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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
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Commission File Number 0-22495
PEROT SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2230700
(State of incorporation) (I.R.S. Employer Identification No.)
12377 MERIT DRIVE, SUITE 1100 75251
DALLAS, TEXAS
(Address of Principal Executive Offices) (Zip Code)
(972) 383-5600
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
Par Value $0.01 per share
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. [ ]
There is no public market for the registrant's common equity.
The number of shares outstanding of the registrant's common stock as of March
16, 1998 was 38,074,639.
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held May 8, 1998 are
incorporated by reference into Part III.
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FORM 10-K
For The Year Ended December 31, 1997
INDEX
Part I
Item 1. Business ...................................................................... 1
Item 2. Properties .................................................................... 5
Item 3. Legal Proceedings ............................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders ........................... 6
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters .................................................................... 6
Item 6. Selected Financial Data ....................................................... 7
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition ..................................................... 8
Item 8. Financial Statements and Supplementary Data ................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures .................................................. 13
Part III
Item 10. Directors and Executive Officers of the Registrant ............................. 13
Item 11. Executive Compensation ......................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management ................. 13
Item 13. Certain Relationships and Related Transactions ................................. 13
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................ 14
Signatures .................................................................................. 16
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ITEM 1. BUSINESS
Perot Systems Corporation (the "Company") was founded as a Texas
corporation on June 1, 1988 by Ross Perot and eight business associates. The
Company reincorporated in Delaware in December 1995. With offices located
throughout North America, Europe and Asia, the Company is a worldwide provider
of business and information technology ("IT") services and solutions. The
Company provides business and IT solutions for clients in the financial
services, healthcare, energy, telecommunications, transportation, manufacturing,
retail, travel and leisure, and other industries.
SERVICES
The Company pursues opportunities to provide its services under
long-term contracts and on shorter-term systems integration, development and
consulting projects. The benefits of this approach include more efficient use of
staff between large engagements, the assimilation of new industry expertise and
diversification of the Company's client base. The Company's service offerings
include the following:
Systems Integration - The Company designs and implements IT systems for
clients, including constructing network architectures, integrating system
components and implementing the migration of application systems to new
platforms.
Systems Operation - The Company manages, operates and maintains client
data processing systems, including networks, desktop computing environments,
data centers, print centers and support functions.
Technical Consulting - The Company assists clients with strategic
decisions regarding platforms, networks and delivery media, the development of
overall architectures for IT systems, the selection of vendors and planning
transitions from one platform, technology or application to another.
Business Consulting - The Company assists clients with business
strategies, including evaluations and design of organizational structures,
management of major change events, operational processes and reengineering of
clients' operational processes.
Software Development - The Company develops application software
solutions for its clients.
MARKETS
The Company conducts its business and provides its services in North
America, Europe and Asia through a combination of industry groups,
geographically based project offices, consulting groups and groups providing
specialized services.
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Industry groups focus on delivering services, which are customized to
the particular client and are designed by business and technical experts with
extensive knowledge of the group's industry. The industry groups package and
deliver services using skills and technologies within the industry group may
also utilize resources from other specialized groups in the Company, in order to
bring expanded technical and industry skills to the client engagement. The
Company's industry groups include the following:
Global Financial Services: The Global Financial Services group serves
wholesale, commercial and retail banks, investment banks, brokerage firms and
other financial institutions. The Global Financial Services group helps clients
understand and capitalize on emerging market opportunities, including the
support of global infrastructure systems, electronic commerce over the internet,
customer relationship management and state-of-the-art trading and settlement
systems.
Healthcare: The Healthcare group serves managed care networks, hospital
groups, healthcare product distributors and other healthcare companies. The
Healthcare group's services emphasize the creation of integrated health networks
with the tools to manage and evaluate care, cost and quality outcomes. The
Healthcare group assists its clients with information access and connectivity to
provide tools for transaction management, care management, decision support and
internet-based demand management systems.
Energy: The Energy group serves municipal and private utilities,
related service providers, and other energy companies and emerging competitive
market entities. The Energy group helps clients transform their businesses to
commercially driven, open-competition models. In addition, the Energy group is
actively involved in the creation and management of power exchange and
independent service operations projects.
Communications and Media: The Communications and Media group serves
providers of voice, data, image, video, entertainment, media and information
services through wireless and wireline networks. The Communications and Media
group assists its clients with business strategy, billing, online and customer
care programs, quality assurance and testing, and customer revenue enhancement
programs.
Manufacturing: The Manufacturing group serves a variety of
manufacturing clients, including companies in the automobile manufacturing,
automobile parts manufacturing, steel and plastics businesses. The group
provides industry-specific solutions, including supply chain management,
planning and scheduling, order management and assistance with warehousing,
distribution, production and finance applications.
Travel & Transportation: The Travel and Transportation group serves
rental car companies, airlines, travel agencies and other companies in the
travel and transportation industry. This group provides its clients with
expertise in business planning, reservations systems, inventory and asset
management, customer service, billing, communications and quality assurance.
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The Company has project offices in Dallas, Texas, Detroit, Michigan,
Reston, Virginia, Denver, Colorado, Atlanta, Georgia, Tampa, Florida, London,
England, Houten, Netherlands and Munich, Germany. The project offices provide
services to a wide range of clients and also provide support to the industry
groups. The project offices typically pursue shorter-term systems integration,
software development and technical consulting projects. The Company's
object-oriented group also markets and delivers its services directly to
clients.
The Company's business consulting groups market and deliver their
services directly to clients and as part of integrated service offerings by the
Company. In addition, the Company has business consulting groups that provide
leading edge services which assist clients in transforming their business,
markets and processes.
In addition, the Company has e-commerce and object oriented groups that
market and deliver their services directly to clients and support the design and
delivery of services by other groups.
RELIANCE ON MAJOR CLIENTS
In January 1996, the Company formed a strategic alliance with Swiss
Bank Corporation ("Swiss Bank"). This alliance involves (i) a long-term contract
for the Company to deliver IT services to Swiss Bank's SBC Warburg Division
("SBC Warburg"), (ii) separate agreements to provide services to other Swiss
Bank operating units and to permit the Company to use certain Swiss Bank assets
and (iii) the grant to Swiss Bank of options to acquire stock of the Company.
In April 1997, the Company concluded the renegotiation of the terms of
its strategic alliance with Swiss Bank. The terms of the new alliance were
effective from January 1, 1997 through December 31, 2006. The renegotiation
included (i) the restructuring of the IT services contract for SBC Warburg, (ii)
the termination of all options to acquire stock of the Company that were granted
in connection with the original transactions and (iii) the sale to Swiss Bank of
stock of the Company and options to purchase stock of the Company. The
agreements that contain the terms of the Swiss Bank alliance, as renegotiated,
are collectively called the "Swiss Bank Agreements". Pursuant to the terms of
the Swiss Bank Agreements, the Company also holds a 40% stake in Swiss Bank's IT
subsidiary, Systor AG ("Systor"). A portion of the Company's interest in Systor
will be returned to Swiss Bank if the SBC Warburg EPI Agreement is terminated.
The portion that would be returned to Swiss Bank upon such a termination
declines ratably over a 10-year period, which began on January 1, 1997.
During the year ended December 31, 1997, approximately 27% of the
Company's revenues were earned in connection with services performed on behalf
of Swiss Bank and its affiliates. If certain competitors of Swiss Bank acquire
more than 25% of the shares of Class A Common Stock of the Company ("Class A
Common Stock," and such shares, "Class A Shares") or another party (other than
an affiliate of Ross Perot) acquires more than 50% of the Class A Shares and, if
in either case, that acquisition is reasonably likely to have a significant
adverse impact on the performance of or the charges for the services
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rendered by the Company, Swiss Bank has the right to terminate the Swiss Bank
Agreements. The loss of Swiss Bank as a client would have a material adverse
effect on the Company's business, financial condition and results of operations.
During the year ended December 31, 1997, approximately 10% of the
Company's revenues were earned in connection with services performed on behalf
of East Midlands Electricity (EME). The loss of this client could have a
material adverse effect on the Company's business, financial condition and
results of operations. No other client accounted for more than 10% of the
Company's revenue.
COMPETITION
The Company's markets are intensely competitive and are characterized
by continuous changes in customer requirements and the technology available to
satisfy those requirements. The Company has a small share of the
highly-fragmented IT services market.
With respect to large contracts, the Company's principal competitors
include International Business Machines Corporation, Andersen Consulting
LLP, Computer Sciences Corporation and Electronic Data Systems Corporation. Each
of these companies, as well as some other competitors, has greater financial
resources and a larger customer base than the Company and may have larger
technical, sales and marketing resources than the Company. The Company expects
to see additional competition as it addresses new markets and as the computing
and communications markets converge. The Company competes on the basis of a
number of factors both within and outside of its control, including price,
technological innovation, ability to invest in or acquire assets of potential
customers and strategic relationships with customers and suppliers. There can be
no assurance that the Company will be able to compete successfully against its
current or future competitors with respect to these or other factors in the
future. In addition, there can be no assurance that competition will not have a
material adverse effect on the Company's results of operations.
INFORMATION REGARDING GEOGRAPHIC REGIONS
For information regarding geographic regions in which the Company
operates, see Note 12 to the Consolidated Financial Statements, "Certain
Geographic Data and Segment Information."
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company owns or has obtained licenses for a number of copyrights
and trademarks relating to its products and services. The Company does not
believe that any particular copyright, trademark or group of copyrights and
trademarks is of material importance to the Company's business taken as a whole.
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EMPLOYEES
As of December 31, 1997, the Company employed approximately 5,500
persons located in the United States and several other countries. None of the
Company's United States employees are currently employed under an agreement with
a collective bargaining unit. The Company's employees in France and Germany are
generally members of work councils and have worker representatives. These
representatives must be consulted on any major change in operations that affects
such employees. The Company believes that its relations with employees are good.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company had approximately 40 locations in
the United States and five countries outside the United States. The Company owns
no real estate. The Company leases approximately 1.1 million square feet of
office and warehouse facilities. Current leases have expiration dates that range
from 1998 to 2012. 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 customer locations throughout the world. Such space is
generally occupied pursuant to the terms of the respective customer contract.
The Company's management believes that its facilities are suitable and
adequate for its business. However, the Company has plans for expansion and is
currently negotiating for expanded facilities for several of its locations. The
Company does not anticipate any difficulty in obtaining sufficient space to
accommodate the planned expansion.
OPERATING LEASES AND MAINTENANCE AGREEMENTS
The Company has commitments related to data processing facilities,
office space and computer equipment under non-cancelable operating leases and
fixed maintenance agreements for periods ranging from one to ten years. Future
minimum commitments under these agreements as of December 31, 1997 are disclosed
in Note 13 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various litigation
matters arising in the ordinary course of its business. The Company believes
that the resolution of currently pending legal proceedings, either individually
or taken as a whole, will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the registrant's
securities. As of March 16, 1998, there were 1,196 holders of record of the
Class A common stock and one (1) holder of the Class B common stock.
The Company has never paid cash dividends on its common stock. The
Company currently intends to retain earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected consolidated historical financial data as of and
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 is unaudited
but has been derived from the Company's Consolidated Financial Statements, which
have been audited by Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), independent
auditors. The Company has retained Coopers & Lybrand as its auditors for each of
the five years listed in the table below. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Company's Consolidated Financial Statements and
the Notes to the Consolidated Financial Statements, which are included herein.
