<PAGE> 1
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, 1999
[ ] 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)
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)
(972) 340-5000
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------- ---------------------
<S> <C>
Class A Common Stock New York Stock Exchange
Par Value $0.01 per share
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
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. [ ]
<PAGE> 2
As of January 31, 2000, 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 $1,070,360,140 (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding as of January 31,
2000: 93,060,392.
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
2000 Annual Meeting of Stockholders.
<PAGE> 3
FORM 10-K
For the Year Ended December 31, 1999
INDEX
<TABLE>
<S> <C> <C>
Part I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 15
Item 3. Legal Proceedings ................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders .............. 17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................... 17
Item 6. Selected Financial Data .......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 25
Item 8. Financial Statements and Supplementary Data ...................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................... 27
Part III
Item 10. Directors and Executive Officers of the Registrant ............... 27
Item 11. Executive Compensation ........................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................... 27
Item 13. Certain Relationships and Related Transactions ................... 27
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ...................................................... 28
Signatures ................................................................ 31
</TABLE>
<PAGE> 4
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 under the caption "Risk Factors." These factors may cause our actual
events to differ materially from any forward-looking statement. We do not
undertake to update any forward-looking statement.
ITEM 1. BUSINESS
OVERVIEW
We are a worldwide provider of information technology services and
e-business solutions to a broad range of clients. We serve clients by delivering
services and solutions focused on each client's specific needs. We emphasize
developing and integrating information systems, operating and improving
technology and business processes, and helping clients transform their
businesses. We help companies take full advantage of e-business by leveraging
their traditional strengths and technologies into digital marketplaces. We focus
our business integration, systems integration and applications development, and
infrastructure services to enable clients to accelerate growth, streamline
operations, and create new levels of customer value.
Our approach is to be a strategic long-term provider of high-value
services, combining the benefits of scale and specialization to provide a
multi-layer "integrated service offering." With our approach, we are able to
create long-term relationships with clients that begin with the analysis of
clients' business strategies and continue through the realization of benefits
from implementing business and technology solutions. We believe that as clients
and potential clients create new electronic channels and high growth businesses,
our approach of integrating business consulting, e-business capabilities, strong
industry knowledge, and traditional technology skills enables us to deliver
end-to-end e-business solutions.
We have approximately 7,000 employees and earned revenue for the year
ending December 31, 1999 of $1.15 billion.
INTEGRATED SERVICE OFFERING
We offer our broad strategic capabilities through services classified
within three core disciplines:
o business integration,
o systems integration and applications development, and
1
<PAGE> 5
o information technology infrastructure services.
We combine these disciplines into integrated service offerings
customized for our clients. We believe that our integrated service offerings
allow us to attract strategically motivated clients, focus on our clients'
business objectives, and ultimately generate higher value for our clients.
Business Integration
We help clients develop and implement business and e-business
strategies, information technology strategies, and process redesign programs.
Our services include:
o Digital Marketplaces. Our Time0 unit develops and implements
business-to-business digital marketplaces. Time0's resources
are focused on three specific forms of Internet-native
marketplaces: order and acquisition marketplaces, bid/ask
systems, and auction sites.
o Business Strategy. We deliver strategic advice, designed by
business and technical experts with industry-specific
knowledge, to help our clients align their capabilities with
the demands of the markets in which they compete.
o Information Technology Strategy. We employ our extensive
knowledge of information technology architectures,
infrastructures, and technologies to help our clients optimize
their use of information technology to achieve their business
objectives. We then work with our clients to continually
refine and update their information technology strategies.
o Process Redesign. We work with clients to systematically
reengineer their business processes with innovative approaches
incorporating cross-industry best practices.
Systems Integration and Applications Development
We design and implement information technology systems, including both
custom-developed and packaged software, for clients through the following
services:
o Information Integration. We help clients leverage the power of
the Internet for purposes of conducting electronic commerce by
preparing traditional businesses to compete in a real-time
business environment through the integration of Internet
channels, business processes, legacy systems, and supply
chains.
o Identity Systems. We develop custom software applications,
ranging from modifications and enhancements of existing
packaged software to completely custom-developed applications,
that help to define and differentiate clients from the
competition. We design these applications for various
environments including web-based systems, distributed
networks, and mainframes.
2
<PAGE> 6
o Application Services. We implement and integrate standardized
prepackaged application programs such as ERP systems,
financial systems, medical systems, and physician practice
management systems. In many cases, we subsequently offer these
products to clients in the form of an application service
model to lower the cost of entry for our clients.
o Systems Integration. We assist clients in designing,
evaluating, and implementing information technology systems
comprising software applications and hardware components. Our
services in this area 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.
Information Technology Infrastructure Services
Information technology infrastructure services combine information
technology outsourcing, staffing, and infrastructure management. Our information
technology infrastructure services include:
o Operations and Maintenance. We manage, update, and maintain
data processing systems, networks, and technical
infrastructures, operate help desks, and manage, resolve, and
document problems in our clients' computing environments.
o Monitoring and Planning. We offer comprehensive monitoring of
and planning for information technology systems, including
monitoring network status and availability through periodic
polling of network resources, as well as collecting and
analyzing data.
CHANNELS TO MARKET
We deliver services through our integrated solutions group where we go
to market on technological, business-offering, and geographic bases and through
industry groups supplying services to industries where we have significant
long-term customers.
Integrated Solutions Group
Our integrated solutions group delivers strategic high-value
capabilities to our clients. Through this group we sell a wide range of
traditional and e-business services directly on a short-term basis and
indirectly through our integrated service offering executed by the vertical
industries, which we describe below. Our capabilities include real-time business
transformation, strategic consulting, object architecture construction, and data
mining.
o Real-Time Business Transformation. We leverage our
horizontal-based service capabilities in sourcing, back office
integration, channel management, and dynamic partnering to
help traditional businesses transform themselves into
3
<PAGE> 7
customer-centric companies and prepare themselves to operate
in real-time business models through the integration of
Internet channels, business processes, legacy systems, and
supply chains.
o "Sourcing" is the creation and streamlining of
processes that enable the electronic procurement of
goods and services.
o "Back Office Integration" is the integration of a
business's back office operations with its e-business
strategies to provide end-to-end integration of a
business.
o "Channel Management" is the alignment of the
enterprise around the customer. Communication among
channels is coordinated to ensure the customer has a
consistent experience providing value in the form of
increased revenue and profitability due to high
customer loyalty and expanded channels.
o "Dynamic Partnering" is the integration and
coordination of supply chain providers that enables
clients to flex or change their supply chains, plan
and schedule with partners, and personalize customer
treatment.
o Strategic Consulting. Our strategic consulting team focuses on
assisting clients with the redesign and transformation of
their businesses, as well as the creation of new electronic
business models.
o Object Architecture Construction. The Technical Resource
Connection ("TRC") is our Object Architecture construction
group. TRC has expertise in enterprise computing
architectures, distributed-object computing technologies,
Intranet/Internet applications, and software engineering
processes. TRC employs experienced software engineering
technologists - software architects, designer/developers,
modelers, and systems engineers - who focus on software
development processes and technology skills to reduce the
complexity and risk associated with building powerful business
computing systems.
o Data Mining. One of our subsidiaries, Syllogic B.V., has
extensive expertise in the creation of flexible, structured,
and manageable data warehouses and data mining tools. This
subsidiary created the SyllogicTM Data Mining Tool, a system
that combines several different data mining technologies into
a single graphical user interface.
Digital Marketplaces
Time0, formed in 1997, is our business-to-business e-commerce unit that
focuses exclusively on digital marketplaces. Time0 uses the Digital Marketplace
business model and the underlying technology infrastructure invented by its
business, systems, and software engineers to enable an alliance of cooperating
companies to form a new line of business on the backbone of the Internet. The
participating companies, complementors and competitors alike, join together to
better serve the needs of their customers and to share the opportunity to
dramatically lower transaction costs.
4
<PAGE> 8
An example of Time0's work is a digital marketplace, launched in May
of 1999, that enables a leading distributor of maintenance, repair, and
operating supplies in North America, to provide its small to medium-sized
business customers with one-stop electronic purchasing of supplies, equipment,
and services from multiple vendors. This digital marketplace employs business
processes and technology to enable buyers, sellers, and others to conduct
business more efficiently and effectively.
Industry Groups
We deliver long-term solutions through industry groups that target
industries characterized by rapid rates of change, growth, and the increasing
importance of information technology in driving and managing this change and
growth. Within these industries, our associates have broad technical and
operational experience and expertise in addressing the technical and business
challenges faced by clients in these industries. Our most highly developed
industry groups are our Financial Services Group and Healthcare Services Group.
We also serve significant clients and provide industry specific expertise
through our Travel and Transportation Services, Energy Services, Manufacturing
Services, and Communications and Media Services Groups.
o Financial Services Group. We provide 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.
Our financial services team includes professionals with
backgrounds in investment banking and commercial banking, and
former senior level consultants to the financial services
industry. We use our industry-specific and technical expertise
to help clients capitalize on emerging market opportunities as
financial services markets converge and as the Internet and
other technologies create new markets.
o Healthcare Services Group. Focusing on the requirements of
integrated healthcare networks, we serve managed care
providers, hospital groups, healthcare product distributors,
and other healthcare companies. Our healthcare services team
includes physicians, nurses, health policy experts, managed
care executives, and health insurance experts. We assist
clients with information access and connectivity and provide
tools for transaction management, care management, decision
support, and Internet-based demand management systems.
o Travel and Transportation Services Group. We serve 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.
5
<PAGE> 9
o Energy Services Group. We provide municipal and private utilities,
related service providers, new entrants in deregulated markets,
and other energy companies with our expertise in energy power
systems restructuring and automation, transmission congestion
management and modeling, market simulation design analysis, and
power management system economics.
o Manufacturing Services Group. We provide our manufacturing clients
with expertise in supply chain management, planning and
scheduling, order management, and assistance with warehousing,
distribution, production, and finance applications.
o Communications and Media Services Group. We assist 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.
SUBSEQUENT EVENT - AGREEMENT TO ACQUIRE SOLUTIONS CONSULTING, INC.
On March 1, 2000, we entered into an agreement to purchase
substantially all of the assets and liabilities of Solutions Consulting, Inc., a
Pittsburgh based enterprise software and e-commerce company. Under the terms and
conditions of this agreement, we will pay $72.1 million in cash and $50.0
million in shares of our Class A Common Stock, representing 1,965,602 shares.
Completion of this purchase is subject to certain closing conditions and
government approvals.
PEROT SYSTEMS ASSOCIATES
The markets for information technology personnel and business
integration professionals are intensely competitive. A key part of our business
strategy is the hiring, training, and retention of highly motivated personnel
with strong character and leadership traits. We believe that employing
associates with such traits is and will continue to be an integral factor in
differentiating us from our competitors in the information technology industry.
In seeking such associates, we screen candidates for employment through a
rigorous interview process.
We devote a significant amount of resources to training our associates.
Associates undergo continual training throughout their employment with us. Entry
level training programs develop the skill sets necessary to serve our clients.
These entry level apprentice training programs are augmented by engineering
development programs and periodic continuing education. In addition, we operate
a leadership training course that each manager and executive must complete. This
program includes a workshop stressing the fundamentals of team leadership. We
augment our extensive personnel and leadership training through our TRAIN (The
Real-time Associate Information Network) system, an award-winning, company-wide
intranet featuring training courses that develop both technical and leadership
skills.
We employ 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 our retention program. In
addition to competitive salaries, we distribute cash bonuses that are paid
promptly to reward excellent performance. We seek to align the interests of our
associates with those of our stockholders by compensating outstanding
performance with equity interests in Perot Systems, which we believe fosters
loyalty and commitment to our goals. Approximately 70% of our associates hold
equity interests in the Company.
6
<PAGE> 10
As of December 31, 1999, we employed approximately 7,000 associates
located in the United States and several other countries. None of our United
States associates are currently employed under an agreement with a collective
bargaining unit. Our associates in France and Germany are generally members of
work councils and have worker representatives. We believe that our relations
with our associates are good.
UBS AGREEMENTS
In January 1996, we 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 us to use certain UBS assets. Other agreements
with UBS provide for the sale to UBS of our stock and options and the transfer
to us of a 40% stake in UBS's European information technology subsidiary, Systor
AG ("Systor").
IT Services Agreement
Under the IT Services Agreement, we provide 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, which began January 1, 1996. Our charges for services provided under the
IT Services Agreement are generally based on reimbursement of all costs, other
than our corporate overhead, incurred by us in the performance of services
covered by the contract. In addition to this cost reimbursement, we receive an
agreed upon annual fee, subject to bonuses and penalties of up to 15% of such
fee based on our performance. UBS determines the bonus or penalty based on many
subjective factors, including service quality, client satisfaction, and our
effectiveness in assisting UBS in meeting its business goals.
Approximately 29.9% and 27.3% of our revenues were earned in connection
with services performed on behalf of UBS and its affiliates for the years ended
December 31, 1999 and 1998, respectively. If some competitors of UBS acquire
more than 25% of the shares of our Class A Common Stock or another party (other
than an affiliate of Ross Perot) acquires more than 50% of the shares of our
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 our services, UBS has the right to terminate its agreements with us. The
loss of UBS as a client would materially and adversely affect our business,
financial condition, and results of operations.
Equity Interests
Under the Amended and Restated PSC Stock Option and Purchase Agreement
(the "Stock Agreement"), we sold UBS 100,000 shares of our Class B Common Stock
for $3.65 a share and 7,234,320 options to purchase shares of Class B Common
Stock for
7
<PAGE> 11
$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 850,000 and 834,320 shares of
Class B Common Stock in June 1999 and September 1998, respectively. 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 our 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,
UBS is required to sell to us all unvested shares of our Class B Common Stock
and UBS Options with respect to unvested shares of our Class B Common Stock will
become 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 our Class B Common Stock
UBS must first offer such shares to us. UBS was not able to sell our Class B
Common Stock, except for limited sales to UBS affiliates, until February 5,
2000.
On January 14, 2000, we completed the sale of our 40% minority equity
interest in Systor, to a wholly owned subsidiary of UBS. UBS was the holder of
the remaining 60% interest in Systor. The transaction was effected as a sale of
all stock in Systor held by us to the subsidiary of UBS for a cash purchase
price of US$55.5 million.
COMPETITION
Our markets are intensely competitive. Customer 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 LLP, 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 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 our clients' own internal information
technology capability, which may constitute a fixed cost for the client. This
may increase pricing
8
<PAGE> 12
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 of 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.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See Note 13, "Certain Geographic Data," to the Consolidated Financial
Statements included elsewhere in this report.
INTELLECTUAL PROPERTY
While we attempt to retain intellectual property rights arising from
client engagements, our clients often have the contractual right to retain such
intellectual property. We rely on a combination of nondisclosure and other
contractual arrangements and trade secret, copyright, and trademark laws to
protect our proprietary rights and the proprietary rights of third parties from
whom we license intellectual property. We enter into confidentiality agreements
with our associates and limit distribution of proprietary information. There can
be no assurance that the steps we take in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use thereof and take appropriate steps to enforce our intellectual
property rights.
We license the right to use the names "Perot Systems" and "Perot" in
our 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. We may also sublicense our rights to the
Perot name to our 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, we 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 our business, financial condition, and results of operations.
Except for the license of our name, we do not believe that any particular
copyright, trademark, or group of copyrights and trademarks is of material
importance to our business taken as a whole.
RISK FACTORS
You should carefully consider the following risk factors and warnings.
The risks described below are not the only ones facing us. Additional risks that
we do not yet know
9
<PAGE> 13
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 64.7% of our
revenue for the year ended December 31, 1999. For the year ended December 31,
1998, our ten largest clients accounted for approximately 65.7% of our revenue.
Only one client, UBS, accounted for more than 10% of our revenue during 1999,
whereas two clients, UBS and East Midland Electricity, each accounted for more
than 10% of our revenue during 1998.
Our largest client is UBS. Approximately 29.9% of our revenue came from
services performed on behalf of UBS for the year ended December 31, 1999. For
the year ended December 31, 1998, approximately 27.3% of our revenue came from
UBS. We expect UBS to account for a substantial portion of our revenue and
earnings for the foreseeable future.
After UBS, our next nine largest customers accounted for approximately
34.8% of our revenue in 1999. 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. 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.
In October 1999, we entered into a services agreement with Harvard
Pilgrim Health Care, Inc. On January 4, 2000, Harvard Pilgrim, one of our
largest clients, was placed into temporary receivership by the Supreme Judicial
Court for Suffolk County in Massachusetts. The Commissioner of Insurance of the
Commonwealth of Massachusetts, as temporary receiver, now oversees the
operations of this client. The receiver has broad powers over the future
operations of this client; and, accordingly, we cannot give any assurance that
our relationship with this client will continue in the future.
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 11 years
beginning January 1996. We cannot guarantee that our current relationship with
UBS will continue on the same terms in the future.
10
<PAGE> 14
Revenue derived from this relationship depends upon the level of
services we perform, which may vary from period to period depending on UBS's
requirements. The agreement with UBS that covers a majority of our business with
UBS entitles us to recover our costs plus an annual fee in an agreed amount with
a bonus or penalty that can cause this annual fee to vary up or down by as much
as 15%, depending on our level of performance as determined by UBS.
Determination of whether our performance merits a bonus or a penalty depends on
many subjective factors, including service quality, client satisfaction, and our
effectiveness in assisting UBS in meeting its business goals. As a result, we
cannot predict with certainty the future level of revenue or profit from our
relationship with UBS.
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 into which we will enter. 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 may 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 December 31, 1999. Mr. Perot also owns
44,000 shares of our Class A Common Stock directly. Accordingly, Mr. Perot,
primarily through HWGA, Ltd.,
11
<PAGE> 15
controls approximately 35.0% 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.
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.
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.
We Operate in Highly Competitive Markets
We operate in intensely competitive markets. See "Competition" above
for a discussion of some of the risks associated with our markets.
12
<PAGE> 16
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:
o mix and timing of client projects;
o completing client projects;
o hiring, integrating, and utilizing associates;
o timing of new contracts;
o issuance of common shares and options to employees; and
o 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 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.
13
<PAGE> 17
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:
o cease selling or using products or services that incorporate
the disputed technology;
o obtain from the holder of the infringed intellectual property
right a license to sell or use the relevant technology; and
o 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. Among
other things, these provisions:
o require a 66 2/3% vote of the stockholders 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;
14
<PAGE> 18
o require an 80% vote of the stockholders to amend our Bylaws;
o require advance notice for stockholder proposals and director
nominations to be considered at a vote of a meeting of
stockholders;
o permit only our Chairman, President, or a majority of our
Board of Directors to call stockholder meetings, unless our
Board of Directors otherwise approves;
o prohibit actions by stockholders without a meeting, unless our
Board of Directors otherwise approves; and
o limit transactions between our company and persons that
acquire significant amounts of stock without approval of our
Board of Directors.
Risks Related to International Operations
We have operations in many countries around the world. Risks that
affect these international operations include:
o fluctuations in currency exchange rates;
o complicated licensing and work permit requirements;
o variations in the protection of intellectual property rights;
o restrictions on the ability to convert currency; and
o 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.
Acquisitions Involve Numerous Risks
Acquisitions involve numerous risks, including the following:
difficulties in integration of the operations of the acquired companies; the
risk of diverting management's attention from normal daily operations of the
business; risks of entering markets; and the potential loss of key employees of
the acquired company. Mergers and acquisitions of companies are inherently
risky, and no assurance can be given that our acquisitions will be successful
and will not materially adversely affect our business, operating results or
financial condition.
ITEM 2. PROPERTIES
As of December 31, 1999, Perot Systems Corporation (the "Company") had
offices in approximately 46 locations in the United States and seven countries
outside the United
15
<PAGE> 19
States, all of which were leased. The Company's leases cover approximately
950,000 square feet of office and other facilities and have expiration dates
ranging from 2000 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 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, 1999 are disclosed
in Note 14, "Commitments and Contingencies," 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 condition, results of operations or cash flow.
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. The Company has filed a motion to dismiss Robert Plan's
claims. The court has heard arguments on the motion, but has not yet ruled. The
Company 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.
16
<PAGE> 20
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, 1999.
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 (the "NYSE") under the symbol "PER." The table below shows the range of
reported per share sales prices on the NYSE Composite Tape for the Class A
Common Stock for the periods indicated. There was no established public trading
market for the Company's Class A Common Stock prior to February 2, 1999, and the
initial public offering price was $16.00 per share.
<TABLE>
<CAPTION>
Calendar Year High Low
------------- ------ ------
<S> <C> <C>
1999
First Quarter $85.75 $25.50
Second Quarter 33.63 22.06
Third Quarter 29.50 17.63
Fourth Quarter 21.75 15.31
</TABLE>
The last reported sale price of the Class A Common Stock on the NYSE on
March 1, 2000 was $25.00 per share. As of March 1, 2000, the approximate number
of record holders of Class A Common Stock was 3,475.
The Company has never paid cash dividends on shares of its Class A
Common Stock and has no current intention of paying such dividends in the
future.
On February 1, 1999, the Securities and Exchange Commission declared
the Company's Registration Statement on Form S-1, Registration No. 333-60755
relating to the Company's initial public offering ("IPO"), effective.
As of the filing of this 10-K, the Company has used $37.0 million in
proceeds from the IPO. Of this balance, $17.0 million was utilized to purchase
1,000,000 shares of common stock in a publicly traded company as a temporary
investment, and $20.0 million was paid in connection with a strategic alliance
agreement.
17
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the
years ended December 31, 1999, 1998, 1997, 1996, and 1995 have been derived from
the Company's Consolidated Financial Statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. 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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1):
Revenue ................................ $ 1,151.6 $ 993.6 $ 781.6 $ 599.4 $ 342.3
Direct cost of services ................ 875.8 787.9 636.3 461.2 268.6
---------- ---------- ---------- ---------- ----------
Gross profit ........................... 275.8 205.7 145.3 138.2 73.7
Selling, general and administrative
expenses .......................... 169.2 140.3 125.7 92.9 52.8
Goodwill impairment .................... -- 4.1 -- -- --
Purchased research and development ..... -- -- 2.0 4.0 --
---------- ---------- ---------- ---------- ----------
Operating income ....................... 106.6 61.3 17.6 41.3 20.9
Interest income, net ................... 10.9 4.2 0.6 0.8 1.3
Equity in earnings(losses)
of unconsolidated affiliates ...... 9.0 7.9 4.1 (0.3) --
Write-down of nonmarketable equity
securities ........................ -- -- (3.9) -- --
Other income(expense) .................. (0.7) 2.8 1.1 (1.6) (2.0)
---------- ---------- ---------- ---------- ----------
Income before taxes .................... 125.8 76.2 19.5 40.2 20.2
Provision for income taxes ............. 50.3 35.7 8.3 19.7 9.4
---------- ---------- ---------- ---------- ----------
Net income ............................. $ 75.5 $ 40.5 $ 11.2 $ 20.5 $ 10.8
========== ========== ========== ========== ==========
Basic earnings per common share (2) .... $ 0.85 $ 0.53 $ 0.14 $ 0.27 $ 0.17
Weighted average common shares
outstanding (2) ................... 88.4 76.9 78.3 74.1 62.3
Diluted earnings per common
share (2) ......................... $ 0.67 $ 0.42 $ 0.12 $ 0.24 $ 0.16
Weighted average diluted common
shares outstanding (2) ............ 113.2 97.1 95.2 84.3 66.7
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents .............. $ 294.6 $ 144.9 $ 35.3 $ 27.5 $ 17.4
Total assets ........................... 613.9 382.1 267.1 232.2 130.5
Long-term debt (3) ..................... 0.6 1.5 2.9 5.2 6.1
Stockholders' equity ................... 390.7 142.6 93.3 70.8 42.9
OTHER DATA:
Capital expenditures ................... $ 25.2 $ 25.4 $ 46.1 $ 27.5 $ 18.3
</TABLE>
(1) The Company's results of operations include the effects of business
acquisitions made in 1996 and 1997. See Note 5 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.
18
<PAGE> 22
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 e-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 the design and 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 and e-business
strategies, information technology strategies, and process redesign programs.
The Company's top ten clients accounted for approximately 64.7% of
total revenue for the year ended December 31, 1999, 65.7% for the year ended
December 31, 1998, and 64.1% for the year ended December 31, 1997. Approximately
33.9% of the Company's total revenue was derived from international operations
for the year ended December 31, 1999, 35.5% for the year ended December 31,
1998, and 33.6% for the year ended December 31, 1997.
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 the Company's revenue for the
years ended December 31, 1999, 1998, and 1997 was derived from level-of-effort
contracts. Revenue from level-of-effort contracts is based on time and
materials, direct costs plus an administrative fee (which may be either a fixed
amount or a percent of direct costs incurred), or a combination of these methods
and may be based on a set fee for a specified level of resources that is
adjusted for incremental resource usage. Revenue from fixed-price contracts is
recognized on the percentage-of-completion method and is earned based on the
percentage relationship of incurred contract costs to date to total estimated
contract costs, after giving effect to the most recent estimates of total cost.
Revenue from unit-price contracts is recognized based on technology units
utilized or by number of transactions processed during a given period. For
unit-price contracts, the Company establishes a per-unit fee based on the cost
structure associated with the delivery of that unit of service.
The Company continuously monitors its contract performance in light of
client expectations, the complexity of work, project plans, delivery schedules,
and other relevant factors. Provisions for estimated losses, if any, are made in
the period in which the loss
19
<PAGE> 23
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 revenue growth from 1996 to 1999,
achieving a three year compounded annual growth rate ("CAGR") of 24.3%. A
significant portion of the growth is due to the continued strategic relationship
with UBS AG ("UBS"). UBS related revenue accounted for 29.9%, 27.3%, and 27.2%
of total Company revenue from 1999, 1998 and 1997, respectively. Additionally,
during this period the Company grew its short-term project business as well as
its consulting and e-commerce practices.
The Company had 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 terminated the EME Agreement effective September 1999.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1999 to the year ended December 31,
1998
Total revenue increased in 1999 by 15.9% to $1,151.6 million from
$993.6 million in 1998, due to increases of $73.3 million from UBS and $118.1
million from new sales and short-term projects signed since early 1998. These
increases were partially offset by a $19.8 million revenue decrease from the
termination of EME and a net decrease of $13.6 million from other existing
clients. During 1999, revenue from UBS totaled $344.2 million.
