,983
======== ========
</TABLE>
Depreciation and amortization expense for property, equipment and purchased
software was $26,975, $29,500 and $18,180 for the years ended December 31, 1998,
1997 and 1996, respectively.
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, 1998 are
included in the accompanying 1997 and 1998 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.
F-12
<PAGE> 42
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 740,000 shares of the Company's
Class A Common Stock, and $1,500 in the form of 1,100,000 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 100% 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, 1998 are included in the accompanying 1996, 1997 and 1998
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 2,920,744 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.
In July 1998, the Company sold its equity interest in Doblin. Under the
terms and conditions of the divestiture agreement, the Company received $893 in
cash, $1,182 in the form of 120,000 shares of the Company's Class A Common
Stock, and a $59 note receivable. The impact of the sale was immaterial to the
results of operations for the year ended December 31, 1998.
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............................. 0.14 0.21
Diluted earnings per common share........................... 0.12 0.19
</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.
During 1998, the Company determined that certain amounts recorded for
goodwill, primarily from the acquisition of Stamos, was impaired and no longer
recoverable. The determination was made based on
F-13
<PAGE> 43
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
management's best estimates of the undiscounted future operating cash flows over
the remaining useful life of the goodwill. From this analysis, an impairment
loss was calculated as the difference between the carrying amount of the
goodwill and the fair value of the asset, based on discounted estimated future
cash flows. Goodwill impairments included in the accompanying statement of
operations totaled $4,135 consisting of primarily a write-off of Stamos goodwill
of $3,970. The Stamos goodwill write-off was due primarily to an expected
decline in future cash flows resulting from the departure of certain key
employees during 1998.
At December 31, 1998 and 1997, goodwill of $5,587 and $16,596, net of
$17,535 and $6,309 in accumulated amortization, respectively, related solely to
1997 and 1996 business acquisitions.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND MINORITY INTERESTS
At December 31, 1998, investments in and advances to unconsolidated
affiliates include three equity investments. 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 December 31, 1998 and 1997 was $11,434 and
$7,188, respectively. Summarized financial data for Systor is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets.............................................. $135,959 $ 99,976
Noncurrent assets........................................... 9,348 11,134
Current liabilities......................................... 116,637 95,149
Noncurrent liabilities...................................... -- --
Revenue..................................................... 159,693 142,307
Operating income............................................ 14,570 8,116
Net income.................................................. 13,260 9,118
</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 N.V. ("HPS"), an information technology services company based in
India. The Company contributed capital of $500 to HPS during 1997 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 December 31, 1998 and 1997 was $4,456
and $1,742, respectively. HPS provided subcontractor services to the Company
totaling $26,808 and $10,267 for 1998 and 1997, respectively.
On August 1, 1998, the Company entered into a joint venture with the Bank
of Ireland whereby the Company owns 49% of Perot Systems Information Resource
(Ireland) Limited, a Dublin-based entity providing data center and other related
services. The Company made a capital contribution of $372 to the joint venture
in July 1998.
In June 1998, Systor declared a cash dividend. The Company received the 40%
share, or $804, in August 1998. No dividends or distributions were received from
investments in unconsolidated affiliates in 1997. The amount of undistributed
earnings from investments in unconsolidated affiliates recorded in retained
earnings was $12,189 and $5,060 for 1998 and 1997, 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 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.
F-14
<PAGE> 44
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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
400,000 shares of the preferred stock for $400 in June 1997. Due to certain
anti-dilution provisions, the Company received additional shares bringing the
total number of shares to 2,417,000, representing approximately a 6% equity
interest at December 31, 1998. As part of the purchase agreement, the Company
was subject to a call option, which, if exercised, would require the Company to
purchase additional shares for a commitment of up to $1,000. During the third
quarter of 1998, the Company's commitment terminated.
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 December 31, 1998 and 1997. This facility expired July 31,
1998 and was renewed pursuant to the same terms until January 31, 1999. The
Company did not renew the facility subsequent to this expiration.
F-15
<PAGE> 45
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Operating expenses.......................................... $ 65,910 $33,160
Taxes other than income, insurance, rents, licenses and
maintenance............................................... 6,733 3,433
Other contract-related...................................... 45,504 39,447
-------- -------
$118,147 $76,040
======== =======
</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. An expense of $16,015 was recorded in 1998 to address Year
2000 exposure for certain customer contracts.
9. CAPITAL LEASE OBLIGATIONS AND LONG-TERM DEBT
Capital lease obligations and long-term debt consist of the following as of
December 31:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Computer equipment and furniture capital leases containing
various payment terms through January 2000 with implicit
interest rates ranging from 8.0% to 15.20%................ $ 391 $ 1,308
Notes payable for software and software license transfer
rights, hardware and automobiles financed at various rates
from 6.0% to 11.48%, payable in monthly installments
through July 2001......................................... 1,153 1,591
------ -------
1,544 2,899
Less current maturities..................................... (883) (1,367)
------ -------
$ 661 $ 1,532
====== =======
</TABLE>
Capital lease payments and long-term debt maturities for years ending after
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE LONG-TERM
OBLIGATIONS DEBT
------------- ---------
<S> <C> <C>
1999........................................................ $331 $ 569
2000........................................................ 77 399
2001........................................................ -- 185
---- ------
Total minimum lease payment and long-term debt maturities... $408 $1,153
======
Less amounts representing interest.......................... (17)
----
Present value of net minimum capital lease payments......... $391
====
</TABLE>
F-16
<PAGE> 46
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In July 1998, the Board of Directors of the Company approved an amendment
to the Company's Certificate of Incorporation which authorized 5,000,000 shares
of Preferred Stock, the rights, designations, and preferences of which may be
designated from time to time by the Board of Directors.