As of and for the years ended December 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in millions, except per share data)
OPERATING RESULTS:
Contract revenue $ 781.6 $ 599.4 $ 342.3 $ 292.2 $ 291.7
Direct cost of services 636.3 461.2 268.6 246.1 251.1
Operating income (loss) 17.6 41.3 20.9 10.9 (19.7)
Income (loss) before taxes 19.5 40.2 20.3 10.1 (22.4)
Net income (loss) 11.2 20.5 10.8 6.3 (14.5)
Basic earnings (loss) per share (3) $ 0.29 $ 0.54 $ 0.33 $ 0.19 $ (0.51)
Diluted earnings (loss) per share (3) $ 0.24 $ 0.48 $ 0.31 $ 0.18 $ (0.51)
NON-RECURRING ITEMS - OPERATING:
Contract loss provisions (1) $ 10.2 -- -- -- $ 19.3
Write-off of purchased R&D 2.0 $ 3.9 -- -- --
Write-off of intellectual property rights 3.6 -- -- -- --
------- ------- ------- ------- -------
Total non-recurring items - operating $ 15.8 $ 3.9 -- -- $ 19.3
======= ======= ======= ======= =======
NON-RECURRING ITEMS - NON-OPERATING:
Write-down of non-marketable
equity securities $ 3.9 -- -- -- --
------- ------- ------- ------- -------
Total non-recurring items - non-operating $ 3.9 -- -- -- --
======= ======= ======= ======= =======
TOTAL NON-RECURRING ITEMS - ALL $ 19.7 $ 3.9 -- -- $ 19.3
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents $ 35.3 $ 27.5 $ 17.4 $ 9.2 $ 26.9
Total assets 267.1 232.2 130.5 91.2 122.1
Long-term debt (2) 2.9 5.2 6.1 10.0 18.7
(1) During 1997, the Company recorded a charge to earnings to recognize losses
on certain long-term contracts primarily due to probable contract
termination costs. During 1993, the Company recorded a charge to earnings
reversing amounts previously recognized as recoverable costs under the
percentage-of-completion method of accounting in recognition of delays and
cost overruns related to the development of a software application for a
client.
(2) Represents capital lease obligations.
(3) Years 1993 to 1996 are restated for the effect of Statement of Financial
Accounting Standards No. 128, "Earnings per share."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements, which are included herein.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
Contract revenue increased in 1997 by 30% to $781.6 million from $599.4
million in 1996, due to $43.6 million in revenue growth from the Company's Swiss
Bank contract, $60.2 million in revenue from businesses acquired in the second
half of 1996 and the first half of 1997, and a $78.4 million increase in revenue
from other new and existing business.
Domestic contract revenue grew by 42% in 1997 to $519.1 million from
$365.2 million in 1996, and increased as a percentage of total contract revenue
to 66% from 61% over the same periods.
Non-domestic contract revenue, consisting of European and Asian
operations, grew by 12% in 1997 to $262.5 million from $234.2 million in 1996,
and decreased as a percentage of total contract revenue to 34%, from 39% over
the same periods.
Direct cost of services increased in 1997 by 38% to $636.3 million from
$461.2 million in 1996, due in part to general business growth. Growth in direct
costs of services exceeded revenue growth due to the combination of start-up
costs from sales to new clients and the integration of acquired businesses. In
addition, the Company incurred several non-recurring charges in 1997, including
special contract loss provisions of $10.2 million, related to known termination
and contract completion losses on certain long-term contracts, a $3.6 million
write-off of intellectual property rights acquired, and a $3.1 million charge
related to the abandonment and sub-lease of unused office space.
Selling, general and administrative expenses ("SG&A") increased in 1997
by 35% to $125.7 million from $93.0 million in 1996, due primarily to expansion
of the sales force, staff growth in management and administrative support areas,
severance for key executives and increased goodwill amortization associated with
businesses acquired. SG&A increased as a percentage of total revenue in 1997 to
16.1% from 15.5 % in 1996.
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Equity in earnings of unconsolidated affiliates, net, increased in
1997 to $4.1 million from a loss of $0.3 million in 1996 due primarily to
significantly improved results from the Company's investment in Systor AG, a
subsidiary of Swiss Bank. Other income, net, increased in 1997 to $1.0 million
from a net expense of $1.6 million in 1996. The positive impact of the above
items was substantially offset by a $3.9 million write down of non-marketable
equity securities to net realizable value during 1997.
The decrease in the effective tax rate to 42.5% in 1997 from 48.9% in
1996 was due to both a decrease in nondeductible amortization related to
acquisitions and increased earnings in foreign jurisdictions in which the
Company intends to permanently invest subsidiary profits.
As a result of the factors noted above, operating income decreased in
1997 to $17.6 million from $41.3 million in 1996, and operating margin declined
to 2.3% from 6.9%. Net income margin in 1997 decreased to 1.4% from 3.4% over
the same period in 1996.
Prior to the non-recurring charges, which included special contract
loss provisions, the write-off of purchased research and development, the
write-off of acquired intellectual property rights, and the write-down of
non-marketable equity securities, income before taxes decreased to $39.2 million
in 1997 from $44.1 million in 1996. Net income, excluding the after tax effect
of these charges, increased to $22.6 million in 1997 from $22.5 million in 1996.
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995
Contract revenue increased in 1996 by 75% to $599.4 million from $342.3
million in 1995, due to $168.9 million in revenue from the Company's Swiss Bank
contract, $10.7 million in revenue from businesses acquired in the second half
of 1996, and a $77.5 million increase in revenue from other new and existing
business.
Domestic contract revenue grew by 53% in 1996 to $365.2 million from
$238.8 million in 1995, but declined as a percentage of total contract revenue
to 61% from 70% over the same periods. Swiss Bank accounted for $88.9 million of
the domestic revenue in 1996.
Non-domestic contract revenue, consisting of European and Asian
operations, grew by 126% in 1996 to $234.2 million from $103.5 million in 1995,
and increased as a percentage of total contract revenue to 39% from 30% over the
same periods. The key factor was the Swiss Bank contract revenue of which $72.7
million was earned in Europe and $7.3 million in Asia.
Direct cost of services increased in 1996 by 72% to $461.2 million from
$268.6 million in 1995, due primarily to general business growth.
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SG&A increased in 1996 by 76% to $93.0 million from $52.9 million in
1995, due primarily to the addition of key executives, expansion of the sales
force, staff growth in management and administrative support areas. SG&A
remained constant as a percentage of total revenue at 15.5% during 1995 and
1996.
The effective tax rate increased in 1996 to 48.9% from 46.6%
in 1995, due primarily to an increase in non-deductible expense items.
Operating income increased in 1996 to $41.3 million from $20.9 million
in 1995, reflecting business growth and other factors discussed above. Operating
margin increased in 1996 to 6.9% from 6.1% in 1995, due to a decline in direct
costs of services as a percentage of contract revenue in 1996 to 76.9% from
78.5% in 1995. Net income margin increased in 1996 to 3.4% from 3.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity over the past three years has
been cash flow from operating activities. For the year ended December 31, 1997,
operating cash flow was $71.0 million compared to $53.9 million and $24.0
million for the years ended December 31, 1996 and 1995, respectively. Although
net income decreased by $9.3 million during 1997, operating cash flow increased
$17.0 million over the prior year. An increase in non-cash expenses of $25.7
million, primarily depreciation and amortization, and an increase in operating
net assets of $0.6 million, primarily increased collection of receivables, were
the key factors driving the change. The increase in operating cash flow of $29.9
million from 1995 to 1996 was driven by an increase in net income of $9.7
million, an increase in operating net assets of $15.6 million and a $4.6 million
increase in non-cash expenses.
Net cash used in investing activities was $67.1 million in 1997,
compared to $41.9 million in 1996 and $12.4 million in 1995. Cash expenditures
for property and equipment in 1997 (net of proceeds on disposals) were $44.9
million compared to $26.8 million in 1996 reflecting staff increases and general
business growth. In 1995, total net cash used in investing activities of $12.4
million was due to net capital expenditures relating to staff and general
business growth. Cash paid for new businesses acquired was $13.7 million in 1997
compared to $9.5 million in 1996 and cash paid for purchases of minority
interests in other entities was $2.9 million in 1997 compared to $5.5 million in
1996. The Company also purchased intellectual property rights for $6.6 million
during 1997, of which $1.0 million was sold during the period. At December 31,
1997, the Company was committed to investing a maximum of $8.1 million to fund
additional future capital requirements associated with minority interests in
certain investments. In January 1998, the Company sold its entire minority
interest in one investment for $5.1 million and thus eliminated a future capital
commitment of $7.1 million out of the total of $8.1 million at December 31,
1997.
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Net cash provided by financing activities of $4.4 million in 1997 was
generated primarily by the sale of stock options to Swiss Bank for $8.1 million
offset in part by payments on capital leases of $3.7 million and net cash
purchases of treasury stock totaling $0.7 million. In 1996, total net cash used
in financing activities was $4.5 million primarily due to an $8.5 million
redemption of preferred stock, payments on capital leases of $2.2 million and
preferred stock dividend payments of $0.9 million, offset partially by proceeds
from the sale of common stock of $4.7 million and repayments of stockholder
notes receivable of $2.2 million.
Because of growth in its international operations, the Company, in
certain instances, utilizes foreign currency exchange contracts to manage its
exposure and to mitigate the effects of currency fluctuations.
The Company maintained its existing line of credit of $40.0 million
throughout 1997. Although the Company incurred borrowings up to $34.3 million
during 1997, no borrowings were outstanding at December 31, 1997.
The Company anticipates that cash flows from operating activities will
provide sufficient funds to meet its needs during 1998. The Company's existing
line of credit expires July 31, 1998. Although there is no assurance that the
Company can extend its existing line of credit or negotiate a new line of
credit, the Company anticipates that it will not have significant difficulty
extending its existing line of credit or negotiating a new line of credit if the
Company chooses to do so. As new contracts are commenced or existing contracts
expanded, there will be increasing requirements for cash resources to fund
current operations. Significant growth in the Company's business in 1998 and
beyond could result in the need for private or public offerings of debt or
equity instruments of the Company to provide the funds necessary to support its
growth.
The Company experienced substantial growth in 1996 and 1997. A
significant portion of that growth resulted from the formation of the Company's
strategic alliance with Swiss Bank in January 1996, which was revised in April
1997. During the years ended December 31, 1997 and 1996, approximately 27% and
28%, respectively, of the Company's revenues were earned in connection with
services performed on behalf of Swiss Bank and its affiliates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
Financial Statements Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-6
Notes to Condensed Consolidated Financial Statements F-7 to F-37
Schedule VIII - Valuation and Qualifying Accounts
The Financial Statement Schedule is submitted as Exhibit 99(a) to this
Annual Report on Form 10-K.
Schedules other than that listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
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Index to Consolidated Financial Statements
Page
Index F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-6
Notes to Condensed Consolidated Financial Statements F-7 to F-37
F-1
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Perot Systems Corporation:
We have audited the accompanying consolidated balance sheets of Perot
Systems Corporation and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Perot Systems
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 25, 1998
F-2
17
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(dollars in thousands)
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 35,298 $ 27,516
Accounts receivable, net 105,230 113,804
Prepaid expenses and other 12,578 9,450
Deferred income taxes 24,962 25,935
-------- --------
Total current assets 178,068 176,705
Property, equipment and purchased software, net 50,703 35,748
Goodwill 16,596 7,293
Deferred income taxes 10,269 4,531
Other assets 11,467 7,970
-------- --------
Total assets $267,103 $232,247
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and long-term debt $ 1,367 $ 2,377
Accounts payable 35,760 43,711
Income taxes payable 10,287 13,039
Accrued liabilities 76,040 53,343
Deferred revenue 23,258 22,003
Accrued compensation 23,449 20,240
-------- --------
Total current liabilities 170,161 154,713
Capital lease obligations and long-term debt, less current maturities 1,532 2,796
Other long-term liabilities 2,094 3,976
-------- --------
Total liabilities 173,787 161,485
-------- --------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock; par value $.01; authorized 100,000,000 shares;
outstanding 38,227,707 and 39,630,487 shares, 1997 and 1996,
respectively 406 396
Class B Convertible Common Stock; par value $.01; authorized 24,000,000
shares; 50,000 and 0 shares outstanding, 1997 and 1996, respectively -- --
Additional paid-in-capital 61,546 51,461
Other stockholders' equity 31,364 18,905
-------- --------
Total stockholders' equity 93,316 70,762
-------- --------
Total liabilities and stockholders' equity $267,103 $232,247
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996, and 1995
(shares and dollars in thousands, except per share data)
1997 1996 1995
--------- --------- ---------
Contract revenue $ 781,621 $ 599,438 $ 342,306
Costs and expenses:
Direct cost of services 636,296 461,192 268,553
Selling, general and administrative expenses 125,732 92,997 52,891
Purchased research and development 2,000 3,948 --
--------- --------- ---------
Operating income 17,593 41,301 20,862
Interest income 1,916 1,540 1,988
Interest expense (1,282) (770) (650)
Equity in earnings/(losses) of unconsolidated affiliates, net 4,136 (312) --
Write-down of nonmarketable equity securities (3,900) -- --
Other income/(expense) 1,045 (1,608) (1,950)
--------- --------- ---------
Income before taxes 19,508 40,151 20,250
Provision for income taxes 8,291 19,652 9,437
--------- --------- ---------
Net income $ 11,217 $ 20,499 $ 10,813
========= ========= =========
Net income attributed to common shareholders $ 11,217 $ 20,052 $ 10,218
Basic and diluted earnings per common share:
Basic earnings per common share $ 0.29 $ 0.54 $ 0.33
Weighted average common shares outstanding 39,168 37,055 31,151
Diluted earnings per common share $ 0.24 $ 0.48 $ 0.31
Weighted average diluted common shares outstanding 47,596 42,171 33,366
The accompanying notes are an integral part of these financial statements.