Domestic revenue grew by 18.8% in 1999 to $760.9 million from $640.5
million in 1998, and increased slightly as a percent of total revenue to 66.1%
from 64.5% in the prior year.
Non-domestic revenue, consisting of European and Asian operations, grew
by 10.6% in 1999 to $390.7 million from $353.1 million in 1998, and decreased as
a percent of total revenue to 33.9% from 35.5% over the same periods. The
largest components of European operations are the United Kingdom, where revenue
(including $10.6 million of one-time contract termination fees received from
EME) decreased by 5.7% in 1999 to $241.0 million from $255.6 million in 1998,
and Switzerland, where revenue increased 50.0% in 1999 to $63.6 million from
$42.4 million in 1998. Asian operations generated revenue of $18.9 million, or
1.6% of total revenue and $17.8 million, or 1.8% of total revenue, in 1999 and
1998, respectively.
Direct costs of services increased in 1999 by 11.2% to $875.8 million
from $787.9 million in 1998, due primarily to the continued growth in the
Company's business. Gross margin increased to 23.9% in 1999 as compared to 20.7%
in 1998. In 1998, gross margin was impacted by a $16.0 million charge to address
Year 2000 exposures for certain client
20
<PAGE> 24
contracts which was partially offset by contract termination gains totaling $6.5
million. In the fourth quarter of 1999, the Company revised its estimated Year
2000 exposure downward by $11.1 million. The unexpectedly low incidence of
actual Year 2000 outages and problems occurring after December 31, 1999
triggered this reduction. Also during 1999, gross margin was favorably impacted
by the net gain of $8.0 million on the termination of the EME contract (revenue
of $10.6 million less $2.6 million in termination related direct cost of
services incurred).
Selling, general and administrative expenses increased in 1999 by 20.6%
to $169.2 million from $140.3 million in 1998 and slightly increased as a
percent of total revenue to 14.7% from 14.1%. While the Company continued to
control its normal general and administrative spending as a percent of revenue,
the Company increased its spending primarily in the areas of business
development and sales. Absent the intentional increased spending on the
Company's sales force, selling, general and administrative expenses would have
declined as a percent of revenue from the prior year.
As a result of the factors noted above, operating income increased in
1999 to $106.6 million from $61.3 million in 1998, and operating margin
(operating income as a percent of total revenue) increased to 9.3% from 6.2%.
Interest income increased to $11.3 million in 1999, compared to $4.5
million in 1998 due primarily to a significant increase in cash and cash
equivalents, resulting from $108.1 million of net proceeds received from the
Company's initial public offering ("IPO") and cash generated from operations.
Equity in earnings of unconsolidated affiliates increased in 1999 to
$9.0 million from $7.9 million in 1998 due to improved results at HCL Perot
Systems N.V. ("HPS"), a software joint venture based in India. The equity in
earnings for HPS increased to $5.2 million from $2.7 million, offset by the
equity in earnings for Systor AG ("Systor"), a subsidiary of UBS, which
decreased to $3.8 million from $5.0 million in 1999 and 1998, respectively.
During the first quarter of 2000, the Company sold its equity interest in
Systor.
Other income (expense) decreased in 1999 to a net expense of $0.7
million from a net gain of $2.8 million in 1998, primarily because of a
non-recurring $3.0 million gain on the sale of the Company's limited partnership
interest in a venture capital fund in 1998.
The decrease in the effective tax rate to 40.0% in 1999 from 46.9% in
1998 was due primarily to non-deductible goodwill write-downs recorded in 1998
and lower overall foreign and state taxes in 1999.
Net income increased 86.6% in 1999 to $75.5 million from $40.5 million
in 1998, and net income as a percent of total revenue increased to 6.6% from
4.1%.
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
Total 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 initiated since the
21
<PAGE> 25
second half of 1997, $58.4 million from UBS, $37.1 million from EME and $52.5
million from the extension and expansion of existing client relationships.
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 percent 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 percent of total revenue to 35.5% from 33.6% over the same periods. The
largest components of European operations are the United Kingdom, where revenue
increased by 34.7% in 1998 to $255.6 million from $189.8 million in 1997, and
Switzerland, where revenue increased 15.2% in 1998 to $42.4 million from $36.8
million in 1997. Asian operations generated revenue of $17.8 million, or 1.8% of
total revenue in 1998, compared to $9.7 million, or 1.2% of total revenue, in
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 percent of
total revenue to 14.1% from 16.1%. 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 in 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 percent of total 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 and
HPS. The equity in earnings for Systor increased to $5.0 million from $3.6
million, and the 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.
22
<PAGE> 26
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% to $40.5 million in 1998 from $11.2 million
in 1997, and net income margin increased to 4.1% from 1.4%.
LIQUIDITY AND CAPITAL RESOURCES
In 1999, cash and cash equivalents increased 103.3% to $294.6 million
from $144.9 million at December 31, 1998 due primarily to the Company's IPO of
7,475,000 shares of the Company's Class A Common Stock in February 1999 and cash
flow from operations.
Net cash provided by operating activities decreased to $77.4 million in
1999 from $113.9 million in 1998. The decrease in cash flow from operating
activities was due primarily to a significant growth in the accrued compensation
for annual bonuses earned in 1998, but not paid until the first quarter of 1999.
These decreases were partially offset by an increase in net income and a
decrease in income taxes payable, which resulted from a tax benefit that the
Company receives when associates exercise stock options.
Net cash used in investing activities was $41.3 million in 1999
compared to $11.1 million in 1998. The significant increase in cash used in
investing activities was due to the Company's purchase of 1,000,000 shares in
the initial public offering of TenFold Corporation for $17.0 million during the
second quarter of 1999. Cash expenditures for property, equipment and software
in 1999 were $25.2 million compared to $25.4 million in 1998. Additionally, 1998
expenditures were offset by $7.9 million in proceeds from the sale of property,
equipment and software and $5.2 million from the sale of the Company's limited
partnership interest in a venture capital fund.
In 1999, net cash provided by financing activities was approximately
$119.0 million, compared to $4.2 million in 1998. In 1999, the Company's IPO
generated proceeds of $108.1 million and the exercise of options to purchase the
Company's Class A and Class B shares generated $7.8 million and $3.1 million,
respectively.
The Company routinely maintains cash balances in certain European and
Asian currencies to fund operations in those regions. During 1999, foreign
exchange rate fluctuations adversely impacted the Company's non-domestic cash
balances by $5.3 million, as British pounds and Swiss francs weakened against
the U.S. dollar. The Company's foreign exchange policy does not call for hedging
foreign exchange exposures that are not likely to impact net income or working
capital.
The Company has no committed line of credit or other borrowings and
anticipates that existing cash and cash equivalents and expected net cash flows
from operating activities 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.
23
<PAGE> 27
During the first quarter of 2000, the Company generated cash of
approximately $55.5 million from the sale of its 40% equity interest in Systor,
and approximately $24.0 million from the sale of certain marketable equity
securities.
NEW ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("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 was updated
with SFAS No. 137 to make the accounting effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. 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.
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 commonly referred to as the "Year 2000 Problem." Although we
observed only minor problems in systems operated for us or our clients during
the transition from 1999 to 2000, our management continues to believe that it is
not possible to determine with complete certainty that all Year 2000 Problems
that could affect us or our clients have been identified or resolved. The number
of devices that could be affected and the interactions among these devices are
simply too numerous. It is possible that additional problems could occur later
this year as month end, quarter end and year end processes are executed. As a
result, we are continuing to review and monitor systems we believe could be
affected and take precautions that we believe to be appropriate.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that had to be
modified, upgraded, or replaced to minimize the possibility of a material
disruption to its business. The Company estimates the total cost of completing
modifications, upgrades, or replacements to internal systems is $2.6 million,
most of which was incurred during 1999.
24
<PAGE> 28
Based on its experience through the date of this disclosure, the
Company does not believe that the Year 2000 Problem will have a material adverse
effect on the Company's business or results of operations.
Client Systems. During 1997, the Company initiated assessments of the
effect of the Year 2000 Problem on computers, software and other equipment it
operates or maintains for its customers, and its obligations to modify, upgrade,
or replace these systems. As part of this process, the Company has been
estimating the costs and revenues to the Company for performing any necessary
services. The Company is monitoring and updating this assessment on an ongoing
basis. 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 estimates these
costs were $3.9 million, most of which were incurred during 1999. If any Year
2000 Problems occur, management believes that they will be resolved in the
ordinary course of business and may result in claims for pricing adjustments or
penalties.
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 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 taking the steps necessary to convert
or upgrade its internal systems and, where the Company is contractually
obligated to take these steps, systems operated or maintained on behalf of its
clients. The Company expects to complete the implementation of Euro compliant
systems by December 31, 2000. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS Page
----
<S> <C>
Index to Consolidated Financial Statements ........................ F-1
Report of Independent Accountants ................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ...... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 .............................. F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997 .............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 .............................. F-6
Notes to Consolidated Financial Statements ........................ F-7 to F-35
</TABLE>
The Financial Statement Schedule is submitted as Exhibit 99(a) to this Annual
Report on Form 10-K.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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.
26
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
----
<S> <C>
Report of Independent Accountants ................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ..... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ............................. F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997 ............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ............................. F-6
Notes to Consolidated Financial Statements ....................... F-7 to F-35
</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, 1999
and December 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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
February 8, 2000
F-2
<PAGE> 32
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $294,645 $144,907
Marketable equity securities ................................................. 39,938 --
Accounts receivable, net ..................................................... 156,754 115,441
Prepaid expenses and other ................................................... 29,744 15,963
Deferred income taxes ........................................................ 21,416 32,081
-------- --------
Total current assets ....................................................... 542,497 308,392
Property, equipment and purchased software, net ................................ 38,965 39,508
Investments in and advances to unconsolidated affiliates ....................... 24,884 16,324
Other non-current assets ....................................................... 7,619 17,922
-------- --------
Total assets ............................................................... $613,965 $382,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 38,069 $ 41,824
Accrued liabilities .......................................................... 94,203 118,147
Deferred revenue ............................................................. 20,533 9,397
Accrued compensation ......................................................... 53,057 49,982
Other current liabilities .................................................... 10,367 17,303
-------- --------
Total current liabilities .................................................. 216,229 236,653
Other non-current liabilities .................................................. 7,014 2,910
-------- --------
Total liabilities .......................................................... 223,243 239,563
-------- --------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock; par value $.01; authorized 200,000,000 shares;
outstanding 90,819,898 and 77,126,048 shares, 1999 and 1998,
respectively ............................................................... 908 811
Class B Convertible Common Stock; par value $.01; authorized
24,000,000 shares; issued and outstanding 1,784,320 and 934,320 shares,
1999 and 1998, respectively ................................................ 18 9
Additional paid-in capital ................................................... 226,712 72,936
Other stockholders' equity ................................................... 151,177 68,128
Accumulated other comprehensive income ....................................... 11,907 699
-------- --------
Total stockholders' equity ................................................. 390,722 142,583
-------- --------
Total liabilities and stockholders' equity ................................. $613,965 $382,146
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 33
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue .................................................... $ 1,151,553 $ 993,589 $ 781,621
Costs and expenses:
Direct cost of services ............................... 875,779 787,877 636,296
Selling, general and administrative expenses .......... 169,176 140,262 125,732
Goodwill impairment ................................... -- 4,135 --
Purchased research and development .................... -- -- 2,000
------------ ------------ ------------
Operating income ........................................... 106,598 61,315 17,593
Interest income ............................................ 11,328 4,471 1,916
Interest expense ........................................... (423) (245) (1,282)
Equity in earnings of unconsolidated affiliates ............ 8,976 7,933 4,136
Write-down of nonmarketable equity securities .............. -- -- (3,900)
Other income (expense) ..................................... (650) 2,732 1,045
------------ ------------ ------------
Income before taxes ........................................ 125,829 76,206 19,508
Provision for income taxes ................................. 50,332 35,741 8,291
------------ ------------ ------------
Net income ................................................. $ 75,497 $ 40,465 $ 11,217
============ ============ ============
Basic and diluted earnings per common share:
Basic earnings per common share ....................... $ 0.85 $ 0.53 $ 0.14
Weighted average common shares outstanding ............ 88,350 76,882 78,336
Diluted earnings per common share ..................... $ 0.67 $ 0.42 $ 0.12
Weighted average diluted common shares outstanding .... 113,229 97,142 95,192
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 34
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 1997............................ $ 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 shares 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, net of tax
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, net of tax
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
Issuance of Class A shares at
initial public offering (7,475,000 shares)........ 75 108,051 -- -- -- -- 108,126
Issuance of Class A shares under
incentive plans (331,773 shares).................. 2 4,871 -- 129 -- -- 5,002
Exercise of stock options for
Class A shares (5,938,356 shares)................. 20 1,522 -- 6,354 (512) -- 7,384
Exercise of stock options for
Class B shares (850,000 shares)................... 9 3,094 -- -- -- -- 3,103
Class A shares repurchased (51,279 shares).......... -- -- -- (668) -- -- (668)
Note repayments and other........................... -- -- -- -- 1,417 -- 1,417
Tax benefit of employee options exercised........... -- 35,909 -- -- -- -- 35,909
Deferred compensation, net of amortization.......... -- 329 -- -- -- 832 1,161
Net income.......................................... -- -- 75,497 -- -- -- 75,497
Other comprehensive income, net of tax
Unrealized gain on marketable equity securities... -- -- -- -- -- 13,992 13,992
Translation adjustment............................ -- -- -- -- -- (2,784) (2,784)
----------
Comprehensive income................................ 86,705
----- -------- -------- -------- ---------- ------- ----------
Balance, December 31, 1999.......................... $ 926 $226,712 $155,009 $ -- $ (1,010) $ 9,085 $ 390,722
===== ======== ======== ======== ========== ======= ==========
</TABLE>
* The Other balance as of January 1, 1997 includes ($4,342) contract rights,
$1,009 accumulated other comprehensive income and ($1,306) deferred
compensation.
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE> 35
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 75,497 $ 40,465 $ 11,217
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 27,434 37,514 35,363
Write-off of purchased research and development ...................... -- -- 2,000
Write-off of intellectual property rights ............................ -- 853 3,623
Loss (gain) on nonmarketable equity securities ....................... -- (2,986) 3,900
Equity in earnings of unconsolidated affiliates ...................... (8,976) (7,933) (4,136)
Change in deferred income taxes ...................................... 4,936 (6,120) (10,423)
Other ................................................................ 3,888 1,962 455
Changes in assets and liabilities (net of effects from acquisition of
businesses):
Accounts receivable ............................................. (40,863) (11,845) 16,039
Prepaid expenses ................................................ 1,303 (3,508) (3,010)
Other current and non-current assets ............................ (3,240) (1,231) 5,843
Accounts payable and accrued liabilities ........................ (21,714) 45,085 13,244
Deferred revenue ................................................ 11,363 (13,912) 372
Accrued compensation ............................................ 4,154 26,008 3,295
Income taxes .................................................... 19,904 9,476 (3,550)
Other current and non-current liabilities ....................... 3,692 53 (3,260)
---------- ---------- ----------
Total adjustments ........................................... 1,881 73,416 59,755
---------- ---------- ----------
Net cash provided by operating activities ................... 77,378 113,881 70,972
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, equipment and software ............................ (25,205) (25,424) (46,054)
Proceeds from sale of property, equipment and software ................... 883 7,852 2,366
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)
Investments in marketable equity securities .............................. (17,000) -- --
Acquisition of intellectual property rights .............................. -- -- (5,623)
Acquisition of businesses, net of cash acquired of $665 .................. -- -- (13,721)
Other .................................................................... -- (372) --
---------- ---------- ----------
Net cash used in investing activities ....................... (41,322) (11,145) (65,923)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations ................. (863) (1,380) (3,725)
Proceeds from issuance of common stock ................................... 113,336 3,045 381
Proceeds from sale of stock options ...................................... -- -- 8,139
Repayment of stockholder notes receivable ................................ 1,517 193 266
Proceeds from issuance of treasury stock ................................. 5,731 3,582 1,125
Purchases of treasury stock .............................................. (466) (950) (1,834)
Other .................................................................... (255) (307) --
---------- ---------- ----------
Net cash provided by financing activities ................... 119,000 4,183 4,352
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents .................. (5,318) 2,690 (1,619)
---------- ---------- ----------
Net increase in cash and cash equivalents ..................................... 149,738 109,609 7,782
Cash and cash equivalents at beginning of year ................................ 144,907 35,298 27,516
---------- ---------- ----------
Cash and cash equivalents at end of year ...................................... $ 294,645 $ 144,907 $ 35,298
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated 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 information technology services and e-business solutions to
clients on a worldwide basis. The significant accounting policies of
the Company are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and all domestic and foreign subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The Company's investments in companies in which it does not
have 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 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 that 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.
F-7
<PAGE> 37
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
REVENUE RECOGNITION
The Company provides services under level-of-effort,
fixed-price, and unit-price contracts, with the length of existing
contracts ranging up to 11 years. Revenue from level-of-effort pricing
is based on time and materials, direct costs plus an administrative fee
(which may be either a fixed amount or a percentage of direct costs
incurred), or a combination of these methods and may be based on a set
fee for a specified level of resources that is adjusted for incremental
resource usage. Revenue from fixed-price contracts is recognized on the
percentage-of-completion method and is earned based on the percentage
relationship of incurred contract costs to date to total estimated
contract costs, after giving effect to the most recent estimates of
total cost. Provisions for estimated losses, if any, are made in the
period in which the loss first becomes probable and reasonably
estimable. Revenue from unit-price contracts is recognized based on
technology units utilized or by number of transactions processed during
a given period. For unit-price contracts, the Company establishes a
per-unit fee based on the cost structure associated with the delivery
of that unit of service, after an appropriate risk factor is applied.
Billings for products or services for which the Company acts
as an agent on behalf of the client and bears no risk of
non-performance are excluded from the Company's revenue, except to the
extent of any mark-up added.
Deferred revenue 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 as contract services are
rendered.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as
incurred and were $1,058, $569 and $3,243 in 1999, 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.
F-8
<PAGE> 38
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 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 Company periodically evaluates the carrying amount of
software, 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 assets over the
remaining useful lives of the related intangible assets. To the extent
such projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of related intangibles, the
underlying assets are reduced by charges to expense so that the
carrying amounts are 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 $91,484 at
December 31, 1999 and $68,718 at December 31, 1998, 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.
F-9
<PAGE> 39
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
FOREIGN OPERATIONS
The consolidated balance sheets include foreign assets and
liabilities of $120,616 and $88,139, respectively, as of December 31,
1999 and $149,381 and $114,534, respectively, as of December 31, 1998.
Assets and liabilities of subsidiaries located outside the
United States are translated into U.S. dollars at current exchange
rates as of the respective 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 ($604), $360 and $736 for the years
ended December 31, 1999, 1998 and 1997, 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. Generally, the Company
does not require collateral from its customers, since the receivables
are supported by long-term contracts. Management does not believe that
any single customer, industry or geographic area represents significant
credit risk.
One customer accounted for 11% of the Company's accounts
receivable at December 31, 1999. No customers accounted for over 10% of
the Company's accounts receivable at December 31, 1998.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments is
estimated using bank or market quotes. The fair value of the financial
instruments is disclosed in the
F-10
<PAGE> 40
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 swaps and
foreign currency exchange forward contracts.
The Company accounts for its marketable equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of
marketable equity securities at the time of purchase and reevaluates
such designation at each balance sheet date. All marketable equity
securities held by the Company have been classified as
available-for-sale and are carried at fair value, with unrealized
holding gains and losses, net of taxes, reported as a component of
Accumulated other comprehensive income.
TREASURY STOCK
Treasury stock transactions are accounted for under the cost
method.
RECLASSIFICATIONS
Certain of the 1998 and 1997 amounts in the accompanying
financial statements have been reclassified to conform to the current
presentation. Certain stockholders' equity share numbers for 1998 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 SFAS No. 123, "Accounting for Stock
Based Compensation," ("SFAS 123").
F-11
<PAGE> 41
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
ACCOUNTING STANDARD ISSUED
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133 ("SFAS 133") which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS 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. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133" ("SFAS 137"). Under SFAS 137, SFAS 133 becomes
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Management does not believe the implementation of SFAS 133
will have a material effect on the Company's financial position or
results of operations.
2. MARKETABLE EQUITY SECURITIES
In May 1999, the Company purchased 1,000,000 common shares
(approximately 3% voting interest) in the initial public offering of
TenFold Corporation ("TenFold") for $17,000 as part of a strategic
alliance agreement with TenFold to develop and deliver applications,
products and services to clients of Perot Systems and TenFold.
At December 31, 1999, the fair market value of this investment
was $39,938, and the unrealized gain of $13,992 (net of tax of $8,946)
was classified in Accumulated other comprehensive income on the
consolidated balance sheet.
There were no sales of marketable equity securities, and thus
no realized gains or losses, during the year ended December 31, 1999.
As discussed in Note 20, "Subsequent Events," the Company has sold a
portion of these shares since December 31, 1999.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December
31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Amounts billed ................ $ 108,412 $ 68,589
Amounts to be invoiced ........ 27,533 29,999
Recoverable costs and profits . 12,863 4,926
Other ......................... 12,005 13,280
Allowance for doubtful accounts (4,059) (1,353)
---------- ----------
$ 156,754 $ 115,441
========== ==========
</TABLE>
F-12
<PAGE> 42
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 $12,208 of the recoverable costs and profits will be billed in
2000 and $655 will be billed in 2001.
4. PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software consist of the
following as of December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Owned assets:
Computer equipment .................. $ 48,663 $ 52,242
Furniture and equipment ............. 22,621 23,049
Leasehold improvements .............. 15,769 16,065
Automobiles ......................... 293 640
---------- ----------
87,346 91,996
Less accumulated depreciation
and amortization .............. (56,608) (60,725)
---------- ----------
30,738 31,271
---------- ----------
Assets under capital leases:
Computer equipment .................. 101 1,164
Furniture and equipment ............. 1,582 1,582
---------- ----------
1,683 2,746
Less accumulated depreciation
and amortization .............. (1,520) (2,486)
---------- ----------
163 260
---------- ----------
Purchased software ..................... 27,345 32,094
Less accumulated amortization ..... (19,281) (24,117)
---------- ----------
8,064 7,977
---------- ----------
Total property, equipment and
purchased software, net ....... $ 38,965 $ 39,508
========== ==========
</TABLE>
F-13
<PAGE> 43
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Depreciation and amortization expense for property, equipment
and purchased software was $22,387, $26,975 and $29,500 for the years
ended December 31, 1999, 1998 and 1997, respectively.
5. ACQUISITIONS
During 1997, the Company acquired 100% of the equity interests
or assets in four companies and 70% of the equity interests in another
company. These five acquisitions were recorded under the purchase
method of accounting. The purchase prices have been allocated to assets
acquired and liabilities assumed based on the estimated fair values at
the dates of acquisition.
Under the terms and conditions of the various acquisition
agreements executed in 1997, the Company paid a total of $18,587:
$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 options to purchase
1,100,000 shares of 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. The pro-forma effect of these
transactions on the full year 1997 revenue, net income and earnings per
common share was immaterial.
During 1998, the Company determined that certain amounts
recorded for goodwill, primarily related to the acquisition of a
company during 1997, were impaired and no longer recoverable. The
determination was made based on management's best estimates of the
undiscounted future operation 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 statements of
operations totaled $4,135, consisting primarily of a write-down of
$3,970 related to the aforementioned 1997 acquisition. This goodwill
impairment was due primarily to an expected decline in future cash
flows resulting from the departure of certain key employees during
1998.
Also during 1998, the Company sold its equity interest in
Doblin Group, Inc., a Chicago based consulting company acquired in
1996. 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.
At December 31, 1999 and 1998, goodwill of $659 and $5,587,
net of $22,201 and $17,535 in accumulated amortization, respectively,
was included in Other assets on the consolidated balance sheet and
related solely to business acquisition activity.
F-14
<PAGE> 44
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES AND MINORITY
INTERESTS
At December 31, 1999, investments in and advances to
unconsolidated affiliates included two 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, 1999 and 1998 was $15,273 and
$11,434, respectively. In June 1998, Systor declared a cash dividend
for which the Company received $804. As discussed in Note 20,
"Subsequent Events," the Company has recently sold its investment in
Systor.
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, 1999 and 1998 was $9,601 and $4,456,
respectively. HPS provided subcontractor services to the Company
totaling $28,670 and $26,808 for 1999 and 1998, respectively.
No dividends or distributions were received from investments
in unconsolidated affiliates in 1999. The amount of cumulative
undistributed earnings from investments in unconsolidated affiliates
recorded in retained earnings was $21,172, $12,189 and $5,060 for 1999,
1998 and 1997, respectively.
In 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, the
Company made net capital contributions of $834. In January 1998, the
Company sold its entire investment for $5,162, recognized a gain of
$2,986, and has no future commitments to the fund.
In May 1996, the Company began purchasing shares of a class of
preferred stock in a software company. As of December 31, 1999, the
Company owned a total number of 2,417,000 shares, representing
approximately a 5% equity interest. Additionally, in 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.
F-15
<PAGE> 45
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
7. 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 IP Rights in October 1997, and charged
$3,623 to direct cost of services to reflect the impairment of the
remaining IP Rights.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December
31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Operating expenses ..................... $ 59,824 $ 70,906
Taxes other than income, insurance,
rents, licenses and maintenance .... 4,342 1,737
Other contract-related ................. 30,037 45,504
---------- ----------
$ 94,203 $ 118,147
========== ==========
</TABLE>
OTHER CONTRACT-RELATED
Other contract-related accrued liabilities represent
provisions to match contract-related expenses to 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 $16,015 was recorded in 1998 to
address Year 2000 exposure for certain customer contracts. In the
fourth quarter of 1999, the Company revised its estimate of the expense
associated with Year
F-16
<PAGE> 46
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2000 contract costs downward by $11,137, which represents $0.06 per
diluted share for both the fourth quarter and year-end December 31,
1999 results.