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 Series A Preferred Stock was subsequently removed from the Company's
charter in 1997.
COMMON STOCK AND CONVERTIBLE LIQUIDATION PREFERENCE COMMON STOCK
In July 1998, the Board of Directors of the Company approved an amendment
to the Company's Certificate of Incorporation which included an increase in
authorized number of shares of Class A Common Stock to 200,000,000 from
100,000,000 shares. The amendment was approved by stockholders in August 1998.
At December 31, 1998, there were 81,066,350 shares issued and 77,126,048 shares
outstanding. At December 31, 1997, there were 81,049,638 shares issued and
76,455,414 shares outstanding and at December 31, 1996, there were 79,247,696
shares issued and outstanding. The Company is authorized to issue, under its
existing stock plans, up to 42,000,000 shares of Class A Common Stock. At
December 31, 1998, there were 36,224,248 shares outstanding under such plans. At
December 31, 1997 such plans had 35,172,414 shares outstanding and at December
31, 1996, there were 35,164,696 shares outstanding.
On January 5, 1999, the Company's Board of Directors declared a two-for-one
split of the Class A and Class B Common Stock to be effected in the form of a
stock dividend. The record date for the stock dividend was January 6, 1999 and
the distribution date was January 19, 1999. All share and per share amounts
included in these consolidated financial statements have been retroactively
adjusted to reflect this split.
Class B shares consist of 24,000,000 authorized shares of $0.01 par value
common stock, of which there are 934,320 shares issued and outstanding as of
December 31, 1998. At December 31, 1997, there were 100,000 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 32,000,000 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 32,000,000 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.
F-17
<PAGE> 47
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 retained a 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. The right of first refusal terminated on
February 2, 1999 (the "IPO Date") when the Class A shares became publicly
traded. The Company may repurchase unvested shares, and under certain
circumstances, vested shares of participants whose employment with the Company
terminates. The repurchase price under these provisions is determined by the
underlying agreement, generally the employees' cost plus interest at 8%. 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 and 1998. Pursuant to the 1991 Plan, options to
purchase the Company's Class A shares can be granted to eligible employees. Such
options were generally 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, and
based upon an independent third-party valuation. Subsequent to the IPO date,
fair value will be the New York Stock Exchange closing price on or after the
respective issuance dates. 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, there is generally a required 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 date one year after the
entire option grant has vested. Unexercised vested options are cancelled
following the expiration of a certain period after the employee leaves the
employment of the Company. Prior to the IPO date, the Company had 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 after the IPO date. For options granted
on or after July 20, 1998, the Plan was amended to provide for immediate vesting
in the event of death or total disability as defined in the Plan.
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, and 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.
F-18
<PAGE> 48
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 800,000 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 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, 120,000 options were granted under the plan
and no options were granted in 1998.
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
option grants under the plan is calculated at the time of issuance and amortized
ratably over the vesting period as compensation expense. In 1998 and 1997,
30,000 and 48,000 options were granted under the plan, respectively.
OTHER STOCK AND OPTION ACTIVITY
During 1995, options for the purchase of 4,000,000 Class A shares, with an
exercise price of $0.50 per share, were granted to an executive officer of the
Company when the fair value of the stock was estimated to be $0.875 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 the IPO date, the Company had a 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. During the third quarter of
1997, the executive terminated his employment and the Company made a non-cash
repurchase of 2,800,000 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
F-19
<PAGE> 49
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Under the terms and conditions of the new agreement, the Company sold to
UBS AG options to purchase 7,234,320 shares of the Company's Class B stock at a
non-refundable cash purchase price of $1.125 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 $3.65 per share. In addition, the Company sold to UBS AG
100,000 shares of the Company's Class B stock, subject to the same
transferability and holding-period restrictions, at a purchase price of $3.65
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 100,000 shares
of Class B stock and the 7,234,320 shares of Class B stock subject to options
vest at a rate, in the aggregate, of 63,906 shares per month for the first five
years of the agreement, and at a rate of 58,334 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
$3.65 per share. UBS AG exercised 834,320 options in the third quarter of 1998.
Pursuant to the Bank Holding Company Act of 1956 and subsequent regulations
and interpretations by the Federal Reserve Board, 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 $4,027 of deferred compensation expense for options
granted in 1998 representing the difference between the option exercise price
and the fair value of the underlying common stock. The Company recognized $373
of compensation expense during the year ended December 31, 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 is approximately $407 for each year from 1999 through 2008.