F-4
19
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1997, 1996, 1995
(dollars in thousands)
Convertible
Liquidation Preference
Preferred Stock Common Stock Class A Common Stock
----------------------- ---------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
--------- ----------- ---------- -------- ---------- -----------
Balance, December 31, 1994 4,000,000 $ 9,888 16,000,000 $ 160 14,409,616 $ 150
Issuance of shares under incentive plans -- -- -- -- 3,312,808 30
Exercise of stock options -- -- -- -- 18,540 --
Shares repurchased -- -- -- -- -- --
Deferred compensation, net of amortization -- -- -- -- -- --
Dividends paid and accrued -- (942) -- -- -- --
Note repayments -- -- -- -- -- --
Net income -- -- -- -- -- --
Translation adjustment -- -- -- -- --
--------- ----------- ---------- -------- ---------- -----------
Balance, December 31, 1995 4,000,000 $ 8,946 16,000,000 $ 160 17,740,964 $ 180
Issuance of shares for businesses acquired -- -- -- -- 1,460,372 15
Issuance of shares under incentive plans -- -- -- -- 2,604,294 27
Exercise of stock options -- -- -- -- 1,818,218 14
Shares repurchased (4,000,000) (8,500) -- -- -- --
Shares converted to Class A Common -- -- (16,000,000) (160) 16,000,000 160
Amortization of deferred compensation -- -- -- -- -- --
Options issued for contract rights -- -- -- -- -- --
Amortization of contract rights -- -- -- -- -- --
Dividends paid and accrued -- (446) -- -- -- --
Note repayments -- -- -- -- -- --
Equity investment -- -- -- -- -- --
Tax benefit of employee options exercised -- -- -- -- -- --
Net income -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
--------- ----------- ---------- -------- ---------- -----------
Balance, December 31, 1996 -- -- -- -- 39,623,848 $ 396
Issuance of shares for businesses acquired -- -- -- -- 370,000 4
Issuance of options for business acquired -- -- -- -- -- --
Issuance of shares under incentive plans -- -- -- -- 615,369 6
Exercise of stock options -- -- -- -- 654,520 --
Shares repurchased -- -- -- -- (3,036,030) --
Sale of stock and options to Swiss Bank -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Reversal of deferred compensation -- -- -- -- -- --
Amortization of contract rights -- -- -- -- -- --
Elimination of contract rights -- -- -- -- -- --
Note repayments and other -- -- -- -- -- --
Tax benefit of employee options exercised -- -- -- -- -- --
Net income -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
--------- ----------- ---------- -------- ---------- -----------
Balance, December 31, 1997 -- -- -- -- 38,227,707 $ 406
========= =========== ========== ======== ========== ===========
Retained Cumulative Treasury Stock
Additional Earnings Translation --------------------------
Paid-in Capital (Deficit) Adjustment Shares Amount
--------------- ---------- ------------ ---------- ----------
Balance, December 31, 1994 $ 26,335 $ (2,440) $ (221) (457,464) $ (317)
Issuance of shares under incentive plans 3,264 -- -- 600,904 397
Exercise of stock options -- -- -- 9,560 14
Shares repurchased -- -- -- (153,000) (94)
Deferred compensation, net of amortization 1,500 -- -- -- --
Dividends paid and accrued -- (595) -- -- --
Note repayments -- -- -- -- --
Net income -- 10,813 -- -- --
Translation adjustment -- -- 49 -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 $ 31,099 $ 7,778 $ (172) -- --
Issuance of shares for businesses acquired 6,530 -- -- -- --
Issuance of shares under incentive plans 6,520 -- -- -- --
Exercise of stock options 1,167 -- -- 204,330 313
Shares repurchased -- -- -- (204,330) (313)
Shares converted to Class A Common -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Options issued for contract rights 4,544 -- -- -- --
Amortization of contract rights -- -- -- -- --
Dividends paid and accrued -- (447) -- -- --
Note repayments -- -- -- -- --
Equity investment 706 -- -- -- --
Tax benefit of employee options exercised 895 -- -- -- --
Net income -- 20,499 -- -- --
Translation adjustment -- -- 1,181 -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 $ 51,461 $ 27,830 $ 1,009 -- --
Issuance of shares for businesses acquired 2,697 -- -- -- --
Issuance of options for business acquired 1,500 -- -- -- --
Issuance of shares under incentive plans 1,935 -- -- (105,000) 263
Exercise of stock options (350) -- -- (635,520) 1,215
Shares repurchased -- -- -- 3,039,132 (5,344)
Sale of stock and options to Swiss Bank 8,503 -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Reversal of deferred compensation (1,050) -- -- -- --
Amortization of contract rights -- -- -- -- --
Elimination of contract rights (4,146) -- -- -- --
Note repayments and other (88) -- -- -- (84)
Tax benefit of employee options exercised 1,121 -- -- -- --
Net income -- 11,217 -- -- --
Translation adjustment (37) -- (1,803) -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 $ 61,546 $ 39,047 $ (794) 2,298,612 $ (3,950)
========== ========== ========== ========== ==========
Notes
Receivables Total
From Contract Deferred Stockholders'
Stockholders Rights Compensation Equity(Deficit)
------------ -------- ------------ ---------------
Balance, December 31, 1994 $ (887) -- -- $ 32,668
Issuance of shares under incentive plans (901) -- -- 2,790
Exercise of stock options (2,000) -- -- (1,986)
Shares repurchased -- -- -- (94)
Deferred compensation, net of amortization -- -- (1,456) 44
Dividends paid and accrued -- -- -- (1,537)
Note repayments 130 -- -- 130
Net income -- -- -- 10,813
Translation adjustment -- -- -- 49
-------- -------- -------- --------
Balance, December 31, 1995 $ (3,658) -- $ (1,456) $ 42,877
Issuance of shares for businesses acquired -- -- -- 6,545
Issuance of shares under incentive plans (3,065) -- -- 3,482
Exercise of stock options -- -- -- 1,494
Shares repurchased 225 -- -- (8,588)
Shares converted to Class A Common -- -- -- --
Amortization of deferred compensation -- -- 150 150
Options issued for contract rights -- (4,544) -- --
Amortization of contract rights -- 202 -- 202
Dividends paid and accrued -- -- -- (893)
Note repayments 2,212 -- -- 2,212
Equity investment -- -- -- 706
Tax benefit of employee options exercised -- -- -- 895
Net income -- -- -- 20,499
Translation adjustment -- -- -- 1,181
-------- -------- -------- --------
Balance, December 31, 1996 $ (4,286) $ (4,342) $ (1,306) $ 70,762
Issuance of shares for businesses acquired -- -- -- 2,701
Issuance of options for business acquired -- -- -- 1,500
Issuance of shares under incentive plans (1,427) -- -- 777
Exercise of stock options (39) -- -- 826
Shares repurchased 2,603 -- -- (2,741)
Sale of stock and options to Swiss Bank -- -- -- 8,503
Amortization of deferred compensation -- -- 256 256
Reversal of deferred compensation -- -- 1,050 --
Amortization of contract rights -- 196 -- 196
Elimination of contract rights -- 4,146 -- --
Note repayments and other 210 -- -- 38
Tax benefit of employee options exercised -- -- -- 1,121
Net income -- -- -- 11,217
Translation adjustment -- -- -- (1,840)
-------- -------- -------- --------
Balance, December 31, 1997 $ (2,939) -- -- $ 93,316
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
20
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income $ 11,217 $ 20,499 $ 10,813
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 35,363 18,715 14,083
Write-off of purchased research and development 2,000 3,948 --
Write-off of software license transfer rights -- 4,156 --
Write-off of intellectual property rights 3,623 -- --
Write-down of nonmarketable equity securities 3,900 -- --
Equity in (earnings)/losses of unconsolidated affiliates, net (4,136) 312 --
Change in deferred income taxes (10,423) (16,044) (3,598)
Loss/(gain) on sale of property, equipment and software 455 860 (47)
Changes in assets and liabilities (net of effects from acquisition
of businesses):
Accounts receivable 16,039 (43,184) (33,263)
Prepaid expenses (3,010) (4,037) 6,760
Other assets 5,843 (837) (4,578)
Accounts payable and accrued liabilities 13,244 39,401 17,790
Income taxes payable (3,550) 7,998 6,873
Deferred revenue 372 15,388 (4,685)
Accrued compensation 3,295 9,852 7,155
Other long-term liabilities (3,260) (3,095) 6,746
-------- -------- --------
Total adjustments 59,755 33,433 13,236
-------- -------- --------
Net cash provided by operating activities 70,972 53,932 24,049
-------- -------- --------
Cash flows from investing activities:
Purchase of property, equipment and software (47,243) (27,534) (18,342)
Proceeds from sale of property, equipment and software 2,366 713 5,975
Investments in and advances to minority interests (2,891) (5,536) --
Acquisition of intellectual property rights (5,623) -- --
Acquisition of businesses, net of cash acquired of $665 in 1997 and $149 in 1996 (13,721) (9,520) --
-------- -------- --------
Net cash used in investing activities (67,112) (41,877) (12,367)
-------- -------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations (3,725) (2,162) (2,896)
Proceeds from issuance of common stock 381 4,686 528
Proceeds from sale of stock options 8,139 -- --
Repayment of stockholder notes receivable 266 2,212 130
Proceeds from issuance of treasury stock 1,125 197 273
Purchase of treasury stock (1,834) (88) (94)
Redemption of preferred stock -- (8,500) --
Dividends paid on preferred stock -- (893) (1,537)
-------- -------- --------
Net cash provided by (used in) financing activities 4,352 (4,548) (3,596)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (430) 2,652 28
-------- -------- --------
Net increase in cash and cash equivalents 7,782 10,159 8,114
Cash and cash equivalents at beginning of year 27,516 17,357 9,243
-------- -------- --------
Cash and cash equivalents at end of year $ 35,298 $ 27,516 $ 17,357
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
21
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
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 to provide systems
outsourcing, systems integration, software development, consulting, and
other information technology services. On December 19, 1995, the
Company reincorporated in the state of Delaware. The significant
accounting policies of the Company are described below. Dollar amounts
presented are in thousands, except as otherwise noted.
Principles of consolidation
The consolidated financial statements include the
accounts of the Company and all domestic and foreign
subsidiaries that are more than 50% owned and controlled. All
significant intercompany balances and transactions have been
eliminated.
The Company's investments in 20% to 50% owned
companies in which it has the ability to exercise significant
influence over operating and financial policies are accounted
for by the equity method. Accordingly, the Company's share
of the earnings (losses) of these companies is included in
consolidated net income. Investments in unconsolidated
companies and limited partnerships that are less than 20%
owned, where the Company has virtually no influence over
operating and financial policies, are carried at cost.
The Company periodically evaluates whether impairment
losses must be recorded on each investment by comparing the
projection of the undiscounted future operating cash flows to
the carrying amount of the investment. If this evaluation
indicates that future undiscounted operating cash flows are
less than the carrying amount of the investments, the
underlying assets are written down by charges to expense so
the carrying amount equals the future discounted cash flows.
Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense
during the reporting period. These estimates involve judgments
with
F-7
22
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
respect to, among other things, various future economic
factors which are difficult to predict and are beyond the
control of the Company. Therefore, actual amounts could differ
from these estimates.