9. CAPITAL LEASE OBLIGATIONS AND LONG-TERM DEBT
Capital lease obligations and long-term debt are included in
Other current liabilities and Other non-current liabilities at December
31, 1999 and 1998. These obligations have various payment terms through
July 2001 at interest rates ranging from 6.0% to 10.81%. The total
amount outstanding of these obligations at December 31, 1999 is $631,
of which $445 is due in 2000 and $186 is due in 2001.
10. COMMON AND PREFERRED STOCK
COMMON STOCK
Class A Common Stock
On February 2, 1999 (the "IPO Date"), 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 $108,126.
Class B Convertible Common Stock
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.
On April 24, 1997, the Company concluded the renegotiation of
the terms of its strategic alliance with UBS AG. Under the terms and
conditions of the new agreement, which were effective from January 1,
1997, the Company sold to UBS AG 100,000 shares of the Company's Class
B stock at a purchase price of $3.65 per share. These Class B shares
are subject to certain transferability and holding-period restrictions,
which lapse over a defined vesting period. These shares vest at a rate
of approximately 833 shares per month over the ten year term of the
agreement. In the
F-17
<PAGE> 47
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
event of termination of the agreement, the Company would have the right
to buy back any previously acquired unvested shares for the original
purchase price of $3.65 per share. Additionally, as discussed in Note
11, "Stock Awards and Options," options were issued to UBS under this
agreement.
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 five 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.
Other Common Stock Activity
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.
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.
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
F-18
<PAGE> 48
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Participating Preferred Stock, par value $.01 per share (the "Series B
Preferred Stock" and, together with the Series A Preferred Stock, the
"Preferred Stock").
STOCKHOLDER RIGHTS PLAN
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 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.
EMPLOYEE STOCK PURCHASE PLAN
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 the IPO Date. 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.
F-19
<PAGE> 49
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
11. STOCK AWARDS AND OPTIONS
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. The Company may issue up to a total of
109,000,000 shares of the Company's Class A Common Stock under this
plan, the 1991 Stock Option Plan and the 1996 Advisor and Consultant
Stock Option/Stock Incentive Plan. Employees selected by management may
elect to become participants in the plan by entering into an agreement
that provides for vesting of the Class A common shares over a
five-to-ten year period. 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 common 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. This right of first
refusal terminated on the IPO Date when the Class A common 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
five 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. For the years ended December 31,
1999, 1998 and 1997, 81,415, 40,652 and 1,662,204 shares, respectively,
of the Company's Class A common stock were granted under the Restricted
Stock Plan. The weighted average grant-date fair value for each
respective year is $2,075, $135 and $4,505.
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 common shares can be
granted to eligible employees. Prior to the IPO Date, such options were
generally granted at a price not less than 100% of the fair value of
the Company's Class A common shares, as determined by the Board of
Directors, and based upon an independent third-party valuation.
Subsequent to the IPO Date, the exercise price for options issued is
the fair market value of the shares on the date of grant. The stock
options vest over a three-to-ten
F-20
<PAGE> 50
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 the options 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 interest at 8%. For options granted on or after July 20, 1998, the
Plan was amended to provide for immediate vesting in the event of death
and continued vesting in the event of total disability, in each case,
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 Common Stock at a price not less than
100% of the fair value of the Company's common stock, as determined by
the Board of Directors and based upon an independent third-party
valuation. The options and shares are subject to a vesting schedule and
to restrictions associated with their transfer. Under certain
circumstances, the shares can be repurchased by the Company at cost
plus interest at 8% from the date of issuance.
In 1996, the Board approved the 1996 Non-Employee Director
Stock Option/Stock Incentive Plan and the 1996 Advisor and Consultant
Stock Option/Stock Incentive Plan, which together replaced the Advisor
Plan for subsequent grants of options. Provisions of the Advisor Plan
will remain in effect for outstanding stock and options, but no new
issuances will be made pursuant to the plan.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION/STOCK INCENTIVE PLAN
In 1996, the Company adopted the 1996 Non-Employee Director
Stock Option/Stock Incentive Plan (the "Director Plan"). The Director
Plan provides for the issuance of up to 800,000 Class A common shares
or options to Board members who are not employees of the Company.
Shares or options issued under the plan would be subject to five year
vesting, with options expiring after an eleven year term. The purchase
price for shares issued and exercise price for options issued is the
fair value of the shares at the date of issuance. Other restrictions
are established upon issuance.
F-21
<PAGE> 51
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1996 ADVISOR AND CONSULTANT STOCK OPTION/STOCK INCENTIVE PLAN
In 1996, the Company adopted the 1996 Advisor and Consultant
Stock Option/Stock Incentive Plan (the "Consultant Plan"). The
Consultant Plan provides for the issuance of Class A common shares or
options to advisors or consultants who are not employees of the
Company, subject to restrictions established at time of issuance. The
option exercise price is the fair market value of the shares on the
date of grant. Any difference between the option price and the fair
market value of the shares on the date of grant is calculated at the
grant date and amortized ratably over the vesting period as
compensation expense.
CLASS B STOCK OPTIONS UNDER THE UBS AG AGREEMENT
Under the terms and conditions of the UBS AG agreement which
was renegotiated in 1997, the Company sold to UBS AG options to
purchase 7,234,320 shares of the Company's Class B Common Stock at a
non-refundable cash purchase price of $1.125 per option. These options
are exercisable immediately and for a period of five years after the
date that such shares become vested, at an exercise price of $3.65 per
share. The 7,234,320 shares of Class B Common Stock subject to options
vest at a rate of 63,073 shares per month for the first five years of
the ten year agreement, and at a rate of 57,501 shares per month
thereafter. In the event of termination of the UBS Warburg EPI
Agreement, options to acquire unvested shares would be forfeited. UBS
AG exercised 834,320 options in the third quarter of 1998 and an
additional 850,000 options in the second quarter of 1999.
OTHER STOCK AND OPTION ACTIVITY
During 1995, options for the purchase of 4,000,000 Class A
common 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 plus 8% per annum. 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.
F-22
<PAGE> 52
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 $360 and $373 of compensation expense
during the years ended December 31, 1999 and 1998, respectively, and
will amortize the remaining deferred compensation ratably over the
respective vesting periods of the option grants. The estimated amount
of compensation expense to be recognized, excluding consideration of
future forfeitures, is approximately $314 for each year from 2000
through 2008.
Activity in options for Class A Common Stock:
<TABLE>
<CAPTION>
WEIGHTED
DIRECTOR & AVERAGE
CONSULTANT OTHER EXERCISE
1991 PLAN PLANS OPTIONS TOTAL PRICE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
1999 outstanding at beginning of year .... 28,430,722 244,000 326,720 29,001,442 1.62
Granted .................................. 13,749,260 40,000 -- 13,789,260 11.70
Exercised ................................ (5,699,420) (12,000) (226,936) (5,938,356) 1.33
Forfeited ................................ (3,035,424) (56,000) (6,400) (3,097,824) 6.07
------------ ------------ ------------ ------------
Outstanding at December 31, 1999 ......... 33,445,138 216,000 93,384 33,754,522 5.38
============ ============ ============ ============
Exercisable at December 31, 1999 ......... 5,419,887 53,200 59,240 5,532,327 2.62
</TABLE>
F-23
<PAGE> 53
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table summarizes information about options for
Class A Common Stock outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
------------ ------------ ---------------- ------------
<S> <C> <C> <C>
$0.250 165,112 2.36 113,528
$0.375 879,160 3.62 465,580
$0.500 4,848,969 5.22 1,136,029
$0.875 377,984 2.68 143,370
$1.250 4,567,817 7.48 663,312
$1.875 4,948,381 7.27 1,368,759
$2.000 114,000 8.04 --
$3.375 5,536,739 7.20 1,033,569
$11.000 11,248,860 8.38 608,180
$13.500 89,000 10.08 --
$19.063 475,500 9.98 --
$20.750 503,000 10.42 --
------------ ------------
33,754,522 7.29 5,532,327
============ ============
Weighted average exercise price of exercisable options................... $ 2.62
</TABLE>
As previously noted, the Company has continued to account for
its employee and non-employee director 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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported .................... $ 75,497 $ 40,465 $ 11,217
Pro forma ...................... $ 72,562 $ 40,005 $ 10,655
Basic earnings per common share
As reported .................... $ 0.85 $ 0.53 $ 0.14
Pro forma ...................... $ 0.82 $ 0.52 $ 0.14
Diluted earnings per common share
As reported .................... $ 0.67 $ 0.42 $ 0.12
Pro forma ...................... $ 0.64 $ 0.41 $ 0.11
</TABLE>
All options granted by the Company in 1999 and 1997 were
granted at the estimated per share fair market value in effect on the
grant date. For the year ended,
F-24
<PAGE> 54
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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. Prior to the
IPO Date, the fair value of each option grant was estimated on the
grant date using the Minimum Value Stock option-pricing model.
Subsequent to this date, the Black-Scholes option pricing model was
utilized by the Company. The weighted average risk free interest rates
were 4.68%, 5.52%, and 6.28% for the years ended December 31, 1999,
1998, and 1997, respectively. Volatility was 35% for the year ended
December 31, 1999, and zero for the years ended December 31, 1998 and
1997. 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 six
years. The weighted average grant-date fair value per share of options
granted in 1999 and 1997 was $2.47 and $0.02, respectively. For options
granted in 1998, the weighted average grant-date fair value per share
of options that were granted at fair market value and less than fair
market value was $0.14 and $0.32, respectively.
12. INCOME TAXES
Income (loss) before taxes for the years ended December 31 was
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Domestic .... $ 83,192 $ 50,344 $ (4,054)
Foreign ..... 42,637 25,862 23,562
---------- ---------- ----------
$ 125,829 $ 76,206 $ 19,508
========== ========== ==========
</TABLE>
The provision for income taxes charged to operations was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
U.S. federal ..................... $ 26,092 $ 23,958 $ 9,159
State and local .................. 4,268 3,904 1,383
Foreign .......................... 15,036 13,999 8,172
---------- ---------- ----------
Total current ...................... $ 45,396 $ 41,861 $ 18,714
---------- ---------- ----------
Deferred:
U.S. federal ..................... 5,107 (976) (8,902)
State and local .................. 957 (199) (1,392)
Foreign .......................... (1,128) (4,945) (129)
---------- ---------- ----------
Total deferred ..................... 4,936 (6,120) (10,423)
---------- ---------- ----------
Total provision for income taxes ... $ 50,332 $ 35,741 $ 8,291
========== ========== ==========
</TABLE>
Taxes payable are reduced by $35,909 and $3,467 in 1999 and 1998,
respectively, due to the benefit of stock options exercised for that
year. This benefit is recorded as an increase to Stockholders' equity.
F-25
<PAGE> 55
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company has foreign net operating loss carryforwards of
approximately $3,341 to offset future foreign taxable income. The loss
carryforwards do not expire.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Conversion of acquired entity from
cash basis to accrual basis of
accounting ......................... $ 186 $ 636
Unrealized gain on marketable equity
securities ......................... 8,946 --
Equity investments ...................... 4,854 2,384
---------- ----------
Gross deferred tax liabilities .......... 13,986 3,020
---------- ----------
Property and equipment .................. (10,817) (14,261)
Accrued liabilities ..................... (22,341) (31,500)
Intangible assets ....................... (163) 514
Deferred revenue ........................ -- (307)
Loss carryforwards ...................... (1,012) --
Other ................................... (2,393) 373
---------- ----------
Gross deferred tax assets ............... (36,726) (45,181)
---------- ----------
Net deferred tax asset .................. $ (22,740) $ (42,161)
========== ==========
</TABLE>
A valuation allowance has not been established for the net
deferred tax asset as of December 31, 1999 or 1998, 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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- --------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $ 44,040 35.0% $ 26,671 35.0% $ 6,828 35.0%
Non-deductible items 1,255 1.0 768 1.0 528 2.7
State and local taxes 3,328 2.6 3,021 4.0 (215) (1.1)
Nondeductible
amortization and write-
off of intangible assets 1,108 0.9 3,824 5.0 1,765 9.0
U.S. rates in excess of (less
than) foreign rates & other 601 0.5 1,457 1.9 (615) (3.1)
-------- -------- -------- -------- -------- --------
Total provision for
income taxes $ 50,332 40.0% $ 35,741 46.9% $ 8,291 42.5%
======== ======== ======== ======== ======== ========
</TABLE>
F-26
<PAGE> 56
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
13. CERTAIN GEOGRAPHIC DATA
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 geographic area as defined
by FASB SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." "All Other" includes financial information from
the following geographic areas: Hong Kong, Japan, Singapore,
Netherlands, Germany, France, Ireland, Switzerland, and Luxembourg.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States:
Total revenue ....................... $ 760,873 $ 640,508 $ 519,122
Long-lived assets at December 31 .... 103,033 52,312 58,699
United Kingdom:
Total revenue ....................... 241,002 255,613 189,758
Long-lived assets at December 31 .... 4,347 4,932 12,375
All Other:
Total revenue ....................... 149,678 97,468 72,741
Long-lived assets at December 31 .... 2,702 6,430 7,696
Consolidated:
Total revenue ....................... 1,151,553 993,589 781,621
Long-lived assets at December 31 .... 110,082 63,674 78,770
</TABLE>
Greater than 10% of the Company's revenue was earned from one
client for the year ended December 31, 1999, and two clients for the
years ended December 31, 1998 and 1997. Revenue from these clients
comprised 30% of total revenue in 1999, 27% and 12% of total revenue in
1998, and 27% and 10% of total revenue in 1997.
F-27
<PAGE> 57
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
14. 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, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LEASE AND MAINTENANCE
DECEMBER 31: COMMITMENTS
------------ ---------------------
<S> <C>
2000 ............... $ 34,179
2001 ............... 28,617
2002 ............... 16,074
2003 ............... 8,969
2004 ............... 8,018
Thereafter ......... 24,401
--------
Total ........... $120,258
========
</TABLE>
Minimum payments have not been reduced by minimum sublease
rentals of $5,274 due in the future under non-cancelable subleases. The
Company is obligated under certain operating leases for its pro rata
share of the lessors' operating expenses. Rent expense was $35,517,
$31,666 and $22,377 for 1999, 1998 and 1997, respectively.
Additionally, as of December 31, 1999 the Company maintained a loss
accrual of $4,799 in connection with the planned abandonment of certain
leased properties.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Foreign currency exchange forward contracts
At December 31, 1999, the Company had seven forward contracts
in various currencies in the amount of $15,743. These contracts expired
on January 31, 2000.
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 $22 as of December 31, 1999. The Company's
remaining risk associated with this transaction is the risk of default
by the bank, which the Company believes to be remote.
F-28
<PAGE> 58
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
CONTINGENT PUT RIGHTS
Under the terms of a certain stock agreement, a total of
1,000,000 shares of Class A Common Stock are subject to contingent put
rights at December 31, 1999. Under this agreement 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
holder's employment or directorship terminates. At December 31, 1998,
2,848,472 shares, including the 1,000,000 previously discussed, were
subject to contingent put rights. The put rights for the additional
1,848,472 shares lapsed at the IPO Date.
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.
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. The Company has filed a motion to dismiss Robert Plan's claims.
The court has heard arguments on the motion, but has not yet ruled. The
Company intends to continue vigorously defending the lawsuit. The
Company does not believe that the outcome of this litigation will have
a material adverse effect on the Company.
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
F-29
<PAGE> 59
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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.
TENFOLD AGREEMENT
In May 1999, the Company entered into a strategic alliance
agreement with TenFold to develop and deliver applications, products,
and services to clients of the Company and TenFold.
If the Company does not provide TenFold with opportunities to
contract for revenue of at least $15,000 in each of the two years
following May 1, 1999, the Company will pay TenFold 20% of the
shortfall, subject to reduction in the second year to the extent that
the opportunities to contract for revenue provided in the first or
third year following May 1, 1999 exceed $15,000.
15. 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 in 1999 allowed eligible
employees to contribute between 1% and 15% of their annual
compensation, including overtime pay, bonuses and commissions. Under
the plan, participants were vested in their Company contributions at a
rate of 20% per year after their first year of service. 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, 1999, 1998 and 1997 amounted to $11,830,
$7,662 and $7,388, respectively. During 1997, the Company contributed
257,590 shares of its Class A Common Stock to the plan, which were
allocated to participants' plan accounts using a formula based on
compensation. Compensation expense of $631 in 1997 was recorded as a
result of these share contributions. No common stock was contributed to
the plan in 1999 or 1998.
Effective January 1, 2000, the plan was amended to change the
Company contribution to a formula matching 100% of employees'
contributions, up to a maximum Company contribution of 4%. The plan was
also amended to provide 100% vesting on all existing Company matching
contributions for active employees and 100% vesting on any future
Company matching contributions. In addition, the plan will allow
employees to contribute between 1% and 20% of their annual compensation
to the plan.
F-30
<PAGE> 60
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
In 1992, the Company established a European trust, for the
benefit of non-US based employees, to which 23,852 shares were
contributed in 1995. No contributions have been made subsequent to this
issuance.
In 1996, the Company contributed 324,386 shares to certain
trusts established for the benefit of employees transitioning to the
Company pursuant to certain contracts. No contributions have been made
subsequent to these issuances.
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest ................................................... $ 321 $ 245 $ 1,283
============ ============ ============
Income taxes ............................................... $ 27,681 $ 33,615 $ 23,325
============ ============ ============
Non-cash investing and financing activities:
Issuance of common stock for acquisition
of businesses ......................................... $ -- $ -- $ 2,701
============ ============ ============
Issuance of stock options for acquisition
of business ........................................... $ -- $ -- $ 1,500
============ ============ ============
Liabilities assumed in acquisition of businesses ............. $ -- $ -- $ 7,693
============ ============ ============
Repurchase of shares issued under Restricted Stock Plan
in exchange for reductions in notes receivable from
stockholders ........................................... $ -- $ 1,077 $ 2,603
============ ============ ============
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
============ ============ ============
Deferred compensation, net of amortization ................... $ (360) $ 3,654 $ --
============ ============ ============
Reclassification of deferred compensation
to paid-in capital upon option forfeiture .............. $ (472) $ -- $ 1,050
============ ============ ============
Contract rights canceled upon renegotiation
of UBS AG Agreement .................................... $ -- $ -- $ (4,146)
============ ============ ============
</TABLE>
F-31
<PAGE> 61
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
17. RELATED PARTY TRANSACTIONS
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. The loan was paid in full on August 5, 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 was payable in August 1999 and collateralized by shares of
the Company's Class A Common Stock and $1,000 was payable in April 2002
and collateralized by a mortgage on the executive's residence. As of
December 31, 1999, this loan was paid in full. 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 1997, the Company loaned $250 to an executive at the
rate of 8%. This note was collateralized by the executive's Class A
Common Stock. The note was paid in full on August 31, 1999. 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 was paid in full on September 8, 1999.
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 were due by
December 31, 1999. Payment in full was made on these loans on January
5, 2000.
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 each of the years ended December 31, 1999 and 1998,
the Company has recorded a compensation expense of $780 with an offset
to Additional paid-in capital.
F-32
<PAGE> 62
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
18. EARNINGS PER SHARE
The following chart is a reconciliation of the numerators and
the denominators of the basic and diluted per share computations
(shares in thousands).
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income ............................................ $ 75,497 $ 40,465 $ 11,217
========== ========== ==========
Weighted average common shares outstanding ............ 88,350 76,882 78,336
========== ========== ==========
Basic earnings per common share ....................... $ 0.85 $ 0.53 $ 0.14
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Net income ............................................ $ 75,497 $ 40,465 $ 11,217
========== ========== ==========
Weighted average common shares outstanding ............ 88,350 76,882 78,336
Incremental shares assuming dilution .................. 24,879 20,260 16,856
---------- ---------- ----------
Weighted average diluted common shares outstanding .... 113,229 97,142 95,192
========== ========== ==========
Diluted earnings per common share ..................... $ 0.67 $ 0.42 $ 0.12
========== ========== ==========
</TABLE>
19. TERMINATION OF MAJOR CONTRACTS
The Company provided 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 had 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 Company completed termination of the EME
contract effective on September 1, 1999. Under the terms and conditions
of this agreement, the Company received a cash payment of $10,620 which
was fully recognized as revenue during 1999. Related expenses charged
to Direct cost of services during 1999 were $2,591. The resulting gain
of $8,029 is included in Operating income for the year ended December
31, 1999.
20. SUBSEQUENT EVENTS
Sale of Equity Interest in Systor
On January 14, 2000, the Company sold its 40% equity interest
in Systor to UBS Capital B.V. for a purchase price of $55,486,
resulting in a $38,851 pretax gain. UBS Capital B.V. was the holder of
the remaining 60% interest in Systor.
F-33
<PAGE> 63
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Sale of TenFold Shares
Through a series of separate transactions during January and
February of 2000, the Company has sold 500,000 shares of its 1,000,000
shares of TenFold stock which were being held for investment. The total
proceeds and realized gain on these transactions were $23,992 and
$15,492, respectively.
Agreement to Purchase Solutions Consulting, Inc. (Unaudited)
On March 1, 2000, the Company entered into an agreement to
purchase substantially all of the assets and liabilities of Solutions
Consulting, Inc., a Pittsburgh based enterprise software and e-commerce
company. Under the terms and conditions of this agreement, the Company
will pay $72,100 in cash and $50,000 in shares of the Company's Class A
Common Stock, representing 1,965,602 shares. Completion of this
purchase is subject to certain closing conditions and government
approvals.
F-34
<PAGE> 64
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
21. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Revenue (3) ...................... $ 274,368 $ 282,256 $ 304,788 $ 290,141
Direct cost of services .......... 210,327 218,959 231,230 215,263
Gross profit (1) (3) ............. 64,041 63,297 73,558 74,878
Net income ....................... 16,189 16,906 20,132 22,270
Basic earnings per common
share (2) ...................... $ 0.19 $ 0.19 $ 0.22 $ 0.24
Diluted earnings per common
share (2) ...................... $ 0.15 $ 0.15 $ 0.18 $ 0.20
Weighted average common
shares outstanding (4).......... 83,578 87,645 89,832 92,228
Weighted average diluted
common shares outstanding (4)... 111,081 113,850 113,093 112,712
YEAR ENDED DECEMBER 31, 1998:
Revenue .......................... $ 214,087 $ 238,625 $ 271,473 $ 269,404
Direct cost of services .......... 169,917 189,973 215,193 212,794
Gross profit ..................... 44,170 48,652 56,280 56,610
Net income ....................... 9,044 10,100 9,051 12,270
Basic earnings per common
share (2) ...................... $ 0.12 $ 0.13 $ 0.12 $ 0.16
Diluted earnings per common
share (2) ...................... $ 0.10 $ 0.10 $ 0.09 $ 0.13
Weighted average common
shares outstanding (4).......... 76,289 76,603 77,128 77,946
Weighted average diluted
common shares outstanding (4)... 91,620 96,635 98,397 97,801
</TABLE>
(1) In the fourth quarter of 1999, the Company revised its
estimate of the expense associated with Year 2000 contract
cost downward by $11,137.
(2) Due to changes in the weighted average shares outstanding per
quarter, the sum of basic and diluted earnings per common
share per quarter may not equal the basic and diluted earnings
per common share for the applicable year.
(3) In the third quarter of 1999, the Company received a one-time
contract termination payment from EME totaling $10,620.
Expenses related to the payment were $2,591 resulting in a
gain included in gross profit totaling $8,029.
(4) Shares in thousands.
F-35
<PAGE> 65
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
All information required by Item 10 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 10, 2000 which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
All information required by Item 11 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 10, 2000 which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All information required by Item 12 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 10, 2000 which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All information required by Item 13 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 10, 2000 which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999.
27
<PAGE> 66
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 OF EXHIBIT
------ ----------------------
<S> <C>
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 Option 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
10.20+ 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
</TABLE>
28
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
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)
10.41*** Share Purchase Agreement dated January 14, 2000, between the Company and UBS
Capital B.V.
10.42* Asset Purchase Agreement entered into March 1, 2000 by and among the Company,
PSSC Acquisition Corporation, Solutions Consulting, Inc., Mark G. Miller, and
Sanford B. Ferguson
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP dated March 3, 2000
23.2* Report of PricewaterhouseCoopers LLP on the financial statement schedule
dated February 8, 2000
27.0* Financial Data Schedule
99(a)* Schedule II - Valuation and Qualifying Accounts
</TABLE>
29
<PAGE> 68
* Filed herewith.
** Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Registration No. 333-60755, to the
exhibit of the same number except as otherwise indicated.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated January 28, 2000.
+ Incorporated by reference to the Registrant's Form 10, dated
April 30, 1997, to the exhibit of the same number except as
otherwise indicated.
++ Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, 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 1999.
30
<PAGE> 69
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
Dated: March 3, 2000
By: /s/ ROSS PEROT
-------------------------------------
Ross Perot
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ROSS PEROT Chairman, President and
- ----------------------------------- Chief Executive Officer
Ross Perot (Principal Executive
Officer) March 3, 2000
/s/ JAMES CHAMPY Vice President and
- ----------------------------------- Director March 3, 2000
James Champy
/s/ TERRY ASHWILL Vice President and
- ----------------------------------- Chief Financial Officer
Terry Ashwill (Principal Financial and
Accounting Officer) March 3, 2000
/s/ STEVE BLASNIK Director March 3, 2000
- -----------------------------------
Steve Blasnik
/s/ ROSS PEROT, JR. Director March 3, 2000
- -----------------------------------
Ross Perot, Jr.
/s/ WILLIAM K. GAYDEN Director March 3, 2000
- -----------------------------------
William K. Gayden
/s/ CARL HAHN Director March 3, 2000
- -----------------------------------
Carl Hahn
</TABLE>
31
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
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 Option 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
10.20+ 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
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
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)
10.41*** Share Purchase Agreement dated January 14, 2000, between the Company and UBS
Capital B.V.
10.42* Asset Purchase Agreement entered into March 1, 2000 by and among the Company,
PSSC Acquisition Corporation, Solutions Consulting, Inc., Mark G. Miller, and
Sanford B. Ferguson
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP dated March 3, 2000
23.2* Report of PricewaterhouseCoopers LLP on the financial statement schedule
dated February 8, 2000
27.0* Financial Data Schedule
99(a)* Schedule II - Valuation and Qualifying Accounts
</TABLE>
<PAGE> 72
* Filed herewith.
** Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Registration No. 333-60755, to the
exhibit of the same number except as otherwise indicated.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated January 28, 2000.
+ Incorporated by reference to the Registrant's Form 10, dated
April 30, 1997, to the exhibit of the same number except as
otherwise indicated.
++ Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, to the
exhibit of the same number except as otherwise indicated.
<PAGE> 1
EXHIBIT 10.32
PEROT SYSTEMS CORPORATION
1999 Employee Stock Purchase Plan/US
(Revised January 7, 2000)
Effective January 1, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Purpose of the Plan
1.1 General...................................................................1
1.2 Tax Treatment.............................................................1
2. Participation in the Plan
2.1 Eligibility...............................................................1
2.2 Enrollment to Buy Stock...................................................1
2.3 Designation of Beneficiary................................................2
2.4 Contributions; Payroll Deductions; Account; No Interest...................2
2.5 Changes in Contributions..................................................2
2.6 Withdrawal................................................................2
2.7 Termination of Employment; Leave of Absence...............................3
2.8 Transferability...........................................................4
3. Purchase of Stock
3.1 Offering Periods..........................................................4
3.2 Grant of Option; Exercise Price...........................................4
3.3 Automatic Exercise of Option..............................................4
3.4 Payment for Stock.........................................................4
3.5 Delivery of Shares; Voting................................................5
3.6 Periodic Reports..........................................................5
3.7 No Rights in Stock Prior to Exercise......................................6
4. Operation of the Plan
4.1 Effective Date and Term of Plan...........................................6
4.2 Shares Authorized for Sale and Issuance Under the Plan....................6
4.3 Conditions Upon Issuance of Shares........................................6
4.4 Administration; Committee.................................................7
4.5 Amendment or Termination..................................................8
4.6 Approval of the Stockholders..............................................9
4.7 No Liability for Good Faith Determinations................................9
5. Miscellaneous Legal Provisions
5.1 Definitions...............................................................9
5.2 Adjustments Upon Changes in Capitalization...............................12
5.3 Notices; Waiver of Notice................................................12
5.4 Severability.............................................................13
5.5 Successors and Assigns...................................................13
5.6 Headings.................................................................13
5.7 Governing Law............................................................13
5.8 No Right to Employment...................................................13
</TABLE>
<PAGE> 3
PEROT SYSTEMS CORPORATION
1999 Employee Stock Purchase Plan/US
(Revised January 7, 2000)
1. PURPOSE OF THE PLAN
1.1 General. Perot Systems has adopted this Plan to provide Eligible
Associates with the opportunity and a convenient means to purchase
Common Stock as an incentive (a) to exert their maximum efforts for the
success of the Company, and (b) to remain employed with the Company.
1.2 Tax Treatment. Perot Systems intends that options to purchase stock
granted under this Plan qualify as options granted under an "employee
stock purchase plan" as defined in Section 423(b) of the Tax Code, and
this Plan will be construed and applied so as to be consistent with
Section 423 of the Code, including the requirement of Section 423(b)(5)
of the Code that all Participants granted options to purchase Shares
under the Plan have the same rights and privileges with respect to such
options.
2. PARTICIPATION IN THE PLAN
2.1 Eligibility. Each Eligible Associate who is employed by an Employer on
an Enrollment Date may participate in the Plan during the relevant
Offering Period, unless the Tax Code prohibits his or her participation
in that Offering Period because:
(a) Immediately after the grant of an option under this Plan on the
Exercise Date, the Eligible Associate (together with certain
individuals and entities associated with or related to the Eligible
Associate as described in Section 424(d) of the Tax Code) would be
deemed to own a number of shares of stock and certain exercisable
options to purchase stock that together represent 5% or more of the
total combined voting power or value of all classes of stock of Perot
Systems or any Subsidiary (computed in accordance with Section
423(b)(3) of the Tax Code); or
(b) Immediately after the grant of an option under this Plan to an
Eligible Associate on the Exercise Date, the Eligible Associate's
rights to purchase Common Stock under all of the employee stock
purchase plans described in Section 423 of the Tax Code of Perot
Systems and each Subsidiary would accrue at a rate that exceeded
$25,000 (computed based on the Fair Market Value on the Exercise Date
in accordance with Section 423(b)(8) of the Tax Code) during the
calendar year of that Offering Period.
2.2 Enrollment to Buy Stock. Each Eligible Associate who:
(a) completes an Enrollment Agreement in the form, format, and as
otherwise required by the Stock Administrator, and
(b) delivers that Enrollment Agreement to the Stock Administrator at
least 10 business days before the Enrollment Date for an Offering
Period, or
1999 Employee Stock Purchase Plan/US Page 1
<PAGE> 4
(c) calls the Plan Custodian's automated phone system and completes the
enrollment process, may purchase Common Stock on the Exercise Date for
that Offering Period, subject to the other provisions of this Plan.
2.3 Designation of Beneficiary. Each Participant may from time to time
designate a beneficiary by filing a written beneficiary designation
form with the Stock Administrator. Such beneficiary shall receive any
refunds of amounts not used to purchase Shares and any Shares issued to
the Participant. If no beneficiary was designated, any cash refunds and
transfers of Shares shall be made to the appropriate representative of
Participant's estate.
2.4 Contributions; Payroll Deductions; Account; No Interest.
(a) The Company will withhold from each Participant's paycheck the
percentage (not to exceed 10%) of Eligible Compensation specified in
his or her then-current Enrollment Agreement commencing on the first
pay date after the next Enrollment Date of an Offering Period and
continuing throughout that Offering Period and each future Offering
Period until he or she ceases to be a Participant or, if earlier,
changes his or her Enrollment Agreement.
(b) Perot Systems will hold and use the amounts withheld from each
Participant's paycheck until the earlier of the date those amounts are
(i) used to purchase Common Stock, or (ii) refunded to the Participant.
Perot Systems will not be required to segregate any of these funds from
its general corporate fund, and will not pay interest on any of these
funds.
(c) If the funds in the Participant Account of a Participant are in a
currency other than United States dollars on any Exercise Date, for
purposes of determining the maximum number of whole and fractional
shares that may be purchased under this Plan, such funds will be deemed
to have been converted into United States dollars based upon the
foreign exchange selling rates, as reported by the Dow Jones
News/Retrieval Service of Dow Jones and Company, Inc., on such date, or
if not so reported on such date, as reported on the next preceding date
on which such rates are reported.
2.5 Changes in Contributions. During an Offering Period, a Participant may
not change the percentage of Eligible Compensation to be withheld from
his or her paycheck, except by withdrawing from the Plan. However, a
new Enrollment Agreement may be submitted for any subsequent Offering
Period.
2.6 Withdrawal.
(a) A Participant may stop participating in the current Offering Period
and each future Offering Period by delivering a Withdrawal Agreement to
the Stock Administrator or calling the Plan Custodian's automated phone
system and completing the withdrawal process at least 10 business days
before the Exercise Date for then-current Offering Period. Delivery of
a Withdrawal Agreement or completing the withdrawal process will:
(i) permanently and irrevocably terminate the Withdrawing
Associate's participation in the then-current Offering Period, and
1999 Employee Stock Purchase Plan/US Page 2
<PAGE> 5
(ii) suspend the Withdrawing Associate's participation in any
future Offering Periods until he or she delivers an Enrollment
Agreement to the Stock Administrator.
An election to stop participating in one Offering Period will not
prevent an Eligible Associate from participating in any future Offering
Period or in any other Plan adopted by Perot Systems, provided that the
Eligible Associate will not participate in any future Offering Period
until he or she submits a new Enrollment Agreement.
(b) As soon as practical after receiving a Withdrawal Agreement, Perot
Systems will:
(i) stop withholding the applicable percentage of Eligible
Compensation from the Withdrawing Associate's paychecks or
otherwise accepting contributions to the Withdrawing
Associate's Participant Account, and
(ii) refund to the Withdrawing Associate all amounts
previously withheld from his or her paychecks or otherwise
contributed to the Withdrawing Associate's Participant Account
during the then-current Offering Period.
2.7 Termination of Employment; Leave of Absence.
(a) If a Participant's employment with the Company terminates,
including by death, on or before an Exercise Date, he or she will be
deemed to have elected to withdraw from the applicable Offering Period
effective as of the date his or her employment terminated.
(b) As soon as practical after a Participant's termination of
employment, Perot Systems will:
(i) refund all amounts withheld from his or her paycheck or
otherwise contributed under this Plan that have not been used
to purchase Common Stock from Perot Systems or otherwise
refunded; and
(ii) distribute, or direct the Plan Custodian to distribute,
any Shares held by the Employer or the Plan Custodian on the
Participant's behalf to the Participant or his or her
designee.
(c) If a Participant begins an approved leave of absence from his or
her Employer on or before an Exercise Date, he or she will remain in
the Plan for the applicable Offering Period and each subsequent
Offering Period, but only so long as such Participant's approved leave
of absence, measured from the first day of his or her leave of absence,
has not exceeded the greater of: (i) 90 days, or (ii) the period during
which such Participant's right to reemployment with the Company is
guaranteed either by statute or contract (the "Leave Period"). If a
Participant's approved leave of absence exceeds his or her Leave
Period, such Participant will be deemed to have elected to stop
participating in the Plan on the day immediately after the last day of
the Leave Period, and such deemed election to stop participating shall
be effective for each such Offering Period and each subsequent Offering
Period until he or she returns to work and submits a new Enrollment
Form.
1999 Employee Stock Purchase Plan/US Page 3
<PAGE> 6
2.8 Transferability. Neither any monies credited to a Participant Account
nor any rights with regard to the exercise of an option to purchase
Common Stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way (other than by will or the laws of
descent and distribution) by the Participant, and an option granted to
a Participant under this Plan will be exercisable, during his or her
lifetime, only by such Participant. Any such attempt at assignment,
transfer, pledge, or other disposition will be without effect, except
that Perot Systems will treat such act as an election to withdraw funds
in accordance with Section 2.6.
3. PURCHASE OF STOCK
3.1 Offering Periods. Except for the first Offering Period, each Offering
Period will start on the first day of the second month of a calendar
quarter and end on the last day of the first month of the next calendar
quarter. The first Offering Period will start on January 1, 2000 and
end on January 31, 2000.
3.2 Grant of Option; Exercise Price.
(a) On each Enrollment Date, Perot Systems will offer each Participant
the opportunity to have Eligible Compensation withheld from his or her
paycheck to be used to purchase on the next Exercise Date a number of
Shares. The number of shares the Participant will have an option to
purchase (on that Exercise Date and using the funds accumulated since
the prior Enrollment Date) will be a number of whole and fractional
Shares equal to (i) his or her then-current Withholding Percentage,
multiplied by his or her Eligible Compensation for the Offering Period,
divided by the Exercise Price for the next Exercise Date, minus (ii)
the number of whole and fractional Shares, if any, necessary to prevent
(A) that Participant from exceeding the limits referred to in Section
2.1(a), or (B) the Plan from issuing more shares than are authorized as
provided in Section 4.2.
(b) The Exercise Price for each Offering Period will be 85% of the Fair
Market Value of one share of the Common Stock on the Exercise Date for
that Offering Period.
3.3 Automatic Exercise of Option. On each Exercise Date, each Participant's
option to purchase Shares will be exercised automatically to purchase:
(a) the maximum number of whole and fractional Shares that may be
bought with the funds withheld from his or her paycheck during the
applicable Offering Period, minus
(b) any number of Shares required to comply with any limitations
described in Section 2.1 of this Plan concerning the maximum number of
Shares that may be purchased by that Participant.
3.4 Payment for Stock. Immediately upon each exercise of each Participant's
option to purchase shares, the amount held by Perot Systems for the
benefit of that Participant will be reduced by the Exercise Price
multiplied by the number of whole and fractional Shares of Common Stock
purchased by that Participant in that exercise.
1999 Employee Stock Purchase Plan/US Page 4
<PAGE> 7
3.5 Delivery of Shares; Voting.
(a) Subject to the restrictions of Section 3.5(b), as soon as practical
after each Exercise Date, a stock certificate will be issued to each
Participant or to the Plan Custodian for the benefit of each
Participant for the Shares purchased on that Exercise Date. Such
certificate may be issued in nominee name.
(b) All Shares purchased under this Plan will be held by Perot Systems
or the Plan Custodian until the earlier of (i) a request for delivery
of the shares by the Participant, or (ii) the termination of the
Participant's employment by the Employer.
(i) As soon as practical after termination of a Participant's
employment by an Employer, certificates representing shares
purchased under the Plan will be issued in the name of that
Participant or, if timely requested by that Participant in a
form approved by the Plan Custodian, his or her designee.
(ii) All Shares purchased under this Plan shall be
nontransferable and nonassignable for six months after the
date such Shares are issued to the Participant. Any attempt to
sell, gift, pledge or otherwise transfer any Shares prior to
the expiration of six months from issuance shall be
ineffective and void.
Perot Systems will pay all issue or initial transfer taxes of the
Company with respect to the issuance or initial transfer of shares, as
well as all fees and expenses necessarily incurred by the Company in
connection with such issuance or initial transfer.
(c) A Participant who purchases Shares under this Plan shall be
transferred at such time substantially all of the rights of ownership
of such Shares, in accordance with Treasury Regulations Section
1.421-1(f) as in effect on the Effective Date. Such rights of ownership
shall include the right to vote, the right to receive declared
dividends, the right to share in the assets of Company in the event of
liquidation, the right to inspect Company's books and the right to
pledge or sell such Shares, subject to the restrictions on such rights
in this Plan and the restrictions on such rights imposed by applicable
law.
3.6 Periodic Reports. As soon as practical after each Exercise Date, a
statement will be sent to each person who has been a Participant under
this Plan, which statement will include (i) the total amount, in United
States dollars or local currency, of all payroll deductions or other
contributions made during the applicable Offering Period or otherwise
held under this Plan for the benefit of that person by Perot Systems,
and any applicable currency conversion rate, (ii) the number of Shares
purchased by that person on each applicable Exercise Date, (iii) the
per share and aggregate purchase price per Share for those Shares, (iv)
the remaining cash balance, if any held by any Employer for the benefit
of that person, and (v) such other information as the Stock
Administrator or Plan Custodian deems appropriate.
1999 Employee Stock Purchase Plan/US Page 5
<PAGE> 8
3.7 No Rights in Stock Prior to Exercise. Neither a Participant nor his or
her beneficiaries will have any interest or voting right in Common
Stock covered by an option granted this Plan until such option has been
exercised and the Shares purchased.
4. OPERATION OF THE PLAN
4.1 Effective Date and Term of Plan. This Plan will become effective upon
January 1, 2000. This Plan will remain effective until July 16, 2008,
unless sooner terminated under Section 4.5.
4.2 Shares Authorized for Sale and Issuance Under the Plan.
(a) The maximum number of Shares that may be sold and issued under this
Plan will be 20,000,000 Shares, although the stated maximum of
20,000,000 Shares will be (i) reduced by the number of Shares issued
pursuant to exercises of options granted under the Perot Systems 1999
Employee Stock Purchase Plan and any parallel plans created thereunder
and (ii) adjusted as provided in Section 5.2 below. If any option to
purchase Shares granted under this Plan is not exercised for any
reason, the Shares subject to that option will remain available to be
sold and issued under this Plan.
(b) If, for any reason, the number of Shares available for sale and
issuance under this Plan under Section 4.2(a) is less than the number
of Shares to be sold and issued under Section 3.3 on an Exercise Date,
Perot Systems will allocate the Shares available for sale and issuance
pro rata among the Participants in as uniform a manner as it determines
to be equitable. In such event, the Stock Administrator or Plan
Custodian will notify each Participant of the reduction in the number
of Shares and the reason for such reduction.
(c) Shares sold and issued under this Plan may, in the sole and
absolute discretion of the Board, be either authorized and unissued
Shares or treasury Shares that are bought or otherwise acquired in
public or private transactions.
4.3 Conditions Upon Issuance of Shares.
(a) Compliance With Laws. Perot Systems will not be required to grant
an option or to sell or issue any Shares under this Plan to any
Eligible Associate unless that option and the sale, issuance and
delivery of Shares upon exercise of that option complies, in the
opinion of Perot Systems' counsel, with all applicable laws and
regulations, including, but not limited to, the Securities Act of 1933
and the rules and regulations of the United States Securities Exchange
Commission, and all rules and regulations of the New York Stock
Exchange or other applicable stock exchange upon which the Common Stock
is listed.
(b) Investment Intent. As a condition to the exercise of an option,
Perot Systems may require the person exercising such option to
represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
1999 Employee Stock Purchase Plan/US Page 6
<PAGE> 9
4.4 Administration; Committee.
(a) Board of Directors. This Plan will be administered by the Board.
Unless otherwise provided in this Plan, the Board has the power:
(i) To determine when and how rights to purchase Shares will
be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate Participating Affiliates.
(iii) To construe and interpret the Plan and rights granted
under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise
of this power, may correct any defect, omission or
inconsistency in the Plan, in a manner and to the extent it
will deem necessary or expedient to make the Plan fully
effective.
(iv) To amend or terminate this Plan as provided in Section
4.5.
(v) To delegate administration of this Plan to a Committee of
two or more members of the Board.
(vi) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the
best interests of Perot Systems.
(b) Committee. If administration of this Plan is delegated to a
Committee, it will have all the powers of the Board with respect to
this Plan, subject to any limitations on such powers stated in the
Board's resolutions delegating administration to the Committee. Whether
or not the Board delegates administration of this Plan to a Committee,
the Board retains the final power to determine all questions of policy,
procedure, and expediency that arise in the administration of this
Plan.
(c) Participation by Members of the Board or Committee. Members of the
Board who are Eligible Associates are permitted to participate in this
Plan; provided that (A) no member of the Board who participates in this
Plan may vote on any matter affecting the administration of, or the
grant of any option pursuant to, this Plan, and (B) if a Committee is
appointed to administrate this Plan, no member of the Committee will be
eligible to participate in this Plan.
(d) Stock Administrator. Perot Systems' day to day obligations under
this Plan will be managed by the Stock Administrator, subject to the
Board's final power to determine all questions of policy, procedure,
and expediency that arise in the administration of this Plan. The Stock
Administrator will have all of the following powers of the Board:
(i) To manage, or select and direct a Plan Custodian to
manage, the daily operations of this Plan in accordance with
its terms;
(ii) To adopt rules of procedure and regulations necessary for
the operation of this Plan, provided they are consistent with
the terms of this Plan;
1999 Employee Stock Purchase Plan/US Page 7
<PAGE> 10
(iii) To determine all questions with regard to rights of
Eligible Associates and Participants under the Plan,
including, but not limited to, the eligibility of any person
to participate in the Plan;
(iv) To enforce the terms, rules and regulations of this Plan;
(v) To direct the distribution of the Shares purchased
hereunder;
(vi) To furnish the Company with information which it requires
for tax or other purposes;
(vii) To engage the service of counsel (who may, if
appropriate, be counsel for the Company) and a Plan Custodian
or other agents it deems advisable to assist it with the
performance of its duties;
(viii) To prescribe procedures to be followed by Participants
in electing to participate in this Plan;
(ix) To receive from each Company and Eligible Associate any
information necessary to administer or manage this Plan;
(x) To maintain, or cause Perot Systems, the Employer or the
Plan Custodian to maintain, an account in the name of each
Participant to reflect his or her participation in this Plan;
and
(xi) To interpret and construe the Plan.
4.5 Amendment or Termination.
(a) The Board may amend or terminate this Plan without notice, provided
that the Board will not, without the approval of the stockholders of
Perot Systems, (i) increase the maximum number of Shares that may be
sold or issued under this Plan (except pursuant to Section 5.2), or
(ii) amend the requirements as to the class of Eligible Associates
eligible to purchase Shares under this Plan or if a Committee is
appointed to administer this Plan, permit the members of the Committee
to participate in this Plan.
(b) Except as specifically provided in this Plan, as required to comply
with Code section 423, or as required to obtain a favorable ruling from
the Internal Revenue Service, no amendment may, without the consent of
that Participant, make any change in any option granted under this Plan
that adversely affects the rights of any Participant.
(c) This Plan will automatically terminate on the Exercise Date that
Participants become entitled to purchase a number of Shares greater
than the number available for purchase under Section 4.2. In the event
of an automatic termination, reserved Shares remaining as of such
Exercise Date will be sold to Participants on a pro rata basis, as
described in Section 4.2(b).
1999 Employee Stock Purchase Plan/US Page 8
<PAGE> 11
4.6 Approval of the Stockholders. Commencement of the Plan will be subject
to approval by the stockholders of the Company within 12 months after
the date the Plan is adopted. Notwithstanding any provision to the
contrary, failure to obtain such stockholder approval will void the
Plan, any options granted under the Plan, any Share purchases pursuant
to the Plan, and all rights of all Participants.
4.7 No Liability for Good Faith Determinations. Neither the members of the
Board, the Stock Administrator nor the Plan Custodian (nor their
delegates) will be liable for any act, omission, or determination taken
or made in good faith with respect to the Plan or any right to purchase
Shares granted under it. Members of the Board and the Stock
Administrator (and their delegates) will be entitled to indemnification
and reimbursement by Perot Systems in respect of any claim, loss,
damage, or expense (including attorneys' fees, the costs of settling
any suit, provided such settlement is approved by independent legal
counsel selected by Perot Systems, and amounts paid in satisfaction of
a judgment, except a judgment based on a finding of bad faith) arising
therefrom to the full extent permitted by law and under any directors
and officers' liability or similar insurance coverage that may from
time to time be in effect.
5. MISCELLANEOUS LEGAL PROVISIONS
5.1 Definitions.
(1) "Board" means the Board of Directors of Perot Systems or a duly
appointed committee of the Board.
(2) "Committee" means a committee of the Board appointed to administer
this Plan.
(3) "Common Stock" means the Class A Common Stock, $.01 par value per
share, of Perot Systems.
(4) "Company" means Perot Systems and each Subsidiary.
(5) "Eligible Associate" means a natural person who, on the applicable
Exercise Date, (i) has been employed by an Employer (as determined in
accordance with Treasury Regulations Section 1.421-7(h)), (ii) is
customarily employed for more than 20 hours per week, and (iii) is
customarily employed for more than five months in the calendar year.
(6) "Effective Date" means the date specified in Section 4.1.
(7) "Eligible Compensation" means the regular rate of compensation paid
to a Participant by any Employer during an Offering Period, including
wages, salary, bonuses and commission, but shall not include relocation
assistance payments, geographical hardship pay, noncash prizes and
awards, automobile allowances, severance type payments and nonqualified
deferred executive compensation.
1999 Employee Stock Purchase Plan/US Page 9
<PAGE> 12
Eligible Compensation includes the amount of a Participant's elective
contributions that are made by the Employer on behalf of that
Participant that are not includable in gross income under Tax Code
Sections 125, 402(e)(3), 402(h), and 401(k).
(8) "Employer" means Perot Systems or the Participating Affiliate by
which an Eligible Associate is employed.
(9) "Enrollment Agreement" means the agreement submitted to the Stock
Administrator pursuant to Section 2.2; provided, however, that
notwithstanding anything to the contrary in the Plan, the enrollment
agreement or enrollment process which an Eligible Associate completed
prior to the Effective Date under the Perot Systems Corporation 1999
Employee Stock Purchase Plan shall be his or her Enrollment Agreement
and shall be deemed to have satisfied all of the requirements of
Section 2.2, including, without limitation, Sections 2.2(b) and (c),
required for the Eligible Associate to become a Participant on the
Effective Date, without further action by the Eligible Associate.
(10) "Enrollment Date" means the first day of the applicable Offering
Period.
(11) "Exercise Date" means the last day of the applicable Offering
Period.
(12) "Exercise Price" means the price defined in Section 3.2(b).
(13) "Fair Market Value" of one share of Common Stock on a particular
date will be (i) if the Common Stock is listed or admitted to trading
on the New York Stock Exchange, then (A) if sales of Common Stock
occurred on that date, the closing selling price per share of Common
Stock on the New York Stock Exchange Composite Tape for that date (1)
as reported by the Dow Jones News/Retrieval Service of Dow Jones and
Company, Inc., or (2) if not so reported, in a newspaper of national
circulation or other authoritative source selected by the Board , or
(B) if no sales of Common Stock occurred on that date, the closing
selling price per share of Common Stock as of the next preceding date
for which the price is reported on the New York Stock Exchange
Composite Tape on that date, or (ii) in all other cases, determined in
a reasonable way selected by the Board for that purpose.
(14) "Offering Period" means each period commencing on the first day of
the second month following the end of a calendar quarter and ending on
the last day of the first month following the end of the calendar
quarter, during which a Participant has an option to purchase Common
Stock; provided, however, that the first Offering Period will begin on
January 1, 2000 and end on January 31, 2000.
(15) "Participant" means an Eligible Associate who has elected to
participate in any Offering Period and continues to participate in that
Offering Period through its Exercise Date.
(16) "Participant Account" means any account or accounting entry
maintained by Perot Systems, the Employer, the Stock Administrator or
the Plan Custodian to record the amount that a Participant has
contributed to the Plan during an Offering Period and the Common Stock
purchased under this Plan.
1999 Employee Stock Purchase Plan/US Page 10
<PAGE> 13
(17) "Participating Affiliate" means each corporation, domestic or
foreign, (i) of which Perot Systems, directly or indirectly, holds, on
the applicable Exercise Date, not less than 50% of the total combined
voting power of all classes of stock, whether or not such corporation
now exists or is hereafter organized or acquired by Perot Systems or
any Subsidiary, and (ii) which is approved by the Board to participate
in this Plan; provided, however, that the Board will not approve any
corporation for participation in this Plan if its participation would
disqualify this Plan under any provision of the Tax Code, including,
without limitation, Section 423 of the Tax Code.
(18) "Perot Systems" means Perot Systems Corporation, a Delaware
corporation, or any successor in interest that adopts this Plan.
(19) "Plan" means this Perot Systems Corporation 1999 Employee Stock
Purchase Plan/US (Revised January 7, 2000), as amended from time to
time.
(20) "Plan Custodian" means the third party administrator appointed by
Perot Systems to manage this Plan in accordance with its terms.
(21) "Share" means one share of Common Stock.