F-20
<PAGE> 50
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
RESTRICTED ADVISOR OPTION LIQUIDATION SHARE AVERAGE
PLAN PLAN PLAN OTHER PREFERENCE TOTAL PRICE
---------- --------- --------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning shares..... 19,873,162 928,000 160,920 14,851,846 32,000,000 67,813,928 0.37
Issuance............. 7,798,688 30,734 412 376,158 -- 8,205,992 1.46
Options exercised.... -- -- 3,636,436 -- -- 3,636,436 0.42
Conversion........... -- -- -- 32,000,000 (32,000,000) -- 0.01
Repurchased.......... (408,660) -- -- -- -- (408,660) 0.77
---------- --------- --------- ---------- ----------- ----------
December 31, 1996.... 27,263,190 958,734 3,797,768 47,228,004 -- 79,247,696 0.51
Issuance............. 1,662,204 200 -- 314,538 -- 1,976,942 2.71
Options exercised.... -- 240,000 1,069,040 -- -- 1,309,040 0.51
Repurchased.......... (3,277,976) -- -- (2,800,288) -- (6,078,264) 0.79
---------- --------- --------- ---------- ----------- ----------
December 31, 1997.... 25,647,418 1,198,934 4,866,808 44,742,254 -- 76,455,414 0.65
Issuance............. 40,652 -- 45,200 10,860 -- 96,712 3.31
Options exercised.... -- 94,000 2,218,902 -- -- 2,312,902 0.94
Repurchased.......... (1,613,142) -- (45,578) (80,260) -- (1,738,980) 1.29
---------- --------- --------- ---------- ----------- ----------
December 31, 1998.... 24,074,928 1,292,934 7,085,332 44,672,854 -- 77,126,048 0.88
========== ========= ========= ========== =========== ==========
</TABLE>
F-21
<PAGE> 51
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
1996 Outstanding at beginning of year...... 17,827,624 320,000 619,856 18,767,480 0.48
Granted.................................... 13,696,480 130,000 -- 13,826,480 1.37
Exercised.................................. (3,553,252) -- (83,184) (3,636,436) 0.42
Forfeited.................................. (82,784) -- (1,024) (83,808) 1.15
---------- -------- ------- ----------
Outstanding at December 31, 1996........... 27,888,068 450,000 535,648 28,873,716 0.91
========== ======== ======= ==========
Exercisable at December 31, 1996........... 2,779,092 304,000 378,968 3,462,060 0.42
1997 Outstanding at beginning of year...... 27,888,068 450,000 535,648 28,873,716 0.91
Granted.................................... 13,782,704 168,000 -- 13,950,704 2.70
Exercised.................................. (971,360) (240,000) (97,680) (1,309,040) 0.51
Forfeited.................................. (5,716,578) -- (14,368) (5,730,946) 1.55
---------- -------- ------- ----------
Outstanding at December 31, 1997........... 34,982,834 378,000 423,600 35,784,434 1.52
========== ======== ======= ==========
Exercisable at December 31, 1997........... 4,621,650 89,000 280,384 4,991,034 0.66
1998 Outstanding at beginning of year...... 34,982,834 378,000 423,600 35,784,434 1.52
Granted.................................... 1,986,820 30,000 -- 2,016,820 3.27
Exercised.................................. (2,140,102) (94,000) (78,800) (2,312,902) 0.94
Forfeited.................................. (6,398,830) (70,000) (18,080) (6,486,910) 1.79
---------- -------- ------- ----------
Outstanding at December 31, 1998........... 28,430,722 244,000 326,720 29,001,442 1.62
========== ======== ======= ==========
Exercisable at December 31, 1998........... 6,412,072 29,600 205,584 6,647,256 1.12
</TABLE>
The following table summarizes information about options for Class A common
shares outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.250 567,620 3.21 395,360
$0.375 1,935,290 4.76 1,211,850
$0.500 6,671,600 6.14 2,000,840
$0.875 949,312 5.00 232,944
$1.250 5,796,692 8.49 1,032,164
$1.875 6,225,266 8.03 1,077,640
$2.000 130,000 9.04 --
$3.375 6,725,662 8.26 696,458
---------- ---------
29,001,442 7.33 6,647,256
========== =========
Weighted average exercise price of
exercisable options $ 1.12
</TABLE>
F-22
<PAGE> 52
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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income
As reported................................. $40,465 $11,217 $20,499
Pro forma................................... $40,005 $10,655 $20,276
Basic earnings per common share
As reported................................. $ 0.53 $ 0.14 $ 0.27
Pro forma................................... $ 0.52 $ 0.14 $ 0.27
Diluted earnings per common share
As reported................................. $ 0.42 $ 0.12 $ 0.24
Pro forma................................... $ 0.41 $ 0.11 $ 0.24
</TABLE>
All options granted by the Company in 1997 and 1996 were granted at the
estimated per share fair market value in effect on the grant date. For the year
ended, December 31, 1998, certain options were granted at less than fair market
value. For all years, the options 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 grant date using the Minimum Value Stock
option-pricing model. The weighted-average risk free interest rates were 5.52%
for the year ended December 31, 1998 and 6.28% and 6.8% for the years ended
December 31, 1997 and 1996, respectively. Volatility was zero and the expected
life of each grant was equal to the midpoint of the vesting period, plus one
year, for all periods presented. 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 granted in 1997 and 1996 was $245 and $1,014, respectively. For
options granted in 1998, the weighted-average grant-date fair value of options
that were granted at fair market value and less than fair market value was $129
and $310, respectively. The total compensation cost recognized in income at
December 31, 1998 was $373 and zero for years 1997 through 1996. The Company
expects that the impact of future option grants will increase overall pro forma
compensation expense, thereby reducing pro forma net income reported in future
periods.
