-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hc/db0gujl4b4bzVXEeVrhPVYNOR5rNzDgy84Dsqojz4Md33da479WnB6HWZJjro 5hmNlk6PDm3lH0s6PGZH6w== 0000950134-00-001640.txt : 20000307 0000950134-00-001640.hdr.sgml : 20000307 ACCESSION NUMBER: 0000950134-00-001640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEROT SYSTEMS CORP CENTRAL INDEX KEY: 0000894253 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 752230700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14773 FILM NUMBER: 561042 BUSINESS ADDRESS: STREET 1: 12404 PARK CENTRAL DRIVE STREET 2: SUITE #1100 CITY: DALLAS STATE: TX ZIP: 75251 BUSINESS PHONE: 972-340-5000 MAIL ADDRESS: STREET 1: 12404 PARK CENTRAL DRIVE STREET 2: SUITE #1100 CITY: DALLAS STATE: TX ZIP: 75251 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to ----- ----- -------------------- Commission File Number 0-22495 PEROT SYSTEMS CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 75-2230700 (State of Incorporation) (I.R.S. Employer Identification No.) 12404 PARK CENTRAL DRIVE DALLAS, TEXAS 75251 (Address of Principal Executive Offices) (Zip Code) (972) 340-5000 (Registrant's Telephone Number) Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class On Which Registered - ------------------- --------------------- 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. [ ] 2 As of January 31, 2000, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant's common stock as reported on the New York Stock Exchange, was approximately $1,070,360,140 (calculated by excluding shares owned beneficially by directors and officers). Number of shares of registrant's common stock outstanding as of January 31, 2000: 93,060,392. DOCUMENTS INCORPORATED BY REFERENCE The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: certain information required in Part III of this Form 10-K is incorporated from the registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders. 3 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
4 This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "forecasts", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined below under the caption "Risk Factors." These factors may cause our actual events to differ materially from any forward-looking statement. We do not undertake to update any forward-looking statement. ITEM 1. BUSINESS OVERVIEW We are a worldwide provider of information technology services and e-business solutions to a broad range of clients. We serve clients by delivering services and solutions focused on each client's specific needs. We emphasize developing and integrating information systems, operating and improving technology and business processes, and helping clients transform their businesses. We help companies take full advantage of e-business by leveraging their traditional strengths and technologies into digital marketplaces. We focus our business integration, systems integration and applications development, and infrastructure services to enable clients to accelerate growth, streamline operations, and create new levels of customer value. Our approach is to be a strategic long-term provider of high-value services, combining the benefits of scale and specialization to provide a multi-layer "integrated service offering." With our approach, we are able to create long-term relationships with clients that begin with the analysis of clients' business strategies and continue through the realization of benefits from implementing business and technology solutions. We believe that as clients and potential clients create new electronic channels and high growth businesses, our approach of integrating business consulting, e-business capabilities, strong industry knowledge, and traditional technology skills enables us to deliver end-to-end e-business solutions. We have approximately 7,000 employees and earned revenue for the year ending December 31, 1999 of $1.15 billion. INTEGRATED SERVICE OFFERING We offer our broad strategic capabilities through services classified within three core disciplines: o business integration, o systems integration and applications development, and 1 5 o information technology infrastructure services. We combine these disciplines into integrated service offerings customized for our clients. We believe that our integrated service offerings allow us to attract strategically motivated clients, focus on our clients' business objectives, and ultimately generate higher value for our clients. Business Integration We help clients develop and implement business and e-business strategies, information technology strategies, and process redesign programs. Our services include: o Digital Marketplaces. Our Time0 unit develops and implements business-to-business digital marketplaces. Time0's resources are focused on three specific forms of Internet-native marketplaces: order and acquisition marketplaces, bid/ask systems, and auction sites. o Business Strategy. We deliver strategic advice, designed by business and technical experts with industry-specific knowledge, to help our clients align their capabilities with the demands of the markets in which they compete. o Information Technology Strategy. We employ our extensive knowledge of information technology architectures, infrastructures, and technologies to help our clients optimize their use of information technology to achieve their business objectives. We then work with our clients to continually refine and update their information technology strategies. o Process Redesign. We work with clients to systematically reengineer their business processes with innovative approaches incorporating cross-industry best practices. Systems Integration and Applications Development We design and implement information technology systems, including both custom-developed and packaged software, for clients through the following services: o Information Integration. We help clients leverage the power of the Internet for purposes of conducting electronic commerce by preparing traditional businesses to compete in a real-time business environment through the integration of Internet channels, business processes, legacy systems, and supply chains. o Identity Systems. We develop custom software applications, ranging from modifications and enhancements of existing packaged software to completely custom-developed applications, that help to define and differentiate clients from the competition. We design these applications for various environments including web-based systems, distributed networks, and mainframes. 2 6 o Application Services. We implement and integrate standardized prepackaged application programs such as ERP systems, financial systems, medical systems, and physician practice management systems. In many cases, we subsequently offer these products to clients in the form of an application service model to lower the cost of entry for our clients. o Systems Integration. We assist clients in designing, evaluating, and implementing information technology systems comprising software applications and hardware components. Our services in this area range from migrating systems from an existing platform to a new platform to installing, configuring, and testing a new system and providing associated training support. Information Technology Infrastructure Services Information technology infrastructure services combine information technology outsourcing, staffing, and infrastructure management. Our information technology infrastructure services include: o Operations and Maintenance. We manage, update, and maintain data processing systems, networks, and technical infrastructures, operate help desks, and manage, resolve, and document problems in our clients' computing environments. o Monitoring and Planning. We offer comprehensive monitoring of and planning for information technology systems, including monitoring network status and availability through periodic polling of network resources, as well as collecting and analyzing data. CHANNELS TO MARKET We deliver services through our integrated solutions group where we go to market on technological, business-offering, and geographic bases and through industry groups supplying services to industries where we have significant long-term customers. Integrated Solutions Group Our integrated solutions group delivers strategic high-value capabilities to our clients. Through this group we sell a wide range of traditional and e-business services directly on a short-term basis and indirectly through our integrated service offering executed by the vertical industries, which we describe below. Our capabilities include real-time business transformation, strategic consulting, object architecture construction, and data mining. o Real-Time Business Transformation. We leverage our horizontal-based service capabilities in sourcing, back office integration, channel management, and dynamic partnering to help traditional businesses transform themselves into 3 7 customer-centric companies and prepare themselves to operate in real-time business models through the integration of Internet channels, business processes, legacy systems, and supply chains. o "Sourcing" is the creation and streamlining of processes that enable the electronic procurement of goods and services. o "Back Office Integration" is the integration of a business's back office operations with its e-business strategies to provide end-to-end integration of a business. o "Channel Management" is the alignment of the enterprise around the customer. Communication among channels is coordinated to ensure the customer has a consistent experience providing value in the form of increased revenue and profitability due to high customer loyalty and expanded channels. o "Dynamic Partnering" is the integration and coordination of supply chain providers that enables clients to flex or change their supply chains, plan and schedule with partners, and personalize customer treatment. o Strategic Consulting. Our strategic consulting team focuses on assisting clients with the redesign and transformation of their businesses, as well as the creation of new electronic business models. o Object Architecture Construction. The Technical Resource Connection ("TRC") is our Object Architecture construction group. TRC has expertise in enterprise computing architectures, distributed-object computing technologies, Intranet/Internet applications, and software engineering processes. TRC employs experienced software engineering technologists - software architects, designer/developers, modelers, and systems engineers - who focus on software development processes and technology skills to reduce the complexity and risk associated with building powerful business computing systems. o Data Mining. One of our subsidiaries, Syllogic B.V., has extensive expertise in the creation of flexible, structured, and manageable data warehouses and data mining tools. This subsidiary created the SyllogicTM Data Mining Tool, a system that combines several different data mining technologies into a single graphical user interface. Digital Marketplaces Time0, formed in 1997, is our business-to-business e-commerce unit that focuses exclusively on digital marketplaces. Time0 uses the Digital Marketplace business model and the underlying technology infrastructure invented by its business, systems, and software engineers to enable an alliance of cooperating companies to form a new line of business on the backbone of the Internet. The participating companies, complementors and competitors alike, join together to better serve the needs of their customers and to share the opportunity to dramatically lower transaction costs. 4 8 An example of Time0's work is a digital marketplace, launched in May of 1999, that enables a leading distributor of maintenance, repair, and operating supplies in North America, to provide its small to medium-sized business customers with one-stop electronic purchasing of supplies, equipment, and services from multiple vendors. This digital marketplace employs business processes and technology to enable buyers, sellers, and others to conduct business more efficiently and effectively. Industry Groups We deliver long-term solutions through industry groups that target industries characterized by rapid rates of change, growth, and the increasing importance of information technology in driving and managing this change and growth. Within these industries, our associates have broad technical and operational experience and expertise in addressing the technical and business challenges faced by clients in these industries. Our most highly developed industry groups are our Financial Services Group and Healthcare Services Group. We also serve significant clients and provide industry specific expertise through our Travel and Transportation Services, Energy Services, Manufacturing Services, and Communications and Media Services Groups. o Financial Services Group. We provide a full range of business integration and information technology service line offerings to wholesale, commercial, and retail banks, investment banks, private banks, asset management companies, brokerage firms, securities clearing banks, and other financial institutions. Our financial services team includes professionals with backgrounds in investment banking and commercial banking, and former senior level consultants to the financial services industry. We use our industry-specific and technical expertise to help clients capitalize on emerging market opportunities as financial services markets converge and as the Internet and other technologies create new markets. o Healthcare Services Group. Focusing on the requirements of integrated healthcare networks, we serve managed care providers, hospital groups, healthcare product distributors, and other healthcare companies. Our healthcare services team includes physicians, nurses, health policy experts, managed care executives, and health insurance experts. We assist clients with information access and connectivity and provide tools for transaction management, care management, decision support, and Internet-based demand management systems. o Travel and Transportation Services Group. We serve rental car companies, hotels, airlines, travel agencies, and companies in other sectors of the travel and transportation industry. The travel and transportation services group includes former business executives from the rental car, travel agency, and airline industries. 5 9 o Energy Services Group. We provide municipal and private utilities, related service providers, new entrants in deregulated markets, and other energy companies with our expertise in energy power systems restructuring and automation, transmission congestion management and modeling, market simulation design analysis, and power management system economics. o Manufacturing Services Group. We provide our manufacturing clients with expertise in supply chain management, planning and scheduling, order management, and assistance with warehousing, distribution, production, and finance applications. o Communications and Media Services Group. We assist with business strategy, billing, online, and customer care programs, quality assurance and testing, and customer revenue enhancement programs to providers of voice, data, image, video, entertainment, media, and information services through wireless and wireline networks. SUBSEQUENT EVENT - AGREEMENT TO ACQUIRE SOLUTIONS CONSULTING, INC. On March 1, 2000, we entered into an agreement to purchase substantially all of the assets and liabilities of Solutions Consulting, Inc., a Pittsburgh based enterprise software and e-commerce company. Under the terms and conditions of this agreement, we will pay $72.1 million in cash and $50.0 million in shares of our Class A Common Stock, representing 1,965,602 shares. Completion of this purchase is subject to certain closing conditions and government approvals. PEROT SYSTEMS ASSOCIATES The markets for information technology personnel and business integration professionals are intensely competitive. A key part of our business strategy is the hiring, training, and retention of highly motivated personnel with strong character and leadership traits. We believe that employing associates with such traits is and will continue to be an integral factor in differentiating us from our competitors in the information technology industry. In seeking such associates, we screen candidates for employment through a rigorous interview process. We devote a significant amount of resources to training our associates. Associates undergo continual training throughout their employment with us. Entry level training programs develop the skill sets necessary to serve our clients. These entry level apprentice training programs are augmented by engineering development programs and periodic continuing education. In addition, we operate a leadership training course that each manager and executive must complete. This program includes a workshop stressing the fundamentals of team leadership. We augment our extensive personnel and leadership training through our TRAIN (The Real-time Associate Information Network) system, an award-winning, company-wide intranet featuring training courses that develop both technical and leadership skills. We employ a performance-based incentive compensation program that provides guidelines for career development, encourages the development of skills, provides a tool to manage the associate development process, and establishes compensation guidelines as part of our retention program. In addition to competitive salaries, we distribute cash bonuses that are paid promptly to reward excellent performance. We seek to align the interests of our associates with those of our stockholders by compensating outstanding performance with equity interests in Perot Systems, which we believe fosters loyalty and commitment to our goals. Approximately 70% of our associates hold equity interests in the Company. 6 10 As of December 31, 1999, we employed approximately 7,000 associates located in the United States and several other countries. None of our United States associates are currently employed under an agreement with a collective bargaining unit. Our associates in France and Germany are generally members of work councils and have worker representatives. We believe that our relations with our associates are good. UBS AGREEMENTS In January 1996, we entered into a series of agreements to form a strategic relationship with Swiss Bank Corporation, one of the predecessors to UBS AG ("UBS"). This relationship involves a long-term contract (the "IT Services Agreement") and a separate agreement to provide services to other UBS operating units and to permit us to use certain UBS assets. Other agreements with UBS provide for the sale to UBS of our stock and options and the transfer to us of a 40% stake in UBS's European information technology subsidiary, Systor AG ("Systor"). IT Services Agreement Under the IT Services Agreement, we provide Warburg Dillon Read, the investment banking division of UBS, with services meeting its requirements for the operational management of its technology resources (including mainframes, desktops, and voice and data networks), excluding hardware and proprietary software applications development. The term of the IT Services Agreement is 11 years, which began January 1, 1996. Our charges for services provided under the IT Services Agreement are generally based on reimbursement of all costs, other than our corporate overhead, incurred by us in the performance of services covered by the contract. In addition to this cost reimbursement, we receive an agreed upon annual fee, subject to bonuses and penalties of up to 15% of such fee based on our performance. UBS determines the bonus or penalty based on many subjective factors, including service quality, client satisfaction, and our effectiveness in assisting UBS in meeting its business goals. Approximately 29.9% and 27.3% of our revenues were earned in connection with services performed on behalf of UBS and its affiliates for the years ended December 31, 1999 and 1998, respectively. If some competitors of UBS acquire more than 25% of the shares of our Class A Common Stock or another party (other than an affiliate of Ross Perot) acquires more than 50% of the shares of our Class A Common Stock and, if in either case, that acquisition is reasonably likely to have a significant adverse effect on the performance of or the charges for our services, UBS has the right to terminate its agreements with us. The loss of UBS as a client would materially and adversely affect our business, financial condition, and results of operations. Equity Interests Under the Amended and Restated PSC Stock Option and Purchase Agreement (the "Stock Agreement"), we sold UBS 100,000 shares of our Class B Common Stock for $3.65 a share and 7,234,320 options to purchase shares of Class B Common Stock for 7 11 $1.125 an option (the "UBS Options"). UBS can exercise the UBS Options at any time for $3.65 a share, subject to United States bank regulatory limits on UBS's shareholdings. UBS exercised options to purchase 850,000 and 834,320 shares of Class B Common Stock in June 1999 and September 1998, respectively. In addition to other limits set forth in the Stock Agreement, the number of shares of Class B Common Stock owned by UBS and its employees may not exceed 10% of the number of shares of outstanding Common Stock. Once the underlying shares of Class B Common Stock vest, the corresponding UBS Options are void unless exercised by UBS within five years of such vesting. This five-year period is tolled at any time when bank regulatory limits prohibit UBS from acquiring the shares. Beginning on January 1, 1997, the shares of our Class B Common Stock subject to the UBS Options vest at a rate of 63,906 shares per month until January 1, 2002 and a rate of 58,334 shares per month thereafter until the IT Services Agreement terminates. Upon termination of the IT Services Agreement, UBS is required to sell to us all unvested shares of our Class B Common Stock and UBS Options with respect to unvested shares of our Class B Common Stock will become void. UBS cannot transfer the UBS Options. Subject to exceptions relating to certain transfers to UBS affiliates and transfers in connection with widely dispersed offerings, before transferring any shares of our Class B Common Stock UBS must first offer such shares to us. UBS was not able to sell our Class B Common Stock, except for limited sales to UBS affiliates, until February 5, 2000. On January 14, 2000, we completed the sale of our 40% minority equity interest in Systor, to a wholly owned subsidiary of UBS. UBS was the holder of the remaining 60% interest in Systor. The transaction was effected as a sale of all stock in Systor held by us to the subsidiary of UBS for a cash purchase price of US$55.5 million. COMPETITION Our markets are intensely competitive. Customer requirements and the technology available to satisfy those requirements continually change. Our principal competitors include Andersen Consulting LLP, Cambridge Technology Partners, Inc., Cap Gemini Group, Computer Sciences Corporation, debis Systemhaus GmbH (the information technology division of DaimlerChrysler), Electronic Data Systems Corporation, Ernst & Young LLP, IBM Global Services (a division of International Business Machines Corporation), KPMG LLP, Oracle Corporation, PricewaterhouseCoopers LLP, and The SABRE Group Holdings, Inc. Many of these companies, as well as some other competitors, have greater financial resources and larger customer bases than we do and may have larger technical, sales, and marketing resources than we do. We expect to encounter additional competition as we address new markets and as the computing and communications markets converge. We must frequently compete with our clients' own internal information technology capability, which may constitute a fixed cost for the client. This may increase pricing 8 12 pressure on us. If we are forced to lower our pricing or if demand for our services decreases, our business, financial condition, and results of operations will be materially and adversely affected. We compete on the basis of a number of factors, including the attractiveness of the business strategy and services that we offer, breadth of services we offer, pricing, technological innovation, quality of service, and ability to invest in or acquire assets of potential customers. Some of these factors are outside of our control. We cannot be sure that we will compete successfully against our competitors in the future. If we fail to compete successfully against our current or future competitors with respect to these or other factors, our business, financial condition, and results of operations will be materially and adversely affected. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS See Note 13, "Certain Geographic Data," to the Consolidated Financial Statements included elsewhere in this report. INTELLECTUAL PROPERTY While we attempt to retain intellectual property rights arising from client engagements, our clients often have the contractual right to retain such intellectual property. We rely on a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our associates and limit distribution of proprietary information. There can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use thereof and take appropriate steps to enforce our intellectual property rights. We license the right to use the names "Perot Systems" and "Perot" in our current and future businesses, products, or services from the Perot Systems Family Corporation and Ross Perot. The license is a non-exclusive, royalty-free, worldwide, non-transferable license. We may also sublicense our rights to the Perot name to our affiliates. Under the license agreement, as amended, either party may, in their sole discretion, terminate the license at any time, with or without cause and without penalty, by giving the other party written notice of such termination. Upon termination by either party, we must discontinue all use of the Perot name within one year following receipt of the notice of termination. The termination of this license agreement may materially and adversely affect our business, financial condition, and results of operations. Except for the license of our name, we do not believe that any particular copyright, trademark, or group of copyrights and trademarks is of material importance to our business taken as a whole. RISK FACTORS You should carefully consider the following risk factors and warnings. The risks described below are not the only ones facing us. Additional risks that we do not yet know 9 13 of or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such case, the trading price of our Class A Common Stock could decline, and you may lose all or part of your investment. You should also refer to the other information set forth in this report, including our Consolidated Financial Statements and the related notes. Loss of Major Clients Could Adversely Affect Our Business Our ten largest clients accounted for approximately 64.7% of our revenue for the year ended December 31, 1999. For the year ended December 31, 1998, our ten largest clients accounted for approximately 65.7% of our revenue. Only one client, UBS, accounted for more than 10% of our revenue during 1999, whereas two clients, UBS and East Midland Electricity, each accounted for more than 10% of our revenue during 1998. Our largest client is UBS. Approximately 29.9% of our revenue came from services performed on behalf of UBS for the year ended December 31, 1999. For the year ended December 31, 1998, approximately 27.3% of our revenue came from UBS. We expect UBS to account for a substantial portion of our revenue and earnings for the foreseeable future. After UBS, our next nine largest customers accounted for approximately 34.8% of our revenue in 1999. Our success depends substantially upon the retention of UBS and a majority of our other major clients as ongoing clients. Generally, we may lose a client as a result of a merger or acquisition, business failure, contract expiration, or the selection of another provider of information technology services. We cannot guarantee that we will be able to retain long-term relationships or secure renewals of short-term relationships with our major clients in the future. In October 1999, we entered into a services agreement with Harvard Pilgrim Health Care, Inc. On January 4, 2000, Harvard Pilgrim, one of our largest clients, was placed into temporary receivership by the Supreme Judicial Court for Suffolk County in Massachusetts. The Commissioner of Insurance of the Commonwealth of Massachusetts, as temporary receiver, now oversees the operations of this client. The receiver has broad powers over the future operations of this client; and, accordingly, we cannot give any assurance that our relationship with this client will continue in the future. Changes in Our UBS Relationship and Variability of Profits from UBS Could Adversely Affect Our Business Our relationship with UBS is a long-term strategic relationship that we formed by entering into several agreements with UBS in January 1996. These contracts were renegotiated in April 1997 and June 1998. The April 1997 renegotiation reduced the term of the agreements from 25 years to 11 years beginning January 1996. We cannot guarantee that our current relationship with UBS will continue on the same terms in the future. 