(22) "Stock Administrator" means the Stock Administration or Human
Resources Department of Perot Systems.
(23) "Subsidiary" means a domestic or foreign corporation of which not
less than 50% of the total combined voting power of all classes of
stock is held either by (i) Perot Systems or (ii) any other corporation
in an unbroken chain of corporations (beginning with Perot Systems, and
in which not less than 50% of the total combined voting power of all
classes of stock is held by each corporation in the chain), without
regard to whether such corporation now exists or is hereafter organized
or acquired.
(24) "Tax Code" means the Internal Revenue Code of 1986, as amended.
(25) "Withdrawal Agreement" means the agreement submitted to the Stock
Administrator pursuant to Section 2.6.
(26) "Withdrawing Associate" means a Participant who withdraws from
this Plan as provided in Section 2.6(a).
(27) "Withholding Percentage means the percentage of Eligible
Compensation that a Participant elects, from time to time, to have
withheld as his or her contribution during an Offering Period.
1999 Employee Stock Purchase Plan/US Page 11
<PAGE> 14
5.2 Adjustments Upon Changes in Capitalization.
(a) If any change is made in the Common Stock, or subject to any rights
granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash,
stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not
involving the receipt of consideration by the Company), the Plan and
outstanding rights will be appropriately adjusted in the class(es) and
maximum number of Shares subject to the Plan and the class(es) and
number of Shares and price per Share of Common Stock subject to
outstanding rights. Such adjustments will be made by the Board, the
determination of which will be final, binding and conclusive. The
conversion of any convertible securities of the Company will not be
treated as a "transaction not involving the receipt of consideration by
the Company."
(b) If (i) a dissolution or liquidation of Perot Systems or a sale of
all or substantially all of Perot Systems' assets; (ii) a merger or
consolidation in which Perot Systems is not the surviving corporation;
(iii) a reverse merger in which Perot Systems is the surviving
corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other
property, whether in the form of securities, cash or otherwise; or (iv)
any other capital reorganization in which more than 50% of the shares
of the Company entitled to vote are exchanged, is proposed to be
consummated, then, the Exercise Date for the applicable Offering Period
will be accelerated to the date such transaction is consummated, and
the payroll deductions of the Participants made through the Exercise
Date will be used to purchase Common Stock immediately prior to such
transaction and all further rights of the Participants will terminate,
unless otherwise provided by the Board in its sole discretion.
5.3 Notices; Waiver of Notice.
(a) To a Participant. All notices or other communications relating to
the Plan given to a Participant or former Participant by the Board,
Perot Systems, or any Employer will be deemed delivered on the day the
notice or other communication is (i) personally delivered to that
person, (ii) electronically transmitted to a person who on the date of
that transmission either is an Eligible Associate or has consented to
receiving notices by electronic transmission to the last known
electronic transmission address of that person, or (iii) placed in the
official government mail of the country of the sender in an envelope
addressed to the last known address of that person, whichever is
earlier.
(b) By a Participant. All notices or other communications relating to
the Plan given to the Board, Perot Systems, or an Employer will be
deemed delivered on the day the notice or other communication is (i)
received in tangible written form by the Stock Administrator at Perot
Systems' Corporate Headquarters address, or (ii) electronically
transmitted by an Eligible Associate to the Stock Administrator by
means of Perot Systems' internal corporate e-mail or intranet system,
provided that such notice is in the form specified by Perot Systems and
is acknowledged by the Stock Administrator.
(c) Consent to Electronic Delivery of Notices, Plan Documents and
Prospectuses. By requesting to participate in the Plan, an Eligible
Associate will be deemed to consent to receiving copies of all notices
and other communications relating to the Plan by electronic
transmission, including but not limited to the Prospectus relating to
the Plan, all enrollment and other
1999 Employee Stock Purchase Plan/US Page 12
<PAGE> 15
participation materials, and all other documents required to be
delivered in connection with the Plan. Upon request, Perot Systems will
provide any such documents to any Eligible Associate in tangible
written form.
(d) Waiver of Notice. Any person entitled to notice under the Plan may
waive the notice.
5.4 Severability. If any provision of this Plan is held to be illegal or
invalid for any reason, the illegality or invalidity will not affect
the other provisions of this Plan, but will be fully severable and the
Plan will be construed and enforced as if the illegal or invalid
provision had never been included in this Plan.
5.5 Successors and Assigns. The Plan is binding on all Participants and
their respective heirs, legatees, and legal representatives, including
but not limited to their estate and the executors, any receiver,
trustee in bankruptcy or representative of creditors of such person,
and upon the Employer, its successors and assigns.
5.6 Headings. The titles and headings of the paragraphs are included for
convenience of reference only and are not to be considered in
construction of the provisions hereof.
5.7 Governing Law. This Plan and rights to purchase Shares that may be
granted under this Plan will be governed by and construed in accordance
with the laws of the State of Texas, without giving effect to any
conflicts-of-law rules or principles that might require the application
of the laws of another jurisdiction, except to the extent this Plan or
those rights are governed by the Delaware General Corporation Law, or
the Federal law of the United States.
5.8 No Right to Employment. Nothing in this Plan, any amendment to this
Plan, or the creation of any Participant Account, the execution or
submission of any Enrollment Agreement or Withdrawal Agreement, or the
issuance of any Shares of Common Stock, will give any Eligible
Associate any right (a) to continue employment with any Employer, (b)
any legal or equitable right against Perot Systems or any Employer, or
any officer, director, or Associate of Perot Systems or its
Participating Affiliates, in connection with his or her employment by
the Employer, or (c) interfere in any way with the Employer's right to
terminate or otherwise modify his or her employment at any time, except
as expressly provided by the Plan or by applicable law.
This Plan has been executed by a duly authorized officer of the Company,
effective on the Effective Date.
PEROT SYSTEMS CORPORATION
By: /s/ KELLY PARSONS
-----------------------------------
Its: Director, Corporate Finance and
Human Resources
-------------------------------
1999 Employee Stock Purchase Plan/US Page 13
<PAGE> 16
Perot Systems Corporation
1999 Employee Stock Purchase Plan/US
Participating Affiliates
The following corporations are approved by the Board as Participating Affiliates
to participate in this Plan.
Applewhite & Gittleson (US Market Link)
Benton International Incorporated
perot.com inc.
Perot Systems Communication Services, Inc.
Perot Systems Financial Services Corporation
Perot Systems Healthcare Services Corporation
Perot Systems International, Inc.
PSC Government Services Corporation
PSC Health Care, Inc.
Security Services, Inc.
The Technical Resource Connection, Inc.
<PAGE> 1
EXHIBIT 10.42
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made and entered
into as of March 1, 2000, by and among Perot Systems Corporation, a Delaware
corporation ("PSC"), PSSC Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of PSC ("Acquisition Sub"), Solutions Consulting Inc., a
Pennsylvania corporation (the "Company"), Mark G. Miller (the "Principal
Shareholder"), and Sanford B. Ferguson ("SBF").
BACKGROUND
The Company and the Principal Shareholder are referred to collectively
as the "Sellers," and PSC and Acquisition Sub are referred to collectively as
the "Buyers."
The Company desires to sell substantially all of the assets used in the
business of the Company to Acquisition Sub, and Acquisition Sub desires to
purchase such assets from the Company, on the terms and subject to the
conditions set forth in this Agreement.
The Principal Shareholder will receive substantial direct and indirect
benefits from the transactions contemplated by this Agreement, and Buyers have
required that the Principal Shareholder enter into this Agreement as a condition
to PSC's and Acquisition Sub's execution of this Agreement.
THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
PURCHASE OF ASSETS
1.1 Purchase of Assets. At the Closing (as defined in Section 1.6), the
Company agrees to sell, transfer, assign, and deliver to Acquisition Sub the
Assets (as defined below), and Acquisition Sub agrees to purchase and take the
Assets, on the terms and subject to the conditions set forth in this Agreement.
Subject to the provisions of Section 1.2, the term "Assets" means all tangible
and intangible assets used in the business of the Company, including without
limitation, all cash, accounts receivable, inventory, materials, equipment, real
property, fixtures, furnishings, leasehold rights, leasehold improvements,
vehicles, prepaid assets, contract rights (including, without limitation,
insurance policies other than builder's risk insurance, directors and officers
insurance, roll-off policies), licenses, permits, customer, prospect and
marketing lists, sales data, records, computer software and software licenses,
proprietary information, intellectual property, trade secrets, trademarks and
trade names (including all rights to the name "Solutions Consulting"),
copyrights, goodwill associated with the business and assets of the Company,
material and manufacturing specifications, drawings and designs
1
<PAGE> 2
owned by the Company or acquired by the Company after the date of this Agreement
and prior to the Closing, and specifically including (without limitation):
(a) all assets listed on Schedule 2.4(a) as being owned by the
Company;
(b) all assets reflected on the Latest Balance Sheet (as
defined in Section 2.8) or acquired by the Company after the date of
the Latest Balance Sheet, except those sold for full value to
unaffiliated Persons (as defined in Section 2.12) in the ordinary
course of business of the Company after the date of the Latest Balance
Sheet and the Headquarters Building (as defined in Section 4.21) if
sold pursuant to Section 4.21;
(c) the Registered Intellectual Property (as defined in
Section 2.21); and
(d) all rights of the Company under non-competition,
confidentiality, and similar agreements.
1.2 Excluded Assets. Notwithstanding the provisions of Section 1.1, the
Assets will exclude the following (the "Excluded Assets"):
(a) $150,000 of cash to be retained by the Company at the
Closing (the "Reserve");
(b) the Company's rights under this Agreement and the other
Seller Documents (as defined in Section 2.2), including, without
limitation, the consideration to be paid to the Company hereunder;
(c) the Company's 401(k) Profit Sharing Plan (the "401(k)
Plan") and the Company's Employee Stock Ownership Plan (the "ESOP");
and
(d) the minute books, corporate seal, and stock records of the
Company.
1.3 Assumed Liabilities. Acquisition Sub will assume the direct or
indirect debts, obligations, and liabilities of the Company of any nature,
whether absolute, accrued, contingent, liquidated, or otherwise, and whether due
or to become due, asserted, or unasserted, known or unknown, incurred through
the Closing Date (as defined in Section 1.6) (collectively, "Liabilities") that
are described below (the "Assumed Liabilities"):
(a) Liabilities as shown on the Latest Balance Sheet Date (as
defined in Section 2.8) that remain at Closing;
(b) Liabilities incurred by the Company under (i) agreements
entered into in the ordinary course of business of the Company prior to
the Closing and (ii) the Material Agreements identified in Schedule
2.19(a)(i);
2
<PAGE> 3
(c) Liabilities arising from or related to the formation,
qualification or operation of the 401(k) Plan or the ESOP (i) prior to
the date hereof or (ii) incurred in the ordinary course of business of
the Company from the date hereof through the Closing;
(d) Liabilities arising from the obligation of the Company to
indemnify the Principal Shareholder in his capacity as a director and
officer of the Company under the articles of incorporation and the
bylaws of the Company as in effect on February 1, 2000 incurred as a
director or officer other than Liability as a director or officer with
respect to actions taken or omitted in connection with this Agreement
and the other Seller Documents; and
(e) All Liabilities set forth on the Sellers' Disclosure
Schedules (other than Liabilities relating to the Headquarters Building
(as defined in Section 4.21)).
1.4 Excluded Liabilities. Notwithstanding the terms of Section 1.3 or
the other terms of this Agreement, the Assumed Liabilities will not include the
following specifically identified Liabilities (collectively, the "Excluded
Liabilities"):
(a) Liabilities associated with the operation of the 401(k)
Plan and the ESOP other than those set forth in Section 1.3(c) above;
(b) any Liability arising out of or attributable to the
operations of the Company after the Closing or the use of the Excluded
Assets;
(c) any Liability associated with the Headquarters Building;
and
(d) any other Liability that is not an Assumed Liability.
1.5 Consideration. As consideration in full for the acquisition of the
Assets from the Company, Acquisition Sub will assume the Assumed Liabilities and
pay the Company the consideration referred to below, (collectively, the
"Purchase Price"). The Purchase Price will be payable as follows:
(a) $72,100,000 of the Purchase Price will be paid at the
Closing by wire transfer of immediately available funds (to accounts
specified in writing by the Company to Acquisition Sub at least two
days prior to the Closing); and
(b) 1,965,602 (the "Shares") of PSC's Class A common stock,
$.01 par value per share (the "Common Stock"). The sale of the Shares
will be subject to the Registration Statement (as defined in Section
4.16). The Shares will be listed on The New York Stock Exchange (the
"NYSE"), and will be subject to transfer and trading restrictions
contained in a lock-up agreement or otherwise set forth on the
certificates representing the Shares, as contemplated by Section 4.22.
3
<PAGE> 4
1.6 Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement will take place at the offices of Hughes & Luce,
L.L.P., 1717 Main St., Suite 2800, Dallas, Texas (or such other place as the
parties may agree) at 10:00 a.m. local time on March 31, 2000, or at such other
date, time, and place as is mutually agreed among the parties or, if all of the
conditions to the obligations of the parties set forth in Article V have not
been satisfied or waived by March 31, 2000 and there is no agreement among the
parties, on the day that is two Business Days (as defined below) following the
date on which all such conditions have been satisfied or waived (such date and
time of closing being called the "Closing Date"). As used herein, the term
"Business Day" means any day other than a Saturday, Sunday or Federal holiday.
1.7 Closing Deliveries. At the Closing,
(a) PSC will cause the Acquisition Sub to pay the cash portion
of the Purchase Price specified in Section 1.5(a) to the Company;
(b) PSC will cause the Acquisition Sub to deliver the Shares
specified in Section 1.5(b) to the Company;
(c) the Company will execute and deliver to Acquisition Sub a
Bill of Sale conveying the Assets to Acquisition Sub substantially in
the form agreed by the parties on the date of this Agreement;
(d) the Company will execute and deliver to Acquisition Sub an
Assignment of Intellectual Property conveying all registered patents,
copyrights, trademarks, trade names, and service marks included within
the Assets, substantially in the form of agreed by the parties on the
date of this Agreement;
(e) Acquisition Sub and the Company will execute and deliver
to one another an Assumption Agreement, substantially in the form
agreed by the parties on the date of this Agreement;
(f) the Company will execute and deliver to Acquisition Sub
any certificates of title necessary to effect or record the transfer of
any vehicles or other Assets for which ownership is evidenced by a
certificate of title;
(g) the Company will deliver to Acquisition Sub or otherwise
make available the originals or copies of all of the Company's books,
records, ledgers, disks, proprietary information, and other data and
all other written or electronic depositories of information relating to
the Assets; and
(h) Sellers and Buyers, as applicable, will execute and
deliver the other Seller Documents (as defined in Section 2.2) and the
other Buyer Documents (as defined in Section 3.2).
4
<PAGE> 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyers as follows:
2.1 Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of Pennsylvania and has full power
to own its properties and to conduct its business as presently conducted. The
Company is duly authorized, qualified, or licensed to do business and is in good
standing in each state or other jurisdiction in which its assets are located or
in which its business or operations as presently conducted make such
authorization, qualification, or licensing necessary except in those
jurisdictions where failure to qualify would not have a material adverse effect
on the Company or the Assets (a "Material Adverse Effect"). The Company is
qualified to do business as a foreign corporation only in the jurisdictions set
forth on Schedule 2.1. Set forth on Schedule 2.1 is a list of all assumed names
under which the Company operates and all jurisdictions in which any of the
assumed names are registered.
2.2 Authority. Each of Sellers has all requisite power and authority,
corporate or otherwise, to execute, deliver, and perform under this Agreement
and the other agreements, certificates, and instruments to be executed by any of
them in connection with or pursuant to this Agreement (collectively, the "Seller
Documents"). The execution, delivery, and performance by each of Sellers of each
Seller Document to which any of them is a party has been duly authorized by all
necessary action, corporate or otherwise, on the part of each such Seller and
any security or equity holders of the Company. This Agreement has been, and at
the Closing the other Seller Documents will be, duly executed and delivered by
each Seller (to the extent each is a party thereto). This Agreement is, and each
of the other Seller Documents will be, a legal, valid, and binding agreement of
each Seller, enforceable against each Seller in accordance with their respective
terms.
2.3 Organic Documents. The Company has provided Buyers a true, correct,
and complete copy of the Company's articles of incorporation, bylaws, minute
books and stock record books.
2.4 Title to Assets.
(a) Set forth in Schedule 2.4(a) is a complete list (including
the street address, where applicable) of (i) all real property owned by
the Company; (ii) all real property leased by the Company; and (iii)
each vehicle owned or leased by the Company. The Company has provided
Buyers with a true and materially correct copy of the detailed asset
list of the Company.
(b) The Company has good and marketable title to all of the
Assets (including Registered Intellectual Property (as defined in
Section 2.21), but excluding the other Intellectual Property (as
defined in Section 2.21)) and owns all of the Assets free and clear of
any obligation, lien, claim, pledge, security interest, liability,
charge, contingency, or other encumbrance or claim of any nature,
5
<PAGE> 6
other than (i) statutory liens securing current taxes and other
obligations that are not yet delinquent; (ii) minor imperfections of
title and encumbrances that do not materially detract from or interfere
with the present use and value of the Assets; and (iii) other matters
described in Schedule 2.4(b) (collectively, "Liens"). The execution and
delivery of the Seller Documents by the parties thereto at the Closing
will convey to and vest in Acquisition Sub good and marketable title to
the Assets, free and clear of any Liens except those described in
Schedule 2.4(b). The Company holds a valid leasehold interest in all
leased assets that are included within the Assets.
(c) The real property owned by the Company (the "Real
Property") is zoned for a classification that permits the continued use
of the Real Property in the manner currently used by the Company.
Improvements included in the Assets were constructed in full compliance
with, and remain in compliance with, all applicable laws, statutes,
regulations, codes, covenants, conditions, and restrictions affecting
the Real Property in all material respects. Except as disclosed on
Schedule 2.4(c), final certificates of occupancy have been issued for
the improvements on the Real Property permitting the existing use of
such improvements. There are no actions pending or, to the Company's
Knowledge (as defined in Section 7.10), threatened that would alter the
current zoning classification of the Real Property or alter any
applicable Laws, codes, covenants, conditions, or restrictions that
would adversely affect the use of the Real Property in the Company's
business. Sellers have not received notice from any insurance company
or Governmental Body (as defined in Section 2.7) of any defects or
inadequacies in the Real Property or the improvements thereon that
would adversely affect the insurability or usability of the Real
Property or such improvements or prevent the issuance of new insurance
policies thereon at rates not materially higher than present rates. To
the Company's Knowledge, no fact or condition exists that would result
in the discontinuation of necessary utilities or services to the Real
Property or the termination of current access to and from the Real
Property. The Principal Shareholder is not a "foreign person" as that
term is defined in Section 1445 of the Internal Revenue Code of 1986,
as amended (the "Code"), and applicable regulations.
2.5 Sufficiency of Assets. The Assets, other than the Excluded Assets,
constitute all assets material to the conduct of the business of the Company.
The Assets will be sufficient to carry on the business of the Company after
Closing without material interruption or disruption.
2.6 No Violation. Except for the approval of the shareholders of the
Company, and except as described in Schedule 2.6, neither the execution or
delivery of the Seller Documents nor the consummation of the transactions
contemplated by the Seller Documents, including without limitation the sale of
the Assets to Acquisition Sub, will conflict with or result in the breach of any
term or provision of, or violate or constitute a default under (or an event that
with notice or lapse of time or both would constitute a breach or default), or
result in the creation of any Lien on the Assets, or relieve any third
6
<PAGE> 7
party of any obligation to the Company, or give any third party the right to
terminate or accelerate any obligation under, any charter provision, bylaw,
Material Agreement (as defined in Section 2.19), Permit (as defined in Section
2.14), Law to which the Company is a party or by which the Company or the Assets
is in any way bound or obligated. Except as described in Schedule 2.6, by
closing the transactions contemplated hereby, the Company represents and
warrants that all consents and approvals of its shareholders and its security or
equity holders have been obtained. Except as described in Schedule 2.6, and
except for any agreement, arrangement or understanding that is terminable
without cause upon ninety (90) days or less notice, neither the Principal
Shareholder, the Company, nor any other person having colorable authority to
bind the Company or to enter into any obligation with respect to the Assets has
entered into any agreement, arrangement or understanding that purports to grant
to any Person any right to approve of, or consent to any transaction
contemplated by this Agreement or that alters or accelerates any obligation of
the Company or affecting the Assets upon the consummation of the transactions
contemplated by this Agreement, except where the failure to obtain such approval
or consent, or where any such alteration, acceleration of affect would not have
a material adverse effect on the business of the Company.
2.7 Governmental Consents. Except as set forth in Schedule 2.7, and
except as required in connection with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), no consent, approval,
order, or authorization of, or registration, qualification, designation,
declaration, or filing with, any governmental or quasi-governmental agency,
authority, commission, board, or other body (collectively, a "Governmental
Body") is required on the part of Sellers in connection with the transfer of any
Permits or other Assets to Acquisition Sub or any of the other transactions
contemplated by the Seller Documents.
2.8 Financial Statements.
(a) The Company has previously delivered to Buyers a true and
complete copy of (i) the audited balance sheet of the Company (the
"Latest Balance Sheet") as of December 31, 1999 (the "Latest Balance
Sheet Date") and the related audited statements of operations and cash
flow for the year then ended (collectively, the "1999 Financial
Statements"), and (ii) the audited balance sheets of the Company as
December 31, 1998 and 1997 and the related audited statements of
operations and cash flow for the years then ended ((i) and (ii)
collectively, the "Financial Statements"). Except as set forth on
Schedule 2.8(a), the Financial Statements present fairly the financial
condition of the Company at the dates specified and the results of its
operations for the periods specified and have been prepared in
accordance with generally accepted accounting principles, consistently
applied ("GAAP"). Except as set forth on Schedule 2.8(a), the Financial
Statements do not contain any items of a special or nonrecurring
nature, except as expressly stated in the Financial Statements. The
Financial Statements have been prepared from the books and records of
the Company, which accurately and fairly reflect the transactions of,
acquisitions, and dispositions of assets by, and incurrence of
liabilities by the Company.
7
<PAGE> 8
(b) The Company has no Liabilities except for (i) Liabilities
reflected on the Latest Balance Sheet, (ii) current liabilities
incurred in the ordinary course of business of the Company after the
Latest Balance Sheet Date, and (iii) obligations incurred in the
ordinary course of business of the Company under the Material
Agreements and under other agreements entered into by the Company in
the ordinary course of business of the Company that are not included
within the definition of Material Agreements set forth in Section 2.19,
which Liabilities are not required by GAAP to be reflected in the
Latest Balance Sheet.
(c) All accounts receivable reflected in the Latest Balance
Sheet or included in the Assets arose in the ordinary course of
business of the Company and are due and owing in the face amount
thereof less any reserves reflected on the Latest Balance Sheet, and
the Company has no reason to believe that such amounts are not
substantially collectible in full in the ordinary course of business of
the Company.
(d) Prior to the Latest Balance Sheet Date, the Company did
not enter into any agreement in the ordinary course of its business
that resulted in a Liability that is materially disadvantageous to the
Company that is not reflected in the Latest Balance Sheet.
2.9 Subsidiaries and Investments. Except as reflected on the Latest
Balance Sheet, the Company does not own or hold any direct or indirect equity or
debt interest or any form of proprietary interest in any other Person or option
to acquire any such interest.
2.10 Absence of Material Adverse Change. Since the Latest Balance Sheet
Date, except as specifically contemplated by this Agreement and as disclosed in
Schedule 2.10, there has not been (a) any material adverse change in the
condition (financial or otherwise), results of operations, business, assets, or
Liabilities of the Company or with respect to the manner in which the Company
conducts its business or operations; (b) any declaration, setting aside, or
payment of any dividends or distributions in respect of any equity capital of
the Company or any redemption, purchase, or other acquisition by the Company of
any of its equity capital; (c) any payment or transfer of assets (including
without limitation any distribution or any repayment of indebtedness) to or for
the benefit of any security holder of the Company, other than compensation and
expense reimbursements paid in the ordinary course of business of the Company;
(d) any revaluation by the Company of any of its assets, including, without
limitation, the writing down or off of notes or accounts receivable, other than
in the ordinary course of business of the Company; (e) any entry by the Company
into any commitment or transaction outside of the ordinary course of business of
the Company including, without limitation, incurring or agreeing to incur
capital expenditures in excess of $100,000, individually or in the aggregate;
(f) any increase in indebtedness for borrowed money; (g) any breach or default
(or event that with notice or lapse of time would constitute a breach or
default), termination, or threatened termination under any Material Agreement by
the Company, or, to the Company's Knowledge, by any third party; (h) any change
by the Company in its
8
<PAGE> 9
accounting methods, principles, or practices; (i) any increase in the benefits
under, or the establishment or amendment of, any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, or other employee
benefit plan, or any increase in the compensation payable or to become payable
to directors, officers, employees, or consultants of the Company, except for
annual merit increases in salaries or wages; (j) the termination of employment
(whether voluntary or involuntary) of any officer or key employee of the Company
or the termination of employment (whether voluntary or involuntary) of employees
of the Company materially in excess of historical attrition in personnel; (k)
any theft, condemnation, or eminent domain proceeding or any material damage,
destruction, or casualty loss affecting any asset used in the business of the
Company, whether or not covered by insurance; (l) any sale, assignment, or
transfer of any asset used in the business of the Company, except sales of
services in the ordinary course of business of the Company; (m) any waiver by
the Company or the shareholders of the Company of any material rights related to
the Company's business, operations, or assets; (n) any other transaction,
agreement or commitment entered into or affecting the Company's business,
operations, or assets, except in the ordinary course of business of the Company;
or (o) any agreement or understanding to do or resulting in any of the
foregoing.