In July 1998, the Board of Directors adopted an employee stock purchase
plan (the "ESPP"), which provides for the issuance of a maximum of 20,000,000
shares of Class A Common Stock. The ESPP became effective on February 2, 1999.
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.
On January 5, 1999, the Company's Board of Directors authorized two series
of Preferred Stock in connection with the adoption of a Shareholder Rights Plan:
200,000 shares of Series A Junior Participating Preferred Stock, par value $.01
per share (the "Series A Preferred Stock"), and 10,000 shares of Series B Junior
Participation Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock" and, together with the Series A Preferred Stock, the "Preferred Stock").
The Company has entered into a Stockholder Rights Plan (the "Rights Plan"),
pursuant to which one Class A right (a "Class A Right") is 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") is attached to each share of
Class B Common Stock. Each Class A Right entitles the registered holder to
purchase from the Company a unit consisting of one one-thousandth of a share of
Series A Preferred Stock, at a purchase price of $55.00 per share, subject to
adjustment. Each Class B Right entitles the registered holder to purchase from
the Company
F-23
<PAGE> 53
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
a unit consisting of one one-thousandth of a share of Series B Preferred Stock,
at a purchase price of $55.00 per share, subject to adjustment. The Rights are
not exercisable until the Distribution Date and will expire on January 7, 2009,
unless earlier redeemed by the Company as described below. At any time until ten
days following (i) the Stock Acquisition Date or (ii) the date that the Board of
Directors of the Company determines a person to be an "Adverse Person," the
Company may redeem the Rights in whole, but not in part, at a price of $.001 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 $.001
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.
During the period July 1, 1998 to December 31, 1998, the Company issued
options to associates to acquire shares of Class A Common Stock. There were
10,401,040, and 12,226,290 of these options outstanding at December 31, 1998 and
January 6, 1999, respectively. The exercise price was set on January 5, 1999.
11. INCOME TAXES
Income before taxes for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic.................................................... $50,344 $(4,054) $10,151
Foreign..................................................... 25,862 23,562 30,000
------- ------- -------
$76,206 $19,508 $40,151
======= ======= =======
</TABLE>
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Current:
U.S. Federal............................................ $23,958 $ 9,159 $ 21,794
State and local......................................... 3,904 1,383 3,583
Foreign................................................. 13,999 8,172 10,319
------- -------- --------
Total current............................................. $41,861 $ 18,714 $ 35,696
======= ======== ========
Deferred:
U.S. Federal............................................ (976) (8,902) (14,400)
State and local......................................... (199) (1,392) (2,242)
Foreign................................................. (4,945) (129) 598
------- -------- --------
Total deferred............................................ (6,120) (10,423) (16,044)
------- -------- --------
Total provision for income taxes.......................... $35,741 $ 8,291 $ 19,652
======= ======== ========
</TABLE>
F-24
<PAGE> 54
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Conversion of acquired entity from cash basis to accrual
basis of accounting....................................... $ 636 $ 1,171
Other....................................................... 473 1,095
-------- --------
Gross deferred tax liabilities.............................. 1,109 2,266
-------- --------
Property, plant and equipment............................... (14,261) (11,050)
Accrued liabilities......................................... (31,500) (22,958)
Equity investments.......................................... 2,384 (817)
Intangibles................................................. 514 (1,134)
Deferred revenue............................................ (307) (1,538)
Other....................................................... (100) --
-------- --------
Gross deferred tax assets................................... (43,270) (37,497)
-------- --------
Net deferred tax asset...................................... $(42,161) $(35,231)
======== ========
</TABLE>
A valuation allowance has not been established for the net deferred tax
asset as of December 31, 1998 or 1997, due to a significant contract backlog and
the availability of loss carrybacks.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
income before taxes, as a result of the following differences in dollars and
percentages as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates.................. $26,671 35.0% $6,828 35.0% $14,053 35.0%
Non-deductible items...................... 768 1.0 528 2.7 3,017 7.5
State and local taxes..................... 3,021 4.0 (215) (1.1) 609 1.5
Nondeductible amortization and write-off
of intangible assets.................... 3,824 5.0 1,765 9.0 1,900 4.7
U.S. rates (in excess of) less than
foreign rates & others.................. 1,457 1.9 (615) (3.1) 73 .2
------- ---- ------ ---- ------- ----
Total provision for income taxes.......... $35,741 46.9% $8,291 42.5% $19,652 48.9%
======= ==== ====== ==== ======= ====
</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. Summarized below is the financial
information for each reportable segment as defined by Financial Accounting
Standards Board Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information." "All Other" includes
financial information from
F-25
<PAGE> 55