10 14 Revenue derived from this relationship depends upon the level of services we perform, which may vary from period to period depending on UBS's requirements. The agreement with UBS that covers a majority of our business with UBS entitles us to recover our costs plus an annual fee in an agreed amount with a bonus or penalty that can cause this annual fee to vary up or down by as much as 15%, depending on our level of performance as determined by UBS. Determination of whether our performance merits a bonus or a penalty depends on many subjective factors, including service quality, client satisfaction, and our effectiveness in assisting UBS in meeting its business goals. As a result, we cannot predict with certainty the future level of revenue or profit from our relationship with UBS. Failure to Recruit, Train, and Retain Skilled Personnel Could Increase Costs or Limit Growth We must continue to grow internally by hiring and training technically-skilled people in order to perform services under our existing contracts and new contracts into which we will enter. The people capable of filling these positions are in great demand and recruiting and training such personnel require substantial resources. We have to pay an increasing amount to hire and retain a technically-skilled workforce. Our business also experiences significant turnover of technically-skilled people. These factors create variations and uncertainties in our compensation expense and directly affect our profits. If we fail to attract, train, and retain sufficient numbers of these technically-skilled people, our business, financial condition, and results of operations may be materially and adversely affected. We have issued a substantial number of options to purchase shares of Class A Common Stock to our associates. We expect to continue to issue options to our associates to reward performance and encourage retention. The exercise of any additional options issued by us could adversely affect the prevailing market price of the Class A Common Stock. We Could Lose Rights to Our Company Name We do not own the right to our company name. In 1988, we entered into a license agreement with Ross Perot and the Perot Systems Family Corporation that allows us to use the name "Perot" and "Perot Systems" in our business on a royalty-free basis. Mr. Perot and the Perot Systems Family Corporation may terminate this agreement at any time and for any reason. Beginning one year following such a termination, we would not be allowed to use the names "Perot" or "Perot Systems" in our business. Mr. Perot's or the Perot Systems Family Corporation's termination of our license agreement could materially and adversely affect our business, financial condition, and results of operations. Ross Perot's Stock Ownership Provides Substantial Control Over Our Company Ross Perot, our Chairman, President, and Chief Executive Officer, is the managing general partner of HWGA, Ltd., a partnership that owned 31,705,000 shares of our Class A Common Stock as of December 31, 1999. Mr. Perot also owns 44,000 shares of our Class A Common Stock directly. Accordingly, Mr. Perot, primarily through HWGA, Ltd., 11 15 controls approximately 35.0% of our outstanding voting common stock. As a result, Mr. Perot, through HWGA, Ltd., will have the power to block corporate actions such as an amendment to our Certificate of Incorporation, the consummation of any merger, or the sale of all or substantially all of our assets. In addition, Mr. Perot may significantly influence the election of directors and any other action requiring shareholder approval. The other general partner of HWGA, Ltd. is Ross Perot, Jr., a director of our company, who has the authority to manage the partnership and direct the voting or sale of the shares of Class A Common Stock held by HWGA, Ltd. if Ross Perot is no longer the managing general partner. Loss of Key Personnel Could Adversely Affect Our Business Our success depends largely on the skills, experience, and performance of some key members of our management, including our Chairman, President, and Chief Executive Officer, Ross Perot. The loss of any key members of our management may materially and adversely affect our business, financial condition, and results of operations. Our Contracts Contain Termination Provisions and Pricing Risks Many of the services we provide are critical to our clients' business. Some of our contracts with clients permit termination in the event our performance is not consistent with service levels specified in those contracts. The ability of our clients to terminate contracts creates an uncertain revenue stream. If clients are not satisfied with our level of performance, our reputation in the industry may suffer, which may also materially and adversely affect our business, financial condition, and results of operations. Some of our contracts contain pricing provisions that require the payment of a set fee by the client for our services regardless of the costs we incur in performing these services, or provide for penalties in the event we fail to achieve certain contract standards. In such situations, we are exposed to the risk that we will incur significant unforeseen costs or such penalties in performing the contract. Failure to Properly Manage Growth Could Adversely Affect Our Business We have expanded our operations rapidly in recent years. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities. This rapid growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures, and controls on a timely basis. If we fail to implement these systems, our business, financial condition, and results of operations will be materially and adversely affected. We Operate in Highly Competitive Markets We operate in intensely competitive markets. See "Competition" above for a discussion of some of the risks associated with our markets. 12 16 Variability of Quarterly Operating Results We expect our revenues and operating results to vary from quarter to quarter. Such variations are likely to be caused by many factors that are, to some extent, outside our control, including: o mix and timing of client projects; o completing client projects; o hiring, integrating, and utilizing associates; o timing of new contracts; o issuance of common shares and options to employees; and o one-time non-recurring and unusual charges. Accordingly, we believe that quarter-to-quarter comparisons of operating results for preceding quarters are not necessarily meaningful. You should not rely on the results of one quarter as an indication of our future performance. Changes in Technology Could Adversely Affect Our Business The markets for our information technology services change rapidly because of technological innovation, new product introductions, changes in customer requirements, declining prices, and evolving industry standards, among other factors. New products and new technology often render existing information services or technology infrastructure obsolete, excessively costly, or otherwise unmarketable. As a result, our success depends on our ability to timely innovate and integrate new technologies into our service offerings. We cannot guarantee that we will be successful at adopting and integrating new technologies into our service offerings in a timely manner. Advances in technology also require us to commit substantial resources to acquiring and deploying new technologies for use in our operations. We must continue to commit resources to train our personnel and our clients' personnel in the use of these new technologies. We must continue to train personnel to maintain the compatibility of existing hardware and software systems with these new technologies. We cannot be sure that we will be able to continue to commit the resources necessary to refresh our technology infrastructure at the rate demanded by our markets. Intellectual Property Rights In recent years, there has been significant litigation in the United States involving patent and other intellectual property rights. We are not currently involved in any material intellectual property litigation. We may, however, be a party to intellectual property litigation in the future to protect our trade secrets or know-how. 13 17 Our suppliers, clients, and competitors may have patents and other proprietary rights that cover technology employed by us. Such persons may also seek patents in the future. United States patent applications are confidential until a patent is issued and most technologies are developed in secret. Accordingly, we are not, and cannot, be aware of all patents or other intellectual property rights of which our services may pose a risk of infringement. Others asserting rights against us could force us to defend ourselves or our clients against alleged infringement of intellectual property rights. We could incur substantial costs to prosecute or defend any such litigation and intellectual property litigation could force us to do one or more of the following: o cease selling or using products or services that incorporate the disputed technology; o obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology; and o redesign those services or products that incorporate such technology. Provisions of Our Certificate of Incorporation, Bylaws, and Delaware Law Could Deter Takeover Attempts Our Board of Directors may issue up to 5,000,000 shares of preferred stock and may determine the price, rights, preferences, privileges, and restrictions, including voting and conversion rights, of these shares of preferred stock. These determinations may be made without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, we have adopted a stockholders' rights plan. Under this plan, after the occurrence of specified events that may result in a change of control, our stockholders will be able to buy stock from us or our successor at half the then current market price. These rights will not extend, however, to persons participating in takeover attempts without the consent of our Board of Directors or that our Board of Directors determines to be adverse to the interests of the stockholders. Accordingly, this plan could deter takeover attempts. Some provisions of our Certificate of Incorporation and Bylaws and of Delaware General Corporation Law could also delay, prevent, or make more difficult a merger, tender offer, or proxy contest involving our company. Among other things, these provisions: o require a 66 2/3% vote of the stockholders to amend our Certificate of Incorporation or approve any merger or sale, lease, or exchange of all or substantially all of our property and assets; 14 18 o require an 80% vote of the stockholders to amend our Bylaws; o require advance notice for stockholder proposals and director nominations to be considered at a vote of a meeting of stockholders; o permit only our Chairman, President, or a majority of our Board of Directors to call stockholder meetings, unless our Board of Directors otherwise approves; o prohibit actions by stockholders without a meeting, unless our Board of Directors otherwise approves; and o limit transactions between our company and persons that acquire significant amounts of stock without approval of our Board of Directors. Risks Related to International Operations We have operations in many countries around the world. Risks that affect these international operations include: o fluctuations in currency exchange rates; o complicated licensing and work permit requirements; o variations in the protection of intellectual property rights; o restrictions on the ability to convert currency; and o additional expenses and risks inherent in conducting operations in geographically distant locations, with customers speaking different languages and having different cultural approaches to the conduct of business. To attempt to mitigate the effects of foreign currency fluctuations on the results of our foreign operations, we sometimes use forward exchange contracts and other hedging techniques to help protect us from large swings in currency exchange rates. Acquisitions Involve Numerous Risks Acquisitions involve numerous risks, including the following: difficulties in integration of the operations of the acquired companies; the risk of diverting management's attention from normal daily operations of the business; risks of entering markets; and the potential loss of key employees of the acquired company. Mergers and acquisitions of companies are inherently risky, and no assurance can be given that our acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. ITEM 2. PROPERTIES As of December 31, 1999, Perot Systems Corporation (the "Company") had offices in approximately 46 locations in the United States and seven countries outside the United 15 19 States, all of which were leased. The Company's leases cover approximately 950,000 square feet of office and other facilities and have expiration dates ranging from 2000 to 2016. Upon expiration of its leases, the Company does not anticipate any significant difficulty in obtaining renewals or alternative space. In addition to the leased property referred to above, the Company occupies office space at client locations throughout the world. Such space is generally occupied pursuant to the terms of the agreement with the particular client. The Company currently anticipates consolidating some or all of its operations located principally in Dallas, Texas during the next two years. The Company's management believes that its current facilities are suitable and adequate for its business. OPERATING LEASES AND MAINTENANCE AGREEMENTS The Company has commitments related to data processing facilities, office space, and computer equipment under non-cancelable operating leases and fixed maintenance agreements for periods ranging from one to ten years. Future minimum commitments under these agreements as of December 31, 1999 are disclosed in Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS The Company is, from time to time, involved in various litigation matters arising in the ordinary course of its business. The Company believes that the resolution of currently pending legal proceedings, either individually or taken as a whole, will not have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flow. On October 19, 1998, the Robert Plan Corporation ("Robert Plan") filed a complaint, which was subsequently amended, in New York state court against the Company and Ross Perot in connection with a September 1, 1990 contract under which the Company provides data processing and software development needs for some of Robert Plan's operations. The complaint, as amended, alleges breach of the 1990 contract, misappropriation of Robert Plan's proprietary information and business methods in connection with an imaging system, breach of warranty, and similar claims relating to the contract. Although the complaint seeks substantial monetary awards and injunctive relief, the 1990 contract substantially limits each party's liability except in limited circumstances, including for "wanton or willful misconduct." Accordingly, Robert Plan has alleged that the Company has acted in a "wanton" and "willful" fashion, even though Robert Plan has used and continues to use the services of the Company under the 1990 contract. The Company believes that it has meritorious defenses to Robert Plan's claims. The Company has filed a motion to dismiss Robert Plan's claims. The court has heard arguments on the motion, but has not yet ruled. The Company intends to vigorously defend the lawsuit. The Company does not believe that the outcome of this litigation will have a material adverse effect on the Company. 16 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "PER." The table below shows the range of reported per share sales prices on the NYSE Composite Tape for the Class A Common Stock for the periods indicated. There was no established public trading market for the Company's Class A Common Stock prior to February 2, 1999, and the initial public offering price was $16.00 per share.
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. 17 21 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended December 31, 1999, 1998, 1997, 1996, and 1995 have been derived from the Company's Consolidated Financial Statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related Notes to the Consolidated Financial Statements, which are included herein.
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. 18 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the Consolidated Financial Statements and the Notes which are included herein. OVERVIEW The Company is a worldwide provider of information technology services and e-business solutions to a broad range of clients. The Company integrates three core disciplines in providing solutions and services to its clients: information technology infrastructure services, systems integration and applications development, and business integration. Information technology infrastructure services combine information technology outsourcing, staffing, and infrastructure management. Systems integration and applications development include the design and implementation of new and existing systems, including both custom-developed and packaged software. Business integration services include working with clients to develop and implement business and e-business strategies, information technology strategies, and process redesign programs. The Company's top ten clients accounted for approximately 64.7% of total revenue for the year ended December 31, 1999, 65.7% for the year ended December 31, 1998, and 64.1% for the year ended December 31, 1997. Approximately 33.9% of the Company's total revenue was derived from international operations for the year ended December 31, 1999, 35.5% for the year ended December 31, 1998, and 33.6% for the year ended December 31, 1997. The Company provides services under contracts containing pricing provisions that relate to the level of services supplied by the Company ("level-of-effort"), provide for a set fee to be received by the Company ("fixed-price"), or link the revenue to the Company to a client-specific data point, such as the number of transactions processed or computing minutes consumed ("unit-price"). Many of the Company's contracts combine more than one of these types of provisions. The majority of the Company's revenue for the years ended December 31, 1999, 1998, and 1997 was derived from level-of-effort contracts. Revenue from level-of-effort contracts is based on time and materials, direct costs plus an administrative fee (which may be either a fixed amount or a percent of direct costs incurred), or a combination of these methods and may be based on a set fee for a specified level of resources that is adjusted for incremental resource usage. Revenue from fixed-price contracts is recognized on the percentage-of-completion method and is earned based on the percentage relationship of incurred contract costs to date to total estimated contract costs, after giving effect to the most recent estimates of total cost. Revenue from unit-price contracts is recognized based on technology units utilized or by number of transactions processed during a given period. For unit-price contracts, the Company establishes a per-unit fee based on the cost structure associated with the delivery of that unit of service. The Company continuously monitors its contract performance in light of client expectations, the complexity of work, project plans, delivery schedules, and other relevant factors. Provisions for estimated losses, if any, are made in the period in which the loss 19 23 first becomes probable and reasonably estimable. Other contract-related accrued liabilities are also recorded to match contract-related expenses in the period in which revenues from those contracts are recognized. The Company experienced substantial revenue growth from 1996 to 1999, achieving a three year compounded annual growth rate ("CAGR") of 24.3%. A significant portion of the growth is due to the continued strategic relationship with UBS AG ("UBS"). UBS related revenue accounted for 29.9%, 27.3%, and 27.2% of total Company revenue from 1999, 1998 and 1997, respectively. Additionally, during this period the Company grew its short-term project business as well as its consulting and e-commerce practices. The Company had been providing services for East Midlands Electricity (IT) Limited (together with its parent company, East Midlands Electricity plc, "EME") under an Information Technology Services Agreement initially entered into on April 8, 1992 (as amended, the "EME Agreement"). In July 1998, PowerGen plc ("PowerGen") acquired EME from Dominion Resources, Inc. Pursuant to EME's right to terminate the EME Agreement following a change in control of EME, PowerGen and EME terminated the EME Agreement effective September 1999. RESULTS OF OPERATIONS Comparison of the year ended December 31, 1999 to the year ended December 31, 1998 Total revenue increased in 1999 by 15.9% to $1,151.6 million from $993.6 million in 1998, due to increases of $73.3 million from UBS and $118.1 million from new sales and short-term projects signed since early 1998. These increases were partially offset by a $19.8 million revenue decrease from the termination of EME and a net decrease of $13.6 million from other existing clients. During 1999, revenue from UBS totaled $344.2 million. Domestic revenue grew by 18.8% in 1999 to $760.9 million from $640.5 million in 1998, and increased slightly as a percent of total revenue to 66.1% from 64.5% in the prior year. Non-domestic revenue, consisting of European and Asian operations, grew by 10.6% in 1999 to $390.7 million from $353.1 million in 1998, and decreased as a percent of total revenue to 33.9% from 35.5% over the same periods. The largest components of European operations are the United Kingdom, where revenue (including $10.6 million of one-time contract termination fees received from EME) decreased by 5.7% in 1999 to $241.0 million from $255.6 million in 1998, and Switzerland, where revenue increased 50.0% in 1999 to $63.6 million from $42.4 million in 1998. Asian operations generated revenue of $18.9 million, or 1.6% of total revenue and $17.8 million, or 1.8% of total revenue, in 1999 and 1998, respectively. Direct costs of services increased in 1999 by 11.2% to $875.8 million from $787.9 million in 1998, due primarily to the continued growth in the Company's business. Gross margin increased to 23.9% in 1999 as compared to 20.7% in 1998. In 1998, gross margin was impacted by a $16.0 million charge to address Year 2000 exposures for certain client 20 24 contracts which was partially offset by contract termination gains totaling $6.5 million. In the fourth quarter of 1999, the Company revised its estimated Year 2000 exposure downward by $11.1 million. The unexpectedly low incidence of actual Year 2000 outages and problems occurring after December 31, 1999 triggered this reduction. Also during 1999, gross margin was favorably impacted by the net gain of $8.0 million on the termination of the EME contract (revenue of $10.6 million less $2.6 million in termination related direct cost of services incurred). Selling, general and administrative expenses increased in 1999 by 20.6% to $169.2 million from $140.3 million in 1998 and slightly increased as a percent of total revenue to 14.7% from 14.1%. While the Company continued to control its normal general and administrative spending as a percent of revenue, the Company increased its spending primarily in the areas of business development and sales. Absent the intentional increased spending on the Company's sales force, selling, general and administrative expenses would have declined as a percent of revenue from the prior year. As a result of the factors noted above, operating income increased in 1999 to $106.6 million from $61.3 million in 1998, and operating margin (operating income as a percent of total revenue) increased to 9.3% from 6.2%. Interest income increased to $11.3 million in 1999, compared to $4.5 million in 1998 due primarily to a significant increase in cash and cash equivalents, resulting from $108.1 million of net proceeds received from the Company's initial public offering ("IPO") and cash generated from operations. Equity in earnings of unconsolidated affiliates increased in 1999 to $9.0 million from $7.9 million in 1998 due to improved results at HCL Perot Systems N.V. ("HPS"), a software joint venture based in India. The equity in earnings for HPS increased to $5.2 million from $2.7 million, offset by the equity in earnings for Systor AG ("Systor"), a subsidiary of UBS, which decreased to $3.8 million from $5.0 million in 1999 and 1998, respectively. During the first quarter of 2000, the Company sold its equity interest in Systor. Other income (expense) decreased in 1999 to a net expense of $0.7 million from a net gain of $2.8 million in 1998, primarily because of a non-recurring $3.0 million gain on the sale of the Company's limited partnership interest in a venture capital fund in 1998. The decrease in the effective tax rate to 40.0% in 1999 from 46.9% in 1998 was due primarily to non-deductible goodwill write-downs recorded in 1998 and lower overall foreign and state taxes in 1999. Net income increased 86.6% in 1999 to $75.5 million from $40.5 million in 1998, and net income as a percent of total revenue increased to 6.6% from 4.1%. Comparison of the year ended December 31, 1998 to the year ended December 31, 1997 Total revenue increased in 1998 by 27.1% to $993.6 million from $781.6 million in 1997, due to increases of $64.0 million from two significant contracts initiated since the 21 25 second half of 1997, $58.4 million from UBS, $37.1 million from EME and $52.5 million from the extension and expansion of existing client relationships. During 1998, revenue from UBS and EME totaled $270.9 million and $116.5 million, respectively. Domestic revenue grew by 23.4% in 1998 to $640.5 million from $519.1 million in 1997, and decreased slightly as a percent of total revenue to 64.5% from 66.4% over the same period. Non-domestic revenue, consisting of European and Asian operations, grew by 34.5% in 1998 to $353.1 million from $262.5 million in 1997, and increased as a percent of total revenue to 35.5% from 33.6% over the same periods. The largest components of European operations are the United Kingdom, where revenue increased by 34.7% in 1998 to $255.6 million from $189.8 million in 1997, and Switzerland, where revenue increased 15.2% in 1998 to $42.4 million from $36.8 million in 1997. Asian operations generated revenue of $17.8 million, or 1.8% of total revenue in 1998, compared to $9.7 million, or 1.2% of total revenue, in 1997, respectively. Direct costs of services increased in 1998 by 23.8% to $787.9 million from $636.3 million in 1997, due primarily to continued growth in the Company's business. Gross margin increased to 20.7% in 1998 as compared to 18.6% in 1997. The increase in gross margin was due in part to certain charges in 1997 including a contract loss provision of $10.2 million related to known termination and contract completion losses on two long-term contracts, a $3.6 million write-off of intellectual property rights acquired and $4.3 million in business integration expenses, collectively representing a 2.3 percentage point reduction to 1997 gross margin. In 1998, gross margin was impacted by a $16.0 million charge to address Year 2000 exposures for certain client contracts which was partially offset by contract termination gains totaling $6.5 million, representing a net 1.0 percentage point reduction in gross margin. Selling, general and administrative expenses increased in 1998 by 11.6% to $140.3 million from $125.7 million in 1997, but decreased as a percent of total revenue to 14.1% from 16.1%. The most significant savings in administrative expenses included reductions in executive compensation, the cancellation of discretionary projects, and reductions in marketing and promotional expenses and in non-essential travel. Operating income increased in 1998 to $61.3 million from $17.6 million in 1997, and operating margin (operating income as a percent of total revenue) increased to 6.2% from 2.3%. Equity in earnings of unconsolidated affiliates, net, increased in 1998 to $7.9 million from $4.1 million in 1997 due to improved results at Systor and HPS. The equity in earnings for Systor increased to $5.0 million from $3.6 million, and the equity in earnings for HPS increased to $2.7 million from $0.5 million in 1998 and 1997, respectively. Other income (expense) increased in 1998 to $2.8 million from $1.1 million in 1997 primarily due to a $3.0 million gain on the sale of the Company's limited partnership interest in a venture capital fund in 1998, offset in part by the $0.7 million loss on the sale of a subsidiary and a $0.4 million decrease in foreign exchange gains from 1997 to 1998. 