2.11 Taxes.
(a) Except as set forth in Schedule 2.11(a), all required
federal, state, local, and other Tax (as defined in Section 2.11(b))
returns, notices, and reports (including without limitation income,
property, sales, use, franchise, withholding, social security, and
unemployment Tax returns) relating to or involving transactions with
the Company have been accurately prepared and duly and timely filed,
and all Taxes required to be paid by the Company with respect to the
periods covered by any such returns have been timely paid or reserved
for in the Financial Statements. No Tax deficiency has been proposed or
assessed against the Company, and the Company has not executed any
waiver of any statute of limitations on the assessment or collection of
any Tax. No Tax audit, action, suit, proceeding, investigation, or
claim is now pending or, to the Company's Knowledge, threatened against
the Company, and no issue or question has been raised (and is currently
pending) by any taxing authority in connection with the Company's Tax
returns or reports. Except as set forth in Schedule 2.11(a), the
Company has withheld or collected from each payment made to each of its
employees or contractors the full amount of all Taxes required to be
withheld or collected therefrom and has paid the same to the proper Tax
receiving officers or authorized depositaries. The Company is, and has
been since October 1, 1994, a validly electing "S corporation" for
purposes of the Internal Revenue Code of 1986, as amended (and its
predecessor statutes) (the "Code"). The Company does not own any assets
the sale of which would impose tax on the Company pursuant to section
1374 of the Code, and no taxes have ever been, or will be for periods
through the Closing Date, imposed on the Company pursuant to section
1375 of the Code.
9
<PAGE> 10
(b) "Tax" or "Taxes" means any and all taxes, charges, fees,
levies, assessments, duties, or other amounts payable to any federal,
state, local, or foreign taxing authority or agency, including, without
limitation, (i) income, franchise, profits, gross receipts, minimum,
alternative minimum, estimated, ad valorem, value added, sales, use,
service, real or personal property, capital stock, license, payroll,
withholding, disability, employment, social security, workers
compensation, unemployment compensation, utility, severance, excise,
stamp, windfall profits, transfer, gift and gains taxes; (ii) customs,
duties, imposts, charges, levies, or other similar assessments of any
kind; and (iii) interest, penalties, and additions to Tax imposed with
respect thereto.
2.12 Litigation. Except as described in Schedule 2.12, there are no
pending or, to the Company's Knowledge, threatened, lawsuits, administrative
proceedings, or reviews, or formal or informal complaints or investigations by
any individual, corporation, partnership, Governmental Body, or other entity (a
"Person") against or that could result in any Liability of the Company or any of
its directors, officers, employees, agents, or affiliates (in their capacities
as such) or to which any of the Assets are subject or relating to the
transactions contemplated by this Agreement or the consummation thereof. The
Company is not subject to or bound by any currently existing judgment, order,
writ, injunction, or decree.
2.13 Compliance with Laws. Except as set forth in Schedule 2.13, the
Company is currently complying with and has at all times complied with each
applicable statute, law, ordinance, decree, order, rule, or regulation of any
Governmental Body, including without limitation all federal, state, and local
laws relating to zoning and land use, occupational health and safety, product
quality and safety, and employment and labor matters (collectively, "Laws").
2.14 Permits. The Company owns or possesses from each appropriate
Governmental Body all right, title, and interest in and to all material permits,
licenses, authorizations, approvals, quality certifications, franchises, or
rights (collectively, "Permits") issued by any Governmental Body necessary to
conduct the business of the Company, including without limitation, Permits
associated with the construction of the Headquarters Building. Each of such
Permits is described in Schedule 2.14 and is included within the Assets. No loss
or expiration of any such Permit is, on account of the transactions contemplated
by this Agreement or otherwise, pending or, to the Company's Knowledge,
threatened other than expiration in accordance with the terms thereof of Permits
that may be renewed in the ordinary course of business of the Company without
lapsing.
2.15 Environmental Matters.
(a) Without limiting the generality of the other
representations and warranties set forth in this Article II, (i) the
Company has conducted its business in compliance with all applicable
Environmental Laws, including without limitation by having all Permits
required under any Environmental Laws for the operation of the
Company's business; (ii) none of the Real Property contains any
Hazardous
10
<PAGE> 11
Substance in amounts exceeding the levels permitted by applicable
Environmental Laws; (iii) Sellers have not received any notices, demand
letters, or requests for information from any Governmental Body or
other Person indicating that the Company is or may be in violation of,
or liable under, any Environmental Law or relating to any of the Assets
or former assets of the Company; (iv) no reports have been filed, or
are required to be filed, by (or relating to) the Company concerning
the release or threatened release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law; (v) no
Hazardous Substance has been disposed of, released or transported in
violation of any applicable Environmental Law to or from any Real
Property or as a result of any activity of Sellers; (vi) there have
been no environmental investigations, studies, audits, tests, reviews,
or other analyses regarding compliance or noncompliance with any
Environmental Law conducted by or for or which are in the possession of
Sellers relating to the activities of the Company or any of the Real
Property that have not been delivered or disclosed to Buyer; (vii)
there are no underground storage tanks on, in, or under any of the Real
Property, and no underground storage tanks have been closed or removed
from any of the Real Property; (viii) there is no asbestos present in
any of the Real Property, and no asbestos has been removed from any of
the Real Property; (ix) neither the Company nor any of the Assets are
subject to any Liabilities or expenditures relating to any suit,
settlement, court order, administrative order, regulatory requirement,
judgment, or claim asserted or arising under any Environmental Law; and
(x) to the Company's Knowledge, no Hazardous Substance is present and
there are no violations of any Environmental Laws involving property
adjacent to the Real Property.
(b) As used in this Agreement, "Environmental Law" means any
federal, state, local or foreign law, statute, ordinance, rule,
regulation, Permit, order, judgment, decree, requirement, or agreement
with any Governmental Body relating to (i) the protection, preservation
or restoration of the environment, (ii) the use, storage, generation,
transportation, processing, production, release, or disposal of
Hazardous Substances, or (iii) the protection or preservation of public
health, in each case as amended and in effect on the date of the
Closing.
(c) As used in this Agreement, "Hazardous Substance" means any
substance presently or hereafter listed, defined, designated, or
classified as hazardous, toxic, radioactive, or dangerous under any
Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any Governmental Body or any Environmental
Law, including without limitation any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste,
special waste, industrial substance, or petroleum or any derivative or
by-product thereof, radon, radioactive material, asbestos, or asbestos
containing material, urea formaldehyde, foam insulation, lead, or
polychlorinated biphenyls.
11
<PAGE> 12
2.16 Employee Matters. The Company has delivered to Buyers as of the
date of this Agreement a complete list of all current employees of the Company,
including date of employment, and compensation. The Company has no collective
bargaining, union, or labor agreements, contracts, or other arrangements with
any group of employees, labor union, or employee representative and to the
Company's Knowledge there is no organization effort currently being made or, to
the Company's Knowledge, threatened by or on behalf of any labor union with
respect to employees of the Company.
2.17 Employee Benefit Plans.
(a) Set forth in Schedule 2.17(a) is a complete and correct
list of all "employee benefit plans" (as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), copies
of which have been delivered to Buyers as of the date hereof, all plans
or policies providing for "fringe benefits" (including but not limited
to vacation, paid holidays, personal leave, employee discount,
educational benefit, or similar programs), and all other bonus,
incentive, compensation, profit-sharing, stock, severance, retirement,
health, life, disability, group insurance, employment, fringe benefit,
or any other similar plan, agreement, policy, or understanding (whether
written or oral, qualified or nonqualified, currently effective or
terminated), and any trust, escrow, or other agreement related thereto,
which (a) is maintained or contributed to by the Company, or with
respect to which the Company has or may have any liability or (b)
provides benefits, or describes policies or procedures applicable, to
any director, former director, consultant, former consultant, officer,
employee, former officer, or former employee of the Company, or the
dependents of any thereof, regardless of whether funded (the "Employee
Plans"). Except as set forth in the Latest Balance Sheet, the Company
does not have any liability for accrued employee leave used for
vacation, sick leave, urgent business, or other reasons. No written or
oral representations have been made to any employee or former employee
of the Company promising or guaranteeing any employer payment or
funding for the continuation of medical, dental, life, or disability
coverage for any period of time beyond the end of the current plan year
(except to the extent of coverage required under Code Section 4980B).
Except as set forth in Schedule 2.17(a), the consummation of the
transactions contemplated by this Agreement will not accelerate the
time of payment or vesting, or increase the amount of compensation due
to any director, former director, consultant, former consultant,
employee, officer, former employee, or former officer of the Company.
(b) With respect to each "employee benefit plan" (as defined
in ERISA) maintained or contributed to, currently or in the past by
Company or any ERISA Affiliate (as defined below), or with respect to
which the Company or any ERISA Affiliate has liability (the "Controlled
Group Plans"):
(i) there are no unfunded liabilities existing under
any Controlled Group Plan, and each Controlled Group Plan
could be
12
<PAGE> 13
terminated as of the Closing Date with no liability to Buyer,
the Company, or any ERISA Affiliate;
(ii) there is no Controlled Group Plan that is a
defined benefit plan (as defined in Section 3(35) of ERISA) or
a multiemployer plan (as defined in Section 3(37) of ERISA);
and
(iii) each such Controlled Group Plan has been
operated in compliance with ERISA, applicable tax
qualification requirements, and all other applicable laws.
(c) With respect to each Employee Plan, the Company has
furnished to Buyers a true, correct, and complete copy of (i) the plan
documents and summary plan description; (ii) the most recent
determination letter received from the Internal Revenue Service (if
any); (iii) the annual reports required to be filed for the three most
recent plan years of each such Employee Plan, or such shorter period as
such Employee Plan has been in existence; (iv) all related trust
agreements, insurance contracts, or other funding agreements that
implement such Employee Plan; and (v) all other documents, records, or
other materials related thereto requested by Buyers
(d) Neither the Company, any ERISA Affiliate, nor any plan
fiduciary of any Employee Plan has engaged in any transaction in
violation of Section 406(a) or (b) of ERISA or any "prohibited
transaction" (as defined in Code Section 4975(c)(1)) that would subject
the Company or PSC or Acquisition Sub to any taxes, penalties, or other
liabilities resulting from such transaction.
(e) Except as set forth in Schedule 2.17(e), other than
routine claims for benefits, there are no actions, suits, claims,
audits, or investigations pending or threatened against, or with
respect to, any of the Employee Plans or their assets; and all
contributions required to be made to the Employee Plans have been made
timely.
"ERISA Affiliate" means the Company, the Principal Shareholder
and each corporation, partnership, or other trade or business, whether
or not incorporated, which is or has been treated as a single employer
or controlled group member with the Company pursuant to Section 414 of
the Code or Section 4001 of ERISA.
2.18 Ownership of the Company. The Company has provided to Buyers, in a
writing that refers to this Section 2.18 and that is acknowledged by Buyers, a
description of all ownership interests in the Company and indicates the record
(and if beneficial ownership is, to the Company's Knowledge, different from
record ownership, the beneficial ownership) of each such interest. Except as
disclosed to Buyers in the writing referred to above, the Company has not issued
or become obligated in any manner to issue options, warrants, convertible, or
exchangeable securities or other rights, agreements, arrangements, or
commitments obligating the Company, directly or indirectly,
13
<PAGE> 14
to issue, sell, purchase, acquire or otherwise transfer, or deliver any shares
of capital stock of or other equity interest in the Company, or any agreement,
document, instrument, or obligation convertible or exchangeable therefore that
remain outstanding.
2.19 Material Agreements.
(a) Schedule 2.19(a)(i) lists each agreement, arrangement and
understanding (whether written or oral and including all amendments
thereto) relating to the business of the Company to which the Company
is a party or by which the Company or any of the Assets is bound that
is material to the Company or the Assets (collectively, the "Material
Agreements"), including without limitation the following: (i)
agreements pursuant to which the Company sells or distributes any
products or services and received revenues during the calendar year
1999; (ii) real estate leases; (iii) agreements evidencing, securing or
otherwise relating to any indebtedness for borrowed money for which the
Company is, directly or indirectly, liable; (iv) capital or operating
leases or conditional sales agreements relating to vehicles, equipment,
or other Assets having an aggregate value in excess of $50,000; (v)
agreements pursuant to which the Company is entitled or obligated to
acquire any assets from a third party; (vi) insurance policies; (vii)
employment, consulting, noncompetition, separation, collective
bargaining, union, or labor agreements or arrangements; (viii)
agreements with or for the benefit of any shareholder, director,
officer, employee, or consultant (or any Person that, to the Company
Knowledge, claims or has any basis to claim any rights as such) of
Sellers or any affiliate or immediate family member thereof; (ix)
licenses of computer software; (x) supply agreements or arrangements
pursuant to which the Company is entitled or obligated to acquire any
assets from a third party having an aggregate value in excess of
$50,000; (xi) any partnership, joint venture, consortium, or other
similar arrangements or agreements; and (xii) any other agreement
pursuant to which the Company could be required to make or entitled to
receive aggregate payments or other aggregate value in excess of
$50,000. Except as set forth in Schedule 2.19(a) and except for those
Material Agreements that are terminable without cause upon ninety (90)
days or less notice, the entering of the Seller Documents and the
consummation of the transactions contemplated by the Seller Documents,
without notice to or consent or approval of any Person, will not
constitute a breach of, violation of, or default under any provision of
any Material Agreement, except for any breach, violation or default as
would not have a material adverse effect on the business of the
Company.
(b) Schedule 2.19(b) identifies any Material Agreements that
will be terminated at or prior to, or retained by the Company following
the Closing.
(c) Sellers have provided to Buyers a copy of each written
Material Agreement and a written summary of each oral Material
Agreement. Except as described in Schedule 2.19(c), (i) each Material
Agreement is valid, binding, and in full force and effect and
enforceable against the Company and, to the Company's Knowledge, the
other parties thereto in accordance with its terms; (ii) the Company
14
<PAGE> 15
has performed, in all material respects, all of its obligations under
each Material Agreement, and there exists no breach or default (or
event that with notice or lapse of time would constitute a breach or
default) on the part of the Company or, to the Company's Knowledge, on
the part of any other party under any Material Agreement; (iii) there
has been no termination or notice of default or, to the Company's
Knowledge, any threatened termination under any Material Agreement; and
(iv) to the Company's Knowledge, no party to a Material Agreement
intends to alter its relationship with the Company as a result of or in
connection with the acquisition contemplated by the Seller Documents or
has been threatened with bankruptcy or insolvency.
2.20 Customers. Set forth in Schedule 2.20 is a complete list of each
customer of the Company during the year ended December 31, 1999, and indicating
the amount of revenues attributable to each customer during such year. Except as
set forth in Schedule 2.20, none of the customers that accounted for more than
$500,000 in revenues for the year ended December 31, 1999 (each a "Material
Customer") has threatened to, or notified the Company of any intention to,
terminate, or materially alter its relationship with the Company, and there has
been no material dispute with a Material Customer since January 1, 1998. Except
as set forth in Schedule 2.20, to the Company's Knowledge, there is no basis for
any termination of the Company's contract with any Material Customer other than
expiration of the stated term thereof.
2.21 Intellectual Property Rights. Set forth in Schedule 2.21 is a
complete list of all registered patents, trademarks, service marks, trade names,
and copyrights owned by the Company (collectively, "Registered Intellectual
Property"). The Company has used all Registered Intellectual Property and the
other computer software and software licenses, intellectual property,
proprietary information, trade secrets, trademarks, trade names, brand names,
inventions, processes, know-how, formulas, customer lists, technology, data,
works of authorship and copyrights (collectively, "Intellectual Property") used
by the Company without infringing on the rights of any Person. There is no
pending or, to the Company's Knowledge, threatened infringement, interference,
opposition, or similar action, suit, or proceeding by or against the Company or
the Assets relating to the Registered Intellectual Property, nor, to the
Company's Knowledge, except as set forth in Schedule 2.21, is there any basis
therefor. Except as set forth in Schedule 2.21, no other Person is infringing
the rights of the Company in any of its Registered Intellectual Property.
2.22 Competing Interests. Except for investment in publicly-held
entities (which investment does not exceed 5% of the issued and outstanding
equity capital of such entities), neither the Principal Shareholder, nor to the
Company's Knowledge, any immediate family member of the Principal Shareholder
(a) owns, directly or indirectly, an interest in any Person that is a
competitor, customer, or supplier of the Company or that otherwise has material
business dealings with the Company or (b) is a party to, or otherwise has any
direct or indirect interest opposed to the Company under, any Material Agreement
or other business relationship or arrangement.
15
<PAGE> 16
2.23 Illegal Payments. Neither the Company nor the Principal
Shareholder, nor, to the Company's Knowledge, any immediate family member of the
Principal Shareholder has (a) used any funds of the Company for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity, or (b) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended.
2.24 Brokers. Neither Seller has incurred nor will it incur any
liability for brokers' or finders' fees or agents' commissions in connection
with this Agreement or the transactions contemplated by this Agreement.
2.25 No Misrepresentations. In connection with the acquisition of the
Assets, the Company has not knowingly or recklessly made any untrue statement of
a material fact in this Article II or knowingly or recklessly omitted to state
any material fact set forth in this Article II necessary to make any such
representation, warranty, or statement, under the circumstances in which it is
made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUISITION SUB
Acquisition Sub represents and warrants to Sellers as follows:
3.1 Organization. Each of PSC and Acquisition Sub is a corporation duly
organized, validly existing, and in good standing under the laws of Delaware.
3.2 Authority. Each of PSC and Acquisition Sub has all requisite power
and authority to execute, deliver, and perform under this Agreement and the
other agreements, certificates, and instruments to be executed by Buyers in
connection with or pursuant to this Agreement (collectively, the "Buyer
Documents"). The execution, delivery, and performance by each of PSC and
Acquisition Sub of each Buyer Document to which it is a party have been duly
authorized by all necessary action, corporate or otherwise, on the part of PSC
and Acquisition Sub. This Agreement has been, and at the Closing the other Buyer
Documents will be, duly executed and delivered by PSC and Acquisition Sub (to
the extent each is a party thereto). This Agreement is, and each of the other
Buyer Documents will be, a legal, valid, and binding agreement of PSC and
Acquisition Sub, as the case may be, enforceable against PSC and Acquisition Sub
in accordance with their respective terms.
3.3 Stock Validity. The Shares are duly authorized shares of Class A
Common Stock, $.01 par value per share of PSC, have been duly authorized for
issuance under this Agreement, and when issued as contemplated by this Agreement
will be validly issued, fully paid and nonassessable and free of statutory
preemptive rights with respect thereto. Upon issuance in accordance with this
Agreement, Sellers will receive good and valid title to the Shares free and
clear of any Liens, except for those referred to in this Agreement. All issued
and outstanding shares of capital stock of Acquisition Sub are owned by PSC.
16
<PAGE> 17
3.4 No Violation. The execution, delivery, and performance of the Buyer
Documents by PSC and Acquisition Sub will not conflict with or result in the
breach of any term or provision of, or violate, or constitute a default under
any charter provision or bylaw or under any material agreement, instrument,
order, law, or regulation to which either of them is a party or by which either
of them is in any way bound or obligated.
3.5 Governmental Consents. Except as required in connection with the
HSR Act, the registration of the Shares with the Securities and Exchange
Commission (the "SEC") and the listing of the Shares on the NYSE, no consent,
approval, order, or authorization of, or registration, qualification,
designation, declaration, or filing with, any Governmental Body is required on
the part of either Buyer in connection with the transactions contemplated by the
Seller Documents.
3.6 SEC Reports. There is available on the SEC's EDGAR database a copy
of each report, proxy statement or information statement filed by it since
January 1, 1999, each in the form (including exhibits and any amendments thereto
and all documents incorporated by reference therein) (collectively, the "SEC
Documents") filed with the SEC under the U.S. Securities Exchange Act of 1934,
as amended (the "Exchange Act"). As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the
Exchange Act, and the applicable rules and regulations of the SEC thereunder,
and none of the SEC Documents knowingly and recklessly contained any untrue
statement of a material fact or knowingly or recklessly omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, under the circumstances in which they were made, not misleading,
except to the extent corrected by a document subsequently filed with the SEC
prior to the date hereof. PSC is current in its filings with the SEC.
3.7 Plan. Acquisition Sub has delivered to Sellers a true, correct and
complete copy of the Perot Systems Corporation 1991 Stock Option Plan Amended
and Restated as of February 25, 1999 (the "Plan"). The Plan is in full force and
effect and has not been amended subsequent to such date. The shares of Common
Stock to be granted pursuant to the exercise of the Options to be granted
pursuant to Section 4.13 (collectively, the "Options") have been duly authorized
and reserved for issuance, and such shares, when issued in accordance with the
terms of the Option, will be legally and validly issued, fully-paid and
non-assessable, and registered under the Securities Act of 1933, as amended (the
"Securities Act"), qualified for issuance under all applicable state securities
laws and listed for trading with the NYSE.
3.8 Litigation. There are no pending or, to the knowledge of Buyers,
threatened, lawsuits, administrative proceedings, or reviews, or formal or
informal complaints or investigations by any Person that in any manner
challenges or seeks to prevent, enjoin, alter or materially delay any of the
transactions contemplated by this Agreement.
3.9 Right to Conduct Business. Except as disclosed on Schedule 3.9,
neither PSC nor any affiliate thereof has entered into any contract, agreement,
commitment or
17
<PAGE> 18
understanding (whether written or oral) restricting the manner in which
Acquisition Sub can operate its business.
3.10 Brokers. Neither Buyer has incurred nor will it incur any
liability for brokers' or finders' fees or agents' commissions in connection
with this Agreement or the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.1 Conduct of Business. During the period commencing on the date of
this Agreement and ending on the earlier to occur of the Closing or the
termination of this Agreement in accordance with its terms (the "Interim
Period"), unless Buyers otherwise consent in writing, and except as otherwise
specifically contemplated by this Agreement, the Company will (a) operate in the
ordinary course of business of the Company and use its best efforts to preserve
the goodwill of the Company and of its employees, customers, suppliers,
Governmental Bodies, and others having business dealings with the Company; (b)
not engage in any transaction outside the ordinary course of business of the
Company, including without limitation by making any material expenditure,
investment, or commitment or entering into any material agreement or arrangement
of any kind; (c) except in the ordinary course of business of the Company, not
increase the compensation level of any employee (other than the officers of the
Company), or make any bonus payments or other distributions to any such
employee; (d) not increase the compensation level of any officer of the Company
or make any bonus payments or distributions to any such officer; (e) maintain
all insurance policies and all Permits that are required for the Company to
carry on its business; (f) maintain books of account and records in the usual,
regular, and ordinary manner and consistent with past practices; and (g) use its
best efforts not to take any action that would result in, or otherwise allow, a
breach (as of the Closing) of the representations and warranties set forth in
Section 2.10.
4.2 Access and Information. During the Interim Period, the Company will
permit Buyers and their representatives to have reasonable access to the
Company's directors, officers, employees, agents, assets, and properties and all
relevant books, records, and documents of or relating to the business and assets
of the Company during normal business hours upon reasonable advance notice and
will furnish to Buyers such information, financial records, and other documents
relating to the Company and its operations and businesses as Buyers may
reasonably request. The Company will permit Buyers and their representatives
reasonable access to the Company's accountants, auditors, customers, and
suppliers for consultation or verification of any information obtained by Buyers
and will use their best efforts to cause such Persons to cooperate with Buyers
and their representatives in such consultations and in verifying such
information. The Company will have the right to participate in any contact with
such Persons.
4.3 Supplemental Disclosure. During the Interim Period, the Company
will promptly supplement or amend each of the Schedules to this Agreement with
respect to any matter of which the Company or the Principal Shareholder becomes
aware that arises
18
<PAGE> 19
or is discovered after the date of this Agreement that, if existing or known at
the date of this Agreement, would have been required to be set forth or listed
in the Schedules to this Agreement; provided that, for purposes of determining
whether a breach exists with respect to any of the representations and
warranties set forth in this Agreement, any such supplemental or amended
disclosure will be deemed not to have been disclosed to Buyers unless Buyers
otherwise expressly consents in writing.
4.4 Assistance with Permits and Filings. During the Interim Period,
Sellers will furnish Buyers with all information concerning Sellers that is
required for inclusion in any application or filing made by Buyers to any
Governmental Body in connection with the transactions contemplated by this
Agreement, including, without limitation, the Registration Statement, and Buyers
will furnish Sellers with all information concerning Buyers that is required for
inclusion in any application or filing made by Sellers to any Governmental Body
in connection with the transactions contemplated by this Agreement. Sellers and
Buyers will fully cooperate to file the Notification and Report Form required by
the HSR Act with the Federal Trade Commission and the Anti-Trust Division of the
Department of Justice. Sellers will use commercially reasonable efforts to
assist Buyers in obtaining any Permits, or any consents to assignment related
thereto, that Buyers will require in connection with the continued operation of
the Assets after the Closing.
4.5 Fulfillment of Conditions by Sellers. Sellers will use their best
efforts not to take any action that would cause the conditions on the
obligations of the parties to effect the transactions contemplated by this
Agreement and the Seller Documents not to be fulfilled, including without
limitation by taking or causing to be taken any action that would cause the
representations and warranties made by Sellers in this Agreement not to be true
and correct as of the Closing. Sellers will take all reasonable steps within
their power to cause to be fulfilled the conditions precedent to Buyers'
obligations to consummate the transactions contemplated by this Agreement that
are dependent on the actions of Sellers.
4.6 Fulfillment of Conditions by Buyers. Buyers will use their best
efforts not to take any action that would cause the conditions on the
obligations of the parties to effect the transactions contemplated by this
Agreement not to be fulfilled, including without limitation by taking or causing
to be taken any action that would cause the representations and warranties made
by Buyers in this Agreement not to be true and correct as of the Closing. Buyers
will take all reasonable steps within their power to cause to be fulfilled the
conditions precedent to the obligations of Sellers to consummate the
transactions contemplated by this Agreement that are dependent on the actions of
Buyers.
4.7 Publicity. During the Interim Period, Buyers and Sellers will
cooperate with each other in the development and distribution of all news
releases and other public disclosures relating to the transactions contemplated
by this Agreement. During the Interim Period, neither Buyers nor Sellers will
issue or make, or allow to have issued or made, any press release or public
announcement concerning the transactions contemplated by this Agreement without
giving the other party a reasonable opportunity
19
<PAGE> 20
to comment on such release or announcement in advance, consistent with
applicable legal and stock market requirements.