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
the following geographic areas: Hong Kong, Japan, Singapore, Netherlands,
Germany, France, Ireland, and Luxembourg.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States:
Total revenue.......................................... $640,508 $519,122 $400,211
Operating income....................................... 39,209 (5,507) 10,780
Identifiable assets at December 31..................... 232,765 171,503 130,766
United Kingdom:
Total revenue.......................................... 255,613 189,758 126,131
Operating income....................................... 18,894 18,815 24,619
Identifiable assets at December 31..................... 111,509 67,884 79,682
Switzerland:
Total revenue.......................................... 42,382 36,837 38,426
Operating income....................................... 3,176 3,701 2,083
Identifiable assets at December 31..................... 15,532 13,763 9,743
All Other:
Total revenue.......................................... 55,086 35,904 34,670
Operating income....................................... 36 584 3,819
Identifiable assets at December 31..................... 22,340 13,953 12,056
Consolidated:
Total revenue.......................................... 993,589 781,621 599,438
Operating income....................................... 61,315 17,593 41,301
Identifiable assets at December 31..................... 382,146 267,103 232,247
</TABLE>
Greater than 10% of the Company's revenue was earned from two clients for
the year ended December 31, 1998, two clients for the year ended December 31,
1997, and one client for the year ended December 31, 1996. Revenue from these
clients comprised 27% and 12% of total revenue in 1998, 27% and 10% of total
revenue in 1997, and 28% of total revenue in 1996.
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 one to ten years. Future minimum
commitments under these agreements as of December 31, 1998 are as follows:
F-26
<PAGE> 56
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDING LEASE AND MAINTENANCE
DECEMBER 31: COMMITMENTS
- ------------ ---------------------
<S> <C>
1999........................................................ $ 28,296
2000........................................................ 23,228
2001........................................................ 16,837
2002........................................................ 13,280
2003........................................................ 9,410
Thereafter.................................................. 32,126
--------
Total..................................................... $123,177
========
</TABLE>
The Company is obligated under certain operating leases for its pro rata
share of the lessors' operating expenses. Rent expense was $31,666, $22,377 and
$22,577 for 1998, 1997 and 1996, respectively. Additionally, in 1997, the
Company established a loss accrual of $3,125 in connection with the planned
abandonment of certain leased properties. In 1998, the Company revised its
estimate of that loss accrual to $6,102.
LETTER OF CREDIT
The Company had a $1,000 irrevocable letter of credit that expired on
December 14, 1998 and was not renewed. 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 as of
December 31, 1997) 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 for the year ended
December 31, 1997. 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.
Foreign currency exchange forward contracts
At December 31, 1998, the Company had eight forward contracts in various
currencies in the amount of $22,128. These contracts expire on January 29, 1999.
F-27
<PAGE> 57
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The estimated fair value of the Company's forward exchange contracts using
bank or market quotes and the year end foreign exchange rates was a net
liability of $102 as of December 31, 1998. 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 2,848,472 and
2,926,752 shares of Class A Common Stock were subject to contingent put rights
at December 31, 1998 and December 31, 1997, respectively. For 1,200,000 and
648,472 of these shares, the holders could have required the Company to
repurchase the shares at fair value in the event the Company's Class A Common
Stock was not publicly traded by the years 2010 and 2000, respectively. The
Company began publicly trading on February 2, 1999 and these put rights
terminated. For 1,000,000 of these shares at December 31, 1998 and 1,080,000 at
December 31, 1997, the holder 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.
14. RETIREMENT PLAN AND OTHER EMPLOYEE TRUSTS
During 1989, the Company established the Perot Systems 401(k) Retirement
Plan, a qualified defined contribution retirement plan. The plan year is January
1 to December 31 and allows eligible employees to contribute between 1% and 15%
of their annual compensation, including overtime pay, bonuses and commissions.
The plan was amended effective January 1, 1996 to change the Company's
contribution from 2% of the participants' defined annual compensation, to a
formula matching employees' contributions at a two-thirds rate, up to a maximum
Company contribution of 4%. The Company's cash contribution for the years ended
December 31, 1998, 1997 and 1996 amounted to $7,662, $7,388 and $4,785,
respectively. The Company's contribution of common stock for the years ended
December 31, 1998, 1997 and 1996 totaled 0, 257,590 and 12,650 shares,
respectively, which were allocated to participants' plan accounts using a
formula
F-28
<PAGE> 58
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
based on compensation. Compensation expense of $631 in 1997 and $14 in 1996 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 23,852 shares were contributed in 1995. No
contributions were made in 1998, 1997 or 1996.
In 1996, the Company contributed 324,286 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. No contributions were made in 1998 or 1997.