22 26 The increase in the effective tax rate to 46.9% in 1998 from 42.5% in 1997 was due primarily to non-deductible goodwill write-downs recorded in 1998. Excluding the write-downs, the effective rate would have been 44.5%. Net income increased 261.6% to $40.5 million in 1998 from $11.2 million in 1997, and net income margin increased to 4.1% from 1.4%. LIQUIDITY AND CAPITAL RESOURCES In 1999, cash and cash equivalents increased 103.3% to $294.6 million from $144.9 million at December 31, 1998 due primarily to the Company's IPO of 7,475,000 shares of the Company's Class A Common Stock in February 1999 and cash flow from operations. Net cash provided by operating activities decreased to $77.4 million in 1999 from $113.9 million in 1998. The decrease in cash flow from operating activities was due primarily to a significant growth in the accrued compensation for annual bonuses earned in 1998, but not paid until the first quarter of 1999. These decreases were partially offset by an increase in net income and a decrease in income taxes payable, which resulted from a tax benefit that the Company receives when associates exercise stock options. Net cash used in investing activities was $41.3 million in 1999 compared to $11.1 million in 1998. The significant increase in cash used in investing activities was due to the Company's purchase of 1,000,000 shares in the initial public offering of TenFold Corporation for $17.0 million during the second quarter of 1999. Cash expenditures for property, equipment and software in 1999 were $25.2 million compared to $25.4 million in 1998. Additionally, 1998 expenditures were offset by $7.9 million in proceeds from the sale of property, equipment and software and $5.2 million from the sale of the Company's limited partnership interest in a venture capital fund. In 1999, net cash provided by financing activities was approximately $119.0 million, compared to $4.2 million in 1998. In 1999, the Company's IPO generated proceeds of $108.1 million and the exercise of options to purchase the Company's Class A and Class B shares generated $7.8 million and $3.1 million, respectively. The Company routinely maintains cash balances in certain European and Asian currencies to fund operations in those regions. During 1999, foreign exchange rate fluctuations adversely impacted the Company's non-domestic cash balances by $5.3 million, as British pounds and Swiss francs weakened against the U.S. dollar. The Company's foreign exchange policy does not call for hedging foreign exchange exposures that are not likely to impact net income or working capital. The Company has no committed line of credit or other borrowings and anticipates that existing cash and cash equivalents and expected net cash flows from operating activities will provide sufficient funds to meet its needs for the foreseeable future. From time to time, the Company may consider repurchasing its Class A Common Stock depending on price and availability and alternative uses for its financial resources. 23 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. EX-10.32 2 1999 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.32 PEROT SYSTEMS CORPORATION 1999 Employee Stock Purchase Plan/US (Revised January 7, 2000) Effective January 1, 2000 2 TABLE OF CONTENTS 1. Purpose of the Plan 1.1 General...................................................................1 1.2 Tax Treatment.............................................................1 2. Participation in the Plan 2.1 Eligibility...............................................................1 2.2 Enrollment to Buy Stock...................................................1 2.3 Designation of Beneficiary................................................2 2.4 Contributions; Payroll Deductions; Account; No Interest...................2 2.5 Changes in Contributions..................................................2 2.6 Withdrawal................................................................2 2.7 Termination of Employment; Leave of Absence...............................3 2.8 Transferability...........................................................4 3. Purchase of Stock 3.1 Offering Periods..........................................................4 3.2 Grant of Option; Exercise Price...........................................4 3.3 Automatic Exercise of Option..............................................4 3.4 Payment for Stock.........................................................4 3.5 Delivery of Shares; Voting................................................5 3.6 Periodic Reports..........................................................5 3.7 No Rights in Stock Prior to Exercise......................................6 4. Operation of the Plan 4.1 Effective Date and Term of Plan...........................................6 4.2 Shares Authorized for Sale and Issuance Under the Plan....................6 4.3 Conditions Upon Issuance of Shares........................................6 4.4 Administration; Committee.................................................7 4.5 Amendment or Termination..................................................8 4.6 Approval of the Stockholders..............................................9 4.7 No Liability for Good Faith Determinations................................9 5. Miscellaneous Legal Provisions 5.1 Definitions...............................................................9 5.2 Adjustments Upon Changes in Capitalization...............................12 5.3 Notices; Waiver of Notice................................................12 5.4 Severability.............................................................13 5.5 Successors and Assigns...................................................13 5.6 Headings.................................................................13 5.7 Governing Law............................................................13 5.8 No Right to Employment...................................................13
3 PEROT SYSTEMS CORPORATION 1999 Employee Stock Purchase Plan/US (Revised January 7, 2000) 1. PURPOSE OF THE PLAN 1.1 General. Perot Systems has adopted this Plan to provide Eligible Associates with the opportunity and a convenient means to purchase Common Stock as an incentive (a) to exert their maximum efforts for the success of the Company, and (b) to remain employed with the Company. 1.2 Tax Treatment. Perot Systems intends that options to purchase stock granted under this Plan qualify as options granted under an "employee stock purchase plan" as defined in Section 423(b) of the Tax Code, and this Plan will be construed and applied so as to be consistent with Section 423 of the Code, including the requirement of Section 423(b)(5) of the Code that all Participants granted options to purchase Shares under the Plan have the same rights and privileges with respect to such options. 2. PARTICIPATION IN THE PLAN 2.1 Eligibility. Each Eligible Associate who is employed by an Employer on an Enrollment Date may participate in the Plan during the relevant Offering Period, unless the Tax Code prohibits his or her participation in that Offering Period because: (a) Immediately after the grant of an option under this Plan on the Exercise Date, the Eligible Associate (together with certain individuals and entities associated with or related to the Eligible Associate as described in Section 424(d) of the Tax Code) would be deemed to own a number of shares of stock and certain exercisable options to purchase stock that together represent 5% or more of the total combined voting power or value of all classes of stock of Perot Systems or any Subsidiary (computed in accordance with Section 423(b)(3) of the Tax Code); or (b) Immediately after the grant of an option under this Plan to an Eligible Associate on the Exercise Date, the Eligible Associate's rights to purchase Common Stock under all of the employee stock purchase plans described in Section 423 of the Tax Code of Perot Systems and each Subsidiary would accrue at a rate that exceeded $25,000 (computed based on the Fair Market Value on the Exercise Date in accordance with Section 423(b)(8) of the Tax Code) during the calendar year of that Offering Period. 2.2 Enrollment to Buy Stock. Each Eligible Associate who: (a) completes an Enrollment Agreement in the form, format, and as otherwise required by the Stock Administrator, and (b) delivers that Enrollment Agreement to the Stock Administrator at least 10 business days before the Enrollment Date for an Offering Period, or 1999 Employee Stock Purchase Plan/US Page 1 4 (c) calls the Plan Custodian's automated phone system and completes the enrollment process, may purchase Common Stock on the Exercise Date for that Offering Period, subject to the other provisions of this Plan. 2.3 Designation of Beneficiary. Each Participant may from time to time designate a beneficiary by filing a written beneficiary designation form with the Stock Administrator. Such beneficiary shall receive any refunds of amounts not used to purchase Shares and any Shares issued to the Participant. If no beneficiary was designated, any cash refunds and transfers of Shares shall be made to the appropriate representative of Participant's estate. 2.4 Contributions; Payroll Deductions; Account; No Interest. (a) The Company will withhold from each Participant's paycheck the percentage (not to exceed 10%) of Eligible Compensation specified in his or her then-current Enrollment Agreement commencing on the first pay date after the next Enrollment Date of an Offering Period and continuing throughout that Offering Period and each future Offering Period until he or she ceases to be a Participant or, if earlier, changes his or her Enrollment Agreement. (b) Perot Systems will hold and use the amounts withheld from each Participant's paycheck until the earlier of the date those amounts are (i) used to purchase Common Stock, or (ii) refunded to the Participant. Perot Systems will not be required to segregate any of these funds from its general corporate fund, and will not pay interest on any of these funds. (c) If the funds in the Participant Account of a Participant are in a currency other than United States dollars on any Exercise Date, for purposes of determining the maximum number of whole and fractional shares that may be purchased under this Plan, such funds will be deemed to have been converted into United States dollars based upon the foreign exchange selling rates, as reported by the Dow Jones News/Retrieval Service of Dow Jones and Company, Inc., on such date, or if not so reported on such date, as reported on the next preceding date on which such rates are reported. 2.5 Changes in Contributions. During an Offering Period, a Participant may not change the percentage of Eligible Compensation to be withheld from his or her paycheck, except by withdrawing from the Plan. However, a new Enrollment Agreement may be submitted for any subsequent Offering Period. 2.6 Withdrawal. (a) A Participant may stop participating in the current Offering Period and each future Offering Period by delivering a Withdrawal Agreement to the Stock Administrator or calling the Plan Custodian's automated phone system and completing the withdrawal process at least 10 business days before the Exercise Date for then-current Offering Period. Delivery of a Withdrawal Agreement or completing the withdrawal process will: (i) permanently and irrevocably terminate the Withdrawing Associate's participation in the then-current Offering Period, and 1999 Employee Stock Purchase Plan/US Page 2 5 (ii) suspend the Withdrawing Associate's participation in any future Offering Periods until he or she delivers an Enrollment Agreement to the Stock Administrator. An election to stop participating in one Offering Period will not prevent an Eligible Associate from participating in any future Offering Period or in any other Plan adopted by Perot Systems, provided that the Eligible Associate will not participate in any future Offering Period until he or she submits a new Enrollment Agreement. (b) As soon as practical after receiving a Withdrawal Agreement, Perot Systems will: (i) stop withholding the applicable percentage of Eligible Compensation from the Withdrawing Associate's paychecks or otherwise accepting contributions to the Withdrawing Associate's Participant Account, and (ii) refund to the Withdrawing Associate all amounts previously withheld from his or her paychecks or otherwise contributed to the Withdrawing Associate's Participant Account during the then-current Offering Period. 2.7 Termination of Employment; Leave of Absence. (a) If a Participant's employment with the Company terminates, including by death, on or before an Exercise Date, he or she will be deemed to have elected to withdraw from the applicable Offering Period effective as of the date his or her employment terminated. (b) As soon as practical after a Participant's termination of employment, Perot Systems will: (i) refund all amounts withheld from his or her paycheck or otherwise contributed under this Plan that have not been used to purchase Common Stock from Perot Systems or otherwise refunded; and (ii) distribute, or direct the Plan Custodian to distribute, any Shares held by the Employer or the Plan Custodian on the Participant's behalf to the Participant or his or her designee. (c) If a Participant begins an approved leave of absence from his or her Employer on or before an Exercise Date, he or she will remain in the Plan for the applicable Offering Period and each subsequent Offering Period, but only so long as such Participant's approved leave of absence, measured from the first day of his or her leave of absence, has not exceeded the greater of: (i) 90 days, or (ii) the period during which such Participant's right to reemployment with the Company is guaranteed either by statute or contract (the "Leave Period"). If a Participant's approved leave of absence exceeds his or her Leave Period, such Participant will be deemed to have elected to stop participating in the Plan on the day immediately after the last day of the Leave Period, and such deemed election to stop participating shall be effective for each such Offering Period and each subsequent Offering Period until he or she returns to work and submits a new Enrollment Form. 1999 Employee Stock Purchase Plan/US Page 3 6 2.8 Transferability. Neither any monies credited to a Participant Account nor any rights with regard to the exercise of an option to purchase Common Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way (other than by will or the laws of descent and distribution) by the Participant, and an option granted to a Participant under this Plan will be exercisable, during his or her lifetime, only by such Participant. Any such attempt at assignment, transfer, pledge, or other disposition will be without effect, except that Perot Systems will treat such act as an election to withdraw funds in accordance with Section 2.6. 3. PURCHASE OF STOCK 3.1 Offering Periods. Except for the first Offering Period, each Offering Period will start on the first day of the second month of a calendar quarter and end on the last day of the first month of the next calendar quarter. The first Offering Period will start on January 1, 2000 and end on January 31, 2000. 3.2 Grant of Option; Exercise Price. (a) On each Enrollment Date, Perot Systems will offer each Participant the opportunity to have Eligible Compensation withheld from his or her paycheck to be used to purchase on the next Exercise Date a number of Shares. The number of shares the Participant will have an option to purchase (on that Exercise Date and using the funds accumulated since the prior Enrollment Date) will be a number of whole and fractional Shares equal to (i) his or her then-current Withholding Percentage, multiplied by his or her Eligible Compensation for the Offering Period, divided by the Exercise Price for the next Exercise Date, minus (ii) the number of whole and fractional Shares, if any, necessary to prevent (A) that Participant from exceeding the limits referred to in Section 2.1(a), or (B) the Plan from issuing more shares than are authorized as provided in Section 4.2. (b) The Exercise Price for each Offering Period will be 85% of the Fair Market Value of one share of the Common Stock on the Exercise Date for that Offering Period. 3.3 Automatic Exercise of Option. On each Exercise Date, each Participant's option to purchase Shares will be exercised automatically to purchase: (a) the maximum number of whole and fractional Shares that may be bought with the funds withheld from his or her paycheck during the applicable Offering Period, minus (b) any number of Shares required to comply with any limitations described in Section 2.1 of this Plan concerning the maximum number of Shares that may be purchased by that Participant. 3.4 Payment for Stock. Immediately upon each exercise of each Participant's option to purchase shares, the amount held by Perot Systems for the benefit of that Participant will be reduced by the Exercise Price multiplied by the number of whole and fractional Shares of Common Stock purchased by that Participant in that exercise. 1999 Employee Stock Purchase Plan/US Page 4 7 3.5 Delivery of Shares; Voting. (a) Subject to the restrictions of Section 3.5(b), as soon as practical after each Exercise Date, a stock certificate will be issued to each Participant or to the Plan Custodian for the benefit of each Participant for the Shares purchased on that Exercise Date. Such certificate may be issued in nominee name. (b) All Shares purchased under this Plan will be held by Perot Systems or the Plan Custodian until the earlier of (i) a request for delivery of the shares by the Participant, or (ii) the termination of the Participant's employment by the Employer. (i) As soon as practical after termination of a Participant's employment by an Employer, certificates representing shares purchased under the Plan will be issued in the name of that Participant or, if timely requested by that Participant in a form approved by the Plan Custodian, his or her designee. (ii) All Shares purchased under this Plan shall be nontransferable and nonassignable for six months after the date such Shares are issued to the Participant. Any attempt to sell, gift, pledge or otherwise transfer any Shares prior to the expiration of six months from issuance shall be ineffective and void. Perot Systems will pay all issue or initial transfer taxes of the Company with respect to the issuance or initial transfer of shares, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance or initial transfer. (c) A Participant who purchases Shares under this Plan shall be transferred at such time substantially all of the rights of ownership of such Shares, in accordance with Treasury Regulations Section 1.421-1(f) as in effect on the Effective Date. Such rights of ownership shall include the right to vote, the right to receive declared dividends, the right to share in the assets of Company in the event of liquidation, the right to inspect Company's books and the right to pledge or sell such Shares, subject to the restrictions on such rights in this Plan and the restrictions on such rights imposed by applicable law. 3.6 Periodic Reports. As soon as practical after each Exercise Date, a statement will be sent to each person who has been a Participant under this Plan, which statement will include (i) the total amount, in United States dollars or local currency, of all payroll deductions or other contributions made during the applicable Offering Period or otherwise held under this Plan for the benefit of that person by Perot Systems, and any applicable currency conversion rate, (ii) the number of Shares purchased by that person on each applicable Exercise Date, (iii) the per share and aggregate purchase price per Share for those Shares, (iv) the remaining cash balance, if any held by any Employer for the benefit of that person, and (v) such other information as the Stock Administrator or Plan Custodian deems appropriate. 1999 Employee Stock Purchase Plan/US Page 5 8 3.7 No Rights in Stock Prior to Exercise. Neither a Participant nor his or her beneficiaries will have any interest or voting right in Common Stock covered by an option granted this Plan until such option has been exercised and the Shares purchased. 4. OPERATION OF THE PLAN 4.1 Effective Date and Term of Plan. This Plan will become effective upon January 1, 2000. This Plan will remain effective until July 16, 2008, unless sooner terminated under Section 4.5. 4.2 Shares Authorized for Sale and Issuance Under the Plan. (a) The maximum number of Shares that may be sold and issued under this Plan will be 20,000,000 Shares, although the stated maximum of 20,000,000 Shares will be (i) reduced by the number of Shares issued pursuant to exercises of options granted under the Perot Systems 1999 Employee Stock Purchase Plan and any parallel plans created thereunder and (ii) adjusted as provided in Section 5.2 below. If any option to purchase Shares granted under this Plan is not exercised for any reason, the Shares subject to that option will remain available to be sold and issued under this Plan. (b) If, for any reason, the number of Shares available for sale and issuance under this Plan under Section 4.2(a) is less than the number of Shares to be sold and issued under Section 3.3 on an Exercise Date, Perot Systems will allocate the Shares available for sale and issuance pro rata among the Participants in as uniform a manner as it determines to be equitable. In such event, the Stock Administrator or Plan Custodian will notify each Participant of the reduction in the number of Shares and the reason for such reduction. (c) Shares sold and issued under this Plan may, in the sole and absolute discretion of the Board, be either authorized and unissued Shares or treasury Shares that are bought or otherwise acquired in public or private transactions. 