4.8 Transaction Costs. Buyers will pay all transaction costs and
expenses (including legal, accounting, and other professional fees) that they
incur in connection with the negotiation, execution, and performance of this
Agreement and the transactions contemplated by this Agreement, including the
filing fees required to be paid by Buyers under the HSR Act and the costs of any
mortgagee policies of title insurance. Prior to the Closing, the Company will
pay (a) all transaction costs and expenses (including legal, accounting, and
other professional fees) incurred by Sellers in connection with the negotiation,
execution, and performance of this Agreement and the transactions contemplated
by this Agreement, including the filing fees required to be paid by the
Principal Shareholder under the HSR Act; and (b) any transfer taxes (including
sales, use, and deed taxes) associated with the transfer of the Assets to
Acquisition Sub. Sellers will timely file a request for sales tax exemption
under Pa. Stat. Ann. 72 Sec. 7240 on the bulk transfer of the Assets to Buyer.
4.9 No-Shop Provisions. Each of Sellers hereby covenants and agrees
that during the Interim Period (a) it will not, and will not permit any of its
affiliates to, initiate, solicit, or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any Competing Transaction (as defined below), or enter into
discussions or negotiate with any Person in furtherance of such inquiries or to
obtain a Competing Transaction, or endorse or agree to endorse any Competing
Transaction, or authorize or permit any of the officers, directors, or employees
of Sellers or any investment banker, financial advisor, attorney, accountant, or
other representative retained by Sellers, or any of their affiliates to take any
such action, and (b) Sellers will promptly notify PSC of all relevant terms of
any such inquiries and proposals that the Company reasonably and in good faith
determines to merit serious attention received by it relating to any of such
matters, and if such proposal is in writing, Sellers will promptly deliver or
cause to be delivered to PSC a copy of such proposal. For purposes of this
Agreement, "Competing Transaction" means any of the following (other than the
transactions contemplated by this Agreement) involving the Company: (a) any
merger, consolidation, share exchange, business combination, or similar
transaction; (b) any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition of 5% or more of the assets used in the business of the Company; or
(c) any offer for 5% or more of the outstanding shares of capital stock of the
Company.
4.10 Nondisclosure. Sellers acknowledge and agree that all customer,
prospect, and marketing lists, sales data, intellectual property, proprietary
information, trade secrets, and other confidential information of the Company
(collectively, "Confidential Information") are valuable assets constituting part
of the Assets and, following the Closing, will be transferred to Acquisition
Sub. Sellers agree to, and agree to use reasonable efforts to cause its
representatives to, treat the Confidential Information, together with any other
confidential information furnished to it by Buyers, as confidential and not to
make use of such information for its own purposes or for the benefit of any
other Person (other than the
20
<PAGE> 21
Company prior to the Closing or Buyers after the Closing). Prior to the Closing,
Buyers agree to, and agree to use reasonable efforts to cause their
representatives to, treat the Confidential Information as confidential and not
to make use of such information for their own purposes or for the benefit of any
other Person except in connection with the transactions contemplated by this
Agreement. If this Agreement is terminated prior to the Closing, each party
agrees that it will not thereafter use any Confidential Information furnished to
it by the other party for any purposes whatsoever or permit any such information
to be made available publicly, except to the extent required by law, and that it
will return any such written information to the other party upon request.
4.11 Discharge of Retained Liabilities. Following the Closing, the
Company will fully pay or otherwise discharge in full, prior to the due date
therefor and otherwise in accordance with the terms thereof, all Liabilities of
the Company except the Assumed Liabilities. This Section 4.11 will survive the
Closing.
4.12 Name Change. On the Closing Date, Sellers will file all documents
necessary to change the Company's name to a name bearing no similarity to
"Solutions Consulting," and Acquisition Sub will change its name to "Solutions
Consulting."
4.13 Employees.
(a) On the Closing Date, Acquisition Sub will offer full-time
employment, subject to PSC's standard employment procedures, including
without limitation satisfactory completion of background checks and
execution of PSC's Associates Employment Agreement in the form agreed
upon (the "Associates Agreement"), to the employees of the Company on
the date of this Agreement (the "Transferred Employees"). The terms of
employment for the Transferred Employees will be on substantially the
same terms, with the same compensation and benefits, as are currently
provided by the Company. The Associates Agreement for the President of
the Company (the "President") will provide the same severance
arrangement and permit the same outside activities as are set forth in
the President's letter of agreement with the Company, a copy of which
has been delivered to Buyers. With respect to any benefit plan
providing health coverage, Acquisition Sub will provide substantially
the same health coverage to the Transferred Employees commencing as of
the Closing Date for covered expenses incurred on or after the Closing
Date. To the extent allowed by Law, Acquisition Sub will waive any
participation requirement, waiting period or pre-existing condition
exclusion with respect to the Transferred Employees and will provide
all Transferred Employees credit for all of their employment service
with the Company for purposes of both participation and vesting
requirements under all of Acquisition Sub's benefit plans (except under
any option, stock or similar compensatory benefit plan), and, to the
extent allowed by Law, any covered expenses incurred in calendar year
2000 prior to the Closing Date by such employees or their covered
dependents shall be taken into account for purposes of satisfying any
applicable deductible or co-insurance or maximum out-of-pocket
contribution under Acquisition Sub's health plan. Nothing in this
Agreement will
21
<PAGE> 22
be construed to require Acquisition Sub or PSC to continue the
employment of the Transferred Employees for any particular time period
nor to interfere with Acquisition Sub's or PSC's rights to discipline
or terminate any Transferred Employee, to change the terms and
conditions of any Transferred Employee's employment at any time, and to
modify, amend, suspend, or terminate benefit plans at any time. This
Section 4.13(a) will survive the Closing.
(b) PSC has granted to the Transferred Employees (or will
grant before the Closing Date), under the Plan and subject to the
execution of individual stock option agreements, options to purchase an
aggregate of 5,900,000 shares of Common Stock, with an exercise price
equal to the closing price for the Common Stock on the NYSE on the date
of grant (the "Grant Date") and in substantially the form agreed by the
parties on the date of this Agreement ("Standard Options"), in
individual amounts specified by PSC to the Sellers (after consultation
with Sellers)(with 20,000 Standard Options issued to each of the three
(3) outside directors of the Company). Except as set forth in Section
4.13(d), any remaining Standard Options not granted by the Closing Date
will be terminated, and will not be available for future grants.
(c) PSC has granted to the Transferred Employees (or will
grant before the Closing Date), under the Plan and subject to the
execution of individual stock option agreements, options to purchase an
aggregate of 9,250,000 shares of Common Stock, with an exercise price
equal to the closing price for the Common Stock on the NYSE on the
Grant Date and in substantially the form agreed by the parties on the
date of this Agreement ("Performance Options") (the Standard Options
and the Performance Options collectively, the ("Employee
Compensation")), in individual amounts specified by PSC to the Sellers
(after consultation with Sellers)(with 30,000 Performance Options
issued to each of the three (3) outside directors of the Company).
Except as set forth in Section 4.13(d), any remaining Performance
Options not granted by the Closing Date will be terminated, and will
not be available for future grants.
(d) Simultaneously with the Closing, PSC will reserve
3,900,000 (plus an amount equal to the number of Standard Options and
Performance Options that have not been granted by the Closing Date, if
any; provided that the number of Performance Options cancelled under
Section 4.13(c) will retain their characterization as such) shares of
Common Stock under the Plan for new employees (the "Reserved Options").
Up to an agreed upon number of Reserved Options for a given position
will be granted at the request of the management of Acquisition Sub at
fair market value on the date of grant and containing a five-year
vesting schedule, in accordance with Schedule 4.13(d). While no legal
commitment of any nature is made hereby, additional options may be made
available for grant by Acquisition Sub depending on Acquisition Sub's
performance. This Section 4.13(d) will survive the Closing, but shall
expire and be of no force and effect as of and following the Autonomy
Termination Date (as defined in the Performance Options).
22
<PAGE> 23
4.14 Special Meeting. Sellers will take all action necessary in
accordance with the Pennsylvania law and the articles of incorporation and
bylaws of the Company, to call, as soon as is practicable, a meeting of its
shareholders and such other security or equity holders of the Company having the
right to vote on the transactions contemplated by this Agreement (the "Special
Meeting") at which the shareholders and such other security or equity holders of
the Company will consider and vote upon this Agreement and the transactions
contemplated herein. The Principal Shareholder will vote his shares of capital
stock of the Company in favor of this Agreement and the transactions
contemplated herein.
4.15 Filing and Authorizations. As promptly as practicable, Buyers and
Sellers will make, or cause to be made, such filings and submissions under laws,
rules and regulations applicable to it, including the HSR Act, as may be
required by it to consummate the transactions contemplated herein, and will use
their best efforts to obtain, or cause to be obtained, all authorizations,
approvals, consents and waivers from all Governmental Bodies necessary to be
obtained by Buyers and Sellers, respectively.
4.16 Registration Statement.
(a) PSC has prepared pursuant to all applicable Laws a
registration statement on Form S-4 (the "Registration Statement") that
it has filed with the SEC in connection with the issuance of shares of
its Common Stock in transactions such as those contemplated by this
Agreement, which Registration Statement has been declared effective
under the Securities Act. PSC also agrees to use all reasonable efforts
to obtain, prior to the effective date of the Registration Statement,
all necessary state securities law or "Blue Sky" permits and approvals
required to issue the Shares. The Company agrees to furnish to PSC all
information concerning the Company, officers, directors and
stockholders as may be necessary in connection with the foregoing.
(b) During the Interim Period, PSC will advise the Company
promptly after any supplement or amendment to the Registration
Statement has become effective or any supplement or amendment has been
filed, of the issuance of any stop order or the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
of the initiation or threat known to PSC of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement
of the Registration Statement or for additional information.
(c) At or prior to the Closing, PSC will cause the Shares to
be listed on the NYSE.
4.17 Non-Competition.
(a) The Company will use its best efforts to obtain:
23
<PAGE> 24
(i) from each individual entitled to receive in
excess of $1,500,000 in aggregate Consideration (as defined
below) (each such person, who is identified in a list provided
to Buyers prior to the Closing, a "Significant Personnel") a
non-competition agreement, which non-competition agreement
will, among other things, cover the period commencing on the
Closing Date and ending on the later to occur of (i) five (5)
years after the Closing Date or (ii) two (2) years after such
Significant Personnel ceases to be employed by Acquisition
Sub, each such agreement to be in substantially the form
agreed by the parties on the date of this Agreement
(collectively, the "Five-Year Non-Competition Agreements")
where "Consideration" means the portion of the Purchase Price
such individual is scheduled to receive (with the Common Stock
valued in the same manner as the value in Section 1.5(b)
above); and
(ii) from each individual other than a Significant
Personnel entitled to receive in excess of $250,000 in
aggregate Consideration (each such person, who is identified
in a list provided to Buyers prior to the Closing, a "Key
Personnel") a non-competition agreement, which non-competition
agreement will, among other things, cover a period commencing
on the Closing Date and ending two (2) years after the Closing
Date, each such agreement to be in substantially the form of
agreed by the parties on the date of this Agreement
(collectively, the "Two-Year Non-Competition Agreements").
(b) The Principal Shareholder will execute and deliver a
Five-Year Non-Competition Agreement.
4.19 Adoption of Plan of Liquidation. Prior to the Closing Date, the
Board of Directors of the Company will adopt a plan of liquidation in accordance
with the laws of the state of its incorporation and submit such plan to the
Shareholders.
4.20 Distributions. Prior to the Closing, the Company will distribute
$10,000,000 to its Shareholders.
4.21 Headquarters Building. Prior to the Closing, the Company will sell
to the Principal Shareholder or his designee the real estate and improvements
owned by the Company and located in Cannonsburg, Pennsylvania (the "Headquarters
Building") under the terms set forth in Schedule 4.21, and the Company will
lease space in the Headquarters Building to serve as the primary office of
Acquisition Sub in accordance with the terms set forth in Schedule 4.21.
4.22 Distribution of Shares. The Company will promptly distribute the
Shares to the Persons and in the respective share amounts set forth in a writing
that refers to this Section 4.22 and acknowledged by Buyers prior to the
Closing. Principal Shareholder will receive in excess of 50% of the Shares.
Except as otherwise expressly contemplated in this Section 4.22, the Company
will distribute the Shares only to Persons that sign a
24
<PAGE> 25
lock-up agreement in the forms agreed by the parties on the date of this
Agreement, except that shares to be distributed to the ESOP and the Principal
Shareholder's Grantor Retained Annuity Trust will only bear a restrictive legend
that is substantively the same as set forth in the lock-up agreements. The
Company will sign a lock-up agreement covering the period of time after its
receipt of the Shares through its distribution of the Shares in accordance with
this Section 4.22.
4.23 Operations of Acquisition Sub.
(a) At the Closing, Acquisition Sub will adopt the policies and
procedures of the Company.
(b) Without prejudice to the rights of any Person under the Performance
Options, it is PSC's current intention to permit Acquisition Sub, during the
period commencing on the Closing Date and ending on the Autonomy Termination
Date, to be operated in substantially the same manner as the Company has
operated prior to the Closing unless otherwise agreed by the Principal
Shareholder or the President, except with respect to the issuance of securities
(including debt securities), the consummation of any merger, consolidation,
reorganization, disposition of material assets other than in the ordinary course
of business of the Company, or similar transaction capital expenditures in
excess of $300,000 in any fiscal year, or the amendment of its articles of
incorporation or bylaws. Nothing contained in this provision shall serve to
limit or restrict the legal rights of PSC with respect to Acquisition Sub.
4.24 Exclusive Recourse. Notwithstanding any other provision of this
Agreement, including, without limitation, Article VI, the sole and exclusive
remedy, at law or equity, for any violation of any provision that could be
construed to constrain or otherwise affect the sole and absolute right of Buyers
or their affiliates to control and operate the Assets or the Acquisition Sub
after the Closing (including, without limitation, the provisions of Sections
3.9, 4.13, and 4.23) will be the potential acceleration of Performance Options
as contemplated by Section 2(f) of Exhibit A to the Performance Options and a
potential "Change in Condition" pursuant to and as set forth in the Retention
Agreement. No other rights, duties, liabilities, remedies, recourse, or
obligations arise with respect to any party pursuant to any such provision under
any theory, legal or equitable, including, without limitation, contract, tort,
unjust enrichment, and strict liability. Notwithstanding the foregoing, the
provisions of this Section 4.24 shall not apply to the covenant in Section 4.28.
4.25 Allocation of Purchase Price. Buyers and Sellers will promptly
appoint an accounting or appraisal firm reasonably acceptable to each party (the
"Appraiser") to determine an allocation of the Purchase Price among the Assets.
The Appraiser will be engaged to deliver a draft allocation within seven (7)
business days prior to the Closing Date. Buyers and Sellers will act reasonably
to agree to a final allocation which will be attached to the Agreement at
Closing as Schedule 4.25. Buyers and Sellers will report the transactions
contemplated hereby on all Tax Returns (including information returns and
supplements thereto required to be filed by Buyers and Sellers under the Code)
in a
25
<PAGE> 26
manner consistent with such final allocation, as may be adjusted in accordance
with GAAP after the Closing, with the reasonable consent of the Representative
(as defined in the Performance Options). This Section 4.25 will survive the
Closing.
4.26 Indemnification of Principal Shareholder. PSC will provide the
Principal Shareholder with the full indemnification provided by applicable law
in his capacity as an officer or director of Acquisition Sub (and, in the event
that the Principal Shareholder fails to be an officer or director but remains an
employee of Acquisition Sub, such indemnification as an employee to the same
extent that the Principal Shareholder would be entitled to indemnification if he
were an officer or director).
4.27 Certain Costs. Principal Shareholder, on the one hand, and Buyers,
on the other hand, will share equally any Losses (as defined in Section 6.1)
arising from or relating to any Person with respect to whom Buyers waive the
condition to Closing set forth in Section 5.1(m) (including, without limitation,
any claims by any such Person).
4.28 Ownership. Buyers covenant and agree that, notwithstanding any
other provision of this Agreement, prior to an Autonomy Termination Date, Buyers
shall not without the prior written consent of the Representative (as defined in
the Performance Options) (a) take or permit to be taken any action that would
result in Acquisitions Sub not being beneficially owned 100% by PSC or (b) allow
or cause Acquisition Sub (i) to be merged or consolidated with any Person; (ii)
to sell or otherwise dispose of all or substantially all of its assets; or (iii)
to dissolve, liquidate, or cease to do business as a single entity unless
Acquisition Sub is placed in a bankruptcy or insolvency proceeding.
ARTICLE V
CLOSING CONDITIONS
5.1 Conditions to Obligations of Buyers. The obligations of Buyers
under this Agreement are subject to the satisfaction at or prior to the Closing
of the following conditions, but compliance with any such conditions may be
waived by Buyers in writing:
(a) All representations and warranties of the Company
contained in this Agreement will be true and correct in all material
respects (if not qualified by materiality) or in all respects (if
qualified by materiality) at and as of the Closing with the same effect
as though such representations and warranties were made at and as of
the Closing, and Buyers will have received a certificate to such effect
in form and substance satisfactory to Buyers executed on behalf of the
Company by the Chief Executive Officer and the Chief Financial Officer
of the Company.
(b) Sellers will have performed and complied with all the
covenants and agreements required by this Agreement to be performed or
complied with by them at or prior to the Closing, including without
limitation the delivery of all items required to be delivered by them
pursuant to Section 1.7, and Buyers will have received a certificate to
such effect in form and substance satisfactory to Buyers
26
<PAGE> 27
executed on behalf of the Company by the Chief Executive Officer and
the Chief Financial Officer of the Company and by Principal
Shareholder.
(c) All necessary contractual and governmental consents,
approvals, orders, or authorizations must have been obtained and all
necessary contractual or governmental notices have been given (except
with respect to Material Agreements that are terminable without cause
upon ninety (90) days or less notice, and with respect to other
agreements where to failure to obtain such consents, approvals, orders,
or authorizations or to give such notice would not have a material
adverse effect on the Assets). Without limiting the generality of the
foregoing, (i) all filings pursuant to the HSR Act will have been made
by Sellers, and their respective affiliates and the required waiting
period under the HSR Act will have expired or been terminated without
any threat or commencement of antitrust proceedings with respect to the
transactions contemplated by this Agreement and (ii) the Registration
Statement must have been declared effective by the SEC for at least 20
Business Days prior to the Closing.
(d) There will be no pending or threatened litigation in any
court or any proceeding before or by any Governmental Body to restrain
or prohibit or obtain damages or other relief with respect to this
Agreement or the other Seller Documents or the consummation of the
transactions contemplated by this Agreement or as a result of which
Buyers could be required to dispose of any assets or operations of the
Buyers (including any material assets or operations acquired or to be
acquired from the Company) or their affiliates or to comply with any
material restriction on the manner in which the Buyers or their
affiliates conduct their operations (including any operations acquired
or to be acquired from the Company).
(e) The Company will have delivered to Buyers Associates
Agreements executed by nine (9) of the top (10) individuals (to be
mutually determined) who are to received the highest aggregate amount
of Consideration pursuant to this Agreement, and at least 90% of the
remaining Persons who are to receive consideration pursuant to this
Agreement.
(f) The Company will have delivered to Buyers Five-Year
Non-Competition Agreement executed by six (6) of the seven (7)
Significant Personnel (to be mutually determined upon execution of this
Agreement).
(g) The Company will have delivered to Buyers Two-Year
Non-Competition Agreements, as applicable, executed by 90% of the Key
Personnel.
(h) The Company will have delivered to Buyers a statement
setting forth the total shareholder's equity of the Company as of
February 29, 2000 (the "Shareholders Equity Statement"), as determined
in accordance with GAAP in good faith by the Chief Financial Officer of
the Company, which amount will not be less than $21,250,000 (the
"Shareholders Equity Benchmark").
27
<PAGE> 28
(i) The Company will have delivered to Buyers a statement
setting forth the net working capital of the Company as of February 29,
2000 (the "Working Capital Statement"), as determined in accordance
with GAAP in good faith by the Chief Financial Officer of the Company,
which amount will not be less than $7,250,000 (the "Working Capital
Benchmark").
(j) Principal Shareholder will have executed and delivered to
Buyers a lock-up agreement in the agreed form.
(k) The Company will have delivered lock-up agreements
executed by the Company and by each Person to whom Shares are to be
distributed, as contemplated in Section 4.22, in the agreed form.
(l) Principal Shareholder will have executed and delivered a
retention agreement in the form agreed by the parties on the date of
this Agreement.
(m) The Company will have delivered to Buyers an irrevocable
release, waiver and joinder agreement executed by each Person who is to
receive consideration (Purchase Price or Employee Compensation) in the
form agreed by the parties on the date of this Agreement (the
"Joinder").
(n) The Company will have assigned to Acquisition Sub all
in-force insurance policies, except builder's risk, directors and
officers insurance and roll-off coverage. The in-force insurance
policies will include commercial general liability, umbrella liability,
automobile liability and physical damage, crime, property and workers
compensation and employers liability.
(o) The Company must have delivered to Buyers a certificate of
the secretary of the Company as to the items covered by Section 2.3.
(p) The Company must have delivered to Buyer a legal opinion
of Sellers' counsel covering such legal matters as may be reasonably
requested by Buyers.
(q) The Sellers will have executed and delivered to Buyers the
other Seller Documents.
(r) The Buyers will have completed their due diligence
investigation of the ESOP, the results of which indicate, to the
satisfaction of Buyers in their reasonable discretion, that the Buyers
will incur no more than $500,000 in Liabilities as a result of the
provisions of Section 1.3(c).
(s) Prior to the Closing, each Person that has theretofore
executed an Associates Agreement will confirm in writing that the
reference therein to the "Company" includes the business of the Company
under this Agreement.
28
<PAGE> 29
5.2 Conditions to Obligations of Sellers. The obligations of Sellers
under this Agreement are subject to the satisfaction at or prior to the Closing
of the following conditions, but compliance with any such conditions may be
waived by Sellers in writing:
(a) All representations and warranties of Buyers contained in
this Agreement will be true and correct in all material respects (if
not qualified by materiality) or in all respects (if qualified by
materiality) at and as of the Closing with the same effect as though
such representations and warranties were made at and as of the Closing,
and Sellers will have received a certificate to such effect in form and
substance satisfactory to Sellers executed on behalf of each Buyer by
officers of each Buyer reasonably acceptable to Sellers.
(b) Buyers will have performed and complied with all the
covenants and agreements required by this Agreement to be performed or
complied with by them at or prior to the Closing, including without
limitation the delivery of all items required to be delivered by them
pursuant to Section 1.7, and Sellers will have received a certificate
to such effect in form and substance satisfactory to Sellers executed
on behalf of each Buyer by officers of each Buyer reasonably acceptable
to Sellers
(c) All necessary governmental consents, approvals, orders, or
authorizations must have been obtained and all necessary governmental
notices must have been given. Without limiting the generality of the
foregoing, all filings pursuant to the HSR Act will have been made by
Buyers and their respective affiliates and the required waiting period
under the HSR Act will have expired or been terminated without any
threat or commencement of antitrust proceedings with respect to the
transactions contemplated by this Agreement.
(d) Buyers will have delivered to Sellers a legal opinion of
the Buyers' counsel covering such legal matters as may be reasonably
requested by Sellers.
(e) Buyers will have executed and delivered to Sellers each
other Buyer Document.
(f) The Shares will have been authorized for listing on the
NYSE, the Registration Statement shall have been declared effective and
shall have remained effective for at least twenty (20) Business Days
and no stop order will be in effect with respect thereto and no
proceeding for that purpose will have been initiated or, to the
Knowledge of the Buyers, threatened by the SEC.
(g) Buyers will have delivered to Sellers a copy of the
articles of incorporation and bylaws of Acquisition Sub.
29
<PAGE> 30
(h) Buyers shall not have terminated the employment of any
Transferred Employee prior to the Closing Date without the consent of
the Company.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification of Seller Parties.
(a) Subject to the limitations set forth in Section 6.1(b)
below, Buyers shall jointly and severally indemnify and hold harmless
the Principal Shareholder, the Company, and the shareholders of the
Company other than the Principal Shareholder (the "Other Shareholders")
(the Principal Shareholder, the Company and the Other Shareholders
collectively, the "Seller Parties") against the following liabilities,
obligations, claims, losses, contingencies, damages (including enhanced
damages with respect to intellectual property matters), costs, and
expenses, including all court costs and reasonable attorneys' fees
(exclusive of the Seller Parties' or the Buyers', as applicable,
incidental and consequential damages) (together, "Losses").
(i) any Losses incurred by the Seller Parties
resulting from a breach of the representations and warranties
of the Acquisition Sub set forth in Article III;
(ii) any Losses incurred by the Seller Parties
resulting from the operations of Acquisition Sub and/or use of
the Assets subsequent to the Closing;
(iii) any Losses incurred by the Seller Parties
resulting from the Assumed Liabilities (except that with
respect to an indemnification event which requires Buyers to
make payment directly to Seller Parties, Buyers shall be
entitled to exercise a right of setoff against amounts which
the Seller Parties owe to Buyers pursuant to the provisions of
Section 6.3, regardless of the time limitations set forth in
Section 6.4);
(iv) all Indemnifiable Income Taxes (as hereafter
defined) with respect to the portion of the year 2000
commencing on January 1, 2000 and ending on the day
immediately prior to the Closing Date (the "2000 Stub Year")
and for calendar years 1999 and prior. As used herein, the
term "Indemnifiable Income Taxes" means 80% of the income
Taxes payable by such Seller Party (assuming a 43% combined
Federal and state tax rate) solely as a result of any error by
the Company that does not constitute a knowing and willful
error (including any adjustment resulting from an audit) in
computing its taxable income for the period in question.
Without limiting the foregoing, "Indemnifiable Income Taxes"
(A) will not include failures by the Company to distribute
sufficient cash to pay taxes; (B) will not include
misallocation of taxable income among the
30
<PAGE> 31
shareholders of the Company; and (C) will be offset and
reduced by any income Tax benefit (any refund or reduction of
Taxes payable) of such Seller Party as a result of an error by
the Company or as a result of increased basis in such Seller
Party's capital stock of the Company resulting solely from any
error that gives rise to an Indemnifiable Income Tax; and
(v) any Losses incurred by the Seller Parties arising
from the Company's or Buyers' licensing, sale, offers to sell
or license, or any other use or exploitation of, the
Intellectual Property, together with all improvements,
enhancements, modifications or other derivative works based in
whole or in part thereon, whether such uses occurred prior to
the Closing or subsequent to the Closing (except that with
respect to an indemnification event which requires Buyers to
make payment directly to Seller Parties, Buyers shall be
entitled to exercise a right of setoff against amounts which
the Seller Parties owe to Buyers pursuant to the provisions of
Section 6.3 below, regardless of the time limitations set
forth in Section 6.4 below).
