1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-22495
PEROT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2230700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12404 PARK CENTRAL DRIVE
DALLAS, TEXAS
75251
(Address of principal executive offices)
(Zip Code)
(972) 340-5000
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
Number of shares of registrant's common stock outstanding as of July 30, 2001:
99,712,138.
2
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2001
INDEX
<Table>
<Caption>
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.............................................................1
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and 2000.......................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000..................................................3
Notes to Condensed Consolidated Financial Statements....................................4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................11
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS......................................................................12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................12
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................................................12
SIGNATURES.....................................................................................13
</Table>
3
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
ASSETS
June 30, 2001 December 31, 2000
------------- -----------------
Current assets:
Cash and cash equivalents ...................................................... $ 236,269 $ 239,688
Accounts receivable, net ....................................................... 165,517 176,004
Prepaid expenses and other ..................................................... 48,909 41,652
--------- ---------
Total current assets ....................................................... 450,695 457,344
Property, equipment and purchased software, net ................................... 50,460 48,108
Goodwill, net ..................................................................... 70,534 83,703
Other non-current assets .......................................................... 97,710 83,997
--------- ---------
Total assets ............................................................... $ 669,399 $ 673,152
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 23,825 $ 35,294
Accrued liabilities ............................................................ 77,806 82,620
Other current liabilities ...................................................... 41,960 45,940
--------- ---------
Total current liabilities .................................................. 143,591 163,854
Other non-current liabilities ..................................................... 8,728 8,243
--------- ---------
Total liabilities .......................................................... 152,319 172,097
--------- ---------
Stockholders' equity:
Common stock ................................................................... 994 981
Additional paid-in-capital ..................................................... 309,233 305,320
Other stockholders' equity ..................................................... 216,678 200,637
Accumulated other comprehensive loss ........................................... (9,825) (5,883)
--------- ---------
Total stockholders' equity ................................................. 517,080 501,055
--------- ---------
Total liabilities and stockholders' equity ................................. $ 669,399 $ 673,152
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
Page 1
4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue .............................................. $ 291,287 $ 268,524 $ 586,019 $ 543,106
Costs and expenses:
Direct cost of services ......................... 222,505 209,417 451,320 413,605
Selling, general and administrative expenses .... 46,127 44,927 129,008 88,313
Compensation charge related to acquisition ...... -- -- -- 22,100
--------- --------- --------- ---------
Operating income ..................................... 22,655 14,180 5,691 19,088
Interest income, net ................................. 2,626 3,738 5,725 8,660
Equity in earnings of unconsolidated affiliates ...... 2,604 1,228 4,226 4,315
Other income (expense), net .......................... (611) 2,466 (1,060) 52,600
--------- --------- --------- ---------
Income before taxes .................................. 27,274 21,612 14,582 84,663
Provision for income taxes ........................... 10,773 8,537 5,760 33,442
--------- --------- --------- ---------
Net income ...................................... $ 16,501 $ 13,075 $ 8,822 $ 51,221
========= ========= ========= =========
Basic and diluted earnings per common share:
Basic earnings per common share ................. $ 0.17 $ 0.14 $ 0.09 $ 0.54
Weighted average common shares outstanding ...... 98,513 96,380 98,058 94,891
Diluted earnings per common share ............... $ 0.15 $ 0.12 $ 0.08 $ 0.45
Weighted average diluted common shares
outstanding ..................................... 111,678 113,562 110,905 114,174
</Table>
The accompanying notes are an integral part of these financial statements.