15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................................. $ 245 $ 1,283 $ 1,877
======= ======= =======
Income taxes.............................................. $33,615 $23,325 $28,032
======= ======= =======
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.............................................. $ 1,077 $ 2,603 $ 225
======= ======= =======
Reacquisition of shares from sale of business............... $ 1,182 $ -- $ --
======= ======= =======
Notes receivable from sale of business...................... $ 59 $ -- $ --
======= ======= =======
Purchase of shares financed by notes receivable from
stockholders.............................................. $ -- $ 1,427 $ 3,065
======= ======= =======
Deferred compensation, net of amortization.................. $ 3,654 $ -- $ --
======= ======= =======
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
======= ======= =======
</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 rates between
8.75% and 9.75% and are due at various dates through September 15, 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 December 31, 1998 and 1997, approximately $1,418 and $1,546,
respectively, of principal remain outstanding under these loans. The Company
completed an initial public offering on February 2, 1999 and this provision
terminated.
F-29
<PAGE> 59
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In 1995, the company loaned $1,400 to an executive at an interest rate of
8% per annum collateralized by shares of the Company's Class A Common Stock. At
December 31, 1998, the principal balance was $420 and is payable in full in
August 1999. In 1997, the Company loaned an additional $2,273 to this executive
at an interest rate of 7.25% per annum (subject to adjustment) for which up to
$1,169 is payable in August 1999 and collateralized by shares of the Company's
Class A Common Stock and $1,000 is payable in April 2002 and collateralized by a
mortgage on the executive's residence. At December 31, 1998 and 1997, the
principal balance remaining on these additional loans was $2,169. In 1997, the
Company repurchased 2,800,000 shares of Class A Common Stock from this
executive, following his resignation, through a reduction of $1,830 in
outstanding notes receivable.
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 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. The Company
completed an initial public offering on February 2, 1999 and this provision
terminated.
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
Stock. Prior to December 31, 1997, the notes and the related shares were
canceled.
In August 1997, the Company loaned $250 to an executive at the rate of 8%.
This note is collateralized by the executive's Class A Common Stock and is
payable in August 2000.
In September 1997, the Company loaned $197 to an executive at the rate of
8%. This note is collateralized by the executive's Class A Common Stock and is
payable in September 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 Stock
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
year ended December 31,1998, the Company has recorded a compensation expense of
$780 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.
F-30
<PAGE> 60
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 stockholders................ 20,052 74,110 $0.27
=====
Dilutive options............................................ 10,232
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions.................................. $20,052 84,342 $0.24
======= ====== =====
FOR THE YEAR ENDED 1997
Net income.................................................. $11,217
Less preferred stock dividend............................... --
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common stockholders................ 11,217 78,336 $0.14
=====
Dilutive options............................................ 16,856
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions.................................. $11,217 95,192 $0.12
======= ====== =====
FOR THE YEAR ENDED 1998
Net income.................................................. $40,465
Less preferred stock dividend............................... --
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common stockholders................ 40,465 76,882 $0.53
=====
Dilutive options............................................ 20,260
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions.................................. $40,465 97,142 $0.42
======= ====== =====
</TABLE>
18. SUBSEQUENT EVENTS
On February 2, 1999, the Company completed an initial public offering of
7,475,000 shares of Class A Common Stock at an initial public offering price of
$16.00 per share. Net proceeds to the Company were approximately $109,300.
The Company provides services for East Midlands Electricity (IT) Limited
(together with its parent company, East Midlands Electricity plc, "EME") under
an Information Technology Services Agreement initially entered into on April 8,
1992, as amended. Under the terms and conditions of this agreement, EME
F-31
<PAGE> 61
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
has the right to terminate its relationship with the Company following a change
in control of EME. In July 1998, PowerGen plc acquired EME from Dominion
Resources, Inc. During the first quarter of 1999, PowerGen plc and EME exercised
this right. The termination takes effect in October 1999.
F-32
<PAGE> 62
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
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
4.3* Form of Certificate of Designation, Preferences, and Rights
of Series A Junior Participating Preferred Stock (included
as Exhibit A-1 to the Rights Agreement)
4.4* Form of Certificate of Designation, Preferences, and Rights
of Series B Junior Participating Preferred Stock (included
as Exhibit A-2 to the Rights Agreement)
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 Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ Form of Option Agreement (Advisor Stock Option/Restricted
Stock Incentive Plan)
10.11** Promissory Note in the principal amount of $70,000, dated
March 10, 1996, made by Joseph E. Boyd payable to the
Company.
10.12+ Stock Option Grant dated as of June 27, 1995 by the Company
in favor of James A. Cannavino
10.13+ Employment Agreement dated as of September 16, 1995 by and
between the Company and James A. Cannavino
10.14+ Promissory Note dated December 18, 1995 made by James A.
Cannavino in favor of the Company in the principal amount of
$1,400,000
10.15+ Promissory Note dated January 1, 1996 made by James A.
Cannavino in favor of the Company in the principal amount of
$1,500,000
10.16+ Pledge Agreement made as of December 18, 1995 by James A.
Cannavino in favor of the Company
10.17+ Modification Agreement dated as of March 7, 1997 between the
Company and James A. Cannavino
10.18+ Deed of Trust dated April 15, 1997 made by James A.