Cash equivalents
All highly liquid investments with original
maturities of three months or less are considered to be cash
equivalents.
Revenue recognition
Revenue from contracts is generally recognized based
on the performance of tasks as defined in the contracts.
Revenue and fees on certain cost reimbursable contracts are
recognized as costs are incurred. Revenue from certain
long-term contracts has been recognized by the
percentage-of-completion method of accounting. Provisions for
estimated losses on contracts are recorded when identified.
Billings for services or products acquired for clients when
the Company acts as an agent on behalf of the client are
excluded from revenue.
Deferred revenue is comprised of payments from
customers for which services have not yet been performed, or
prepayments against development work in process. These
unearned revenues are deferred and recognized as future
contract costs are incurred and contract services are
rendered.
Research and development costs
Research and development costs are charged to expense
as incurred and were $3,243 and $4,486 in 1997 and 1996,
respectively. The write-off of purchased research and
development costs made up $2,000 and $3,948 of the total in
1997 and 1996, respectively.
Property and equipment
Property and equipment are stated at cost. Property
and equipment under capital leases are recorded at the lower
of their fair market value or the present value of future
minimum lease payments determined at the inception of the
lease.
Depreciation and amortization are calculated on a
straight-line basis, using estimated useful lives of two to
seven years. Leasehold
F-8
23
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
improvements are amortized over the shorter of the lease term
or the estimated useful life of the improvement. Property and
equipment recorded under capital leases are amortized on a
straight-line basis over the lease term.
Upon sale or retirement of property and equipment,
the costs and related accumulated depreciation are eliminated
from the accounts, and any gain or loss on such disposition is
reflected in the consolidated statement of operations.
Expenditures for repairs and maintenance are charged to
operations as incurred.
Software, goodwill and other intangibles
Software purchased by the Company and utilized in
providing contract services is capitalized at cost and
amortized on a straight-line basis over the lesser of three to
five years or the term of the related contract.
The cost of acquired entities is allocated first to
identifiable assets based on estimated fair values. The excess
of the purchase price over the fair value of identifiable
assets acquired, net of liabilities assumed, is recorded as
goodwill and amortized on a straight-line basis over the
estimated productive life of the assets acquired. Due to the
fact that acquired skills and technological advantages are
subject to rapid obsolescence, and thus continuous
reinvestment, the Company's general policy is to amortize
goodwill over a three to ten year period.
The Company periodically evaluates the carrying
amount of software, goodwill, other intangibles and other
long-lived assets, as well as the related amortization
periods, to determine whether adjustments to these amounts or
useful lives are required based on current events and
circumstances. The evaluation is based on the Company's
projection of the undiscounted future operating cash flows of
the acquired operation over the remaining useful lives of the
related intangible assets. To the extent such projections
indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of related
intangibles, the underlying assets are reduced by charges to
expense so that the carrying amount is equal to future
discounted cash flows.
F-9
24
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
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
$47,033 through 1997, cumulatively, for its foreign
subsidiaries, as such earnings are intended to be permanently
invested in those operations. The ultimate tax liability
related to repatriation of such earnings is dependent upon
future tax planning opportunities and is not estimable at the
present time.
Foreign operations
The consolidated balance sheets include foreign
assets and liabilities of $95,600 and $73,490, respectively,
as of December 31, 1997, and $101,481 and $77,914,
respectively, as of December 31, 1996.
Assets and liabilities of subsidiaries located
outside the United States are translated into U.S. dollars at
current exchange rates as of the balance sheet date, and
revenue and expenses are translated at average exchange rates
during each reporting period. Translation gains and losses are
recorded as a separate component of stockholders' equity.
The Company periodically enters into foreign exchange
forward contracts to hedge certain foreign currency
transactions for periods consistent with the terms of the
underlying transactions. The forward exchange contracts
generally have maturities that do not exceed one year.
The net foreign currency transaction gains/(losses)
reflected in other income/(expense) were $736, ($1,715) and
($892) for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-10
25
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
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 who are engaged in the
banking, insurance, healthcare, manufacturing, communications,
travel and energy industries, and are not concentrated in any
specific geographic region. These specific industries may be
affected by economic factors, and, therefore, accounts
receivable may be impacted. Generally, the Company does not
require collateral from its customers, since the receivables
are supported by long-term contracts. Management does not
believe that any single customer, industry or geographic area
represents significant credit risk.
One customer accounted for 11% and 27% of the
Company's accounts receivables at December 31, 1997 and 1996,
respectively.
Financial instruments
The fair value of the Company's financial instruments
is estimated using bank or market quotes or discounted cash
flows at year-end foreign exchange and interest rates. The
fair value of the financial instruments is disclosed in the
relevant notes to the financial statements. The carrying
amount of short-term financial instruments (cash and cash
equivalents, accounts receivable, and certain other
liabilities) approximates fair value due to the short maturity
of those instruments.
The Company uses derivative financial instruments for
the purpose of hedging specific exposures as part of its risk
management program and holds all derivatives for purposes
other than trading. Deferral (hedge) accounting is applied
only if the derivative reduces the risk of the underlying
hedged item and is designated at inception as a hedge with
respect to the underlying hedged item. Additionally, the
derivative must result in cash flows that are expected to be
inversely correlated to those of the underlying hedged item.
Such instruments to date have been limited to interest rate
swap and foreign currency exchange forward contracts.
Treasury stock
Treasury stock transactions are accounted for under
the cost method.
Reclassifications
Certain of the 1996 and 1995 amounts in the
accompanying financial statements have been reclassified to
conform to the current presentation.
F-11
26
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO 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,
because the exercise price of employee stock options equals
the market price of the underlying stock on the date of
grant, no compensation expense is recorded. The Company has
implemented the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation".
Accounting standard issued
In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income", effective
for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not yet
determined the impact, if any, of implementing SFAS 130.
2. Accounts Receivable
Accounts receivable consist of the following as of December
31:
1997 1996
--------- ---------
Amounts billed $ 77,119 $ 88,577
Amounts to be invoiced 22,409 13,548
Recoverable costs and profits 2,798 7,744
Other 4,089 10,722
Allowance for doubtful accounts (1,185) (6,787)
--------- ---------
$ 105,230 $ 113,804
========= =========
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
F-12
27
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
made in accordance with common industry practice. It is
anticipated that $2,210 of the recoverable costs and profits
as of December 31, 1997 will be billed in 1998 and $588 will
be billed in 1999.
3. Property and Equipment and Purchased Software
Property and equipment and purchased software consist of the
following as of December 31:
1997 1996
--------- ---------
Owned assets:
Computer equipment $ 68,188 $ 48,500
Furniture and equipment 24,193 15,760
Leasehold improvements 11,070 5,897
Automobiles 669 --
--------- ---------
104,120 70,157
Less accumulated depreciation
and amortization (62,808) (41,276)
--------- ---------
41,312 28,881
--------- ---------
Assets under capital leases:
Computer equipment 1,735 3,930
Furniture and equipment 1,582 1,581
--------- ---------
3,317 5,511
Less accumulated depreciation (2,909) (5,057)
--------- ---------
408 454
--------- ---------
Property and equipment, net $ 41,720 $ 29,335
========= =========
Purchased software $ 28,635 $ 21,322
Less accumulated amortization (19,652) (14,909)
--------- ---------
Purchased software, net $ 8,983 $ 6,413
========= =========
4. Acquisitions
During 1997, the Company acquired 100% of the equity interests or
assets in four companies: Business Architects, LLP, ("BA"), based in
Waltham, Massachusetts, a business process reengineering consulting
company; Benton International, Inc. ("Benton"), a retail banking
consulting firm located in New York, California and Florida; Syllogic
B.V. ("Syllogic"), a company based in The Netherlands, specializing
in the implementation, integration and control of information systems
F-13
28
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
with expertise in data warehousing and data mining; and Stamos
Associates, Inc. ("Stamos"), based in New York and California, a
strategic management consulting company in the healthcare industry.
Also, the Company acquired 70% of the equity interests in Icarus
Consulting AG ("Icarus"), a company specializing in airline and related
industry consulting.
These five acquisitions were recorded under the purchase method of
accounting; and accordingly, the results of operations of these
companies for the periods from the date of the acquisition agreements
to December 31, 1997 are included in the accompanying 1997 consolidated
statement of operations. The dates of the 1997 acquisition agreements
for BA, Benton, Icarus, Syllogic, and Stamos were January 15, February
14, March 21, May 27 and June 17, respectively. The purchase prices
have been allocated to assets acquired and liabilities assumed based on
the estimated fair values at the dates of acquisition.
Under the terms and conditions of the various acquisition
agreements executed in 1997, the Company paid a total of $18,587 for
the equity interests acquired, $14,386 in cash, $2,701 in the form of
370,000 shares of the Company's Class A Common Stock, and $1,500 in the
form of 550,000 options to purchase the Company's Class A Common Stock.
The Company allocated $3,513 of the purchase price to the tangible net
assets acquired and $15,074 to goodwill.
During 1996, the Company acquired all of the equity interests in
four companies: Rothwell International, Inc. ("Rothwell"), based in
Houston, Texas, an object-oriented programming company; Doblin Group,
Inc. ("Doblin"), a Chicago-based consulting company, engaging in
strategic design planning and consulting for breakthrough products and
services; CommSys Corporation ("CommSys"), located in Reston, Virginia,
a developer of billing systems for telecommunication companies; and The
Technical Resource Connection, Inc. ("TRC"), based in Tampa, Florida,
specializing in object-oriented programming and software development.
These four acquisitions were recorded under the purchase method of
accounting; and accordingly, the results of operations of Rothwell,
Doblin, CommSys, and TRC for the periods from the date of the
acquisition agreements to December 31, 1997 are included in the
accompanying 1996 and 1997 consolidated statements of operations. The
dates of the 1996 acquisition agreements for Rothwell, Doblin, CommSys,
and TRC were August 2, September 10, September 16 and October 25,
respectively. The purchase prices have been allocated to assets
acquired and liabilities assumed based on the estimated fair values at
the dates of acquisition. In addition, portions of the purchase price
of CommSys and TRC were allocated to in-process product development
that had not reached technological feasibility and had no probable
alternative future uses, which the Company recorded at the date of
acquisition.
F-14
29
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Under the terms and conditions of the various acquisition
agreements executed in 1996, the Company paid a total of $16,214 for
the equity interests acquired, $9,669 in cash, and $6,545 in the form
of 1,460,372 shares of the Company's Class A Common Stock. The Company
allocated $4,286 of the purchase price to the tangible net assets
acquired, $3,948 to expensed in-process product development and $7,980
of goodwill.
The following table reflects unaudited pro forma combined results
of operations of the Company and the 1997 and 1996 acquisitions on the
basis that the acquisitions had taken place and the related product
development expense was recorded at the beginning of the calendar year
for each of the periods presented:
(Unaudited)
1997 1996
----------- ----------
Contract revenue $ 790,174 $ 665,035
Net income 11,065 16,548
Basic earnings per common share 0.28 0.42
Diluted earnings per common share 0.23 0.37
In management's opinion, the unaudited pro forma combined results
of operations are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of 1997
and 1996, respectively, or of future operations of the combined
companies under the ownership and management of the Company.
At December 31, 1997 and 1996, goodwill of $16,596 and $7,293, net
of $6,097 and $686 in accumulated amortization, respectively, related
solely to 1997 and 1996 business acquisitions.
5. Investments in Unconsolidated Affiliates and Minority Interests
At December 31, 1997, investments in and advances to
unconsolidated affiliates include two equity investments made in 1996.
On January 5, 1996, the Company acquired 40% of the equity interest in
Systor AG ("Systor"), a Swiss information services company, from Swiss
Bank Corporation as part of a larger services agreement. The Company's
investment in Systor at December 31, 1997 and 1996 was $7,188 and
$3,538, respectively.
F-15
30
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
On March 26, 1996, the Company entered into a joint venture with
HCL Corporation Limited and HCL Europe Limited whereby the Company owns
49% of HCL Perot Systems NV ("HCL"), an information services company
based in India. The Company contributed capital of $500 to HCL 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 HCL at December
31, 1997 and 1996 was $1,742 and $524, respectively.