4.3 Conditions Upon Issuance of Shares. (a) Compliance With Laws. Perot Systems will not be required to grant an option or to sell or issue any Shares under this Plan to any Eligible Associate unless that option and the sale, issuance and delivery of Shares upon exercise of that option complies, in the opinion of Perot Systems' counsel, with all applicable laws and regulations, including, but not limited to, the Securities Act of 1933 and the rules and regulations of the United States Securities Exchange Commission, and all rules and regulations of the New York Stock Exchange or other applicable stock exchange upon which the Common Stock is listed. (b) Investment Intent. As a condition to the exercise of an option, Perot Systems may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 1999 Employee Stock Purchase Plan/US Page 6 9 4.4 Administration; Committee. (a) Board of Directors. This Plan will be administered by the Board. Unless otherwise provided in this Plan, the Board has the power: (i) To determine when and how rights to purchase Shares will be granted and the provisions of each offering of such rights (which need not be identical). (ii) To designate Participating Affiliates. (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it will deem necessary or expedient to make the Plan fully effective. (iv) To amend or terminate this Plan as provided in Section 4.5. (v) To delegate administration of this Plan to a Committee of two or more members of the Board. (vi) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of Perot Systems. (b) Committee. If administration of this Plan is delegated to a Committee, it will have all the powers of the Board with respect to this Plan, subject to any limitations on such powers stated in the Board's resolutions delegating administration to the Committee. Whether or not the Board delegates administration of this Plan to a Committee, the Board retains the final power to determine all questions of policy, procedure, and expediency that arise in the administration of this Plan. (c) Participation by Members of the Board or Committee. Members of the Board who are Eligible Associates are permitted to participate in this Plan; provided that (A) no member of the Board who participates in this Plan may vote on any matter affecting the administration of, or the grant of any option pursuant to, this Plan, and (B) if a Committee is appointed to administrate this Plan, no member of the Committee will be eligible to participate in this Plan. (d) Stock Administrator. Perot Systems' day to day obligations under this Plan will be managed by the Stock Administrator, subject to the Board's final power to determine all questions of policy, procedure, and expediency that arise in the administration of this Plan. The Stock Administrator will have all of the following powers of the Board: (i) To manage, or select and direct a Plan Custodian to manage, the daily operations of this Plan in accordance with its terms; (ii) To adopt rules of procedure and regulations necessary for the operation of this Plan, provided they are consistent with the terms of this Plan; 1999 Employee Stock Purchase Plan/US Page 7 10 (iii) To determine all questions with regard to rights of Eligible Associates and Participants under the Plan, including, but not limited to, the eligibility of any person to participate in the Plan; (iv) To enforce the terms, rules and regulations of this Plan; (v) To direct the distribution of the Shares purchased hereunder; (vi) To furnish the Company with information which it requires for tax or other purposes; (vii) To engage the service of counsel (who may, if appropriate, be counsel for the Company) and a Plan Custodian or other agents it deems advisable to assist it with the performance of its duties; (viii) To prescribe procedures to be followed by Participants in electing to participate in this Plan; (ix) To receive from each Company and Eligible Associate any information necessary to administer or manage this Plan; (x) To maintain, or cause Perot Systems, the Employer or the Plan Custodian to maintain, an account in the name of each Participant to reflect his or her participation in this Plan; and (xi) To interpret and construe the Plan. 4.5 Amendment or Termination. (a) The Board may amend or terminate this Plan without notice, provided that the Board will not, without the approval of the stockholders of Perot Systems, (i) increase the maximum number of Shares that may be sold or issued under this Plan (except pursuant to Section 5.2), or (ii) amend the requirements as to the class of Eligible Associates eligible to purchase Shares under this Plan or if a Committee is appointed to administer this Plan, permit the members of the Committee to participate in this Plan. (b) Except as specifically provided in this Plan, as required to comply with Code section 423, or as required to obtain a favorable ruling from the Internal Revenue Service, no amendment may, without the consent of that Participant, make any change in any option granted under this Plan that adversely affects the rights of any Participant. (c) This Plan will automatically terminate on the Exercise Date that Participants become entitled to purchase a number of Shares greater than the number available for purchase under Section 4.2. In the event of an automatic termination, reserved Shares remaining as of such Exercise Date will be sold to Participants on a pro rata basis, as described in Section 4.2(b). 1999 Employee Stock Purchase Plan/US Page 8 11 4.6 Approval of the Stockholders. Commencement of the Plan will be subject to approval by the stockholders of the Company within 12 months after the date the Plan is adopted. Notwithstanding any provision to the contrary, failure to obtain such stockholder approval will void the Plan, any options granted under the Plan, any Share purchases pursuant to the Plan, and all rights of all Participants. 4.7 No Liability for Good Faith Determinations. Neither the members of the Board, the Stock Administrator nor the Plan Custodian (nor their delegates) will be liable for any act, omission, or determination taken or made in good faith with respect to the Plan or any right to purchase Shares granted under it. Members of the Board and the Stock Administrator (and their delegates) will be entitled to indemnification and reimbursement by Perot Systems in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by Perot Systems, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising therefrom to the full extent permitted by law and under any directors and officers' liability or similar insurance coverage that may from time to time be in effect. 5. MISCELLANEOUS LEGAL PROVISIONS 5.1 Definitions. (1) "Board" means the Board of Directors of Perot Systems or a duly appointed committee of the Board. (2) "Committee" means a committee of the Board appointed to administer this Plan. (3) "Common Stock" means the Class A Common Stock, $.01 par value per share, of Perot Systems. (4) "Company" means Perot Systems and each Subsidiary. (5) "Eligible Associate" means a natural person who, on the applicable Exercise Date, (i) has been employed by an Employer (as determined in accordance with Treasury Regulations Section 1.421-7(h)), (ii) is customarily employed for more than 20 hours per week, and (iii) is customarily employed for more than five months in the calendar year. (6) "Effective Date" means the date specified in Section 4.1. (7) "Eligible Compensation" means the regular rate of compensation paid to a Participant by any Employer during an Offering Period, including wages, salary, bonuses and commission, but shall not include relocation assistance payments, geographical hardship pay, noncash prizes and awards, automobile allowances, severance type payments and nonqualified deferred executive compensation. 1999 Employee Stock Purchase Plan/US Page 9 12 Eligible Compensation includes the amount of a Participant's elective contributions that are made by the Employer on behalf of that Participant that are not includable in gross income under Tax Code Sections 125, 402(e)(3), 402(h), and 401(k). (8) "Employer" means Perot Systems or the Participating Affiliate by which an Eligible Associate is employed. (9) "Enrollment Agreement" means the agreement submitted to the Stock Administrator pursuant to Section 2.2; provided, however, that notwithstanding anything to the contrary in the Plan, the enrollment agreement or enrollment process which an Eligible Associate completed prior to the Effective Date under the Perot Systems Corporation 1999 Employee Stock Purchase Plan shall be his or her Enrollment Agreement and shall be deemed to have satisfied all of the requirements of Section 2.2, including, without limitation, Sections 2.2(b) and (c), required for the Eligible Associate to become a Participant on the Effective Date, without further action by the Eligible Associate. (10) "Enrollment Date" means the first day of the applicable Offering Period. (11) "Exercise Date" means the last day of the applicable Offering Period. (12) "Exercise Price" means the price defined in Section 3.2(b). (13) "Fair Market Value" of one share of Common Stock on a particular date will be (i) if the Common Stock is listed or admitted to trading on the New York Stock Exchange, then (A) if sales of Common Stock occurred on that date, the closing selling price per share of Common Stock on the New York Stock Exchange Composite Tape for that date (1) as reported by the Dow Jones News/Retrieval Service of Dow Jones and Company, Inc., or (2) if not so reported, in a newspaper of national circulation or other authoritative source selected by the Board , or (B) if no sales of Common Stock occurred on that date, the closing selling price per share of Common Stock as of the next preceding date for which the price is reported on the New York Stock Exchange Composite Tape on that date, or (ii) in all other cases, determined in a reasonable way selected by the Board for that purpose. (14) "Offering Period" means each period commencing on the first day of the second month following the end of a calendar quarter and ending on the last day of the first month following the end of the calendar quarter, during which a Participant has an option to purchase Common Stock; provided, however, that the first Offering Period will begin on January 1, 2000 and end on January 31, 2000. (15) "Participant" means an Eligible Associate who has elected to participate in any Offering Period and continues to participate in that Offering Period through its Exercise Date. (16) "Participant Account" means any account or accounting entry maintained by Perot Systems, the Employer, the Stock Administrator or the Plan Custodian to record the amount that a Participant has contributed to the Plan during an Offering Period and the Common Stock purchased under this Plan. 1999 Employee Stock Purchase Plan/US Page 10 13 (17) "Participating Affiliate" means each corporation, domestic or foreign, (i) of which Perot Systems, directly or indirectly, holds, on the applicable Exercise Date, not less than 50% of the total combined voting power of all classes of stock, whether or not such corporation now exists or is hereafter organized or acquired by Perot Systems or any Subsidiary, and (ii) which is approved by the Board to participate in this Plan; provided, however, that the Board will not approve any corporation for participation in this Plan if its participation would disqualify this Plan under any provision of the Tax Code, including, without limitation, Section 423 of the Tax Code. (18) "Perot Systems" means Perot Systems Corporation, a Delaware corporation, or any successor in interest that adopts this Plan. (19) "Plan" means this Perot Systems Corporation 1999 Employee Stock Purchase Plan/US (Revised January 7, 2000), as amended from time to time. (20) "Plan Custodian" means the third party administrator appointed by Perot Systems to manage this Plan in accordance with its terms. (21) "Share" means one share of Common Stock. (22) "Stock Administrator" means the Stock Administration or Human Resources Department of Perot Systems. (23) "Subsidiary" means a domestic or foreign corporation of which not less than 50% of the total combined voting power of all classes of stock is held either by (i) Perot Systems or (ii) any other corporation in an unbroken chain of corporations (beginning with Perot Systems, and in which not less than 50% of the total combined voting power of all classes of stock is held by each corporation in the chain), without regard to whether such corporation now exists or is hereafter organized or acquired. (24) "Tax Code" means the Internal Revenue Code of 1986, as amended. (25) "Withdrawal Agreement" means the agreement submitted to the Stock Administrator pursuant to Section 2.6. (26) "Withdrawing Associate" means a Participant who withdraws from this Plan as provided in Section 2.6(a). (27) "Withholding Percentage means the percentage of Eligible Compensation that a Participant elects, from time to time, to have withheld as his or her contribution during an Offering Period. 1999 Employee Stock Purchase Plan/US Page 11 14 5.2 Adjustments Upon Changes in Capitalization. (a) If any change is made in the Common Stock, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of Shares subject to the Plan and the class(es) and number of Shares and price per Share of Common Stock subject to outstanding rights. Such adjustments will be made by the Board, the determination of which will be final, binding and conclusive. The conversion of any convertible securities of the Company will not be treated as a "transaction not involving the receipt of consideration by the Company." (b) If (i) a dissolution or liquidation of Perot Systems or a sale of all or substantially all of Perot Systems' assets; (ii) a merger or consolidation in which Perot Systems is not the surviving corporation; (iii) a reverse merger in which Perot Systems is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (iv) any other capital reorganization in which more than 50% of the shares of the Company entitled to vote are exchanged, is proposed to be consummated, then, the Exercise Date for the applicable Offering Period will be accelerated to the date such transaction is consummated, and the payroll deductions of the Participants made through the Exercise Date will be used to purchase Common Stock immediately prior to such transaction and all further rights of the Participants will terminate, unless otherwise provided by the Board in its sole discretion. 5.3 Notices; Waiver of Notice. (a) To a Participant. All notices or other communications relating to the Plan given to a Participant or former Participant by the Board, Perot Systems, or any Employer will be deemed delivered on the day the notice or other communication is (i) personally delivered to that person, (ii) electronically transmitted to a person who on the date of that transmission either is an Eligible Associate or has consented to receiving notices by electronic transmission to the last known electronic transmission address of that person, or (iii) placed in the official government mail of the country of the sender in an envelope addressed to the last known address of that person, whichever is earlier. (b) By a Participant. All notices or other communications relating to the Plan given to the Board, Perot Systems, or an Employer will be deemed delivered on the day the notice or other communication is (i) received in tangible written form by the Stock Administrator at Perot Systems' Corporate Headquarters address, or (ii) electronically transmitted by an Eligible Associate to the Stock Administrator by means of Perot Systems' internal corporate e-mail or intranet system, provided that such notice is in the form specified by Perot Systems and is acknowledged by the Stock Administrator. (c) Consent to Electronic Delivery of Notices, Plan Documents and Prospectuses. By requesting to participate in the Plan, an Eligible Associate will be deemed to consent to receiving copies of all notices and other communications relating to the Plan by electronic transmission, including but not limited to the Prospectus relating to the Plan, all enrollment and other 1999 Employee Stock Purchase Plan/US Page 12 15 participation materials, and all other documents required to be delivered in connection with the Plan. Upon request, Perot Systems will provide any such documents to any Eligible Associate in tangible written form. (d) Waiver of Notice. Any person entitled to notice under the Plan may waive the notice. 5.4 Severability. If any provision of this Plan is held to be illegal or invalid for any reason, the illegality or invalidity will not affect the other provisions of this Plan, but will be fully severable and the Plan will be construed and enforced as if the illegal or invalid provision had never been included in this Plan. 5.5 Successors and Assigns. The Plan is binding on all Participants and their respective heirs, legatees, and legal representatives, including but not limited to their estate and the executors, any receiver, trustee in bankruptcy or representative of creditors of such person, and upon the Employer, its successors and assigns. 5.6 Headings. The titles and headings of the paragraphs are included for convenience of reference only and are not to be considered in construction of the provisions hereof. 5.7 Governing Law. This Plan and rights to purchase Shares that may be granted under this Plan will be governed by and construed in accordance with the laws of the State of Texas, without giving effect to any conflicts-of-law rules or principles that might require the application of the laws of another jurisdiction, except to the extent this Plan or those rights are governed by the Delaware General Corporation Law, or the Federal law of the United States. 5.8 No Right to Employment. Nothing in this Plan, any amendment to this Plan, or the creation of any Participant Account, the execution or submission of any Enrollment Agreement or Withdrawal Agreement, or the issuance of any Shares of Common Stock, will give any Eligible Associate any right (a) to continue employment with any Employer, (b) any legal or equitable right against Perot Systems or any Employer, or any officer, director, or Associate of Perot Systems or its Participating Affiliates, in connection with his or her employment by the Employer, or (c) interfere in any way with the Employer's right to terminate or otherwise modify his or her employment at any time, except as expressly provided by the Plan or by applicable law. This Plan has been executed by a duly authorized officer of the Company, effective on the Effective Date. PEROT SYSTEMS CORPORATION By: /s/ KELLY PARSONS ----------------------------------- Its: Director, Corporate Finance and Human Resources ------------------------------- 1999 Employee Stock Purchase Plan/US Page 13 16 Perot Systems Corporation 1999 Employee Stock Purchase Plan/US Participating Affiliates The following corporations are approved by the Board as Participating Affiliates to participate in this Plan. Applewhite & Gittleson (US Market Link) Benton International Incorporated perot.com inc. Perot Systems Communication Services, Inc. Perot Systems Financial Services Corporation Perot Systems Healthcare Services Corporation Perot Systems International, Inc. PSC Government Services Corporation PSC Health Care, Inc. Security Services, Inc. The Technical Resource Connection, Inc. EX-10.42 3 ASSET PURCHASE AGREEMENT DATED MARCH 1, 2000 1 EXHIBIT 10.42 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (the "Agreement") is made and entered into as of March 1, 2000, by and among Perot Systems Corporation, a Delaware corporation ("PSC"), PSSC Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of PSC ("Acquisition Sub"), Solutions Consulting Inc., a Pennsylvania corporation (the "Company"), Mark G. Miller (the "Principal Shareholder"), and Sanford B. Ferguson ("SBF"). BACKGROUND The Company and the Principal Shareholder are referred to collectively as the "Sellers," and PSC and Acquisition Sub are referred to collectively as the "Buyers." The Company desires to sell substantially all of the assets used in the business of the Company to Acquisition Sub, and Acquisition Sub desires to purchase such assets from the Company, on the terms and subject to the conditions set forth in this Agreement. The Principal Shareholder will receive substantial direct and indirect benefits from the transactions contemplated by this Agreement, and Buyers have required that the Principal Shareholder enter into this Agreement as a condition to PSC's and Acquisition Sub's execution of this Agreement. THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained in this Agreement, the parties agree as follows: ARTICLE I PURCHASE OF ASSETS 1.1 Purchase of Assets. At the Closing (as defined in Section 1.6), the Company agrees to sell, transfer, assign, and deliver to Acquisition Sub the Assets (as defined below), and Acquisition Sub agrees to purchase and take the Assets, on the terms and subject to the conditions set forth in this Agreement. Subject to the provisions of Section 1.2, the term "Assets" means all tangible and intangible assets used in the business of the Company, including without limitation, all cash, accounts receivable, inventory, materials, equipment, real property, fixtures, furnishings, leasehold rights, leasehold improvements, vehicles, prepaid assets, contract rights (including, without limitation, insurance policies other than builder's risk insurance, directors and officers insurance, roll-off policies), licenses, permits, customer, prospect and marketing lists, sales data, records, computer software and software licenses, proprietary information, intellectual property, trade secrets, trademarks and trade names (including all rights to the name "Solutions Consulting"), copyrights, goodwill associated with the business and assets of the Company, material and manufacturing specifications, drawings and designs 1 2 owned by the Company or acquired by the Company after the date of this Agreement and prior to the Closing, and specifically including (without limitation): (a) all assets listed on Schedule 2.4(a) as being owned by the Company; (b) all assets reflected on the Latest Balance Sheet (as defined in Section 2.8) or acquired by the Company after the date of the Latest Balance Sheet, except those sold for full value to unaffiliated Persons (as defined in Section 2.12) in the ordinary course of business of the Company after the date of the Latest Balance Sheet and the Headquarters Building (as defined in Section 4.21) if sold pursuant to Section 4.21; (c) the Registered Intellectual Property (as defined in Section 2.21); and (d) all rights of the Company under non-competition, confidentiality, and similar agreements. 1.2 Excluded Assets. Notwithstanding the provisions of Section 1.1, the Assets will exclude the following (the "Excluded Assets"): (a) $150,000 of cash to be retained by the Company at the Closing (the "Reserve"); (b) the Company's rights under this Agreement and the other Seller Documents (as defined in Section 2.2), including, without limitation, the consideration to be paid to the Company hereunder; (c) the Company's 401(k) Profit Sharing Plan (the "401(k) Plan") and the Company's Employee Stock Ownership Plan (the "ESOP"); and (d) the minute books, corporate seal, and stock records of the Company. 1.3 Assumed Liabilities. Acquisition Sub will assume the direct or indirect debts, obligations, and liabilities of the Company of any nature, whether absolute, accrued, contingent, liquidated, or otherwise, and whether due or to become due, asserted, or unasserted, known or unknown, incurred through the Closing Date (as defined in Section 1.6) (collectively, "Liabilities") that are described below (the "Assumed Liabilities"): (a) Liabilities as shown on the Latest Balance Sheet Date (as defined in Section 2.8) that remain at Closing; (b) Liabilities incurred by the Company under (i) agreements entered into in the ordinary course of business of the Company prior to the Closing and (ii) the Material Agreements identified in Schedule 2.19(a)(i); 2 3 (c) Liabilities arising from or related to the formation, qualification or operation of the 401(k) Plan or the ESOP (i) prior to the date hereof or (ii) incurred in the ordinary course of business of the Company from the date hereof through the Closing; (d) Liabilities arising from the obligation of the Company to indemnify the Principal Shareholder in his capacity as a director and officer of the Company under the articles of incorporation and the bylaws of the Company as in effect on February 1, 2000 incurred as a director or officer other than Liability as a director or officer with respect to actions taken or omitted in connection with this Agreement and the other Seller Documents; and (e) All Liabilities set forth on the Sellers' Disclosure Schedules (other than Liabilities relating to the Headquarters Building (as defined in Section 4.21)). 1.4 Excluded Liabilities. Notwithstanding the terms of Section 1.3 or the other terms of this Agreement, the Assumed Liabilities will not include the following specifically identified Liabilities (collectively, the "Excluded Liabilities"): (a) Liabilities associated with the operation of the 401(k) Plan and the ESOP other than those set forth in Section 1.3(c) above; (b) any Liability arising out of or attributable to the operations of the Company after the Closing or the use of the Excluded Assets; (c) any Liability associated with the Headquarters Building; and (d) any other Liability that is not an Assumed Liability. 1.5 Consideration. As consideration in full for the acquisition of the Assets from the Company, Acquisition Sub will assume the Assumed Liabilities and pay the Company the consideration referred to below, (collectively, the "Purchase Price"). The Purchase Price will be payable as follows: (a) $72,100,000 of the Purchase Price will be paid at the Closing by wire transfer of immediately available funds (to accounts specified in writing by the Company to Acquisition Sub at least two days prior to the Closing); and (b) 1,965,602 (the "Shares") of PSC's Class A common stock, $.01 par value per share (the "Common Stock"). The sale of the Shares will be subject to the Registration Statement (as defined in Section 4.16). The Shares will be listed on The New York Stock Exchange (the "NYSE"), and will be subject to transfer and trading restrictions contained in a lock-up agreement or otherwise set forth on the certificates representing the Shares, as contemplated by Section 4.22. 3 4 1.6 Closing. The closing (the "Closing") of the transactions contemplated by this Agreement will take place at the offices of Hughes & Luce, L.L.P., 1717 Main St., Suite 2800, Dallas, Texas (or such other place as the parties may agree) at 10:00 a.m. local time on March 31, 2000, or at such other date, time, and place as is mutually agreed among the parties or, if all of the conditions to the obligations of the parties set forth in Article V have not been satisfied or waived by March 31, 2000 and there is no agreement among the parties, on the day that is two Business Days (as defined below) following the date on which all such conditions have been satisfied or waived (such date and time of closing being called the "Closing Date"). As used herein, the term "Business Day" means any day other than a Saturday, Sunday or Federal holiday. 1.7 Closing Deliveries. At the Closing, (a) PSC will cause the Acquisition Sub to pay the cash portion of the Purchase Price specified in Section 1.5(a) to the Company; (b) PSC will cause the Acquisition Sub to deliver the Shares specified in Section 1.5(b) to the Company; (c) the Company will execute and deliver to Acquisition Sub a Bill of Sale conveying the Assets to Acquisition Sub substantially in the form agreed by the parties on the date of this Agreement; (d) the Company will execute and deliver to Acquisition Sub an Assignment of Intellectual Property conveying all registered patents, copyrights, trademarks, trade names, and service marks included within the Assets, substantially in the form of agreed by the parties on the date of this Agreement; (e) Acquisition Sub and the Company will execute and deliver to one another an Assumption Agreement, substantially in the form agreed by the parties on the date of this Agreement; (f) the Company will execute and deliver to Acquisition Sub any certificates of title necessary to effect or record the transfer of any vehicles or other Assets for which ownership is evidenced by a certificate of title; (g) the Company will deliver to Acquisition Sub or otherwise make available the originals or copies of all of the Company's books, records, ledgers, disks, proprietary information, and other data and all other written or electronic depositories of information relating to the Assets; and (h) Sellers and Buyers, as applicable, will execute and deliver the other Seller Documents (as defined in Section 2.2) and the other Buyer Documents (as defined in Section 3.2). 