Cannavino in favor of the Company
10.19+ Promissory Note dated April 14, 1997 made by James A.
Cannavino in favor of the Company
10.20+ Associate Agreement dated July 8, 1996 between the Company
and James Champy
10.21+ Restricted Stock Agreement dated July 8, 1996 between the
Company and James Champy
10.22+ Letter Agreement dated July 8, 1996 between James Champy and
the Company
10.23+ Promissory Note dated June 17, 1996 made by Guillermo G.
Marmol in favor of the Company
10.24+ Pledge 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 April 24, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.30 to the
Company's Form 10 dated April 30, 1997)
10.28+ Amended and Restated Master Operating Agreement dated
January 1, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.31 to the
Company's Form 10 dated April 30, 1997)
10.29+ Amended and Restated Agreement for EPI Operational
Management Services dated January 1, 1997 (incorporated by
reference to Exhibit 10.32 to the Company's Form 10 dated
April 30, 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
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
10.32* 1999 Employee Stock Purchase Plan
10.33* Form of Amended and Restated 1991 Stock Option Plan
10.34* Form of Amended Stock Option Agreement
10.35** Pledge Agreement dated May 10, 1996, between the Company and
Joseph E. Boyd.
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
10.38* Agreement dated September 26, 1997 among the Company, Ken
Scott, and NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 10.40 to the Company's Registration
Statement on Form S-1, Registration No. 333-60755)
10.39* Promissory Note dated September 26, 1997 made by Ken Scott
in favor of NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1, Registration No. 333-60755)
10.40* Promissory Note dated September 26, 1997 made by Ken Scott
in favor of the Company (incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement on
Form S-1, Registration No. 333-60755)
21** Subsidiaries of the Registrant
23.1** Consent of PricewaterhouseCoopers LLP dated March 22, 1999
23.2** Report of PricewaterhouseCoopers LLP on the financial
statement schedule dated March 4, 1999
27** Financial Data Schedule
27.a** Restated Financial Data Schedule for September 30, 1998
27.b** Restated Financial Data Schedule for June 30, 1998
27.c** Restated Financial Data Schedule for March 31, 1998
99(a)** Schedule VIII -Valuation and Qualifying Accounts
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-60755, to the exhibit of the same number except as
otherwise indicated.
** Filed herewith.
+ Incorporated by reference to the Company's Form 10 dated April 30, 1997 to
the exhibit of the same number except as otherwise indicated.
<PAGE> 1
EXHIBIT 10.11
PROMISSORY NOTE
May 10, 1996
$70,000.00
FOR VALUE RECEIVED, Joseph E. Boyd ("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 seventy thousand dollars ($70,000.00),
payable, along with interest calculated at eight percent per annum (8%), on or
before May 10, 1999, or earlier if otherwise required pursuant to the terms of
this Note. Interest, unless required to be paid earlier pursuant to the terms
of this Note, will be payable annually, beginning May 10, 1997.
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 or any subsidiary of the Company, for any reason, with or
without cause, or (ii) on the one year anniversary after common stock of the
Company, or any successor company, or stock of the type issued in exchange for
any common stock of the Company pursuant to a merger or otherwise, is publicly
traded on a stock exchange or the NASDAQ. In addition, if Associate sells any
of the Company common stock purchased in connection with the issuance of this
Note, Associate shall, within thirty days of such sale, prepay this Note to the
extent of the net proceeds of such sale, less any income taxes payable by
Associate with respect to income derived from such sale.
Payment of this Note is secured pursuant to a Pledge Agreement of even
date herewith between PSC and Associate (the "Pledge Agreement").
Nothing in this Note shall confer upon Associate any right to continue
to in the employ of the Company or any subsidiary of the Company or interfere
in any way with the right of the Company or any subsidiary 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.
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.
<PAGE> 2
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/ JOSEPH E. BOYD
------------------------------
(Signature)
Joseph E. Boyd
------------------------------
<PAGE> 1
EXHIBIT 10.35
PLEDGE AGREEMENT
This Pledge Agreement (the "Agreement") is made as of May 10, 1996, by
and between Perot Systems Corporation, a Delaware corporation ("PSC"), and
Joseph E. Boyd ("Pledgor").
WHEREAS, PSC has granted Pledgor the option to purchase 56,000 shares
of PSC's common stock pursuant to a Restricted Stock Agreement dated as of May
10, 1996 (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 seventy thousand dollars ($70,000) to finance in part the
acquisition of the Restricted Stock purchased pursuant to the Restricted Stock
Agreement (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) the Restricted Stock purchased by Pledgor pursuant to the
Restricted Stock Agreement, 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,
Page 2
<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.