Page 2
5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months ended June 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income ...................................................... $ 8,822 $ 51,221
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................ 17,136 12,949
Gain on sale of marketable equity securities ................. -- (17,503)
Gain on sale of unconsolidated affiliate ..................... -- (38,851)
Other non-cash items ......................................... 5,093 (7,017)
Changes in assets and liabilities:
Accounts receivable, net .................................. 6,851 (11,307)
Prepaid expenses .......................................... (12,541) (13,880)
Accounts payable and accrued liabilities .................. (10,627) (14,739)
Accrued compensation ...................................... 2,802 (42,163)
Income taxes .............................................. 10,262 31,220
Other current and non-current assets ...................... (7,767) (26,996)
Other current and non-current liabilities ................. (4,391) (198)
--------- ---------
Net cash provided by (used in) operating activities ... 15,640 (77,264)
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software .................. (11,530) (11,854)
Acquisition of businesses, net of cash acquired of
$0 and $8,881, respectively ................................. (1,000) (41,119)
Proceeds from sale of unconsolidated affiliate ................. -- 55,486
Proceeds from sale of marketable equity securities ............. -- 26,543
Other .......................................................... (847) (2,327)
--------- ---------
Net cash (used in) provided by investing activities .. (13,377) 26,729
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ......................... 2,834 4,433
Proceeds from issuance of treasury stock ....................... 2,660 490
Purchases of treasury stock .................................... (3,714) --
Other .......................................................... 179 (254)
--------- ---------
Net cash provided by financing activities ............ 1,959 4,669
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ........ (7,641) (2,937)
--------- ---------
Net decrease in cash and cash equivalents ........................... (3,419) (48,803)
Cash and cash equivalents at beginning of period .................... 239,688 294,645
--------- ---------
Cash and cash equivalents at end of period .......................... $ 236,269 $ 245,842
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
Page 3
6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). The interim condensed consolidated
financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-owned subsidiaries (collectively, the "Company")
with all significant intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the audited financial statements
for the year ended December 31, 2000, as filed in the Company's Annual Report on
Form 10-K filed with the SEC on March 8, 2001. Operating results for the three
and six month periods ended June 30, 2001 are not necessarily indicative of the
results for the year ending December 31, 2001. Dollar amounts presented are in
thousands, except as otherwise noted.
Certain of the 2000 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
Accounting Standards Issued
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. ("FAS") 141, "Business Combinations" ("FAS
141") and FAS 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. FAS 142 addresses the
initial recognition and measurement of intangible assets acquired outside of a
business combination, whether acquired individually or with a group of other
assets, and the accounting and reporting for goodwill and other intangibles
subsequent to their acquisition. These standards require all future business
combinations to be accounted for using the purchase method of accounting.
Goodwill will no longer be amortized but instead will be subject to impairment
tests at least annually. The Company is required to adopt FAS 141 and FAS 142 on
a prospective basis as of January 1, 2002; however, certain provisions of these
new standards may also apply to any acquisitions concluded subsequent to June
30, 2001. As a result of implementing these new standards, the Company will
discontinue the amortization of goodwill as of December 31, 2001.
NOTE 2. REALIGNED OPERATING STRUCTURE
In the first quarter of 2001, the Company implemented a new operating structure
in order to strengthen the Company's market position and reduce its costs. In
connection with this realigned structure, the Company consolidated and closed
certain facilities, eliminated administrative redundancies and non-billable
positions, and recorded asset basis adjustments, resulting in a charge totaling
$33,713. This charge is classified as Selling, general and administrative
expenses in the condensed consolidated statements of operations and is composed
of the following: $23,812 related to employee work force reductions of
approximately 550 positions in all business functions and in all geographic
areas of the Company, of which substantially all were terminated as of March 31,
2001; $5,896 related to the consolidation and closure of facilities; and $4,005
related to adjustments to reduce the basis of certain leasehold improvements,
software and office equipment, and other assets to their net realizable value.