4 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Buyers as follows: 2.1 Organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of Pennsylvania and has full power to own its properties and to conduct its business as presently conducted. The Company is duly authorized, qualified, or licensed to do business and is in good standing in each state or other jurisdiction in which its assets are located or in which its business or operations as presently conducted make such authorization, qualification, or licensing necessary except in those jurisdictions where failure to qualify would not have a material adverse effect on the Company or the Assets (a "Material Adverse Effect"). The Company is qualified to do business as a foreign corporation only in the jurisdictions set forth on Schedule 2.1. Set forth on Schedule 2.1 is a list of all assumed names under which the Company operates and all jurisdictions in which any of the assumed names are registered. 2.2 Authority. Each of Sellers has all requisite power and authority, corporate or otherwise, to execute, deliver, and perform under this Agreement and the other agreements, certificates, and instruments to be executed by any of them in connection with or pursuant to this Agreement (collectively, the "Seller Documents"). The execution, delivery, and performance by each of Sellers of each Seller Document to which any of them is a party has been duly authorized by all necessary action, corporate or otherwise, on the part of each such Seller and any security or equity holders of the Company. This Agreement has been, and at the Closing the other Seller Documents will be, duly executed and delivered by each Seller (to the extent each is a party thereto). This Agreement is, and each of the other Seller Documents will be, a legal, valid, and binding agreement of each Seller, enforceable against each Seller in accordance with their respective terms. 2.3 Organic Documents. The Company has provided Buyers a true, correct, and complete copy of the Company's articles of incorporation, bylaws, minute books and stock record books. 2.4 Title to Assets. (a) Set forth in Schedule 2.4(a) is a complete list (including the street address, where applicable) of (i) all real property owned by the Company; (ii) all real property leased by the Company; and (iii) each vehicle owned or leased by the Company. The Company has provided Buyers with a true and materially correct copy of the detailed asset list of the Company. (b) The Company has good and marketable title to all of the Assets (including Registered Intellectual Property (as defined in Section 2.21), but excluding the other Intellectual Property (as defined in Section 2.21)) and owns all of the Assets free and clear of any obligation, lien, claim, pledge, security interest, liability, charge, contingency, or other encumbrance or claim of any nature, 5 6 other than (i) statutory liens securing current taxes and other obligations that are not yet delinquent; (ii) minor imperfections of title and encumbrances that do not materially detract from or interfere with the present use and value of the Assets; and (iii) other matters described in Schedule 2.4(b) (collectively, "Liens"). The execution and delivery of the Seller Documents by the parties thereto at the Closing will convey to and vest in Acquisition Sub good and marketable title to the Assets, free and clear of any Liens except those described in Schedule 2.4(b). The Company holds a valid leasehold interest in all leased assets that are included within the Assets. (c) The real property owned by the Company (the "Real Property") is zoned for a classification that permits the continued use of the Real Property in the manner currently used by the Company. Improvements included in the Assets were constructed in full compliance with, and remain in compliance with, all applicable laws, statutes, regulations, codes, covenants, conditions, and restrictions affecting the Real Property in all material respects. Except as disclosed on Schedule 2.4(c), final certificates of occupancy have been issued for the improvements on the Real Property permitting the existing use of such improvements. There are no actions pending or, to the Company's Knowledge (as defined in Section 7.10), threatened that would alter the current zoning classification of the Real Property or alter any applicable Laws, codes, covenants, conditions, or restrictions that would adversely affect the use of the Real Property in the Company's business. Sellers have not received notice from any insurance company or Governmental Body (as defined in Section 2.7) of any defects or inadequacies in the Real Property or the improvements thereon that would adversely affect the insurability or usability of the Real Property or such improvements or prevent the issuance of new insurance policies thereon at rates not materially higher than present rates. To the Company's Knowledge, no fact or condition exists that would result in the discontinuation of necessary utilities or services to the Real Property or the termination of current access to and from the Real Property. The Principal Shareholder is not a "foreign person" as that term is defined in Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"), and applicable regulations. 2.5 Sufficiency of Assets. The Assets, other than the Excluded Assets, constitute all assets material to the conduct of the business of the Company. The Assets will be sufficient to carry on the business of the Company after Closing without material interruption or disruption. 2.6 No Violation. Except for the approval of the shareholders of the Company, and except as described in Schedule 2.6, neither the execution or delivery of the Seller Documents nor the consummation of the transactions contemplated by the Seller Documents, including without limitation the sale of the Assets to Acquisition Sub, will conflict with or result in the breach of any term or provision of, or violate or constitute a default under (or an event that with notice or lapse of time or both would constitute a breach or default), or result in the creation of any Lien on the Assets, or relieve any third 6 7 party of any obligation to the Company, or give any third party the right to terminate or accelerate any obligation under, any charter provision, bylaw, Material Agreement (as defined in Section 2.19), Permit (as defined in Section 2.14), Law to which the Company is a party or by which the Company or the Assets is in any way bound or obligated. Except as described in Schedule 2.6, by closing the transactions contemplated hereby, the Company represents and warrants that all consents and approvals of its shareholders and its security or equity holders have been obtained. Except as described in Schedule 2.6, and except for any agreement, arrangement or understanding that is terminable without cause upon ninety (90) days or less notice, neither the Principal Shareholder, the Company, nor any other person having colorable authority to bind the Company or to enter into any obligation with respect to the Assets has entered into any agreement, arrangement or understanding that purports to grant to any Person any right to approve of, or consent to any transaction contemplated by this Agreement or that alters or accelerates any obligation of the Company or affecting the Assets upon the consummation of the transactions contemplated by this Agreement, except where the failure to obtain such approval or consent, or where any such alteration, acceleration of affect would not have a material adverse effect on the business of the Company. 2.7 Governmental Consents. Except as set forth in Schedule 2.7, and except as required in connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), no consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with, any governmental or quasi-governmental agency, authority, commission, board, or other body (collectively, a "Governmental Body") is required on the part of Sellers in connection with the transfer of any Permits or other Assets to Acquisition Sub or any of the other transactions contemplated by the Seller Documents. 2.8 Financial Statements. (a) The Company has previously delivered to Buyers a true and complete copy of (i) the audited balance sheet of the Company (the "Latest Balance Sheet") as of December 31, 1999 (the "Latest Balance Sheet Date") and the related audited statements of operations and cash flow for the year then ended (collectively, the "1999 Financial Statements"), and (ii) the audited balance sheets of the Company as December 31, 1998 and 1997 and the related audited statements of operations and cash flow for the years then ended ((i) and (ii) collectively, the "Financial Statements"). Except as set forth on Schedule 2.8(a), the Financial Statements present fairly the financial condition of the Company at the dates specified and the results of its operations for the periods specified and have been prepared in accordance with generally accepted accounting principles, consistently applied ("GAAP"). Except as set forth on Schedule 2.8(a), the Financial Statements do not contain any items of a special or nonrecurring nature, except as expressly stated in the Financial Statements. The Financial Statements have been prepared from the books and records of the Company, which accurately and fairly reflect the transactions of, acquisitions, and dispositions of assets by, and incurrence of liabilities by the Company. 7 8 (b) The Company has no Liabilities except for (i) Liabilities reflected on the Latest Balance Sheet, (ii) current liabilities incurred in the ordinary course of business of the Company after the Latest Balance Sheet Date, and (iii) obligations incurred in the ordinary course of business of the Company under the Material Agreements and under other agreements entered into by the Company in the ordinary course of business of the Company that are not included within the definition of Material Agreements set forth in Section 2.19, which Liabilities are not required by GAAP to be reflected in the Latest Balance Sheet. (c) All accounts receivable reflected in the Latest Balance Sheet or included in the Assets arose in the ordinary course of business of the Company and are due and owing in the face amount thereof less any reserves reflected on the Latest Balance Sheet, and the Company has no reason to believe that such amounts are not substantially collectible in full in the ordinary course of business of the Company. (d) Prior to the Latest Balance Sheet Date, the Company did not enter into any agreement in the ordinary course of its business that resulted in a Liability that is materially disadvantageous to the Company that is not reflected in the Latest Balance Sheet. 2.9 Subsidiaries and Investments. Except as reflected on the Latest Balance Sheet, the Company does not own or hold any direct or indirect equity or debt interest or any form of proprietary interest in any other Person or option to acquire any such interest. 2.10 Absence of Material Adverse Change. Since the Latest Balance Sheet Date, except as specifically contemplated by this Agreement and as disclosed in Schedule 2.10, there has not been (a) any material adverse change in the condition (financial or otherwise), results of operations, business, assets, or Liabilities of the Company or with respect to the manner in which the Company conducts its business or operations; (b) any declaration, setting aside, or payment of any dividends or distributions in respect of any equity capital of the Company or any redemption, purchase, or other acquisition by the Company of any of its equity capital; (c) any payment or transfer of assets (including without limitation any distribution or any repayment of indebtedness) to or for the benefit of any security holder of the Company, other than compensation and expense reimbursements paid in the ordinary course of business of the Company; (d) any revaluation by the Company of any of its assets, including, without limitation, the writing down or off of notes or accounts receivable, other than in the ordinary course of business of the Company; (e) any entry by the Company into any commitment or transaction outside of the ordinary course of business of the Company including, without limitation, incurring or agreeing to incur capital expenditures in excess of $100,000, individually or in the aggregate; (f) any increase in indebtedness for borrowed money; (g) any breach or default (or event that with notice or lapse of time would constitute a breach or default), termination, or threatened termination under any Material Agreement by the Company, or, to the Company's Knowledge, by any third party; (h) any change by the Company in its 8 9 accounting methods, principles, or practices; (i) any increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, or other employee benefit plan, or any increase in the compensation payable or to become payable to directors, officers, employees, or consultants of the Company, except for annual merit increases in salaries or wages; (j) the termination of employment (whether voluntary or involuntary) of any officer or key employee of the Company or the termination of employment (whether voluntary or involuntary) of employees of the Company materially in excess of historical attrition in personnel; (k) any theft, condemnation, or eminent domain proceeding or any material damage, destruction, or casualty loss affecting any asset used in the business of the Company, whether or not covered by insurance; (l) any sale, assignment, or transfer of any asset used in the business of the Company, except sales of services in the ordinary course of business of the Company; (m) any waiver by the Company or the shareholders of the Company of any material rights related to the Company's business, operations, or assets; (n) any other transaction, agreement or commitment entered into or affecting the Company's business, operations, or assets, except in the ordinary course of business of the Company; or (o) any agreement or understanding to do or resulting in any of the foregoing. 2.11 Taxes. (a) Except as set forth in Schedule 2.11(a), all required federal, state, local, and other Tax (as defined in Section 2.11(b)) returns, notices, and reports (including without limitation income, property, sales, use, franchise, withholding, social security, and unemployment Tax returns) relating to or involving transactions with the Company have been accurately prepared and duly and timely filed, and all Taxes required to be paid by the Company with respect to the periods covered by any such returns have been timely paid or reserved for in the Financial Statements. No Tax deficiency has been proposed or assessed against the Company, and the Company has not executed any waiver of any statute of limitations on the assessment or collection of any Tax. No Tax audit, action, suit, proceeding, investigation, or claim is now pending or, to the Company's Knowledge, threatened against the Company, and no issue or question has been raised (and is currently pending) by any taxing authority in connection with the Company's Tax returns or reports. Except as set forth in Schedule 2.11(a), the Company has withheld or collected from each payment made to each of its employees or contractors the full amount of all Taxes required to be withheld or collected therefrom and has paid the same to the proper Tax receiving officers or authorized depositaries. The Company is, and has been since October 1, 1994, a validly electing "S corporation" for purposes of the Internal Revenue Code of 1986, as amended (and its predecessor statutes) (the "Code"). The Company does not own any assets the sale of which would impose tax on the Company pursuant to section 1374 of the Code, and no taxes have ever been, or will be for periods through the Closing Date, imposed on the Company pursuant to section 1375 of the Code. 9 10 (b) "Tax" or "Taxes" means any and all taxes, charges, fees, levies, assessments, duties, or other amounts payable to any federal, state, local, or foreign taxing authority or agency, including, without limitation, (i) income, franchise, profits, gross receipts, minimum, alternative minimum, estimated, ad valorem, value added, sales, use, service, real or personal property, capital stock, license, payroll, withholding, disability, employment, social security, workers compensation, unemployment compensation, utility, severance, excise, stamp, windfall profits, transfer, gift and gains taxes; (ii) customs, duties, imposts, charges, levies, or other similar assessments of any kind; and (iii) interest, penalties, and additions to Tax imposed with respect thereto. 2.12 Litigation. Except as described in Schedule 2.12, there are no pending or, to the Company's Knowledge, threatened, lawsuits, administrative proceedings, or reviews, or formal or informal complaints or investigations by any individual, corporation, partnership, Governmental Body, or other entity (a "Person") against or that could result in any Liability of the Company or any of its directors, officers, employees, agents, or affiliates (in their capacities as such) or to which any of the Assets are subject or relating to the transactions contemplated by this Agreement or the consummation thereof. The Company is not subject to or bound by any currently existing judgment, order, writ, injunction, or decree. 2.13 Compliance with Laws. Except as set forth in Schedule 2.13, the Company is currently complying with and has at all times complied with each applicable statute, law, ordinance, decree, order, rule, or regulation of any Governmental Body, including without limitation all federal, state, and local laws relating to zoning and land use, occupational health and safety, product quality and safety, and employment and labor matters (collectively, "Laws"). 2.14 Permits. The Company owns or possesses from each appropriate Governmental Body all right, title, and interest in and to all material permits, licenses, authorizations, approvals, quality certifications, franchises, or rights (collectively, "Permits") issued by any Governmental Body necessary to conduct the business of the Company, including without limitation, Permits associated with the construction of the Headquarters Building. Each of such Permits is described in Schedule 2.14 and is included within the Assets. No loss or expiration of any such Permit is, on account of the transactions contemplated by this Agreement or otherwise, pending or, to the Company's Knowledge, threatened other than expiration in accordance with the terms thereof of Permits that may be renewed in the ordinary course of business of the Company without lapsing. 2.15 Environmental Matters. (a) Without limiting the generality of the other representations and warranties set forth in this Article II, (i) the Company has conducted its business in compliance with all applicable Environmental Laws, including without limitation by having all Permits required under any Environmental Laws for the operation of the Company's business; (ii) none of the Real Property contains any Hazardous 10 11 Substance in amounts exceeding the levels permitted by applicable Environmental Laws; (iii) Sellers have not received any notices, demand letters, or requests for information from any Governmental Body or other Person indicating that the Company is or may be in violation of, or liable under, any Environmental Law or relating to any of the Assets or former assets of the Company; (iv) no reports have been filed, or are required to be filed, by (or relating to) the Company concerning the release or threatened release of any Hazardous Substance or the threatened or actual violation of any Environmental Law; (v) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law to or from any Real Property or as a result of any activity of Sellers; (vi) there have been no environmental investigations, studies, audits, tests, reviews, or other analyses regarding compliance or noncompliance with any Environmental Law conducted by or for or which are in the possession of Sellers relating to the activities of the Company or any of the Real Property that have not been delivered or disclosed to Buyer; (vii) there are no underground storage tanks on, in, or under any of the Real Property, and no underground storage tanks have been closed or removed from any of the Real Property; (viii) there is no asbestos present in any of the Real Property, and no asbestos has been removed from any of the Real Property; (ix) neither the Company nor any of the Assets are subject to any Liabilities or expenditures relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment, or claim asserted or arising under any Environmental Law; and (x) to the Company's Knowledge, no Hazardous Substance is present and there are no violations of any Environmental Laws involving property adjacent to the Real Property. (b) As used in this Agreement, "Environmental Law" means any federal, state, local or foreign law, statute, ordinance, rule, regulation, Permit, order, judgment, decree, requirement, or agreement with any Governmental Body relating to (i) the protection, preservation or restoration of the environment, (ii) the use, storage, generation, transportation, processing, production, release, or disposal of Hazardous Substances, or (iii) the protection or preservation of public health, in each case as amended and in effect on the date of the Closing. (c) As used in this Agreement, "Hazardous Substance" means any substance presently or hereafter listed, defined, designated, or classified as hazardous, toxic, radioactive, or dangerous under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any Governmental Body or any Environmental Law, including without limitation any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance, or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, or asbestos containing material, urea formaldehyde, foam insulation, lead, or polychlorinated biphenyls. 11 12 2.16 Employee Matters. The Company has delivered to Buyers as of the date of this Agreement a complete list of all current employees of the Company, including date of employment, and compensation. The Company has no collective bargaining, union, or labor agreements, contracts, or other arrangements with any group of employees, labor union, or employee representative and to the Company's Knowledge there is no organization effort currently being made or, to the Company's Knowledge, threatened by or on behalf of any labor union with respect to employees of the Company. 2.17 Employee Benefit Plans. (a) Set forth in Schedule 2.17(a) is a complete and correct list of all "employee benefit plans" (as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), copies of which have been delivered to Buyers as of the date hereof, all plans or policies providing for "fringe benefits" (including but not limited to vacation, paid holidays, personal leave, employee discount, educational benefit, or similar programs), and all other bonus, incentive, compensation, profit-sharing, stock, severance, retirement, health, life, disability, group insurance, employment, fringe benefit, or any other similar plan, agreement, policy, or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow, or other agreement related thereto, which (a) is maintained or contributed to by the Company, or with respect to which the Company has or may have any liability or (b) provides benefits, or describes policies or procedures applicable, to any director, former director, consultant, former consultant, officer, employee, former officer, or former employee of the Company, or the dependents of any thereof, regardless of whether funded (the "Employee Plans"). Except as set forth in the Latest Balance Sheet, the Company does not have any liability for accrued employee leave used for vacation, sick leave, urgent business, or other reasons. No written or oral representations have been made to any employee or former employee of the Company promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life, or disability coverage for any period of time beyond the end of the current plan year (except to the extent of coverage required under Code Section 4980B). Except as set forth in Schedule 2.17(a), the consummation of the transactions contemplated by this Agreement will not accelerate the time of payment or vesting, or increase the amount of compensation due to any director, former director, consultant, former consultant, employee, officer, former employee, or former officer of the Company. (b) With respect to each "employee benefit plan" (as defined in ERISA) maintained or contributed to, currently or in the past by Company or any ERISA Affiliate (as defined below), or with respect to which the Company or any ERISA Affiliate has liability (the "Controlled Group Plans"): (i) there are no unfunded liabilities existing under any Controlled Group Plan, and each Controlled Group Plan could be 12 13 terminated as of the Closing Date with no liability to Buyer, the Company, or any ERISA Affiliate; (ii) there is no Controlled Group Plan that is a defined benefit plan (as defined in Section 3(35) of ERISA) or a multiemployer plan (as defined in Section 3(37) of ERISA); and (iii) each such Controlled Group Plan has been operated in compliance with ERISA, applicable tax qualification requirements, and all other applicable laws. (c) With respect to each Employee Plan, the Company has furnished to Buyers a true, correct, and complete copy of (i) the plan documents and summary plan description; (ii) the most recent determination letter received from the Internal Revenue Service (if any); (iii) the annual reports required to be filed for the three most recent plan years of each such Employee Plan, or such shorter period as such Employee Plan has been in existence; (iv) all related trust agreements, insurance contracts, or other funding agreements that implement such Employee Plan; and (v) all other documents, records, or other materials related thereto requested by Buyers (d) Neither the Company, any ERISA Affiliate, nor any plan fiduciary of any Employee Plan has engaged in any transaction in violation of Section 406(a) or (b) of ERISA or any "prohibited transaction" (as defined in Code Section 4975(c)(1)) that would subject the Company or PSC or Acquisition Sub to any taxes, penalties, or other liabilities resulting from such transaction. (e) Except as set forth in Schedule 2.17(e), other than routine claims for benefits, there are no actions, suits, claims, audits, or investigations pending or threatened against, or with respect to, any of the Employee Plans or their assets; and all contributions required to be made to the Employee Plans have been made timely. "ERISA Affiliate" means the Company, the Principal Shareholder and each corporation, partnership, or other trade or business, whether or not incorporated, which is or has been treated as a single employer or controlled group member with the Company pursuant to Section 414 of the Code or Section 4001 of ERISA. 