No dividends or distributions were received from investments in
unconsolidated affiliates in 1997 or 1996. The amount of undistributed
earnings from investments in unconsolidated affiliates recorded in
retained earnings was $4,196 and ($312) for 1997 and 1996,
respectively.
In April 1996, the Company entered into an agreement to join a
limited partnership venture capital fund, and committed to invest
$10,000, representing a 2.75% interest in the fund. As of December 31,
1997 and 1996, the Company has made net capital contributions of
$2,125, and $1,292, respectively. In January 1998, the Company sold its
entire investment for $5,162 and recognized a gain of $2,986, and has
no future commitments to the fund.
In May 1996, the Company purchased 1,471,000 shares of a class of
preferred stock in a software company for $2,500. The Company purchased
an additional 867,000 shares of the preferred stock for $400 in June
1997, representing a total 12.3% equity interest. As part of the
purchase agreement, the Company is subject to a call option, which, if
exercised, would require the Company to purchase additional shares for
a commitment of up to $1,000.
In January 1997, the Company purchased 4,000 shares of 5%
cumulative convertible preferred stock for $1,000, representing a 4.5%
interest in a privately held company specializing in the electronic
transmission, storage and retrieval of documents.
In December 1997, the Company wrote both of these investments down
by the entire book value of $3,900 due to a decline in value considered
to be other than temporary.
6. Other Assets
Intellectual property rights
In July 1997, the Company acquired certain assets of Nets, Inc.,
an internet development company in bankruptcy, for $8,755 in cash.
Included in the asset purchase were $2,132 of property and equipment
and $6,623 of intellectual
F-16
31
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
property rights ("IP rights"). The Company recorded a write-off of
$2,000 of the $6,623 in IP rights as purchased research and development
costs. This amount represented an estimate of the fair market value of
development cost related to software for which technological
feasibility had not been established and for which there was no
alternative future use. The completed IP rights were capitalized due to
the expectation that the assets would be used in several contracts
under negotiation.
During the fourth quarter of 1997, the Company determined that it
was not probable that the Company would generate future undiscounted
cash flows sufficient to recover the recorded value of the IP rights.
The Company sold $1,000 of the intellectual property in October 1997,
and charged $3,623 to direct cost of services to reflect the impairment
of the remaining IP rights.
Software license transfer rights
In July 1996, the Company determined that certain software rights
and assets placed in service in 1993 were impaired due to the market
shift from mainframe systems to client/server and network based
systems. In addition, the Company's business mix had gradually shifted
from outsourcing to application development, systems integration, and
consulting. As a result, the $7,552 of transfer rights and assets in
service and the $3,396 of related accumulated amortization were written
off resulting in a loss of $4,156 classified as direct cost of
services.
7. Line of Credit
Effective July 31, 1996, the Company re-established its bank line
of credit, which allows borrowings up to $40,000 at either the adjusted
Eurodollar rate plus 1%, or the bank's prime lending rate. There were
no borrowings outstanding under the line at December 31, 1997. This
facility expires July 31, 1998.
F-17
32
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
8. Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
1997 1996
------- -------
Operating expenses $30,035 $23,903
Taxes other than income, insurance,
rents, licenses and maintenance 3,433 3,519
Other contract-related 42,572 25,921
------- -------
$76,040 $53,343
======= =======
Other contract-related
Other contract-related accrued liabilities represent provisions to
match contract-related liabilities in the period in which revenues from
those contracts are recognized. These include claims made by customers
for services that require additional effort and costs by the Company to
satisfy contractual requirements. An expense of $10,200 was recorded in
1997 to recognize management's estimate of known future losses
associated with the termination or completion of two long-term
contracts.
9. Capital Lease Obligations and Long-Term Debt
Capital lease obligations and long-term debt consist of the
following as of December 31:
1997 1996
------- -------
Computer equipment and furniture capital leases containing various
payment terms through August 2001 with implicit interest rates
ranging from 7.9% to 17.40% $ 1,308 $ 1,777
Notes payable for software and software license transfer rights,
financed at various rates from 8.35% to 10.23%, payable in
monthly installments through July 2001 1,591 3,396
------- -------
2,899 5,173
Less current maturities (1,367) (2,377)
------- -------
$ 1,532 $ 2,796
======= =======
Capital lease payments and long-term debt maturities for years
ending after December 31, 1997, are as follows:
F-18
33
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
Capital lease Long-term
obligations debt
----------- ---------
1998 $ 696 $ 848
1999 460 265
2000 207 293
2001 87 185
------- -------
Total minimum lease payment and
long-term debt maturities $ 1,450 $ 1,591
Less amounts representing interest (142) =======
-------
Present value of net minimum
capital lease payments $ 1,308
=======
10. Stockholders' Equity
Preferred stock
At December 31, 1995, the Company had 4,000,000 shares of $2.125
par value Series A Preferred Stock outstanding. In 1996 the Company
exercised its right to redeem these shares for $8,500 cash, plus
accrued dividends of $298. The authorized preferred stock was
subsequently removed from the Company's charter in 1997.
Common stock and convertible liquidation preference common stock
Class A Common Stock ("Class A") of the Company consists of
100,000,000 authorized shares of $0.01 par value common stock, of which
there are 38,227,707 shares issued and outstanding as of December 31,
1997. The Company is authorized to issue, under its existing stock
plans, up to 100,000,000 Class A shares, of which 33,082,562 were
outstanding at year end. In addition, 7,000,000 Class A shares are
reserved for future conversion of Class B Common Stock ("Class B").
Class B shares consist of 24,000,000 authorized shares of $0.01
par value common stock, of which there are 50,000 shares issued and
outstanding as of December 31, 1997. The Class B shares were authorized
in conjunction with the provisions of the original Swiss Bank 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 Swiss Bank 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
F-19
34
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
third-party purchaser under one of the following circumstances: 1) in
a widely dispersed offering of the Class A shares; 2) to a purchaser of
Class A shares who prior to the sale holds a majority of the Company's
stock; 3) to a purchaser that after the sale holds less than 2% of the
Company's stock; 4) in a transaction that complies with Rule 144 under
the Securities Act of 1933, as amended; or 5) any sale approved by the
Federal Reserve Board of the United States.
At December 31, 1995, the Company had 16,000,000 shares of $0.01 par
value Convertible Liquidation Preference Common Stock. In 1996, at the
initiation of the holder, and under the terms of the Company's
Certificate of Incorporation, the 16,000,000 outstanding shares of
Convertible Liquidation Preference Common Stock were converted on a
one-for-one basis into fully paid and non-assessable Class A shares.
The Convertible Liquidation Preference Common Stock was removed from
the Company's charter in 1997.
Restricted Stock Plan
In 1988, the Company adopted a Restricted Stock Plan, which was
amended in 1993, to attract and retain key employees, and to reward
outstanding performance. Employees selected by management may elect to
become participants in the plan by entering into an agreement that
provides for vesting of the Class A shares over a five-to-ten year
period and establishes a two-year holding period on one-half of the
shares prior to the sale of vested common stock. Each participant has
voting, dividend and distribution rights with respect to all shares of
both vested and unvested common stock. Prior to the Class A shares
becoming publicly traded, the Company retains the right of first
refusal to buy the employees' vested shares at a formula price set
forth in each agreement, based on fair value or book value. After the
Class A shares become publicly traded, the right of first refusal no
longer exists. The Company may repurchase unvested shares, and under
certain circumstances, vested shares of participants whose employment
with the Company terminates. The repurchase price under these
provisions is determined by the underlying agreement, generally the
employees' cost plus interest at 8%. Common stock issued under the
Restricted Stock Plan has been purchased by the employees at varying
prices, determined by the Board of Directors and estimated to be the
fair value of the shares based upon an independent third-party
appraisal. The Company has from time to time financed the issuance of
shares under the Restricted Stock Plan by executing promissory notes
with the employees, with repayment terms ranging from one to fifteen
years. These notes bear interest at 8%, payable at least annually, and
are with recourse. Principal and interest payments vary from monthly to
5 years, and the loans are collateralized by the shares financed by the
notes. The balance of the outstanding notes is included as a reduction
to stockholders' equity.
F-20
35
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1991 Stock Option Plan
In 1991, the Company adopted the 1991 Stock Option Plan (the
"1991 Plan"), which was amended in 1993. Pursuant to the 1991 Plan,
options to purchase the Company's Class A shares can be granted to
eligible employees. The stock options are granted at a price not less
than 100% of the fair value of the Company's Class A shares, as
determined by the Board of Directors, based upon an independent
third-party valuation. The stock options vest over a three to ten year
period based on the provisions of each grant, and in some cases can be
accelerated through attainment of financial performance criteria. All
stock options require a two-year holding period for one half of the
shares purchased once the options are exercised, and are usually
exercisable from the vesting date until the eleventh anniversary from
the date of grant, and unvested options are cancelled following the
expiration of a certain period after the employee leaves the employment
of the Company. Prior to the common stock becoming publicly traded, the
Company has certain rights of first refusal to repurchase employees'
shares obtained through exercise of the stock options at the employees'
cost plus 8%. For options issued after April 1, 1997, the agreements
provide that shares issued upon the exercise of the options may not be
sold until six months following an initial public offering.
Advisor Stock Option/Restricted Stock Incentive Plan
In 1992, the Company adopted the Advisor Stock Option/Restricted
Stock Incentive Plan (the "Advisor Plan"), which was modified in 1993,
to enable non-employee directors and advisors to the Company and
consultants under contract with the Company to acquire shares of the
Company's Class A stock, at a price not less than 100% of the fair
value of the Company's common stock, as determined by the Board of
Directors, based upon an independent third-party valuation. The options
and shares are subject to a vesting schedule and restrictions
associated with their transfer. Under certain circumstances, the shares
can be repurchased by the Company at cost plus 8% from the date of
issuance.
In 1996, the Board approved the 1996 Non-Employee Director Stock
Option/Stock Incentive Plan and the 1996 Advisor and Consultant Stock
Option/Stock Incentive Plan, which together replaced the Advisor Plan
for subsequent grants of options. Provisions of the Advisor Plan will
remain in effect for outstanding stock and options but no new issuances
will be made pursuant to the plan.
F-21
36
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1996 Non-Employee Director Stock Option/Stock Incentive Plan
In 1996, the Company adopted the 1996 Non-Employee Director Stock
Option/Stock Incentive Plan (the "Director Plan"). The Director Plan
provides for the issuance of up to 400,000 Class A shares or options to
Board members who are not employees of the Company. Shares or options
issued under the plan would be subject to five year vesting, with
options expiring after an eleven year term. The purchase price for
shares issued and exercise price for options issued is the fair value
of the shares at the date of issuance. Other restrictions are
established upon issuance. In 1997, 60,000 options were granted under
the plan.
1996 Advisor and Consultant Stock Option/Stock Incentive Plan
In 1996, the Company adopted the 1996 Advisor and Consultant Stock
Option/Stock Incentive Plan (the "Consultant Plan"). The Consultant
Plan provides for the issuance of Class A shares or options to advisors
or consultants who are not employees of the Company, subject to
restrictions established at time of issuance. The option exercise price
is the fair value of the shares on the date of grant. The purchase
price for share issuances is determined by a committee appointed by the
Board of Directors. The fair value of issuances under the plan is
estimated at the time of issuance and amortized ratably over the
vesting period as compensation expense. In 1997, 24,000 options were
granted under the plan.
Other stock and option activity
During 1995, options for the purchase of 2,000,000 Class A
shares, with an exercise price of $1.00 per share, were granted to an
executive officer of the Company when the fair value of the stock was
estimated to be $1.75 per share. This resulted in deferred compensation
of $1,500, which was recorded as a reduction to stockholders' equity.
These options were exercised in 1995, whereby the Company received cash
of $600, and a promissory note for $1,400 in consideration for the
shares, under the terms of the original grant.
Prior to an underwritten public offering of its common stock, the
Company retains the right of first refusal to buy back the vested
shares for cash at a purchase price equal to fair value, and the
unvested shares at the cost paid by the shareholder. After such an
offering, the right of first refusal no longer exists. The Company had
the right, under certain circumstances, to repurchase certain shares at
cost if employment with the Company terminates.