Page 6
<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
Page 7
<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/ JOSEPH E. BOYD
-----------------------------------
Joseph E. Boyd ("Pledgor")
PEROT SYSTEMS CORPORATION
By: /s/ MORTON MEYERSON
---------------------------------
Name:
--------------------------------
Title:
-------------------------------
Page 8
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
<S> <C>
Benton International, Incorporated California
Deutsche Perot Systems GmbH Germany
HCL Perot Systems N.V. The Netherlands
HCL Perot Systems Private Limited (India) India
HCL Perot Systems Pte. Limited (Singapore) Singapore
HCL Perot Systems (Mauritius) Pvt. Ltd. Mauritius
HPS America, Inc. Delaware
HPS Europe Limited United Kingdom
Icarus Consulting A.G. Switzerland
Icarus Consulting GmbH Germany
Perot Systems A.G. Switzerland
Perot Systems Asia Pacific Pte Ltd. Singapore
Perot Systems B.V. The Netherlands
Perot Systems (Canada) Corporation Canada
Perot Systems Communication Services, Inc. Delaware
Perot Systems Europe (Energy Services) Limited United Kingdom
Perot Systems Europe Limited ("PSEL") United Kingdom
Perot Systems Field Services Corporation Delaware
Perot Systems Financial Services Corporation Delaware
Perot Systems Holdings Pte Ltd. Singapore
Perot Systems Investments B.V. The Netherlands
Perot Systems (Japan) Ltd. Japan
Perot Systems Monaco S.A.M. Monaco
Perot Systems Realty Corporation Texas
Perot Systems S.A. France
Persys Ireland Limited Ireland
PSC Government Services Corporation Delaware
PSC Health Care, Inc. Delaware
PS Information Resource (Ireland) Limited Ireland
RothWell International, Inc. Texas
Stamos Associates Inc. California
Syllogic Ireland Limited Ireland
Syllogic B.V. The Netherlands
Syllogic Limited United Kingdom
The Technical Resource Connection, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Perot Systems Corporation on Form S-8 (File No. 333-70267) of our
report dated March 4, 1999 on our audits of the consolidated financial
statements of Perot Systems Corporation and Subsidiaries as of December 31,
1998 and 1997, and for the years ended December 31, 1999, 1997 and 1996, which
report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 22, 1999
<PAGE> 1
EXHIBIT 23.2
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 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 144,907
<SECURITIES> 0
<RECEIVABLES> 116,794
<ALLOWANCES> 1,353
<INVENTORY> 0
<CURRENT-ASSETS> 308,392
<PP&E> 126,836
<DEPRECIATION> 87,328
<TOTAL-ASSETS> 382,146
<CURRENT-LIABILITIES> 236,653
<BONDS> 0
0
0
<COMMON> 820
<OTHER-SE> 141,763
<TOTAL-LIABILITY-AND-EQUITY> 382,146
<SALES> 993,589
<TOTAL-REVENUES> 993,589
<CGS> 787,877
<TOTAL-COSTS> 932,274
<OTHER-EXPENSES> (2,732)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245
<INCOME-PRETAX> 76,206
<INCOME-TAX> 35,741
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,465
<EPS-PRIMARY> .53
<EPS-DILUTED> .42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 102,153
<SECURITIES> 0
<RECEIVABLES> 164,496
<ALLOWANCES> 2,814
<INVENTORY> 0
<CURRENT-ASSETS> 317,154
<PP&E> 130,119
<DEPRECIATION> 90,145
<TOTAL-ASSETS> 390,535
<CURRENT-LIABILITIES> 258,345
<BONDS> 0
0
0
<COMMON> 820
<OTHER-SE> 128,360
<TOTAL-LIABILITY-AND-EQUITY> 390,535
<SALES> 724,185
<TOTAL-REVENUES> 724,185
<CGS> 575,083
<TOTAL-COSTS> 682,042
<OTHER-EXPENSES> (2,742)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184
<INCOME-PRETAX> 51,885
<INCOME-TAX> 23,690
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,195
<EPS-PRIMARY> .37
<EPS-DILUTED> .29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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> 811
<OTHER-SE> 114,730
<TOTAL-LIABILITY-AND-EQUITY> 331,622
<SALES> 452,712
<TOTAL-REVENUES> 452,712
<CGS> 359,891
<TOTAL-COSTS> 425,941
<OTHER-EXPENSES> (2,554)
<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> .25
<EPS-DILUTED> .20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 61,584
<SECURITIES> 0
<RECEIVABLES> 127,259
<ALLOWANCES> 2,022
<INVENTORY> 0
<CURRENT-ASSETS> 224,437
<PP&E> 131,345
<DEPRECIATION> 90,132
<TOTAL-ASSETS> 300,821
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 811
<OTHER-SE> 101,412
<TOTAL-LIABILITY-AND-EQUITY> 300,821
<SALES> 214,087
<TOTAL-REVENUES> 214,087
<CGS> 169,917
<TOTAL-COSTS> 202,699
<OTHER-EXPENSES> (2,653)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 15,729
<INCOME-TAX> 6,685
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,044
<EPS-PRIMARY> .12
<EPS-DILUTED> .10
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
Schedule VIII - Valuation and Qualifying Accounts
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning Deductions end of
of period Additions (Write-offs) period
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
December 31, 1998 $ 1,185 $ 8,653 $ 8,485 $ 1,353
December 31, 1997 $ 6,787 $ 1,167 $ 6,769 $ 1,185
December 31, 1996 $ 1,352 $ 5,625 $ 190 $ 6,787
</TABLE>
