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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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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:
Name of Each Exchange
Title of Each Class On Which Registered
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Class A Common Stock New York Stock Exchange
Par Value $0.01 per share
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. [ ]
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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.
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FORM 10-K
For the Year Ended December 31, 1999
INDEX
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
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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
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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.
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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
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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.
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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.
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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.
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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
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$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
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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
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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.
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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.,
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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.
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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.
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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;
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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
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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.
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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.
Calendar Year High Low
------------- ------ ------
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
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.
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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.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in millions, except per share data)
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
(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.
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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
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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
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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
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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.
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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
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
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
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
CONSOLIDATED FINANCIAL STATEMENTS Page
----
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
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
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
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
F-1
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
32
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(dollars in thousands)
1999 1998
-------- --------
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
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
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)
1999 1998 1997
------------ ------------ ------------
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
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
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)
NOTES
ADDITIONAL RECEIVABLE TOTAL
COMMON PAID-IN RETAINED TREASURY FROM STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK STOCKHOLDERS OTHER* EQUITY
------ ---------- -------- -------- ------------ ------- ------------
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
===== ======== ======== ======== ========== ======= ==========
* 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
35
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands)
1999 1998 1997
---------- ---------- ----------
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
========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
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
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
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
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
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
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:
1999 1998
---------- ----------
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
========== ==========
F-12
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:
1999 1998
---------- ----------
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
========== ==========
F-13
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
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
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:
1999 1998
---------- ----------
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
========== ==========
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
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
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
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
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
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
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
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:
WEIGHTED
DIRECTOR & AVERAGE
CONSULTANT OTHER EXERCISE
1991 PLAN PLANS OPTIONS TOTAL PRICE
------------ ------------ ------------ ------------ ------------
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
F-23
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:
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
------------ ------------ ---------------- ------------
$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
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:
1999 1998 1997
---------- ---------- ----------
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
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
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:
1999 1998 1997
---------- ---------- ----------
Domestic .... $ 83,192 $ 50,344 $ (4,054)
Foreign ..... 42,637 25,862 23,562
---------- ---------- ----------
$ 125,829 $ 76,206 $ 19,508
========== ========== ==========
The provision for income taxes charged to operations was as
follows:
1999 1998 1997
---------- ---------- ----------
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
========== ========== ==========
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
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:
1999 1998
---------- ----------
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)
========== ==========
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:
1999 1998 1997
------------------- ------------------- --------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- -------- -------- -------- -------- --------
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%
======== ======== ======== ======== ======== ========
F-26
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.
1999 1998 1997
---------- ---------- ----------
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
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
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:
YEAR ENDING LEASE AND MAINTENANCE
DECEMBER 31: COMMITMENTS
------------ ---------------------
2000 ............... $ 34,179
2001 ............... 28,617
2002 ............... 16,074
2003 ............... 8,969
2004 ............... 8,018
Thereafter ......... 24,401
--------
Total ........... $120,258
========
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
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
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
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
1999 1998 1997
------------ ------------ ------------
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)
============ ============ ============
F-31
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
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).
1999 1998 1997
---------- ---------- ----------
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
========== ========== ==========
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
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
64
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
21. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
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
(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
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
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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
28
67
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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
29
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
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.
SIGNATURE TITLE DATE
- --------- ----- ----
/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
31
70
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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
71
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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
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.