F-22
37
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
During the third quarter of 1997, the executive terminated his
employment and the Company made a non-cash repurchase of 1,400,000
shares of common stock through a reduction of $1,830 in outstanding
notes receivable. The unamortized balance of deferred compensation was
reclassified to additional paid-in-capital.
Swiss Bank Agreement
On April 24, 1997, the Company concluded the renegotiation of the
terms of its strategic alliance with Swiss Bank, initially entered into
in January 1996. The new terms were effective from January 1, 1997 and
involve (i) a 10-year contract for the Company to provide information
technology ("IT") services to SBC Warburg ("SBC Warburg EPI
Agreement"), (ii) separate agreements to provide IT services to other
Swiss Bank operating units and to permit the Company to use certain
Swiss Bank assets, (iii) the sale to Swiss Bank of options to acquire
shares of the Company's Class B stock, (iv) the sale to Swiss Bank of
shares of the Company's Class B stock, and (v) the termination of all
options to acquire shares of the Company's Class B stock granted under
the terms and conditions of prior Swiss Bank agreements. The Company
continues to hold a 40% stake in Systor. In the event of termination of
the SBC Warburg EPI Agreement, a portion of the Company's interest in
Systor would be returned to Swiss Bank, declining ratably over the
10-year period which began on January 1, 1997.
The new terms of the SBC Warburg EPI Agreement require the Company
to provide operational management for SBC Warburg's technology
resources (including mainframes, desktops, and voice and data
networks), excluding hardware and proprietary software applications
development. The Company is to be reimbursed for all costs, excluding
corporate overhead, related to services provided under the SBC Warburg
EPI Agreement. In addition, the Company will receive a management fee,
subject to bonuses and penalties, depending upon the achievement of
certain defined performance criteria.
Under the terms and conditions of the new agreement, the Company
sold to Swiss Bank options to purchase 3,617,160 shares of the
Company's Class B stock at a cash non-refundable purchase price of
$2.25 per option. These Class B shares are subject to certain
transferability and holding-period restrictions, which lapse over a
defined vesting period. These options are exercisable immediately and
for a period of 5 years after the date that such shares become vested,
at an exercise price of $7.30 per share. In addition, the Company sold
to Swiss Bank 50,000 shares of the Company's Class B stock, subject to
the same transferability and holding-period restrictions, at a purchase
price of $7.30 per share. These
F-23
38
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
options and shares were sold in connection with the execution and
delivery of the 10- year SBC Warburg EPI Agreement. Both the 50,000
shares of Class B stock and the 3,617,160 shares of Class B stock
subject to options vest at a rate, in the aggregate, of 31,953 shares
per month for the first five years of the agreement, and at a rate of
29,167 shares per month thereafter. In the event of termination of the
SBC Warburg EPI Agreement, options to acquire unvested shares would be
forfeited, and the Company would have the right to buy back any
previously acquired unvested shares for the original purchase price of
$7.30 per share.
The Company also agreed to issue and sell to Swiss Bank additional
shares and/or options to purchase Class B shares, subject to the same
transferability and holding-period restrictions, up to a maximum of
3,500,000 shares, in such combination of options and shares that Swiss
Bank deems appropriate, provided the Company and Swiss Bank, on or
prior to December 31, 1998, enter into a second IT services agreement,
having a term of 10 years, and being of a size and scope similar to
that of the SBC Warburg EPI Agreement. The purchase price and exercise
price for these options, as well as the purchase price for these shares
will be the defined fair value as of the date of grant. These shares
will vest ratably over 10 years commencing on the date of execution of
the new agreement. In the event of termination, options to acquire
unvested shares would be forfeited, and the Company would be required
to buy back any previously acquired unvested shares for the original
purchase price.
Pursuant to the Bank Holding Company Act of 1965 and subsequent
regulations and interpretations put forth by the Federal Reserve Board
(the "regulations"), Swiss Bank's holdings in terms of shares of the
Company's common stock may not reach or exceed 10% of the total of all
classes of the Company's common stock. Similarly, the total
consideration paid by Swiss Bank for the purchase of shares plus the
purchase and exercise of options may not at any time reach or 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
Swiss Bank's options are exercisable, is limited due to an insufficient
number of shares outstanding, Swiss Bank 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 Swiss Bank for authorization
to exceed its allowable percentage of ownership, or (iii) the purchase
of Class B shares by the Company from Swiss Bank at a defined fair
value. In addition, the exercise period for options to purchase vested
shares would be increased beyond the normal 5 years to account for any
time during such exercise period in which Swiss Bank is unable to
exercise its options as a result of the regulations.
F-24
39
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Activity in Liquidation Preference Common and Class A Common Stock:
WEIGHTED
RESTRICTED ADVISOR OPTION LIQUIDATION SHARE AVERAGE
PLAN PLAN PLAN OTHER PREFERENCE TOTAL PRICE
---------- ------- --------- ---------- ------------ ---------- --------
BEGINNING SHARES 8,662,920 404,000 61,920 5,280,776 16,000,000 30,409,616 0.70
ISSUANCE 1,107,661 60,000 -- 2,145,147 -- 3,312,808 1.07
OPTIONS EXERCISED -- -- 18,540 -- -- 18,540 0.70
REPURCHASED -- -- -- -- -- -- --
---------- ------- --------- ---------- ---------- ----------
DECEMBER 31, 1995 9,770,581 464,000 80,460 7,425,923 16,000,000 33,740,964 0.74
ISSUANCE 3,871,985 15,367 825 188,079 -- 4,076,256 2.92
OPTIONS EXERCISED -- -- 1,818,218 -- -- 1,818,218 0.85
CONVERSION -- -- -- 16,000,000 (16,000,000) -- 0.01
REPURCHASED (10,971) -- (619) -- -- (11,590) 2.63
---------- ------- --------- ---------- ---------- ----------
DECEMBER 31, 1996 13,631,595 479,367 1,898,884 23,614,002 -- 39,623,848 1.01
ISSUANCE 828,000 100 -- 157,269 -- 985,369 5.42
OPTIONS EXERCISED -- 120,000 534,520 -- -- 654,520 1.02
REPURCHASED (1,635,886) -- -- (1,400,144) -- (3,036,030) 1.58
---------- ------- --------- ---------- ---------- ----------
DECEMBER 31, 1997 12,823,709 599,467 2,433,404 22,371,127 -- 38,227,707 1.28
========== ======= ========= ========== ========== ==========
F-25
40
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
Activity in Options for Class A Common Stock:
WEIGHTED
AVERAGE
ADVISOR OTHER EXERCISE
1991 PLAN PLAN OPTIONS TOTAL PRICE
---------- ------- ------- ---------- --------
1995 OUTSTANDING AT BEGINNING OF YEAR 6,675,992 160,000 311,288 7,147,280 0.86
Granted 2,255,000 -- -- 2,255,000 1.25
Exercised (17,180) -- (1,360) (18,540) 0.70
Forfeited -- -- -- -- --
---------- ------- ------- ----------
Outstanding at December 31, 1995 8,913,812 160,000 309,928 9,383,740 0.96
========== ======= ======= ==========
Exercisable at December 31, 1995 1,858,166 205,214 96,000 2,159,380 0.92
1996 OUTSTANDING AT BEGINNING OF YEAR 8,913,812 160,000 309,928 9,383,740 0.96
Granted 6,848,240 65,000 -- 6,913,240 1.08
Exercised (1,776,626) -- (41,592) (1,818,218) 0.84
Forfeited (41,392) -- (512) (41,904) 2.29
---------- ------- ------- ----------
Outstanding at December 31, 1996 13,944,034 225,000 267,824 14,436,858 2.02
========== ======= ======= ==========
Exercisable at December 31, 1996 1,389,546 152,000 189,484 1,731,030 1.57
1997 OUTSTANDING AT BEGINNING OF YEAR 13,944,034 225,000 267,824 14,436,858 2.02
Granted 6,891,352 84,000 -- 6,975,352 3.55
Exercised (485,680) (120,000) (48,840) (654,520) 1.03
Forfeited (2,858,289) -- (7,184) (2,865,473) 0.66
---------- ------- ------- ----------
Outstanding at December 31, 1997 17,491,417 189,000 211,800 17,892,217 3.15
========== ======= ======= ==========
Exercisable at December 31, 1997 2,310,825 44,500 140,192 2,495,517 2.68
F-26
41
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
The following table summarizes information about options for Class
A common shares outstanding at December 31, 1997:
Weighted-Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
$0.50 362,500 4.22 210,528
$0.75 1,204,260 6.59 658,390
$1.00 4,316,100 7.10 1,003,310
$1.75 697,044 6.33 100,978
$2.50 4,130,321 9.51 393,720
$3.00 71,500 9.69 -
$3.75 3,551,542 8.97 114,306
$4.00 65,000 10.04 -
$6.75 3,493,950 8.84 14,285
---------- ---------
$3.75 17,892,217 8.26 2,495,517
========== =========
Weighted average exercise price of exercisable options $1.14
As previously noted, the Company has continued to account for its
stock option activity under APB 25. Had the Company elected to adopt
SFAS 123, the pro forma impact on net income and earnings per share
would have been as follows:
1997 1996 1995
-------- ------- ---------
Net income
As reported $11,217 $20,499 $10,813
Pro forma $9,948 $20,063 $10,734
Basic earnings per share
As reported $0.29 $0.54 $0.33
Pro forma $0.25 $0.53 $0.33
Diluted earnings per share
As reported $0.24 $0.48 $0.31
Pro forma $0.21 $0.47 $0.31
All options issued by the Company in 1997, 1996 and 1995 were
issued at the estimated fair value in effect at the date of issuance,
vest ratably over the vesting period, and expire one year after the
final vesting date. The fair value of each option
F-27
42
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
grant was estimated on the date of grant using the Minimum Value option
pricing model with the following assumptions for 1997, 1996 and 1995,
respectively; risk free weighted average interest rates of 6.5% for
1997 and 6.8% for 1996 and 1995; dividend yield and volatility of zero
for all years. The expected life for each issuance was equal to the
midpoint of the vesting period, plus one year. For example, an option
vesting ratably over ten years has an expected life of 6 years. The
weighted-average grant-date fair value of options issued in 1997, 1996
and 1995 was $2,709, $5,938 and $1,916, respectively. The Company
expects that the impact of future option issuances will be to increase
overall pro forma compensation expense, thereby reducing pro forma net
income reported in future periods.
11. Income Taxes
Income before taxes for the years ended December 31 was as
follows:
1997 1996 1995
----------- --------- ---------
Domestic $ (4,054) $ 10,151 $ 12,518
Foreign 23,562 30,000 7,732
---------- --------- --------
$ 19,508 $ 40,151 $ 20,250
========== ========= ========
The provision for income taxes charged to operations was as
follows:
1997 1996 1995
--------- -------- --------
Current:
U.S. Federal $ 9,159 $ 21,794 $ 4,444
State and local 1,383 3,583 766
Foreign 8,172 10,319 7,825
-------- -------- --------
Total current $ 18,714 $ 35,696 $ 13,035
======== ======== ========
Deferred:
U.S. Federal (8,902) (14,400) (4)
State and local (1,392) (2,242) 32
Foreign (129) 598 (3,626)
-------- -------- --------
Total deferred (10,423) (16,044) (3,598)
-------- -------- --------
Total provision for income taxes $ 8,291 $ 19,652 $ 9,437
======== ======== ========
F-28
43
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
Deferred tax liabilities (assets) are comprised of the following
at December 31:
1997 1996
-------- --------
Deferred compensation $ 431 $ 536
Conversion of acquired entity from
cash basis to accrual basis of
accounting 1,171 989
Other 664 493
-------- --------
Gross deferred tax liabilities 2,266 2,018
-------- --------
Property, Plant & Equipment (11,050) (5,557)
Accrued liabilities (22,958) (21,233)
Equity investments (817) (517)
Intangibles (1,134) (171)
Deferred revenue (1,538) (4,877)
Other -- (129)
-------- --------
Gross deferred tax assets (37,497) (32,484)
-------- --------
Net deferred tax asset $(35,231) $(30,466)
======== ========
A valuation allowance has not been established for the net
deferred tax asset as of December 31, 1997 or 1996, due to a
significant contract backlog and the availability of loss carrybacks.