2.18 Ownership of the Company. The Company has provided to Buyers, in a writing that refers to this Section 2.18 and that is acknowledged by Buyers, a description of all ownership interests in the Company and indicates the record (and if beneficial ownership is, to the Company's Knowledge, different from record ownership, the beneficial ownership) of each such interest. Except as disclosed to Buyers in the writing referred to above, the Company has not issued or become obligated in any manner to issue options, warrants, convertible, or exchangeable securities or other rights, agreements, arrangements, or commitments obligating the Company, directly or indirectly, 13 14 to issue, sell, purchase, acquire or otherwise transfer, or deliver any shares of capital stock of or other equity interest in the Company, or any agreement, document, instrument, or obligation convertible or exchangeable therefore that remain outstanding. 2.19 Material Agreements. (a) Schedule 2.19(a)(i) lists each agreement, arrangement and understanding (whether written or oral and including all amendments thereto) relating to the business of the Company to which the Company is a party or by which the Company or any of the Assets is bound that is material to the Company or the Assets (collectively, the "Material Agreements"), including without limitation the following: (i) agreements pursuant to which the Company sells or distributes any products or services and received revenues during the calendar year 1999; (ii) real estate leases; (iii) agreements evidencing, securing or otherwise relating to any indebtedness for borrowed money for which the Company is, directly or indirectly, liable; (iv) capital or operating leases or conditional sales agreements relating to vehicles, equipment, or other Assets having an aggregate value in excess of $50,000; (v) agreements pursuant to which the Company is entitled or obligated to acquire any assets from a third party; (vi) insurance policies; (vii) employment, consulting, noncompetition, separation, collective bargaining, union, or labor agreements or arrangements; (viii) agreements with or for the benefit of any shareholder, director, officer, employee, or consultant (or any Person that, to the Company Knowledge, claims or has any basis to claim any rights as such) of Sellers or any affiliate or immediate family member thereof; (ix) licenses of computer software; (x) supply agreements or arrangements pursuant to which the Company is entitled or obligated to acquire any assets from a third party having an aggregate value in excess of $50,000; (xi) any partnership, joint venture, consortium, or other similar arrangements or agreements; and (xii) any other agreement pursuant to which the Company could be required to make or entitled to receive aggregate payments or other aggregate value in excess of $50,000. Except as set forth in Schedule 2.19(a) and except for those Material Agreements that are terminable without cause upon ninety (90) days or less notice, the entering of the Seller Documents and the consummation of the transactions contemplated by the Seller Documents, without notice to or consent or approval of any Person, will not constitute a breach of, violation of, or default under any provision of any Material Agreement, except for any breach, violation or default as would not have a material adverse effect on the business of the Company. (b) Schedule 2.19(b) identifies any Material Agreements that will be terminated at or prior to, or retained by the Company following the Closing. (c) Sellers have provided to Buyers a copy of each written Material Agreement and a written summary of each oral Material Agreement. Except as described in Schedule 2.19(c), (i) each Material Agreement is valid, binding, and in full force and effect and enforceable against the Company and, to the Company's Knowledge, the other parties thereto in accordance with its terms; (ii) the Company 14 15 has performed, in all material respects, all of its obligations under each Material Agreement, and there exists no breach or default (or event that with notice or lapse of time would constitute a breach or default) on the part of the Company or, to the Company's Knowledge, on the part of any other party under any Material Agreement; (iii) there has been no termination or notice of default or, to the Company's Knowledge, any threatened termination under any Material Agreement; and (iv) to the Company's Knowledge, no party to a Material Agreement intends to alter its relationship with the Company as a result of or in connection with the acquisition contemplated by the Seller Documents or has been threatened with bankruptcy or insolvency. 2.20 Customers. Set forth in Schedule 2.20 is a complete list of each customer of the Company during the year ended December 31, 1999, and indicating the amount of revenues attributable to each customer during such year. Except as set forth in Schedule 2.20, none of the customers that accounted for more than $500,000 in revenues for the year ended December 31, 1999 (each a "Material Customer") has threatened to, or notified the Company of any intention to, terminate, or materially alter its relationship with the Company, and there has been no material dispute with a Material Customer since January 1, 1998. Except as set forth in Schedule 2.20, to the Company's Knowledge, there is no basis for any termination of the Company's contract with any Material Customer other than expiration of the stated term thereof. 2.21 Intellectual Property Rights. Set forth in Schedule 2.21 is a complete list of all registered patents, trademarks, service marks, trade names, and copyrights owned by the Company (collectively, "Registered Intellectual Property"). The Company has used all Registered Intellectual Property and the other computer software and software licenses, intellectual property, proprietary information, trade secrets, trademarks, trade names, brand names, inventions, processes, know-how, formulas, customer lists, technology, data, works of authorship and copyrights (collectively, "Intellectual Property") used by the Company without infringing on the rights of any Person. There is no pending or, to the Company's Knowledge, threatened infringement, interference, opposition, or similar action, suit, or proceeding by or against the Company or the Assets relating to the Registered Intellectual Property, nor, to the Company's Knowledge, except as set forth in Schedule 2.21, is there any basis therefor. Except as set forth in Schedule 2.21, no other Person is infringing the rights of the Company in any of its Registered Intellectual Property. 2.22 Competing Interests. Except for investment in publicly-held entities (which investment does not exceed 5% of the issued and outstanding equity capital of such entities), neither the Principal Shareholder, nor to the Company's Knowledge, any immediate family member of the Principal Shareholder (a) owns, directly or indirectly, an interest in any Person that is a competitor, customer, or supplier of the Company or that otherwise has material business dealings with the Company or (b) is a party to, or otherwise has any direct or indirect interest opposed to the Company under, any Material Agreement or other business relationship or arrangement. 15 16 2.23 Illegal Payments. Neither the Company nor the Principal Shareholder, nor, to the Company's Knowledge, any immediate family member of the Principal Shareholder has (a) used any funds of the Company for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity, or (b) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended. 2.24 Brokers. Neither Seller has incurred nor will it incur any liability for brokers' or finders' fees or agents' commissions in connection with this Agreement or the transactions contemplated by this Agreement. 2.25 No Misrepresentations. In connection with the acquisition of the Assets, the Company has not knowingly or recklessly made any untrue statement of a material fact in this Article II or knowingly or recklessly omitted to state any material fact set forth in this Article II necessary to make any such representation, warranty, or statement, under the circumstances in which it is made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUISITION SUB Acquisition Sub represents and warrants to Sellers as follows: 3.1 Organization. Each of PSC and Acquisition Sub is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. 3.2 Authority. Each of PSC and Acquisition Sub has all requisite power and authority to execute, deliver, and perform under this Agreement and the other agreements, certificates, and instruments to be executed by Buyers in connection with or pursuant to this Agreement (collectively, the "Buyer Documents"). The execution, delivery, and performance by each of PSC and Acquisition Sub of each Buyer Document to which it is a party have been duly authorized by all necessary action, corporate or otherwise, on the part of PSC and Acquisition Sub. This Agreement has been, and at the Closing the other Buyer Documents will be, duly executed and delivered by PSC and Acquisition Sub (to the extent each is a party thereto). This Agreement is, and each of the other Buyer Documents will be, a legal, valid, and binding agreement of PSC and Acquisition Sub, as the case may be, enforceable against PSC and Acquisition Sub in accordance with their respective terms. 3.3 Stock Validity. The Shares are duly authorized shares of Class A Common Stock, $.01 par value per share of PSC, have been duly authorized for issuance under this Agreement, and when issued as contemplated by this Agreement will be validly issued, fully paid and nonassessable and free of statutory preemptive rights with respect thereto. Upon issuance in accordance with this Agreement, Sellers will receive good and valid title to the Shares free and clear of any Liens, except for those referred to in this Agreement. All issued and outstanding shares of capital stock of Acquisition Sub are owned by PSC. 16 17 3.4 No Violation. The execution, delivery, and performance of the Buyer Documents by PSC and Acquisition Sub will not conflict with or result in the breach of any term or provision of, or violate, or constitute a default under any charter provision or bylaw or under any material agreement, instrument, order, law, or regulation to which either of them is a party or by which either of them is in any way bound or obligated. 3.5 Governmental Consents. Except as required in connection with the HSR Act, the registration of the Shares with the Securities and Exchange Commission (the "SEC") and the listing of the Shares on the NYSE, no consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with, any Governmental Body is required on the part of either Buyer in connection with the transactions contemplated by the Seller Documents. 3.6 SEC Reports. There is available on the SEC's EDGAR database a copy of each report, proxy statement or information statement filed by it since January 1, 1999, each in the form (including exhibits and any amendments thereto and all documents incorporated by reference therein) (collectively, the "SEC Documents") filed with the SEC under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and the applicable rules and regulations of the SEC thereunder, and none of the SEC Documents knowingly and recklessly contained any untrue statement of a material fact or knowingly or recklessly omitted to state a material fact required to be stated therein or necessary to make the statements made therein, under the circumstances in which they were made, not misleading, except to the extent corrected by a document subsequently filed with the SEC prior to the date hereof. PSC is current in its filings with the SEC. 3.7 Plan. Acquisition Sub has delivered to Sellers a true, correct and complete copy of the Perot Systems Corporation 1991 Stock Option Plan Amended and Restated as of February 25, 1999 (the "Plan"). The Plan is in full force and effect and has not been amended subsequent to such date. The shares of Common Stock to be granted pursuant to the exercise of the Options to be granted pursuant to Section 4.13 (collectively, the "Options") have been duly authorized and reserved for issuance, and such shares, when issued in accordance with the terms of the Option, will be legally and validly issued, fully-paid and non-assessable, and registered under the Securities Act of 1933, as amended (the "Securities Act"), qualified for issuance under all applicable state securities laws and listed for trading with the NYSE. 3.8 Litigation. There are no pending or, to the knowledge of Buyers, threatened, lawsuits, administrative proceedings, or reviews, or formal or informal complaints or investigations by any Person that in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement. 3.9 Right to Conduct Business. Except as disclosed on Schedule 3.9, neither PSC nor any affiliate thereof has entered into any contract, agreement, commitment or 17 18 understanding (whether written or oral) restricting the manner in which Acquisition Sub can operate its business. 3.10 Brokers. Neither Buyer has incurred nor will it incur any liability for brokers' or finders' fees or agents' commissions in connection with this Agreement or the transactions contemplated by this Agreement. ARTICLE IV COVENANTS AND AGREEMENTS 4.1 Conduct of Business. During the period commencing on the date of this Agreement and ending on the earlier to occur of the Closing or the termination of this Agreement in accordance with its terms (the "Interim Period"), unless Buyers otherwise consent in writing, and except as otherwise specifically contemplated by this Agreement, the Company will (a) operate in the ordinary course of business of the Company and use its best efforts to preserve the goodwill of the Company and of its employees, customers, suppliers, Governmental Bodies, and others having business dealings with the Company; (b) not engage in any transaction outside the ordinary course of business of the Company, including without limitation by making any material expenditure, investment, or commitment or entering into any material agreement or arrangement of any kind; (c) except in the ordinary course of business of the Company, not increase the compensation level of any employee (other than the officers of the Company), or make any bonus payments or other distributions to any such employee; (d) not increase the compensation level of any officer of the Company or make any bonus payments or distributions to any such officer; (e) maintain all insurance policies and all Permits that are required for the Company to carry on its business; (f) maintain books of account and records in the usual, regular, and ordinary manner and consistent with past practices; and (g) use its best efforts not to take any action that would result in, or otherwise allow, a breach (as of the Closing) of the representations and warranties set forth in Section 2.10. 4.2 Access and Information. During the Interim Period, the Company will permit Buyers and their representatives to have reasonable access to the Company's directors, officers, employees, agents, assets, and properties and all relevant books, records, and documents of or relating to the business and assets of the Company during normal business hours upon reasonable advance notice and will furnish to Buyers such information, financial records, and other documents relating to the Company and its operations and businesses as Buyers may reasonably request. The Company will permit Buyers and their representatives reasonable access to the Company's accountants, auditors, customers, and suppliers for consultation or verification of any information obtained by Buyers and will use their best efforts to cause such Persons to cooperate with Buyers and their representatives in such consultations and in verifying such information. The Company will have the right to participate in any contact with such Persons. 4.3 Supplemental Disclosure. During the Interim Period, the Company will promptly supplement or amend each of the Schedules to this Agreement with respect to any matter of which the Company or the Principal Shareholder becomes aware that arises 18 19 or is discovered after the date of this Agreement that, if existing or known at the date of this Agreement, would have been required to be set forth or listed in the Schedules to this Agreement; provided that, for purposes of determining whether a breach exists with respect to any of the representations and warranties set forth in this Agreement, any such supplemental or amended disclosure will be deemed not to have been disclosed to Buyers unless Buyers otherwise expressly consents in writing. 4.4 Assistance with Permits and Filings. During the Interim Period, Sellers will furnish Buyers with all information concerning Sellers that is required for inclusion in any application or filing made by Buyers to any Governmental Body in connection with the transactions contemplated by this Agreement, including, without limitation, the Registration Statement, and Buyers will furnish Sellers with all information concerning Buyers that is required for inclusion in any application or filing made by Sellers to any Governmental Body in connection with the transactions contemplated by this Agreement. Sellers and Buyers will fully cooperate to file the Notification and Report Form required by the HSR Act with the Federal Trade Commission and the Anti-Trust Division of the Department of Justice. Sellers will use commercially reasonable efforts to assist Buyers in obtaining any Permits, or any consents to assignment related thereto, that Buyers will require in connection with the continued operation of the Assets after the Closing. 4.5 Fulfillment of Conditions by Sellers. Sellers will use their best efforts not to take any action that would cause the conditions on the obligations of the parties to effect the transactions contemplated by this Agreement and the Seller Documents not to be fulfilled, including without limitation by taking or causing to be taken any action that would cause the representations and warranties made by Sellers in this Agreement not to be true and correct as of the Closing. Sellers will take all reasonable steps within their power to cause to be fulfilled the conditions precedent to Buyers' obligations to consummate the transactions contemplated by this Agreement that are dependent on the actions of Sellers. 4.6 Fulfillment of Conditions by Buyers. Buyers will use their best efforts not to take any action that would cause the conditions on the obligations of the parties to effect the transactions contemplated by this Agreement not to be fulfilled, including without limitation by taking or causing to be taken any action that would cause the representations and warranties made by Buyers in this Agreement not to be true and correct as of the Closing. Buyers will take all reasonable steps within their power to cause to be fulfilled the conditions precedent to the obligations of Sellers to consummate the transactions contemplated by this Agreement that are dependent on the actions of Buyers. 4.7 Publicity. During the Interim Period, Buyers and Sellers will cooperate with each other in the development and distribution of all news releases and other public disclosures relating to the transactions contemplated by this Agreement. During the Interim Period, neither Buyers nor Sellers will issue or make, or allow to have issued or made, any press release or public announcement concerning the transactions contemplated by this Agreement without giving the other party a reasonable opportunity 19 20 to comment on such release or announcement in advance, consistent with applicable legal and stock market requirements. 4.8 Transaction Costs. Buyers will pay all transaction costs and expenses (including legal, accounting, and other professional fees) that they incur in connection with the negotiation, execution, and performance of this Agreement and the transactions contemplated by this Agreement, including the filing fees required to be paid by Buyers under the HSR Act and the costs of any mortgagee policies of title insurance. Prior to the Closing, the Company will pay (a) all transaction costs and expenses (including legal, accounting, and other professional fees) incurred by Sellers in connection with the negotiation, execution, and performance of this Agreement and the transactions contemplated by this Agreement, including the filing fees required to be paid by the Principal Shareholder under the HSR Act; and (b) any transfer taxes (including sales, use, and deed taxes) associated with the transfer of the Assets to Acquisition Sub. Sellers will timely file a request for sales tax exemption under Pa. Stat. Ann. 72 Sec. 7240 on the bulk transfer of the Assets to Buyer. 4.9 No-Shop Provisions. Each of Sellers hereby covenants and agrees that during the Interim Period (a) it will not, and will not permit any of its affiliates to, initiate, solicit, or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction (as defined below), or enter into discussions or negotiate with any Person in furtherance of such inquiries or to obtain a Competing Transaction, or endorse or agree to endorse any Competing Transaction, or authorize or permit any of the officers, directors, or employees of Sellers or any investment banker, financial advisor, attorney, accountant, or other representative retained by Sellers, or any of their affiliates to take any such action, and (b) Sellers will promptly notify PSC of all relevant terms of any such inquiries and proposals that the Company reasonably and in good faith determines to merit serious attention received by it relating to any of such matters, and if such proposal is in writing, Sellers will promptly deliver or cause to be delivered to PSC a copy of such proposal. For purposes of this Agreement, "Competing Transaction" means any of the following (other than the transactions contemplated by this Agreement) involving the Company: (a) any merger, consolidation, share exchange, business combination, or similar transaction; (b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition of 5% or more of the assets used in the business of the Company; or (c) any offer for 5% or more of the outstanding shares of capital stock of the Company. 4.10 Nondisclosure. Sellers acknowledge and agree that all customer, prospect, and marketing lists, sales data, intellectual property, proprietary information, trade secrets, and other confidential information of the Company (collectively, "Confidential Information") are valuable assets constituting part of the Assets and, following the Closing, will be transferred to Acquisition Sub. Sellers agree to, and agree to use reasonable efforts to cause its representatives to, treat the Confidential Information, together with any other confidential information furnished to it by Buyers, as confidential and not to make use of such information for its own purposes or for the benefit of any other Person (other than the 20 21 Company prior to the Closing or Buyers after the Closing). Prior to the Closing, Buyers agree to, and agree to use reasonable efforts to cause their representatives to, treat the Confidential Information as confidential and not to make use of such information for their own purposes or for the benefit of any other Person except in connection with the transactions contemplated by this Agreement. If this Agreement is terminated prior to the Closing, each party agrees that it will not thereafter use any Confidential Information furnished to it by the other party for any purposes whatsoever or permit any such information to be made available publicly, except to the extent required by law, and that it will return any such written information to the other party upon request. 4.11 Discharge of Retained Liabilities. Following the Closing, the Company will fully pay or otherwise discharge in full, prior to the due date therefor and otherwise in accordance with the terms thereof, all Liabilities of the Company except the Assumed Liabilities. This Section 4.11 will survive the Closing. 4.12 Name Change. On the Closing Date, Sellers will file all documents necessary to change the Company's name to a name bearing no similarity to "Solutions Consulting," and Acquisition Sub will change its name to "Solutions Consulting." 