(b) Limitations.
(i) The amount of Assumed Liabilities for which PSC
shall be liable under Subsection 6.1(a)(iii) above shall not
exceed the sum of (A) all distributions and dividends (whether
in cash or property) from Acquisition Sub to PSC or any
affiliate of PSC (other than Acquisition Sub) and the
difference between the tangible, monetary benefit received by
PSC (or any affiliate of PSC)(other than Acquisition Sub) from
any transactions between PSC (or any affiliate of PSC) (other
than Acquisition Sub) and Acquisition Sub and the fair market
value of any such transaction and (B) any other assets
transferred from the Company to PSC (other than as
contemplated in this Agreement) upon consummation of the
transactions contemplated hereunder (the foregoing to have no
effect on Acquisition Sub's obligations under Section 6.1).
(ii) In no event will the obligation of the Buyers to
indemnify the Principal Shareholder for the Assumed
Liabilities set forth in Section 1.3(d) exceed $5,000,000.
(iii) In no event shall the aggregate amount for
which the Buyers are liable under Section 6.1(a)(iv) for the
years 1999 and prior exceed $2,000,000, nor shall Buyers have
any indemnification obligation under Section 6.1(a)(iv) if,
and to the extent that, the Company had Knowledge of such
Indemnifiable Income Taxes prior to the Closing (as such
knowledge as defined in Section 7.10 hereof).
31
<PAGE> 32
(iv) In no event will Buyers have any obligation to
indemnify Seller Parties for any Losses which are covered, to
the extent covered, by insurance (excluding special purpose
insurance purchased by Seller Parties (other than the Company
prior to the Closing) for the express purpose of insuring
risks related to this Agreement) or for which the Sellers
collect claims against third parties (including, without
limitation, rights of contribution or indemnification). Buyers
will have no obligation to indemnify for any Loss under more
than one subsection of Section 6.1(a). Notwithstanding the
foregoing, the Seller Parties will not be entitled to
indemnification with respect to any Claim (as defined in
Section 6.6) in excess of the amount of the Loss, net of
insurance recoveries or recoveries from third parties, if any,
actually incurred by Seller Parties with respect to such
Claim.
(v) Buyers will not assert in any manner whatsoever
adverse to a claim for indemnification by a Seller Party under
the terms of this Article VI the breach or alleged breach of
any representation or warranty in Article II, except that the
foregoing will not limit the right of Buyers to indemnity
under this Article VI or the right of Buyers to set off under
Section 6.1(a)(iii) or 6.1(a)(v).
6.2 Indemnification for Excluded Liabilities. The Company shall
indemnify and hold harmless Acquisition Sub for any Losses Acquisition Sub may
suffer or incur as a result of or relating to the Excluded Liabilities set forth
in Section 1.4(a).
6.3 Indemnification of Acquisition Sub.
(a) Subject to the limitations set forth in Sections 6.3(b)
and 6.3(c) below, the Shareholders and the persons holding options as
of the date hereof to purchase capital stock of the Company (the
"Optionholders") (collectively, the "Obligors") shall indemnify and
hold harmless Acquisition Sub against the following Losses
(collectively, the "Acquisition Subs' Indemnifiable Sum"):
(i) any Losses incurred by Acquisition Sub resulting
from a breach of the representations and warranties of the
Company set forth in Article II;
(ii) any shortfall in the actual shareholders equity
of the Company as of February 29, 2000 (as determined in a
manner consistent with the Company's past accounting
practices) (the "Actual Shareholders Equity") below the
Applicable Shareholders Equity (as hereinafter defined) (the
"Shareholders Equity Shortfall"); provided, that Acquisition
Sub will not be entitled to indemnification unless the amount
of the Shareholders Equity Shortfall is at least $100,000, in
which event the amount to be indemnified will equal the sum of
$50,000 plus the amount of the Shareholders Equity Shortfall
in excess of $100,000, where "Applicable Shareholders Equity"
32
<PAGE> 33
means the Shareholders Equity Benchmark (as defined in Section
5.1(h)) (unless the shareholders equity shown on the
Shareholders Equity Statement is less than the Shareholders
Equity Benchmark, in which event the "Applicable Shareholders
Equity" shall equal the shareholders equity shown on the
Shareholders Equity Statement); and
(iii) any shortfall in the actual working capital of
the Company as of February 29, 2000 (as determined in a manner
consistent with the Company's past accounting practices) (the
"Actual Working Capital") below the Applicable Working Capital
(as herein defined) (the "Working Capital Shortfall");
provided, that Acquisition Sub will not be entitled to
indemnification unless the amount of the Working Capital
Shortfall is at least $500,000, in which event the amount to
be indemnified will equal $250,000 plus the amount of the
Working Capital Shortfall in excess of $500,000, where
"Applicable Working Capital" means the Working Capital
Benchmark (as defined in Section 5.1(i) below) (unless the
working capital shown on the Working Capital Statement is less
than the Working Capital Benchmark, in which event the
"Applicable Working Capital" shall equal the working capital
shown on the Working Capital Statement).
The Acquisition Subs' Indemnifiable Sum will not include any
Losses to the extent covered, by insurance (excluding special
purpose insurance purchased by Buyers for the express purpose
of insuring risks related to this Agreement) or for which the
Buyers collect claims against third parties (including,
without limitation, rights of contribution or
indemnification). The Obligors will have no obligation to
indemnify for any Loss under more than one subsection of this
Section 6.3(a). Notwithstanding the foregoing, the Acquisition
Sub will not be entitled to indemnification with respect to
any Claim in excess of the amount of the Loss, net of
insurance recoveries or recoveries from third parties if any,
actually incurred by Acquisition Sub with respect to such
Claim.
(b) Several Obligations. The obligations of the Obligors under
this Section 6.3 shall be several (and not joint) as follows:
Principal Shareholder 32.5%
SBF 32.5%
Other Shareholders 18.0%
SCI Optionholders 17.0%
The obligations of each Obligor within each classification set forth
above shall also be several (and not joint). The allocation of
liability among the Other Shareholders shall be based upon the number
of shares of common stock of the Company owned by each Other
Shareholder as of the Closing; and the allocation of liability among
the SCI Optionholders shall be based upon the Consideration paid to
each such SCI Optionholder in such SCI Optionholder's capacity as such.
33
<PAGE> 34
(c) Limitation on Amount.
(i) The Obligors shall have no obligation to pay any
Acquisition Subs' Indemnifiable Sum unless and until the
aggregate Acquisition Subs' Indemnifiable Sum exceeds
$2,000,000 (the "Threshold Indemnifiable Amount"), and then
only to the extent that the Acquisition Subs' Indemnifiable
Sum exceeds the Threshold Indemnifiable Amount.
(ii) In no event shall the maximum liability of the
Obligors collectively under this Article VI exceed Five
Million Dollars ($5,000,000) (the "Collective Maximum
Liability"). Accordingly, the maximum liability of each
Obligor under this Article VI (the "Individual Maximum
Liability") shall not exceed the Obligor's proportionate share
of liability as determined in accordance with Section 6.3(b)
multiplied by the Collective Maximum Liability (e.g., the
Principal Shareholder's maximum liability under this Article
VI shall not exceed $1,625,000 (32.5% of $5,000,000)).
(iii) Notwithstanding the foregoing:
(A) the Principal Shareholder shall be
liable on a first dollar basis, and without regard to
the Threshold Indemnifiable Amount or the Individual
Maximum Liability, for Acquisition Subs'
Indemnifiable Amounts arising under Section 6.3(a)(i)
if and to the extent that the Principal Shareholder
or WRM (as defined in Section 7.10) had actual
knowledge (with no duty to investigate) of the
inaccuracy of the applicable representation or
warranty and, with fraudulent intent, allowed the
Company to make such inaccurate representation or
warranty. Principal Shareholder acknowledges that for
the purposes of this Section 6.3(c)(iii)(A) an
inaccuracy of any applicable representation and
warranty is material and in an action based on this
Section 6.3(c)(iii)(A), reliance on an applicable
representation or warranty is justified and Principal
Shareholder will not assert to the contrary as a
defense.
(B) SBF (as defined in Section 7.10) shall
be liable on a first dollar basis, and without regard
to the Threshold Indemnifiable Amount or the
Individual Maximum Liability, for Acquisition Subs'
Indemnifiable Amounts arising under Section 6.3(a)(i)
if and to the extent that SBF had actual knowledge
(with no duty to investigate) of the inaccuracy of
the applicable representation or warranty and, with
fraudulent intent, allowed the Company to make such
inaccurate representation or warranty. SBF
acknowledges that for the purposes of this Section
6.3(c)(iii)(B) an inaccuracy of any applicable
representation and warranty is material and in an
action based on this Section 6.3(c)(iii)(B) reliance
on an applicable
34
<PAGE> 35
representation or warranty is justified and SBF will
not assert to the contrary as a defense.
6.4 Survival. The representations and warranties of the Company and
Acquisition Sub made in or pursuant to this Agreement will survive the execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement until March 31, 2001 ("Survival Deadline");
provided that any representation or warranty the violation of which is made the
basis of a claim for indemnification pursuant to Section 6.1(a)(i) or Section
6.3(a)(i) will survive until such claim is finally resolved if the party to be
indemnified notifies the indemnifying party of such claim in reasonable detail
prior to the date on which such representation or warranty would otherwise
expire under this Agreement. No claim for indemnification pursuant to Section
6.1(a)(i) or Section 6.3(a)(i) may be asserted by a party after the Survival
Deadline. No claim under Section 6.3(a)(ii) or 6.3(a)(iii) may be made later
than ninety (90) days after the Closing. Subject to the foregoing, all rights
and obligations of all parties referenced in this Article VI will survive
without limitation.
6.5 Exclusivity.
(a) The representations and warranties (and the related
Schedules thereto) set forth herein and in the closing certificates
referenced in Sections 5.1(a) and 5.2(a) (the "Closing Certificates")
are the sole and exclusive representations and warranties made by the
Buyers and Sellers in connection with the transactions contemplated by
this Agreement. Neither Buyers nor Sellers shall be deemed to have made
any representation or warranty other than as expressly made herein or
in the Closing Certificates, as applicable. Without limiting the
foregoing, and notwithstanding any otherwise express representations
and warranties made herein or in the Closing Certificates, as
applicable, neither Buyers nor Sellers make any representation or
warranty with respect to any other information or documents (financial
or otherwise) made available to the other party or its counsel,
accountants, advisors, or representatives.
(b) Except as otherwise expressly referred to in Section 4.24,
the rights under this Article VI are the sole and exclusive remedies of
the parties under this Agreement for any breach of any representation
or warranty under this Agreement or for any misstatement of fact or
omission to state any fact in connection with this Agreement and the
transactions contemplated by this Agreement.
6.6 Notice. Any party entitled to receive indemnification under this
Article VI (the "Indemnified Party") agrees to give prompt written notice to the
party or parties required to provide such indemnification (the "Indemnifying
Parties") upon the occurrence of any indemnifiable Loss or the assertion of any
claim or the commencement of any action or proceeding in respect of which such a
Loss may reasonably be expected to occur (a "Claim"), but the Indemnified
Party's failure to give such notice will not affect the obligations of the
Indemnifying Party under this Article VI except to the extent that the
Indemnifying Party is materially prejudiced thereby. Such
35
<PAGE> 36
written notice will include a reference to the event or events forming the basis
of such Loss or Claim and the amount involved, unless such amount is uncertain
or contingent, in which event the Indemnified Party will give a later written
notice when the amount becomes fixed.
6.7 Defense of Claims. Buyers shall assume and control the defense of
any Claims, including the employment of counsel reasonably satisfactory to the
Obligors and the payment of expenses relating to such Claim, pending
indemnification as provided herein, if applicable. No Buyer shall settle any
Claim for which it will seek indemnification under Section 6.3(a) without the
Principal Shareholder's consent (which consent shall not be unreasonably
withheld) (and SBF's approval, if Acquisition Sub asserts or intends to assert
that the Maximum Liability with respect to SBF is inapplicable), and the
Obligors may employ separate counsel and participate in the defense of such
Claim (but Buyers will not be responsible for the fees and expenses of such
counsel).
6.8 Miscellaneous. Except as expressly set forth in this Article VI, no
third party shall have any rights under this Article VI or be subrogated to any
party's rights hereunder.
ARTICLE VII
MISCELLANEOUS
7.1 Termination. This Agreement and the transactions contemplated by
this Agreement may be terminated and abandoned (a) at any time prior to the
Closing by mutual written consent of Buyers and Sellers; or (b) by either Buyer,
on the one hand, or Sellers, on the other hand, if a condition to performance by
the terminating party under this Agreement has not been satisfied or waived
prior to April 30, 2000; or (c) by Buyers, on the one hand, or Sellers, on the
other hand, at any time, if there is pending or threatened litigation in any
court or any proceeding before or by any Governmental Body to restrain or
prohibit or obtain damages or other relief with respect to this Agreement or the
consummation of the transactions contemplated by this Agreement or as a result
of which Buyers could be required to dispose of any assets or operations of
Buyers (including any assets or operations acquired or to be acquired from the
Company) or their affiliates or to comply with any restriction on the manner in
which Buyers or their affiliates conduct their operations (including any
operations acquired or to be acquired from the Company); provided that (i)
Buyers may not terminate this Agreement if the Closing has not occurred because
of Buyers' failure to perform or observe any of its covenants or agreements set
forth in this Agreement or if Buyers are, at such time, in breach of this
Agreement, and (ii) Sellers may not terminate this Agreement if the Closing has
not occurred because of Sellers' failure to perform or observe any of their
respective covenants or agreements set forth in this Agreement or if any of
Sellers is, at such time, in breach of this Agreement.
7.2 Notices. All notices that are required or may be given pursuant to
this Agreement must be in writing and delivered personally, by a recognized
courier service, by
36
<PAGE> 37
a recognized overnight delivery service, by telecopy or by registered or
certified mail, postage prepaid, to the parties at the following addresses (or
to the attention of such other person or such other address as any party may
provide to the other parties by notice in accordance with this Section 7.2):
<TABLE>
<CAPTION>
if to Buyers: with copies to:
------------ --------------
<S> <C>
PSSC Acquisition Corporation Hughes & Luce, L.L.P.
12404 Park Central Drive 1717 Main Street
Dallas, Texas 75251 Suite 2800
Attn: John Harper Dallas, Texas 75201
Telecopy: (972) 340-6100 Attention: Glen J. Hettinger, Esq.
Telecopy: (214) 939-5849
Perot Systems Corporation Hughes & Luce, L.L.P.
12404 Park Central Drive 1717 Main Street
Dallas, Texas 75251 Suite 2800
Attn: Peter Altabef Dallas, Texas 75201
Telecopy: (972) 340-6085 Attention: Glen J. Hettinger, Esq.
Telecopy: (214) 939-5849
if to Sellers: with copies to:
------------- --------------
Solutions Consulting, Inc. Solution Consulting, Inc.
370 Southpointe Blvd. 370 Southpointe Blvd.
Canonsburg, Pennsylvania 15317 Canonsburg, Pennsylvania 15317
Attn: Sanford B. Ferguson Attn: William R. Miller, Esq.
Telecopy: (724) 746-9247 Telecopy: (724) 746-9247
and
Kirkpatrick & Lockhart LLP
1500 Oliver Bldg.
Pittsburgh, Pennsylvania 15222
Attn: David J. Lehman, Esq.
Telecopy: (412) 355-6501
</TABLE>
Any such notice or other communication will be deemed to have been given and
received (whether actually received or not) on the day it is personally
delivered or delivered by courier or overnight delivery service or sent by
telecopy or, if mailed, when actually received.
7.3 Attorneys' Fees and Costs. If attorneys' fees or other costs are
incurred to secure performance of any obligations under this Agreement, or to
establish damages for
37
<PAGE> 38
the breach thereof or to obtain any other appropriate relief, whether by way of
prosecution or defense, the prevailing party will be entitled to recover
reasonable attorneys' fees and costs incurred in connection therewith.
7.4 Further Assurances. Each party agrees to execute any and all
documents and to perform such other acts as may be necessary or expedient to
further the purposes of this Agreement and the transactions contemplated by this
Agreement. Without limiting the foregoing, the Company will execute and deliver
to Acquisition Sub such further instruments of conveyance and transfer as
Acquisition Sub may reasonably request in order more effectively to convey and
transfer the Assets to Acquisition Sub and to put Acquisition Sub in operational
control of the business of the Company, or for aiding, assisting, collecting,
and reducing to possession any of the Assets and exercising rights with respect
to the Assets.
7.5 Counterparts. This Agreement may be executed in one or more
counterparts for the convenience of the parties, all of which together will
constitute one and the same instrument.
7.6 Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and will not in any way affect the meaning or interpretation of
this Agreement. References in this Agreement to Articles, Sections, Exhibits,
and Schedules are to the Articles, Sections, Exhibits, and Schedules of this
Agreement unless the context requires otherwise. Any matter referred to in a
Schedule in Article II will be deemed to be incorporated into all other
Schedules to Article II and to have been disclosed to Buyers.
7.7 Successors and Assigns; Assignment. This Agreement will bind and
inure to the benefit of the parties named in this Agreement and their respective
successors and assigns. Neither this Agreement nor any of the rights, interests,
or obligations under this Agreement may be assigned or delegated by any of
Sellers or Buyers without the prior written consent of the other parties and any
purported assignment or delegation will be null and void; except that Buyers may
assign its rights under this Agreement to any direct or indirect wholly-owned
subsidiary of PSC. This Agreement is not intended to confer any rights or
benefits on any Person other than the parties to this Agreement, and to the
extent provided in Article VI, the Buyer Parties and the Seller Parties;
provided, that parties to the Joinder will be deemed to be third party
beneficiaries to the covenant set forth in Section 4.28.
7.8 Entire Agreement.
(a) This Agreement, the Buyer Documents, the Seller Documents,
and the related documents contained as Schedules to this Agreement or
expressly contemplated by this Agreement contain the entire
understanding of the parties relating to the subject matter of this
Agreement and supersede all prior written or oral and all
contemporaneous oral agreements and understandings relating to the
38
<PAGE> 39
subject matter of this Agreement. This Agreement may not be modified or
amended except in writing signed by the party against whom enforcement
is sought. The Schedules to this Agreement are hereby incorporated by
reference into and made a part of this Agreement for all purposes.
(b) Each Seller acknowledges that:
(i) it has had the opportunity to visit with the
Buyers and meet with the officers and other representatives of
the Buyers to discuss the business and the financial condition
and operations of the Buyers, and
(ii) all materials and information requested by each
Seller have been provided to each Sellers' reasonable
satisfaction.
(c) Each Seller acknowledges that it has made its own
independent examination, investigation, analysis and evaluation of the
Buyers.
(d) Each Seller acknowledges that it has undertaken such due
diligence concerning the Buyers, including, without limitation, a
review of the financial statements and other information available from
the public filings of PSC with the SEC.
7.9 Specific Performance. The parties hereby acknowledge and agree that
the failure of any party to perform its agreements and covenants under this
Agreement, including its failure to take all required actions on its part
necessary to consummate the transactions contemplated by this Agreement, will
cause irreparable injury to the other parties for which damages, even if
available, will not be an adequate remedy. Accordingly, each party hereby
consents to the issuance of injunctive relief by any court of competent
jurisdiction to compel performance of such party's obligations and to the
granting by any court of the remedy of specific performance of its obligations
under this Agreement.
7.10 Knowledge. As used in this Agreement, "Company's Knowledge" means
within the actual knowledge (without any duty to investigate) of the Principal
Shareholder, SBF, William R. Miller ("WRM"), Jennifer Gula, P. --- Edward
Muller, and Arthur Valentine.
7.11 Governing Law. This Agreement will be governed by and construed
and interpreted in accordance with the substantive laws of the State of
Delaware, without giving effect to any conflicts of law rule or principle that
might require the application of the laws of another jurisdiction.
7.12 Drafting. Neither this Agreement nor any provision contained in
this Agreement will be interpreted in favor of or against any party hereto
because such party or its legal counsel drafted this Agreement or such
provision.
39
<PAGE> 40
7.13 Usage. Whenever the plural form of a word is used in this
Agreement, that word will include the singular form of that word. Whenever the
singular form of a word is used in this Agreement, that word will include the
plural form of that word. The term "or" will not be interpreted as excluding any
of the items described. The term "include" or any derivative of such term does
not mean that the items following such term are the only types of such items.
7.14 Arbitration. Any controversy, dispute, or claim arising under this
Agreement will be finally settled by arbitration conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
effect on the date of this Agreement. Notwithstanding any provision of the
American Arbitration Association Commercial Arbitration Rules, any such
arbitration will be conducted before and decided by three (3) arbitrators. The
parties to the arbitration will request that the American Arbitration
Association provide the parties with a list of seven (7) potential arbitrators
composed of individuals that are former judges of the Chancery Court for the
State of Delaware or the federal courts of such state. Each party will then
strike from the list (taking turns, beginning with PSC) two (2) names. After the
rights to strike are exercised, the individuals remaining on the list will be
the arbitrators. Any such arbitration will take place in the City of Wilmington,
Delaware. The arbitrators in any such arbitration will apply the laws of the
State of Delaware and the United States of America. In any arbitration under
this Agreement, this Agreement will be deemed to have been made in, and will be
governed by and construed under the laws of, the State of Delaware and the
United States of America. Any decision rendered by the arbitrators will be final
and binding and judgment thereon may be entered in any court having jurisdiction
or application may be made to such court for an order of enforcement as the case
may require. The parties intend that this agreement to arbitrate be irrevocable
and the exclusive means of settling all disputes under this Agreement, whether
for money damages or equitable relief. If arbitration is invoked in accordance
with the provisions of this Agreement, the prevailing party in the arbitration
will be entitled to recover from the other all costs, fees, and expenses
pertaining or attributable to such arbitration, including reasonable attorneys'
fees.
7.15 Partial Invalidity. Wherever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained in this
Agreement will, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such provision will be ineffective to the extent, but only to
the extent, of such invalidity, illegality, or unenforceability without
invalidating the remainder of such invalid, illegal, or unenforceable provision
or provisions or any other provisions of this Agreement, unless such a
construction would be unreasonable.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PEROT SYSTEMS CORPORATION
By: /s/ PETER ALTABEF
-----------------------------------
Name: Peter Altabef
Title: Vice President and General Counsel
PSSC ACQUISITION CORPORATION
By: /s/ JOHN E. HARPER
-----------------------------------
Name: John E. Harper
Title: Vice President and Treasurer
SOLUTIONS CONSULTING, INC.
By: /s/ MARK G. MILLER
-----------------------------------
Name: Mark G. Miller
Title: Chief Executive Officer
/s/ MARK G. MILLER
--------------------------------------------
MARK G. MILLER
/s/ SANFORD B. FERGUSON
--------------------------------------------
SANFORD B. FERGUSON
41
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
<S> <C>
Applewhite & Gittleson California
Benton International, Inc. California
Deutsche Perot Systems GmbH Germany
Icarus Consulting A.G. Switzerland
Icarus Consulting GmbH Germany
perot.com inc. Delaware
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 United Kingdom
Perot Systems Financial Services Corporation Delaware
Perot Systems Healthcare Services Corporation Delaware
Perot Systems Holdings Pte Ltd. Singapore
Perot Systems International, Inc. Delaware
Perot Systems Investments B.V. The Netherlands
Perot Systems Investments Limited United Kingdom
Perot Systems Investments No. 2 Limited United Kingdom
Perot Systems (Japan) Ltd. Japan
Perot Systems Luxembourg S.a.r.l. Luxembourg
Perot Systems Monaco S.A.M. Monaco
Perot Systems S.A. France
Persys Ireland Limited Ireland
PS Information Resource (Ireland) Limited Ireland
PSC Government Services Corporation Delaware
PSC Health Care, Inc. Delaware
PSSC Acquisition Corporation Delaware
RothWell International, Inc. Texas
Security Services, Inc. d/b/a Park Central Security Services, Inc. Delaware
Stamos Associates Inc. California
Syllogic Ireland Limited Ireland
Syllogic B.V. The Netherlands
The Technical Resource Connection, Inc. Delaware
Time 0 Inc. Delaware
TXZ North America, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Perot Systems Corporation on Form S-3 (File No. 333-82869), Form S-4 (File No.
333-30068) and Forms S-8 (File Nos. 333-30401, 333-70267 and 333-31278) of our
reports dated February 8, 2000 on our audits of the consolidated financial
statements and financial statement schedule of Perot Systems Corporation and
Subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, which reports are included in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 3, 2000
<PAGE> 1
EXHIBIT 23.2
Report of Independent Accountants on
Financial Statement Schedule
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
February 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 294,645
<SECURITIES> 39,938
<RECEIVABLES> 160,813
<ALLOWANCES> 4,059
<INVENTORY> 0
<CURRENT-ASSETS> 542,497
<PP&E> 116,374
<DEPRECIATION> 77,409
<TOTAL-ASSETS> 613,965
<CURRENT-LIABILITIES> 216,229
<BONDS> 0
0
0
<COMMON> 926
<OTHER-SE> 389,796
<TOTAL-LIABILITY-AND-EQUITY> 613,965
<SALES> 1,151,553
<TOTAL-REVENUES> 1,151,553
<CGS> 875,779
<TOTAL-COSTS> 1,044,955
<OTHER-EXPENSES> 650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 423
<INCOME-PRETAX> 125,829
<INCOME-TAX> 50,332
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,497
<EPS-BASIC> .85
<EPS-DILUTED> .67
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning of Deductions end of
period Additions (Write-offs) period
--------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
December 31, 1999...................... $ 1,353 $ 7,681 $ 4,975 $ 4,059
December 31, 1998...................... $ 1,185 $ 8,653 $ 8,485 $ 1,353
December 31, 1997...................... $ 6,787 $ 1,167 $ 6,769 $ 1,185
</TABLE>