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:
1997 1996 1995
---- ---- ----
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
Statutory U.S. tax rates $ 6,828 35.0% $14,053 35.0% $ 7,087 35.0%
Non-deductible items 528 2.7 3,017 7.5 1,829 9.0
State and local taxes (215) (1.1) 609 1.5 751 3.7
Nondeductible
amortization and write-
off of intangible assets 1,765 9.0 1,900 4.7 -- --
U.S. rates in excess of
foreign rates and other (615) (3.1) 73 .2 (230) (1.1)
------- ------- ------- ------- ------- -------
Total provision for
income taxes $ 8,291 42.5% $19,652 48.9% $ 9,437 46.6%
======= ======= ======= ======= ======= =======
F-29
44
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
12. Certain Geographic Data and Segment Information
As defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
the Company operates in one industry segment which includes the
development, implementation, operation and management of information
systems. Services are provided through the parent company in the United
States, and through a worldwide network of subsidiaries located in the
United Kingdom, Germany, France, Switzerland, the Netherlands,
Singapore, Hong Kong and Japan. Financial information by geographic
region is as follows:
1997 1996 1995
-------------------------------------
United States:
Total revenue $ 519,122 $ 365,211 $ 238,783
Operating income (5,507) 10,969 12,802
Identifiable assets at December 31 171,503 130,766 90,632
Europe and Asia:
Total revenue 262,499 234,227 103,523
Operating income 23,100 30,332 8,060
Identifiable assets at December 31 95,600 101,481 39,841
Consolidated:
Total revenue 781,621 599,438 342,306
Operating income 17,593 41,301 20,862
Identifiable assets at December 31 267,103 232,247 130,473
Greater than 10% of the Company's contract revenue was earned from
two customers for the year ended December 31, 1997, one customer for
the year ended December 31, 1996, and two customers for the year ended
December 31, 1995. Revenue from these customers comprised 27% and 10%
of total revenue in 1997, 28% of total revenue in 1996, and 12% and 10%
of total revenue in 1995.
F-30
45
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
13. Commitments and Contingencies
Operating leases and maintenance agreements
The Company has commitments related to data processing
facilities, office space and computer equipment under
non-cancelable operating leases and fixed maintenance agreements
for periods ranging from one to ten years. Future minimum
commitments under these agreements as of December 31, 1997 are as
follows:
Year ending Lease and Maintenance
December 31: Commitments
------------ -----------
1998 $25,599
1999 20,559
2000 15,556
2001 10,783
2002 11,168
-------
Total $83,665
=======
The Company is obligated under certain operating leases for
its pro rata share of the lessors' operating expenses. Rent
expense was $17,958, $18,212, and $23,731 for 1997, 1996 and 1995,
respectively.
Letter of credit
The Company had a $1,000 irrevocable letter of credit as of
December 31, 1997. The letter of credit was issued in conjunction
with the provisions of a certain contract. The fair value of the
letter of credit is estimated to be equal to the face value based
on the nature of the fee arrangements with the issuing bank.
Financial instruments with off-balance sheet risk
Interest rate swap
In December 1993, the Company entered into an agreement with
a customer to reduce future monthly billings in exchange for a
non-refundable payment for work performed involving the
development and installation of a major new system. Under the
terms of this agreement, the
F-31
46
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Company is required to make an interest sensitive payment to
the customer if a defined variable interest rate ("Rate") exceeds
8.5% based upon a declining notional amount ($48,756 and $67,716
as of December 31, 1997 and 1996, respectively) over the term of
the contract. If the Rate is less than 8.5%, the customer is
required to pay the Company for the difference in the interest
rates based upon the same declining notional amount.
In January 1994, the Company entered into an interest rate
swap agreement with a bank to eliminate its exposure to the
interest sensitive payment. Under the terms of the swap agreement,
the Company is required to pay a fixed interest rate of 7.32% to a
bank in exchange for being paid the Rate.
The differences to be paid or received on the interest
sensitive payment and swap are included as an adjustment to direct
cost of services. The Company recorded a reduction to direct cost
of services of $643 and $852 for the years ended December 31, 1997
and 1996, respectively. Based on anticipated cash flows,
discounted at the U.S. prime lending rate of 8.5%, the fair value
of these instruments was estimated to be a $1,102 benefit as of
December 31, 1997. The Company's remaining risk associated with
these transactions is risk of default by the customer or the bank,
which the Company believes to be remote.
Foreign currency exchange forward contracts
At December 31, 1997, the Company had three forward exchange
contracts maturing in early 1998. Two British pound to U.S. dollar
trades for $10,177 and $6,684 as of December 31, 1997 mature in
February 1998 and January 1998, respectively. A third forward
trade of Swiss franc to U.S. dollar totaling $8,108 matures in
January 1998.
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 $18 as of December 31, 1997.
The Company's remaining risk associated with this transaction is
the risk of default by the bank, which the Company believes to be
remote.
Contracts
In the normal course of business, the Company provides
services to its clients which may require the Company to comply
with certain performance criteria. The Company believes that the
ultimate liability, if any, incurred under these contracts will
not have a material adverse effect on the Company's consolidated
results of operations or financial position.
Contingent put rights
Under the terms of various stock agreements, a total of
1,463,376 shares of Class A Common Stock are subject to contingent
put rights. For
F-32
47
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
600,000 and 323,376 of these shares, the holders may require the
Company to repurchase the shares at fair value in the event the
Company's Class A Common Stock is not publicly traded by the years
2010 and 2000, respectively. For 540,000 of these shares, the
holders may require the Company to repurchase the shares at the
original cost plus 8% interest, accrued from the date of purchase,
in the event the holders' employment or directorship terminates.
Litigation
There are various claims and pending actions against the
Company arising in the ordinary course of the conduct of its
business. The Company believes that these claims and actions will
have no material adverse effect on the Company's financial
condition, results of operations or cash flow.
Year 2000
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process date
fields containing a 2 digit year is commonly referred to as the
Year 2000 Compliance issue. As the year 2000 approaches, such
systems could be unable to accurately process certain date-based
information. The Company believes it has identified all
significant applications that will require modification to ensure
Year 2000 Compliance and does not believe compliance with the Year
2000 requirements will have a material adverse effect on the
Company's business or results of operations. The Company is
performing an assessment of its obligations to make any of its
clients' systems Year 2000 compliant, including an estimate of the
cost and revenues to be incurred in fulfilling such obligations,
and monitors this assessment on an ongoing basis. Based on such
assessment, the Company does not believe that its client
obligations with respect to the Year 2000 issue will have a
material adverse impact on the financial position and results of
operations of the Company.
14. Retirement Plan and Other Employee Trusts
During 1989, the Company established the Perot Systems 401(k)
Retirement Plan, a qualified defined contribution retirement plan. The
plan year is January 1 to December 31 and allows eligible employees to
contribute between 1% and 15% of their annual compensation, including
overtime pay, bonuses and commissions. The Plan was amended effective
January 1, 1996 to change the Company's contribution from 2% of the
participants' defined annual compensation, to a formula matching
employees' contributions at a two-thirds rate, up to a maximum Company
contribution of 4%. The Company's cash contribution for the years ended
December 31, 1997, 1996 and 1995 amounted to $7,388, $4,785 and $1,919,
respectively. The Company's contribution of common stock for the years
ended December 31, 1997, 1996 and 1995 totaled 128,795, 6,325 and
99,486 shares, respectively, which were allocated to participants' plan
accounts using a formula based on compensation. Compensation expense of
$631, $14, and $224, respectively, was recorded as a result of these
share contributions.
In 1992 the company established a European trust, for the benefit
of non-U.S. based employees, to which 11,926 shares were contributed in
1995. Compensation expense of $26 was recorded in 1995 as a result of
this grant.
In 1996, the company contributed 162,143 shares to certain trusts
established for the benefit of employees transitioning to the company
pursuant to certain contracts. Compensation expense of $405 was
recorded in 1996 related to these grants.
F-33
48
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
15. Supplemental Cash Flow Information
1997 1996 1995
---------- ------------ -------
Cash paid during the year for:
Interest $ 1,283 $ 1,877 $ 671
========== ============ ======
Income taxes $ 23,325 $ 28,032 $7,031
========== ============ ======
Non-cash investing and financing activities:
Issuance of common stock for acquisition
of businesses $ 2,701 $ 6,545 $ --
========== ============ ======
Issuance of stock options for acquisition
of business $ 1,500 $ -- $ --
========== ============ ======
Liabilities assumed in acquisition of businesses $ 7,693 $ 4,150 $ --
========== ============ ======
Repurchase of shares issued under Restricted
Stock Plan in exchange for reductions in
notes receivable from stockholders $ 2,353 $ 225 --
========== ============ ======
Purchase of shares financed by notes
receivable from stockholders $ 1,427 $ 3,065 $ 901
========== ============ ======
Reversal of deferred compensation $ 1,050 $ -- $ --
========== ============ ======
Contract rights issued (cancelled) at inception
and renegotiation of Swiss Bank Agreement ($ 4,146) $ 4,544 $ --
========== ============ ======
Stock options issued for investments in
and advances to unconsolidated
affiliates $ -- $ 706 $ --
========== ============ ======
Transfer of assets upon assignment of lease obligation $ -- $ -- $1,008
========== ============ ======
F-34
49
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
16. Related Party Transactions
During 1996 and 1997, certain officers financed the purchase of
Class A Common Stock with a bank. In addition, the Company entered into
an agreement with this bank under which, if the Company's Class A
common shares are not publicly traded prior to the earlier of June 30,
1998 or the maturity date of the individual loans, the Company would
purchase, at the bank's option, any of these loans. As of December 31,
1997, approximately $1,546 remain outstanding under these loans. All of
these loans bear interest at the prime rate plus 1% (currently 9.5%)
and are due at various dates between July 1, 1998 and July 22, 1999.
In March 1996, the Company loaned $615 to an executive. The note
bears interest at a rate of 5.98% per annum and is payable at the
fifteenth anniversary of the date of the note or at an earlier date if
the Company's common stock is publicly traded. In April 1997, the
Company loaned an additional $2,397 to this executive. For these
additional loans, up to $1,169 is collateralized by the Company's Class
A common shares held by this executive and $1,000 is collateralized by
a mortgage on the executive's residence. These additional loans will
bear interest at the greater of 7.25% or the applicable federal rate.
As of December 31, 1997, the principal balance remaining on these notes
is $2,169. In July 1997, the Company repurchased 1,400,000 shares of
common stock from this executive, following his resignation, through a
reduction of $1,830 in outstanding notes receivable.
In August 1996, an officer of the Company obtained funding in the
amount of $350 from a bank. The Company entered into a third party
agreement with this bank under which, if the Company's Class A common
shares are not publicly traded prior to the earlier of June 30, 1998 or
the maturity date of the loan, the Company will purchase the loan at
the bank's option. The maturity date of this loan is February 26, 2000.
In January and February 1997, the Company loaned $450 to an
executive at the rate of 8%. The notes were collateralized by the
executive's Class A common shares. Prior to year end, the notes and the
related shares were canceled.
In August 1997, the Company also loaned $250 to an executive at
the rate of 8%. This note is collateralized by the executive's Class A
common shares and is payable in August 2000.
F-35
50
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------
A former officer of the Company has three outstanding loans
totaling $349 with the Company. These loans are secured by the
Company's Class A common shares held by the executive and are due by
December 31, 1999.
In 1996, the Company entered into an agreement with Perot
Investments, Inc. ("PII") pursuant to which the Company licensed
certain software from PII. The Company sublicensed such software to The
Witan Company, L.P. ("Witan"). Witan paid a license fee of $1,000
directly to PII in connection with the license. The Company had a
separate contract with Witan to perform development work on the
licensed software. The contract was terminated in 1997. PII is an
affiliate of a stockholder of the Company.
17. Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share", effective for
fiscal years ending after December 15, 1997. SFAS 128 replaces the
presentation of primary earnings per common share with basic earnings
per share, with the principal difference being that common stock
equivalents are not considered in computing basic earnings per share.
The following chart is a reconciliation of the numerators and the
denominators of the basic and diluted per-share computations.