4.13 Employees. (a) On the Closing Date, Acquisition Sub will offer full-time employment, subject to PSC's standard employment procedures, including without limitation satisfactory completion of background checks and execution of PSC's Associates Employment Agreement in the form agreed upon (the "Associates Agreement"), to the employees of the Company on the date of this Agreement (the "Transferred Employees"). The terms of employment for the Transferred Employees will be on substantially the same terms, with the same compensation and benefits, as are currently provided by the Company. The Associates Agreement for the President of the Company (the "President") will provide the same severance arrangement and permit the same outside activities as are set forth in the President's letter of agreement with the Company, a copy of which has been delivered to Buyers. With respect to any benefit plan providing health coverage, Acquisition Sub will provide substantially the same health coverage to the Transferred Employees commencing as of the Closing Date for covered expenses incurred on or after the Closing Date. To the extent allowed by Law, Acquisition Sub will waive any participation requirement, waiting period or pre-existing condition exclusion with respect to the Transferred Employees and will provide all Transferred Employees credit for all of their employment service with the Company for purposes of both participation and vesting requirements under all of Acquisition Sub's benefit plans (except under any option, stock or similar compensatory benefit plan), and, to the extent allowed by Law, any covered expenses incurred in calendar year 2000 prior to the Closing Date by such employees or their covered dependents shall be taken into account for purposes of satisfying any applicable deductible or co-insurance or maximum out-of-pocket contribution under Acquisition Sub's health plan. Nothing in this Agreement will 21 22 be construed to require Acquisition Sub or PSC to continue the employment of the Transferred Employees for any particular time period nor to interfere with Acquisition Sub's or PSC's rights to discipline or terminate any Transferred Employee, to change the terms and conditions of any Transferred Employee's employment at any time, and to modify, amend, suspend, or terminate benefit plans at any time. This Section 4.13(a) will survive the Closing. (b) PSC has granted to the Transferred Employees (or will grant before the Closing Date), under the Plan and subject to the execution of individual stock option agreements, options to purchase an aggregate of 5,900,000 shares of Common Stock, with an exercise price equal to the closing price for the Common Stock on the NYSE on the date of grant (the "Grant Date") and in substantially the form agreed by the parties on the date of this Agreement ("Standard Options"), in individual amounts specified by PSC to the Sellers (after consultation with Sellers)(with 20,000 Standard Options issued to each of the three (3) outside directors of the Company). Except as set forth in Section 4.13(d), any remaining Standard Options not granted by the Closing Date will be terminated, and will not be available for future grants. (c) PSC has granted to the Transferred Employees (or will grant before the Closing Date), under the Plan and subject to the execution of individual stock option agreements, options to purchase an aggregate of 9,250,000 shares of Common Stock, with an exercise price equal to the closing price for the Common Stock on the NYSE on the Grant Date and in substantially the form agreed by the parties on the date of this Agreement ("Performance Options") (the Standard Options and the Performance Options collectively, the ("Employee Compensation")), in individual amounts specified by PSC to the Sellers (after consultation with Sellers)(with 30,000 Performance Options issued to each of the three (3) outside directors of the Company). Except as set forth in Section 4.13(d), any remaining Performance Options not granted by the Closing Date will be terminated, and will not be available for future grants. (d) Simultaneously with the Closing, PSC will reserve 3,900,000 (plus an amount equal to the number of Standard Options and Performance Options that have not been granted by the Closing Date, if any; provided that the number of Performance Options cancelled under Section 4.13(c) will retain their characterization as such) shares of Common Stock under the Plan for new employees (the "Reserved Options"). Up to an agreed upon number of Reserved Options for a given position will be granted at the request of the management of Acquisition Sub at fair market value on the date of grant and containing a five-year vesting schedule, in accordance with Schedule 4.13(d). While no legal commitment of any nature is made hereby, additional options may be made available for grant by Acquisition Sub depending on Acquisition Sub's performance. This Section 4.13(d) will survive the Closing, but shall expire and be of no force and effect as of and following the Autonomy Termination Date (as defined in the Performance Options). 22 23 4.14 Special Meeting. Sellers will take all action necessary in accordance with the Pennsylvania law and the articles of incorporation and bylaws of the Company, to call, as soon as is practicable, a meeting of its shareholders and such other security or equity holders of the Company having the right to vote on the transactions contemplated by this Agreement (the "Special Meeting") at which the shareholders and such other security or equity holders of the Company will consider and vote upon this Agreement and the transactions contemplated herein. The Principal Shareholder will vote his shares of capital stock of the Company in favor of this Agreement and the transactions contemplated herein. 4.15 Filing and Authorizations. As promptly as practicable, Buyers and Sellers will make, or cause to be made, such filings and submissions under laws, rules and regulations applicable to it, including the HSR Act, as may be required by it to consummate the transactions contemplated herein, and will use their best efforts to obtain, or cause to be obtained, all authorizations, approvals, consents and waivers from all Governmental Bodies necessary to be obtained by Buyers and Sellers, respectively. 4.16 Registration Statement. (a) PSC has prepared pursuant to all applicable Laws a registration statement on Form S-4 (the "Registration Statement") that it has filed with the SEC in connection with the issuance of shares of its Common Stock in transactions such as those contemplated by this Agreement, which Registration Statement has been declared effective under the Securities Act. PSC also agrees to use all reasonable efforts to obtain, prior to the effective date of the Registration Statement, all necessary state securities law or "Blue Sky" permits and approvals required to issue the Shares. The Company agrees to furnish to PSC all information concerning the Company, officers, directors and stockholders as may be necessary in connection with the foregoing. (b) During the Interim Period, PSC will advise the Company promptly after any supplement or amendment to the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order or the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threat known to PSC of any proceeding for any such purpose, or of any request by the SEC for the amendment or supplement of the Registration Statement or for additional information. (c) At or prior to the Closing, PSC will cause the Shares to be listed on the NYSE. 4.17 Non-Competition. (a) The Company will use its best efforts to obtain: 23 24 (i) from each individual entitled to receive in excess of $1,500,000 in aggregate Consideration (as defined below) (each such person, who is identified in a list provided to Buyers prior to the Closing, a "Significant Personnel") a non-competition agreement, which non-competition agreement will, among other things, cover the period commencing on the Closing Date and ending on the later to occur of (i) five (5) years after the Closing Date or (ii) two (2) years after such Significant Personnel ceases to be employed by Acquisition Sub, each such agreement to be in substantially the form agreed by the parties on the date of this Agreement (collectively, the "Five-Year Non-Competition Agreements") where "Consideration" means the portion of the Purchase Price such individual is scheduled to receive (with the Common Stock valued in the same manner as the value in Section 1.5(b) above); and (ii) from each individual other than a Significant Personnel entitled to receive in excess of $250,000 in aggregate Consideration (each such person, who is identified in a list provided to Buyers prior to the Closing, a "Key Personnel") a non-competition agreement, which non-competition agreement will, among other things, cover a period commencing on the Closing Date and ending two (2) years after the Closing Date, each such agreement to be in substantially the form of agreed by the parties on the date of this Agreement (collectively, the "Two-Year Non-Competition Agreements"). (b) The Principal Shareholder will execute and deliver a Five-Year Non-Competition Agreement. 4.19 Adoption of Plan of Liquidation. Prior to the Closing Date, the Board of Directors of the Company will adopt a plan of liquidation in accordance with the laws of the state of its incorporation and submit such plan to the Shareholders. 4.20 Distributions. Prior to the Closing, the Company will distribute $10,000,000 to its Shareholders. 4.21 Headquarters Building. Prior to the Closing, the Company will sell to the Principal Shareholder or his designee the real estate and improvements owned by the Company and located in Cannonsburg, Pennsylvania (the "Headquarters Building") under the terms set forth in Schedule 4.21, and the Company will lease space in the Headquarters Building to serve as the primary office of Acquisition Sub in accordance with the terms set forth in Schedule 4.21. 4.22 Distribution of Shares. The Company will promptly distribute the Shares to the Persons and in the respective share amounts set forth in a writing that refers to this Section 4.22 and acknowledged by Buyers prior to the Closing. Principal Shareholder will receive in excess of 50% of the Shares. Except as otherwise expressly contemplated in this Section 4.22, the Company will distribute the Shares only to Persons that sign a 24 25 lock-up agreement in the forms agreed by the parties on the date of this Agreement, except that shares to be distributed to the ESOP and the Principal Shareholder's Grantor Retained Annuity Trust will only bear a restrictive legend that is substantively the same as set forth in the lock-up agreements. The Company will sign a lock-up agreement covering the period of time after its receipt of the Shares through its distribution of the Shares in accordance with this Section 4.22. 4.23 Operations of Acquisition Sub. (a) At the Closing, Acquisition Sub will adopt the policies and procedures of the Company. (b) Without prejudice to the rights of any Person under the Performance Options, it is PSC's current intention to permit Acquisition Sub, during the period commencing on the Closing Date and ending on the Autonomy Termination Date, to be operated in substantially the same manner as the Company has operated prior to the Closing unless otherwise agreed by the Principal Shareholder or the President, except with respect to the issuance of securities (including debt securities), the consummation of any merger, consolidation, reorganization, disposition of material assets other than in the ordinary course of business of the Company, or similar transaction capital expenditures in excess of $300,000 in any fiscal year, or the amendment of its articles of incorporation or bylaws. Nothing contained in this provision shall serve to limit or restrict the legal rights of PSC with respect to Acquisition Sub. 4.24 Exclusive Recourse. Notwithstanding any other provision of this Agreement, including, without limitation, Article VI, the sole and exclusive remedy, at law or equity, for any violation of any provision that could be construed to constrain or otherwise affect the sole and absolute right of Buyers or their affiliates to control and operate the Assets or the Acquisition Sub after the Closing (including, without limitation, the provisions of Sections 3.9, 4.13, and 4.23) will be the potential acceleration of Performance Options as contemplated by Section 2(f) of Exhibit A to the Performance Options and a potential "Change in Condition" pursuant to and as set forth in the Retention Agreement. No other rights, duties, liabilities, remedies, recourse, or obligations arise with respect to any party pursuant to any such provision under any theory, legal or equitable, including, without limitation, contract, tort, unjust enrichment, and strict liability. Notwithstanding the foregoing, the provisions of this Section 4.24 shall not apply to the covenant in Section 4.28. 4.25 Allocation of Purchase Price. Buyers and Sellers will promptly appoint an accounting or appraisal firm reasonably acceptable to each party (the "Appraiser") to determine an allocation of the Purchase Price among the Assets. The Appraiser will be engaged to deliver a draft allocation within seven (7) business days prior to the Closing Date. Buyers and Sellers will act reasonably to agree to a final allocation which will be attached to the Agreement at Closing as Schedule 4.25. Buyers and Sellers will report the transactions contemplated hereby on all Tax Returns (including information returns and supplements thereto required to be filed by Buyers and Sellers under the Code) in a 25 26 manner consistent with such final allocation, as may be adjusted in accordance with GAAP after the Closing, with the reasonable consent of the Representative (as defined in the Performance Options). This Section 4.25 will survive the Closing. 4.26 Indemnification of Principal Shareholder. PSC will provide the Principal Shareholder with the full indemnification provided by applicable law in his capacity as an officer or director of Acquisition Sub (and, in the event that the Principal Shareholder fails to be an officer or director but remains an employee of Acquisition Sub, such indemnification as an employee to the same extent that the Principal Shareholder would be entitled to indemnification if he were an officer or director). 4.27 Certain Costs. Principal Shareholder, on the one hand, and Buyers, on the other hand, will share equally any Losses (as defined in Section 6.1) arising from or relating to any Person with respect to whom Buyers waive the condition to Closing set forth in Section 5.1(m) (including, without limitation, any claims by any such Person). 4.28 Ownership. Buyers covenant and agree that, notwithstanding any other provision of this Agreement, prior to an Autonomy Termination Date, Buyers shall not without the prior written consent of the Representative (as defined in the Performance Options) (a) take or permit to be taken any action that would result in Acquisitions Sub not being beneficially owned 100% by PSC or (b) allow or cause Acquisition Sub (i) to be merged or consolidated with any Person; (ii) to sell or otherwise dispose of all or substantially all of its assets; or (iii) to dissolve, liquidate, or cease to do business as a single entity unless Acquisition Sub is placed in a bankruptcy or insolvency proceeding. ARTICLE V CLOSING CONDITIONS 5.1 Conditions to Obligations of Buyers. The obligations of Buyers under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions, but compliance with any such conditions may be waived by Buyers in writing: (a) All representations and warranties of the Company contained in this Agreement will be true and correct in all material respects (if not qualified by materiality) or in all respects (if qualified by materiality) at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing, and Buyers will have received a certificate to such effect in form and substance satisfactory to Buyers executed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company. (b) Sellers will have performed and complied with all the covenants and agreements required by this Agreement to be performed or complied with by them at or prior to the Closing, including without limitation the delivery of all items required to be delivered by them pursuant to Section 1.7, and Buyers will have received a certificate to such effect in form and substance satisfactory to Buyers 26 27 executed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company and by Principal Shareholder. (c) All necessary contractual and governmental consents, approvals, orders, or authorizations must have been obtained and all necessary contractual or governmental notices have been given (except with respect to Material Agreements that are terminable without cause upon ninety (90) days or less notice, and with respect to other agreements where to failure to obtain such consents, approvals, orders, or authorizations or to give such notice would not have a material adverse effect on the Assets). Without limiting the generality of the foregoing, (i) all filings pursuant to the HSR Act will have been made by Sellers, and their respective affiliates and the required waiting period under the HSR Act will have expired or been terminated without any threat or commencement of antitrust proceedings with respect to the transactions contemplated by this Agreement and (ii) the Registration Statement must have been declared effective by the SEC for at least 20 Business Days prior to the Closing. (d) There will be no pending or threatened litigation in any court or any proceeding before or by any Governmental Body to restrain or prohibit or obtain damages or other relief with respect to this Agreement or the other Seller Documents or the consummation of the transactions contemplated by this Agreement or as a result of which Buyers could be required to dispose of any assets or operations of the Buyers (including any material assets or operations acquired or to be acquired from the Company) or their affiliates or to comply with any material restriction on the manner in which the Buyers or their affiliates conduct their operations (including any operations acquired or to be acquired from the Company). (e) The Company will have delivered to Buyers Associates Agreements executed by nine (9) of the top (10) individuals (to be mutually determined) who are to received the highest aggregate amount of Consideration pursuant to this Agreement, and at least 90% of the remaining Persons who are to receive consideration pursuant to this Agreement. (f) The Company will have delivered to Buyers Five-Year Non-Competition Agreement executed by six (6) of the seven (7) Significant Personnel (to be mutually determined upon execution of this Agreement). (g) The Company will have delivered to Buyers Two-Year Non-Competition Agreements, as applicable, executed by 90% of the Key Personnel. (h) The Company will have delivered to Buyers a statement setting forth the total shareholder's equity of the Company as of February 29, 2000 (the "Shareholders Equity Statement"), as determined in accordance with GAAP in good faith by the Chief Financial Officer of the Company, which amount will not be less than $21,250,000 (the "Shareholders Equity Benchmark"). 27 28 (i) The Company will have delivered to Buyers a statement setting forth the net working capital of the Company as of February 29, 2000 (the "Working Capital Statement"), as determined in accordance with GAAP in good faith by the Chief Financial Officer of the Company, which amount will not be less than $7,250,000 (the "Working Capital Benchmark"). (j) Principal Shareholder will have executed and delivered to Buyers a lock-up agreement in the agreed form. (k) The Company will have delivered lock-up agreements executed by the Company and by each Person to whom Shares are to be distributed, as contemplated in Section 4.22, in the agreed form. (l) Principal Shareholder will have executed and delivered a retention agreement in the form agreed by the parties on the date of this Agreement. (m) The Company will have delivered to Buyers an irrevocable release, waiver and joinder agreement executed by each Person who is to receive consideration (Purchase Price or Employee Compensation) in the form agreed by the parties on the date of this Agreement (the "Joinder"). (n) The Company will have assigned to Acquisition Sub all in-force insurance policies, except builder's risk, directors and officers insurance and roll-off coverage. The in-force insurance policies will include commercial general liability, umbrella liability, automobile liability and physical damage, crime, property and workers compensation and employers liability. (o) The Company must have delivered to Buyers a certificate of the secretary of the Company as to the items covered by Section 2.3. (p) The Company must have delivered to Buyer a legal opinion of Sellers' counsel covering such legal matters as may be reasonably requested by Buyers. (q) The Sellers will have executed and delivered to Buyers the other Seller Documents. (r) The Buyers will have completed their due diligence investigation of the ESOP, the results of which indicate, to the satisfaction of Buyers in their reasonable discretion, that the Buyers will incur no more than $500,000 in Liabilities as a result of the provisions of Section 1.3(c). (s) Prior to the Closing, each Person that has theretofore executed an Associates Agreement will confirm in writing that the reference therein to the "Company" includes the business of the Company under this Agreement. 28 29 5.2 Conditions to Obligations of Sellers. The obligations of Sellers under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions, but compliance with any such conditions may be waived by Sellers in writing: (a) All representations and warranties of Buyers contained in this Agreement will be true and correct in all material respects (if not qualified by materiality) or in all respects (if qualified by materiality) at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing, and Sellers will have received a certificate to such effect in form and substance satisfactory to Sellers executed on behalf of each Buyer by officers of each Buyer reasonably acceptable to Sellers. (b) Buyers will have performed and complied with all the covenants and agreements required by this Agreement to be performed or complied with by them at or prior to the Closing, including without limitation the delivery of all items required to be delivered by them pursuant to Section 1.7, and Sellers will have received a certificate to such effect in form and substance satisfactory to Sellers executed on behalf of each Buyer by officers of each Buyer reasonably acceptable to Sellers (c) All necessary governmental consents, approvals, orders, or authorizations must have been obtained and all necessary governmental notices must have been given. Without limiting the generality of the foregoing, all filings pursuant to the HSR Act will have been made by Buyers and their respective affiliates and the required waiting period under the HSR Act will have expired or been terminated without any threat or commencement of antitrust proceedings with respect to the transactions contemplated by this Agreement. (d) Buyers will have delivered to Sellers a legal opinion of the Buyers' counsel covering such legal matters as may be reasonably requested by Sellers. (e) Buyers will have executed and delivered to Sellers each other Buyer Document. (f) The Shares will have been authorized for listing on the NYSE, the Registration Statement shall have been declared effective and shall have remained effective for at least twenty (20) Business Days and no stop order will be in effect with respect thereto and no proceeding for that purpose will have been initiated or, to the Knowledge of the Buyers, threatened by the SEC. (g) Buyers will have delivered to Sellers a copy of the articles of incorporation and bylaws of Acquisition Sub. 29 30 (h) Buyers shall not have terminated the employment of any Transferred Employee prior to the Closing Date without the consent of the Company. ARTICLE VI INDEMNIFICATION 6.1 Indemnification of Seller Parties. (a) Subject to the limitations set forth in Section 6.1(b) below, Buyers shall jointly and severally indemnify and hold harmless the Principal Shareholder, the Company, and the shareholders of the Company other than the Principal Shareholder (the "Other Shareholders") (the Principal Shareholder, the Company and the Other Shareholders collectively, the "Seller Parties") against the following liabilities, obligations, claims, losses, contingencies, damages (including enhanced damages with respect to intellectual property matters), costs, and expenses, including all court costs and reasonable attorneys' fees (exclusive of the Seller Parties' or the Buyers', as applicable, incidental and consequential damages) (together, "Losses"). (i) any Losses incurred by the Seller Parties resulting from a breach of the representations and warranties of the Acquisition Sub set forth in Article III; (ii) any Losses incurred by the Seller Parties resulting from the operations of Acquisition Sub and/or use of the Assets subsequent to the Closing; (iii) any Losses incurred by the Seller Parties resulting from the Assumed Liabilities (except that with respect to an indemnification event which requires Buyers to make payment directly to Seller Parties, Buyers shall be entitled to exercise a right of setoff against amounts which the Seller Parties owe to Buyers pursuant to the provisions of Section 6.3, regardless of the time limitations set forth in Section 6.4); (iv) all Indemnifiable Income Taxes (as hereafter defined) with respect to the portion of the year 2000 commencing on January 1, 2000 and ending on the day immediately prior to the Closing Date (the "2000 Stub Year") and for calendar years 1999 and prior. As used herein, the term "Indemnifiable Income Taxes" means 80% of the income Taxes payable by such Seller Party (assuming a 43% combined Federal and state tax rate) solely as a result of any error by the Company that does not constitute a knowing and willful error (including any adjustment resulting from an audit) in computing its taxable income for the period in question. Without limiting the foregoing, "Indemnifiable Income Taxes" (A) will not include failures by the Company to distribute sufficient cash to pay taxes; (B) will not include misallocation of taxable income among the 30 31 shareholders of the Company; and (C) will be offset and reduced by any income Tax benefit (any refund or reduction of Taxes payable) of such Seller Party as a result of an error by the Company or as a result of increased basis in such Seller Party's capital stock of the Company resulting solely from any error that gives rise to an Indemnifiable Income Tax; and (v) any Losses incurred by the Seller Parties arising from the Company's or Buyers' licensing, sale, offers to sell or license, or any other use or exploitation of, the Intellectual Property, together with all improvements, enhancements, modifications or other derivative works based in whole or in part thereon, whether such uses occurred prior to the Closing or subsequent to the Closing (except that with respect to an indemnification event which requires Buyers to make payment directly to Seller Parties, Buyers shall be entitled to exercise a right of setoff against amounts which the Seller Parties owe to Buyers pursuant to the provisions of Section 6.3 below, regardless of the time limitations set forth in Section 6.4 below). (b) Limitations. (i) The amount of Assumed Liabilities for which PSC shall be liable under Subsection 6.1(a)(iii) above shall not exceed the sum of (A) all distributions and dividends (whether in cash or property) from Acquisition Sub to PSC or any affiliate of PSC (other than Acquisition Sub) and the difference between the tangible, monetary benefit received by PSC (or any affiliate of PSC)(other than Acquisition Sub) from any transactions between PSC (or any affiliate of PSC) (other than Acquisition Sub) and Acquisition Sub and the fair market value of any such transaction and (B) any other assets transferred from the Company to PSC (other than as contemplated in this Agreement) upon consummation of the transactions contemplated hereunder (the foregoing to have no effect on Acquisition Sub's obligations under Section 6.1). (ii) In no event will the obligation of the Buyers to indemnify the Principal Shareholder for the Assumed Liabilities set forth in Section 1.3(d) exceed $5,000,000. (iii) In no event shall the aggregate amount for which the Buyers are liable under Section 6.1(a)(iv) for the years 1999 and prior exceed $2,000,000, nor shall Buyers have any indemnification obligation under Section 6.1(a)(iv) if, and to the extent that, the Company had Knowledge of such Indemnifiable Income Taxes prior to the Closing (as such knowledge as defined in Section 7.10 hereof). 