F-36
51
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
PER-SHARE
INCOME SHARES AMOUNT
------ ------ ----------
FOR THE YEAR ENDED 1995
Net income 10,813
Less preferred stock dividend (595)
------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders 10,218 31,151 $ 0.33
==============
Dilutive options 2,215
-----------------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions 10,218 33,366 $ 0.31
==============
FOR THE YEAR ENDED 1996
Net income 20,499
Less preferred stock dividend (447)
------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders 20,052 37,055 $ 0.54
==============
Dilutive options 5,116
-----------------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions 20,052 42,171 $ 0.48
==============
FOR THE YEAR ENDED 1997
Net income 11,217
Less preferred stock dividend -
------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders 11,217 39,168 $ 0.29
==============
Dilutive options 8,428
-----------------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common stockholders
Plus assumed conversions 11,217 47,596 $ 0.24
==============
The effect of this accounting change on previously reported earnings
per share data was as follows:
PER SHARE AMOUNTS 1996 1995
-----------------------------
Primary EPS as reported $ 0.40 $ 0.30
Effect of SFAS No. 128 0.14 0.03
-----------------------------
Basic EPS as restated $ 0.54 $ 0.33
============================
Fully diluted EPS as reported $ 0.40 $ 0.30
Effect of SFAS No. 128 0.08 0.01
----------------------------
Diluted EPS as restated $ 0.48 $ 0.31
============================
F-37
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All other information required by Items 10, 11, 12 and 13, is incorporated by
reference to the registrant's definitive proxy statement for its Annual Meeting
of Stockholders to be held on May 8, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997.
13
53
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
- ------ -----------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1* 1991 Stock Option Plan
10.2* Form Option Agreement (1991 Option Plan)
10.3* Restricted Stock Plan
10.4* Form Restricted Stock Agreement (Restricted Stock Plan)
10.5* 1996 Non-employee Director Stock Option/Restricted Stock Incentive Plan
10.6* Form Restricted Stock Agreement (Non-Employee Director Stock Option/ Restricted Stock Plan
10.7* Form Option Agreement (Non-Employee Stock Option/Restricted Stock Plan)
10.8* Advisor Stock Option/Restricted Stock Incentive Plan
10.9* Form Restricted Stock Agreement (Advisor Stock Option/Restricted Stock Plan)
10.10* Form Option Agreement (Advisor Stock Option/Restricted Stock Plan)
10.11* Stock Purchase Agreement dated as of August 20, 1992, between the Company and Meyerson Family Limited Partnership
10.12* Stock Option Grant dated as of June 27, 1995, by the Company in favor of James A. Cannavino
10.13* Employment Agreement dated as of September 16, 1995, by and between the Company and James A. Cannavino
10.14* Promissory Note dated December 18, 1995, made by James A. Cannavino in favor of the Company in the principal amount of
$1,400,000
10.15* Promissory Note dated January 1, 1996, made by James A. Cannavino in favor of the Company in the principal amount of
$1,500,000
10.16* Pledge Agreement made as of December 18, 1995, by James A. Cannavino in favor of the Company
10.17* Modification Agreement dated as of March 7, 1997, between the Company and James A. Cannavino
10.18* Deed of Trust dated April 15, 1997, made by James A. Cannavino in favor of the Company
10.19* Promissory note dated April 14, 1997, made by James A. Cannavino in favor of the Company
10.20* Associate Agreement dated July 8, 1996, between the Company and James Champy
10.21* Restricted Stock Agreement dated July 8, 1996, between the Company and James Champy
10.22* Letter Agreement dated July 8, 1996, between James Champy and the Company
10.23* Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in favor of the Company
10.24* Pledge dated June 17, 1996, made by Guillermo G. Marmol in favor of the Company
10.25* Agreement dated June17, 1996, among the Company, Guillermo Marmol and NationsBank of Texas, N.A.
10.26* Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in favor of NationsBank of Texas, N.A.
14
54
10.27* Agreement dated August 26, 1996, among the Company, Donald D. Drobny and NationsBank of Texas, N.A.
10.28* Promissory Note dated August 26, 1996, made by Donald D. Drobny in favor of NationsBank of Texas, N.A.
10.29* Promissory Note dated July 31, 1996, made by the Company in favor of NationsBank N.A.
10.30* Amended and Restated PSC Stock Option and Purchase Agreement dated as of April 24, 1997, by and between Swiss Bank
Corporation and the Company
10.31* Amended and Restated Master Operating Agreement dated as of January 1, 1997, between Swiss Bank Corporation and the
Company
10.32* Amended and Restated Agreement for EPI Operational Management Services dated as of January 1, 1997
10.33** Form of Stock Option Agreement for the Perot Systems Corporation 1991 Stock Option Plan
10.34*** Restricted Stock Agreement dated as of December 22, 1995, between the Company and Morton H. Meyerson
10.35*** Promissory Note in the principal amount of $187,500 dated as of January 28, 1997, made by Terry M. Ashwill payable to the
Company.
10.36*** Bridge Note in the principal amount of $187,500, dated as of January 28, 1997, made by Terry M. Ashwill payable to the
Company.
10.37*** Promissory Note in the principal amount of $37,500, dated as of February 14, 1997, made by Terry M. Ashwill payable to
the Company.
10.38*** Bridge Note in the principal amount of $37,500, dated as of February 14, 1997, made by Terry M. Ashwill payable to the
Company.
10.39*** Pledge Agreement dated as of January 28, 1997, between the Company and Terry M. Ashwill.
10.40*** Pledge Agreement dated as of February 14, 1997, between the Company and Terry M. Ashwill.
10.41*** Letter Agreement dated as of December 23, 1997, between the Company and Terry M. Ashwill.
10.42*** Letter Agreement dated as of January 4, 1997, between the Company and Terry M. Ashwill.
10.43*** Letter Agreement dated November 17, 1997, between the Company and George H. Heilmeier.
11*** Statement re Computation of Earnings Per Share
21*** Subsidiaries of the Registrant
23.1*** Consent of Coopers & Lybrand L.L.P. dated March 30, 1998.
27*** Financial Data Schedule
27.a*** Restated Financial Data Schedule for December 31, 1996
27.b*** Restated Financial Data Schedule for September 30, 1997
27.c*** Restated Financial Data Schedule for June 20, 1997
27.d*** Restated Financial Data Schedule for March 31, 1997
99(a)*** Schedule VIII -Valuation and Qualifying Accounts
*This exhibit is incorporated by reference to the Company's Form 10 Registration
Statement filed with the Securities and Exchange Commission on April 30, 1997,
as amended.
**This exhibit is incorporated by reference to the Company's Form 10-Q filed
with the Securities and Exchange Commission on November 14, 1997.
***This exhibit is filed herewith.
B. There were no reports on Form 8-K filed during the fourth quarter of 1997.
15
55
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 30, 1998
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 duly 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
(Principal Executive
Officer) March 30, 1998
/s/ JAMES CHAMPY Vice President and
Director March 30, 1998
/s/ TERRY ASHWILL Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) March 30, 1998
/s/ STEVE BLASNIK Director March 30, 1998
/s/ ROSS PEROT, JR. Director March 30, 1998
/s/ GEORGE H. HEILMEIER Director March 30, 1998
/s/ CARL H. HAHN Director March 30, 1998
16
56
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1* 1991 Stock Option Plan
10.2* Form Option Agreement (1991 Option Plan)
10.3* Restricted Stock Plan
10.4* Form Restricted Stock Agreement (Restricted Stock Plan)
10.5* 1996 Non-employee Director Stock Option/Restricted Stock Incentive Plan
10.6* Form Restricted Stock Agreement (Non-Employee Director Stock Option/Restricted Stock Plan
10.7* Form Option Agreement (Non-Employee Stock Option/Restricted Stock Plan)
10.8* Advisor Stock Option/Restricted Stock Incentive Plan
10.9* Form Restricted Stock Agreement (Advisor Stock Option/Restricted Stock Plan)
10.10* Form Option Agreement (Advisor Stock Option/Restricted Stock Plan)
10.11* Stock Purchase Agreement dated as of August 20, 1992, between the Company and Meyerson Family Limited Partnership
10.12* Stock Option Grant dated as of June 27, 1995, by the Company in favor of James A. Cannavino
10.13* Employment Agreement dated as of September 16, 1995, by and between the Company and James A. Cannavino
10.14* Promissory Note dated December 18, 1995, made by James A. Cannavino in favor of the Company in the principal amount of
$1,400,000
10.15* Promissory Note dated January 1, 1996, made by James A. Cannavino in favor of the Company in the principal amount of
$1,500,000
10.16* Pledge Agreement made as of December 18, 1995, by James A. Cannavino in favor of the Company
10.17* Modification Agreement dated as of March 7, 1997, between the Company and James A. Cannavino
10.18* Deed of Trust dated April 15, 1997, made by James A. Cannavino in favor of the Company
10.19* Promissory note dated April 14, 1997, made by James A. Cannavino in favor of the Company
10.20* Associate Agreement dated July 8, 1996, between the Company and James Champy
10.21* Restricted Stock Agreement dated July 8, 1996, between the Company and James Champy
10.22* Letter Agreement dated July 8, 1996, between James Champy and the Company
10.23* Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in favor of the Company
10.24* Pledge dated June 17, 1996, made by Guillermo G. Marmol in favor of the Company
10.25* Agreement dated June 17, 1996, among the Company, Guillermo Marmol and NationsBank of Texas, N.A.
10.26* Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in favor of NationsBank of Texas, N.A.
10.27* Agreement dated August 26, 1996, among the Company, Donald D. Drobny and NationsBank of Texas, N.A.
10.28* Promissory Note dated August 26, 1996, made by Donald D. Drobny in favor of NationsBank of Texas, N.A.
10.29* Promissory Note dated July 31, 1996, made by the Company in favor of NationsBank N.A.
10.30* Amended and Restated PSC Stock Option and Purchase Agreement dated as of April 24, 1997, by and between Swiss Bank
Corporation and the Company
10.31* Amended and Restated Master Operating Agreement dated as of January 1, 1997, between Swiss Bank Corporation and the
Company
10.32* Amended and Restated Agreement for EPI Operational Management Services dated as of January 1, 1997
10.33** Form of Stock Option Agreement for the Perot Systems Corporation 1991 Stock Option Plan
10.34*** Restricted Stock Agreement dated as of December 22, 1995, between the Company and Morton H. Meyerson
10.35*** Promissory Note in the principal amount of $187,500, dated as of January 28, 1997, made by Terry M. Ashwill payable to the
Company.
10.36*** Bridge Note in the principal amount of $187,500, dated as of January 28, 1997, made by Terry M. Ashwill payable to the
Company.
10.37*** Promissory Note in the principal amount of $37,500, dated as of February 14, 1997, made by Terry M. Ashwill payable to
the Company.
10.38*** Bridge Note in the principal amount of $37,500, dated as of February 14, 1997, made by Terry M. Ashwill payable to the
Company.
10.39*** Pledge Agreement dated as of January 28, 1997, between the Company and Terry M. Ashwill.
10.40*** Pledge Agreement dated as of February 14, 1997, between the Company and Terry M. Ashwill.
10.41*** Letter Agreement dated as of December 23, 1997, between the Company and Terry M. Ashwill.
10.42*** Letter Agreement dated as of January 4, 1997, between the Company and Terry M. Ashwill.
10.43*** Letter Agreement dated November 17, 1997, between the Company and George H. Heilmeier.
11*** Statement re Computation of Earnings Per Share
21*** Subsidiaries of the Registrant
23.1*** Consent of Coopers & Lybrand L.L.P. dated March 30, 1998.
27*** Financial Data Schedule
27.a*** Restated Financial Data Schedule for December 31, 1996
27.b*** Restated Financial Data Schedule for September 30, 1997
27.c*** Restated Financial Data Schedule for June 30, 1997
27.d*** Restated Financial Data Schedule for March 31, 1997
99(a)*** Schedule VIII -Valuation and Qualifying Accounts
*This exhibit is incorporated by reference to the Company's Form 10 Registration
Statement filed with the Securities and Exchange Commission on April 30, 1997,
as amended.
**This exhibit is incorporated by reference to the Company's Form 10-Q filed
with the Securities and Exchange Commission on November 14, 1997.
***This exhibit is filed herewith.