31 32 (iv) In no event will Buyers have any obligation to indemnify Seller Parties for any Losses which are covered, to the extent covered, by insurance (excluding special purpose insurance purchased by Seller Parties (other than the Company prior to the Closing) for the express purpose of insuring risks related to this Agreement) or for which the Sellers collect claims against third parties (including, without limitation, rights of contribution or indemnification). Buyers will have no obligation to indemnify for any Loss under more than one subsection of Section 6.1(a). Notwithstanding the foregoing, the Seller Parties will not be entitled to indemnification with respect to any Claim (as defined in Section 6.6) in excess of the amount of the Loss, net of insurance recoveries or recoveries from third parties, if any, actually incurred by Seller Parties with respect to such Claim. (v) Buyers will not assert in any manner whatsoever adverse to a claim for indemnification by a Seller Party under the terms of this Article VI the breach or alleged breach of any representation or warranty in Article II, except that the foregoing will not limit the right of Buyers to indemnity under this Article VI or the right of Buyers to set off under Section 6.1(a)(iii) or 6.1(a)(v). 6.2 Indemnification for Excluded Liabilities. The Company shall indemnify and hold harmless Acquisition Sub for any Losses Acquisition Sub may suffer or incur as a result of or relating to the Excluded Liabilities set forth in Section 1.4(a). 6.3 Indemnification of Acquisition Sub. (a) Subject to the limitations set forth in Sections 6.3(b) and 6.3(c) below, the Shareholders and the persons holding options as of the date hereof to purchase capital stock of the Company (the "Optionholders") (collectively, the "Obligors") shall indemnify and hold harmless Acquisition Sub against the following Losses (collectively, the "Acquisition Subs' Indemnifiable Sum"): (i) any Losses incurred by Acquisition Sub resulting from a breach of the representations and warranties of the Company set forth in Article II; (ii) any shortfall in the actual shareholders equity of the Company as of February 29, 2000 (as determined in a manner consistent with the Company's past accounting practices) (the "Actual Shareholders Equity") below the Applicable Shareholders Equity (as hereinafter defined) (the "Shareholders Equity Shortfall"); provided, that Acquisition Sub will not be entitled to indemnification unless the amount of the Shareholders Equity Shortfall is at least $100,000, in which event the amount to be indemnified will equal the sum of $50,000 plus the amount of the Shareholders Equity Shortfall in excess of $100,000, where "Applicable Shareholders Equity" 32 33 means the Shareholders Equity Benchmark (as defined in Section 5.1(h)) (unless the shareholders equity shown on the Shareholders Equity Statement is less than the Shareholders Equity Benchmark, in which event the "Applicable Shareholders Equity" shall equal the shareholders equity shown on the Shareholders Equity Statement); and (iii) any shortfall in the actual working capital of the Company as of February 29, 2000 (as determined in a manner consistent with the Company's past accounting practices) (the "Actual Working Capital") below the Applicable Working Capital (as herein defined) (the "Working Capital Shortfall"); provided, that Acquisition Sub will not be entitled to indemnification unless the amount of the Working Capital Shortfall is at least $500,000, in which event the amount to be indemnified will equal $250,000 plus the amount of the Working Capital Shortfall in excess of $500,000, where "Applicable Working Capital" means the Working Capital Benchmark (as defined in Section 5.1(i) below) (unless the working capital shown on the Working Capital Statement is less than the Working Capital Benchmark, in which event the "Applicable Working Capital" shall equal the working capital shown on the Working Capital Statement). The Acquisition Subs' Indemnifiable Sum will not include any Losses to the extent covered, by insurance (excluding special purpose insurance purchased by Buyers for the express purpose of insuring risks related to this Agreement) or for which the Buyers collect claims against third parties (including, without limitation, rights of contribution or indemnification). The Obligors will have no obligation to indemnify for any Loss under more than one subsection of this Section 6.3(a). Notwithstanding the foregoing, the Acquisition Sub will not be entitled to indemnification with respect to any Claim in excess of the amount of the Loss, net of insurance recoveries or recoveries from third parties if any, actually incurred by Acquisition Sub with respect to such Claim. (b) Several Obligations. The obligations of the Obligors under this Section 6.3 shall be several (and not joint) as follows: Principal Shareholder 32.5% SBF 32.5% Other Shareholders 18.0% SCI Optionholders 17.0% The obligations of each Obligor within each classification set forth above shall also be several (and not joint). The allocation of liability among the Other Shareholders shall be based upon the number of shares of common stock of the Company owned by each Other Shareholder as of the Closing; and the allocation of liability among the SCI Optionholders shall be based upon the Consideration paid to each such SCI Optionholder in such SCI Optionholder's capacity as such. 33 34 (c) Limitation on Amount. (i) The Obligors shall have no obligation to pay any Acquisition Subs' Indemnifiable Sum unless and until the aggregate Acquisition Subs' Indemnifiable Sum exceeds $2,000,000 (the "Threshold Indemnifiable Amount"), and then only to the extent that the Acquisition Subs' Indemnifiable Sum exceeds the Threshold Indemnifiable Amount. (ii) In no event shall the maximum liability of the Obligors collectively under this Article VI exceed Five Million Dollars ($5,000,000) (the "Collective Maximum Liability"). Accordingly, the maximum liability of each Obligor under this Article VI (the "Individual Maximum Liability") shall not exceed the Obligor's proportionate share of liability as determined in accordance with Section 6.3(b) multiplied by the Collective Maximum Liability (e.g., the Principal Shareholder's maximum liability under this Article VI shall not exceed $1,625,000 (32.5% of $5,000,000)). (iii) Notwithstanding the foregoing: (A) the Principal Shareholder shall be liable on a first dollar basis, and without regard to the Threshold Indemnifiable Amount or the Individual Maximum Liability, for Acquisition Subs' Indemnifiable Amounts arising under Section 6.3(a)(i) if and to the extent that the Principal Shareholder or WRM (as defined in Section 7.10) had actual knowledge (with no duty to investigate) of the inaccuracy of the applicable representation or warranty and, with fraudulent intent, allowed the Company to make such inaccurate representation or warranty. Principal Shareholder acknowledges that for the purposes of this Section 6.3(c)(iii)(A) an inaccuracy of any applicable representation and warranty is material and in an action based on this Section 6.3(c)(iii)(A), reliance on an applicable representation or warranty is justified and Principal Shareholder will not assert to the contrary as a defense. (B) SBF (as defined in Section 7.10) shall be liable on a first dollar basis, and without regard to the Threshold Indemnifiable Amount or the Individual Maximum Liability, for Acquisition Subs' Indemnifiable Amounts arising under Section 6.3(a)(i) if and to the extent that SBF had actual knowledge (with no duty to investigate) of the inaccuracy of the applicable representation or warranty and, with fraudulent intent, allowed the Company to make such inaccurate representation or warranty. SBF acknowledges that for the purposes of this Section 6.3(c)(iii)(B) an inaccuracy of any applicable representation and warranty is material and in an action based on this Section 6.3(c)(iii)(B) reliance on an applicable 34 35 representation or warranty is justified and SBF will not assert to the contrary as a defense. 6.4 Survival. The representations and warranties of the Company and Acquisition Sub made in or pursuant to this Agreement will survive the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement until March 31, 2001 ("Survival Deadline"); provided that any representation or warranty the violation of which is made the basis of a claim for indemnification pursuant to Section 6.1(a)(i) or Section 6.3(a)(i) will survive until such claim is finally resolved if the party to be indemnified notifies the indemnifying party of such claim in reasonable detail prior to the date on which such representation or warranty would otherwise expire under this Agreement. No claim for indemnification pursuant to Section 6.1(a)(i) or Section 6.3(a)(i) may be asserted by a party after the Survival Deadline. No claim under Section 6.3(a)(ii) or 6.3(a)(iii) may be made later than ninety (90) days after the Closing. Subject to the foregoing, all rights and obligations of all parties referenced in this Article VI will survive without limitation. 6.5 Exclusivity. (a) The representations and warranties (and the related Schedules thereto) set forth herein and in the closing certificates referenced in Sections 5.1(a) and 5.2(a) (the "Closing Certificates") are the sole and exclusive representations and warranties made by the Buyers and Sellers in connection with the transactions contemplated by this Agreement. Neither Buyers nor Sellers shall be deemed to have made any representation or warranty other than as expressly made herein or in the Closing Certificates, as applicable. Without limiting the foregoing, and notwithstanding any otherwise express representations and warranties made herein or in the Closing Certificates, as applicable, neither Buyers nor Sellers make any representation or warranty with respect to any other information or documents (financial or otherwise) made available to the other party or its counsel, accountants, advisors, or representatives. (b) Except as otherwise expressly referred to in Section 4.24, the rights under this Article VI are the sole and exclusive remedies of the parties under this Agreement for any breach of any representation or warranty under this Agreement or for any misstatement of fact or omission to state any fact in connection with this Agreement and the transactions contemplated by this Agreement. 6.6 Notice. Any party entitled to receive indemnification under this Article VI (the "Indemnified Party") agrees to give prompt written notice to the party or parties required to provide such indemnification (the "Indemnifying Parties") upon the occurrence of any indemnifiable Loss or the assertion of any claim or the commencement of any action or proceeding in respect of which such a Loss may reasonably be expected to occur (a "Claim"), but the Indemnified Party's failure to give such notice will not affect the obligations of the Indemnifying Party under this Article VI except to the extent that the Indemnifying Party is materially prejudiced thereby. Such 35 36 written notice will include a reference to the event or events forming the basis of such Loss or Claim and the amount involved, unless such amount is uncertain or contingent, in which event the Indemnified Party will give a later written notice when the amount becomes fixed. 6.7 Defense of Claims. Buyers shall assume and control the defense of any Claims, including the employment of counsel reasonably satisfactory to the Obligors and the payment of expenses relating to such Claim, pending indemnification as provided herein, if applicable. No Buyer shall settle any Claim for which it will seek indemnification under Section 6.3(a) without the Principal Shareholder's consent (which consent shall not be unreasonably withheld) (and SBF's approval, if Acquisition Sub asserts or intends to assert that the Maximum Liability with respect to SBF is inapplicable), and the Obligors may employ separate counsel and participate in the defense of such Claim (but Buyers will not be responsible for the fees and expenses of such counsel). 6.8 Miscellaneous. Except as expressly set forth in this Article VI, no third party shall have any rights under this Article VI or be subrogated to any party's rights hereunder. ARTICLE VII MISCELLANEOUS 7.1 Termination. This Agreement and the transactions contemplated by this Agreement may be terminated and abandoned (a) at any time prior to the Closing by mutual written consent of Buyers and Sellers; or (b) by either Buyer, on the one hand, or Sellers, on the other hand, if a condition to performance by the terminating party under this Agreement has not been satisfied or waived prior to April 30, 2000; or (c) by Buyers, on the one hand, or Sellers, on the other hand, at any time, if there is pending or threatened litigation in any court or any proceeding before or by any Governmental Body to restrain or prohibit or obtain damages or other relief with respect to this Agreement or the consummation of the transactions contemplated by this Agreement or as a result of which Buyers could be required to dispose of any assets or operations of Buyers (including any assets or operations acquired or to be acquired from the Company) or their affiliates or to comply with any restriction on the manner in which Buyers or their affiliates conduct their operations (including any operations acquired or to be acquired from the Company); provided that (i) Buyers may not terminate this Agreement if the Closing has not occurred because of Buyers' failure to perform or observe any of its covenants or agreements set forth in this Agreement or if Buyers are, at such time, in breach of this Agreement, and (ii) Sellers may not terminate this Agreement if the Closing has not occurred because of Sellers' failure to perform or observe any of their respective covenants or agreements set forth in this Agreement or if any of Sellers is, at such time, in breach of this Agreement. 7.2 Notices. All notices that are required or may be given pursuant to this Agreement must be in writing and delivered personally, by a recognized courier service, by 36 37 a recognized overnight delivery service, by telecopy or by registered or certified mail, postage prepaid, to the parties at the following addresses (or to the attention of such other person or such other address as any party may provide to the other parties by notice in accordance with this Section 7.2):
if to Buyers: with copies to: ------------ -------------- PSSC Acquisition Corporation Hughes & Luce, L.L.P. 12404 Park Central Drive 1717 Main Street Dallas, Texas 75251 Suite 2800 Attn: John Harper Dallas, Texas 75201 Telecopy: (972) 340-6100 Attention: Glen J. Hettinger, Esq. Telecopy: (214) 939-5849 Perot Systems Corporation Hughes & Luce, L.L.P. 12404 Park Central Drive 1717 Main Street Dallas, Texas 75251 Suite 2800 Attn: Peter Altabef Dallas, Texas 75201 Telecopy: (972) 340-6085 Attention: Glen J. Hettinger, Esq. Telecopy: (214) 939-5849 if to Sellers: with copies to: ------------- -------------- Solutions Consulting, Inc. Solution Consulting, Inc. 370 Southpointe Blvd. 370 Southpointe Blvd. Canonsburg, Pennsylvania 15317 Canonsburg, Pennsylvania 15317 Attn: Sanford B. Ferguson Attn: William R. Miller, Esq. Telecopy: (724) 746-9247 Telecopy: (724) 746-9247 and Kirkpatrick & Lockhart LLP 1500 Oliver Bldg. Pittsburgh, Pennsylvania 15222 Attn: David J. Lehman, Esq. Telecopy: (412) 355-6501
Any such notice or other communication will be deemed to have been given and received (whether actually received or not) on the day it is personally delivered or delivered by courier or overnight delivery service or sent by telecopy or, if mailed, when actually received. 7.3 Attorneys' Fees and Costs. If attorneys' fees or other costs are incurred to secure performance of any obligations under this Agreement, or to establish damages for 37 38 the breach thereof or to obtain any other appropriate relief, whether by way of prosecution or defense, the prevailing party will be entitled to recover reasonable attorneys' fees and costs incurred in connection therewith. 7.4 Further Assurances. Each party agrees to execute any and all documents and to perform such other acts as may be necessary or expedient to further the purposes of this Agreement and the transactions contemplated by this Agreement. Without limiting the foregoing, the Company will execute and deliver to Acquisition Sub such further instruments of conveyance and transfer as Acquisition Sub may reasonably request in order more effectively to convey and transfer the Assets to Acquisition Sub and to put Acquisition Sub in operational control of the business of the Company, or for aiding, assisting, collecting, and reducing to possession any of the Assets and exercising rights with respect to the Assets. 7.5 Counterparts. This Agreement may be executed in one or more counterparts for the convenience of the parties, all of which together will constitute one and the same instrument. 7.6 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and will not in any way affect the meaning or interpretation of this Agreement. References in this Agreement to Articles, Sections, Exhibits, and Schedules are to the Articles, Sections, Exhibits, and Schedules of this Agreement unless the context requires otherwise. Any matter referred to in a Schedule in Article II will be deemed to be incorporated into all other Schedules to Article II and to have been disclosed to Buyers. 7.7 Successors and Assigns; Assignment. This Agreement will bind and inure to the benefit of the parties named in this Agreement and their respective successors and assigns. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned or delegated by any of Sellers or Buyers without the prior written consent of the other parties and any purported assignment or delegation will be null and void; except that Buyers may assign its rights under this Agreement to any direct or indirect wholly-owned subsidiary of PSC. This Agreement is not intended to confer any rights or benefits on any Person other than the parties to this Agreement, and to the extent provided in Article VI, the Buyer Parties and the Seller Parties; provided, that parties to the Joinder will be deemed to be third party beneficiaries to the covenant set forth in Section 4.28. 7.8 Entire Agreement. (a) This Agreement, the Buyer Documents, the Seller Documents, and the related documents contained as Schedules to this Agreement or expressly contemplated by this Agreement contain the entire understanding of the parties relating to the subject matter of this Agreement and supersede all prior written or oral and all contemporaneous oral agreements and understandings relating to the 38 39 subject matter of this Agreement. This Agreement may not be modified or amended except in writing signed by the party against whom enforcement is sought. The Schedules to this Agreement are hereby incorporated by reference into and made a part of this Agreement for all purposes. (b) Each Seller acknowledges that: (i) it has had the opportunity to visit with the Buyers and meet with the officers and other representatives of the Buyers to discuss the business and the financial condition and operations of the Buyers, and (ii) all materials and information requested by each Seller have been provided to each Sellers' reasonable satisfaction. (c) Each Seller acknowledges that it has made its own independent examination, investigation, analysis and evaluation of the Buyers. (d) Each Seller acknowledges that it has undertaken such due diligence concerning the Buyers, including, without limitation, a review of the financial statements and other information available from the public filings of PSC with the SEC. 7.9 Specific Performance. The parties hereby acknowledge and agree that the failure of any party to perform its agreements and covenants under this Agreement, including its failure to take all required actions on its part necessary to consummate the transactions contemplated by this Agreement, will cause irreparable injury to the other parties for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to compel performance of such party's obligations and to the granting by any court of the remedy of specific performance of its obligations under this Agreement. 7.10 Knowledge. As used in this Agreement, "Company's Knowledge" means within the actual knowledge (without any duty to investigate) of the Principal Shareholder, SBF, William R. Miller ("WRM"), Jennifer Gula, P. --- Edward Muller, and Arthur Valentine. 7.11 Governing Law. This Agreement will be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. 7.12 Drafting. Neither this Agreement nor any provision contained in this Agreement will be interpreted in favor of or against any party hereto because such party or its legal counsel drafted this Agreement or such provision. 39 40 7.13 Usage. Whenever the plural form of a word is used in this Agreement, that word will include the singular form of that word. Whenever the singular form of a word is used in this Agreement, that word will include the plural form of that word. The term "or" will not be interpreted as excluding any of the items described. The term "include" or any derivative of such term does not mean that the items following such term are the only types of such items. 7.14 Arbitration. Any controversy, dispute, or claim arising under this Agreement will be finally settled by arbitration conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date of this Agreement. Notwithstanding any provision of the American Arbitration Association Commercial Arbitration Rules, any such arbitration will be conducted before and decided by three (3) arbitrators. The parties to the arbitration will request that the American Arbitration Association provide the parties with a list of seven (7) potential arbitrators composed of individuals that are former judges of the Chancery Court for the State of Delaware or the federal courts of such state. Each party will then strike from the list (taking turns, beginning with PSC) two (2) names. After the rights to strike are exercised, the individuals remaining on the list will be the arbitrators. Any such arbitration will take place in the City of Wilmington, Delaware. The arbitrators in any such arbitration will apply the laws of the State of Delaware and the United States of America. In any arbitration under this Agreement, this Agreement will be deemed to have been made in, and will be governed by and construed under the laws of, the State of Delaware and the United States of America. Any decision rendered by the arbitrators will be final and binding and judgment thereon may be entered in any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. The parties intend that this agreement to arbitrate be irrevocable and the exclusive means of settling all disputes under this Agreement, whether for money damages or equitable relief. If arbitration is invoked in accordance with the provisions of this Agreement, the prevailing party in the arbitration will be entitled to recover from the other all costs, fees, and expenses pertaining or attributable to such arbitration, including reasonable attorneys' fees. 7.15 Partial Invalidity. Wherever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained in this Agreement will, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such provision will be ineffective to the extent, but only to the extent, of such invalidity, illegality, or unenforceability without invalidating the remainder of such invalid, illegal, or unenforceable provision or provisions or any other provisions of this Agreement, unless such a construction would be unreasonable. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 40 41 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PEROT SYSTEMS CORPORATION By: /s/ PETER ALTABEF ----------------------------------- Name: Peter Altabef Title: Vice President and General Counsel PSSC ACQUISITION CORPORATION By: /s/ JOHN E. HARPER ----------------------------------- Name: John E. Harper Title: Vice President and Treasurer SOLUTIONS CONSULTING, INC. By: /s/ MARK G. MILLER ----------------------------------- Name: Mark G. Miller Title: Chief Executive Officer /s/ MARK G. MILLER -------------------------------------------- MARK G. MILLER /s/ SANFORD B. FERGUSON -------------------------------------------- SANFORD B. FERGUSON 41 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF SUBSIDIARY INCORPORATION Applewhite & Gittleson California Benton International, Inc. California Deutsche Perot Systems GmbH Germany Icarus Consulting A.G. Switzerland Icarus Consulting GmbH Germany perot.com inc. Delaware Perot Systems A.G. Switzerland Perot Systems Asia Pacific Pte Ltd. Singapore Perot Systems, B.V. The Netherlands Perot Systems (Canada) Corporation Canada Perot Systems Communication Services, Inc. Delaware Perot Systems Europe (Energy Services) Limited United Kingdom Perot Systems Europe Limited United Kingdom Perot Systems Financial Services Corporation Delaware Perot Systems Healthcare Services Corporation Delaware Perot Systems Holdings Pte Ltd. Singapore Perot Systems International, Inc. Delaware Perot Systems Investments B.V. The Netherlands Perot Systems Investments Limited United Kingdom Perot Systems Investments No. 2 Limited United Kingdom Perot Systems (Japan) Ltd. Japan Perot Systems Luxembourg S.a.r.l. Luxembourg Perot Systems Monaco S.A.M. Monaco Perot Systems S.A. France Persys Ireland Limited Ireland PS Information Resource (Ireland) Limited Ireland PSC Government Services Corporation Delaware PSC Health Care, Inc. Delaware PSSC Acquisition Corporation Delaware RothWell International, Inc. Texas Security Services, Inc. d/b/a Park Central Security Services, Inc. Delaware Stamos Associates Inc. California Syllogic Ireland Limited Ireland Syllogic B.V. The Netherlands The Technical Resource Connection, Inc. Delaware Time 0 Inc. Delaware TXZ North America, Inc. Delaware
EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Perot Systems Corporation on Form S-3 (File No. 333-82869), Form S-4 (File No. 333-30068) and Forms S-8 (File Nos. 333-30401, 333-70267 and 333-31278) of our reports dated February 8, 2000 on our audits of the consolidated financial statements and financial statement schedule of Perot Systems Corporation and Subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which reports are included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Dallas, Texas March 3, 2000 EX-23.2 6 REPORT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Perot Systems Corporation: Our report on the consolidated financial statements of Perot Systems Corporation and Subsidiaries is included herein. In connection with our audits of such financial statements, we have also audited the related financial statement schedule of Perot Systems Corporation and Subsidiaries. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP Dallas, Texas February 8, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 294,645 39,938 160,813 4,059 0 542,497 116,374 77,409 613,965 216,229 0 0 0 926 389,796 613,965 1,151,553 1,151,553 875,779 1,044,955 650 0 423 125,829 50,332 0 0 0 0 75,497 .85 .67
EX-99.(A) 8 SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS 1 EXHIBIT 99(a) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR UNCOLLECTIBLES (dollars in thousands)
Balance at Balance at beginning of Deductions end of period Additions (Write-offs) period --------- ----------- ------------ ------------- December 31, 1999...................... $ 1,353 $ 7,681 $ 4,975 $ 4,059 December 31, 1998...................... $ 1,185 $ 8,653 $ 8,485 $ 1,353 December 31, 1997...................... $ 6,787 $ 1,167 $ 6,769 $ 1,185
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