Page 4
7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amounts accrued and the related payments and adjustments against the charge
were as follows:
<Table>
<Caption>
Employee Facility Asset
Related Related Basis
Costs Costs Adjustments Total
--------- --------- ----------- --------
Total charges ............................... $ 23,812 $ 5,896 $ 4,005 $ 33,713
Less: cash payments and asset write-downs .. (17,227) (2,951) (4,005) (24,183)
-------- -------- -------- --------
Remaining balance at June 30, 2001 .......... $ 6,585 $ 2,945 $ -- $ 9,530
======== ======== ======== ========
</Table>
The remaining balance of $9,530 is included in Accrued liabilities on the
condensed consolidated balance sheets and is expected to be substantially
settled by September 30, 2001.
As a part of the realigned operating structure, the Company exited a separately
identifiable operation. For the six months ended June 30, 2001, revenue and net
operating losses for this operation were $0 and ($3,916), respectively. For the
six months ended June 30, 2000, revenue and net operating losses for this
operation were $1,394 and ($12,339), respectively.
NOTE 3. ACQUISITION
On December 15, 2000, the Company acquired 100% of the equity interests of the
outstanding shares of Health Systems Design Corporation for $9,274 in cash (net
of $4,271 in cash acquired). The transaction was accounted for as a purchase and
at December 31, 2000, the excess of the purchase price paid over the net assets
acquired (in the amount of $10,762) was recorded in Goodwill, net, on the
consolidated balance sheets, pending completion of the tangible and intangible
asset appraisals. The appraisal resulted in the reclass of $10,197 from
Goodwill, net, to purchased software and other identifiable tangible and
intangible assets.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss), net of tax, was as follows:
<Table>
<Caption>
Three months Six months
Ended June 30, Ended June 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income ...................................... $ 16,501 $ 13,075 $ 8,822 $ 51,221
Foreign currency translation adjustments ........ (575) (1,961) (3,963) (3,392)
Unrealized gain (loss) on marketable equity
securities, net of tax of $24, $(10,518),
$14, and $(8,894), respectively ............ 38 (16,450) 21 (13,910)
-------- -------- -------- --------
Total comprehensive income (loss) ............... $ 15,964 $ (5,336) $ 4,880 $ 33,919
======== ======== ======== ========
</Table>
Page 5
8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. STOCKHOLDERS' EQUITY
The components of "Other stockholders' equity" were as follows:
<Table>
<Caption>
June 30, 2001 December 31, 2000
------------- -----------------
Retained earnings ................. $ 219,314 $ 210,492
Deferred compensation ............. (2,046) (2,272)
Treasury stock .................... -- (7,388)
Other ............................. (590) (195)
--------- ---------
Total other stockholders' equity .. $ 216,678 $ 200,637
========= =========
</Table>
Additional paid-in-capital increased by $3,913 during the six months ended June
30, 2001, resulting primarily from an increase of $6,722 relating to tax
benefits resulting from the exercise of options to purchase shares of the
Company's Class A Common Stock. In addition, there was an offsetting decrease of
$2,772 from the re-issuance of Class A Common treasury shares for the exercise
of options and issuance of shares in the Employee Stock Purchase Plan.
At June 30, 2001, there were 97,523,818 shares of the Company's Class A Common
Stock outstanding and 1,784,320 shares of the Company's Class B Common Stock
outstanding. At December 31, 2000, there were 95,567,228 shares of the Company's
Class A Common Stock outstanding and 1,784,320 shares of the Company's Class B
Common Stock outstanding. The increase in the Company's Class A Common Stock is
primarily due to the exercise of stock options.
NOTE 6. EARNINGS PER SHARE (SHARES IN THOUSANDS)
The following chart is a reconciliation of the numerators and the denominators
of the basic and diluted per share computations.
<Table>
<Caption>
Three months ended June 30,
2001 2000
-------- --------
BASIC EARNINGS PER COMMON SHARE
Net income ............................................ $ 16,501 $ 13,075
======== ========
Weighted average common shares outstanding ............ 98,513 96,380
======== ========
Basic earnings per common share ....................... $ 0.17 $ 0.14
======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income ............................................ $ 16,501 $ 13,075
======== ========
Weighted average common shares outstanding ............ 98,513 96,380
Incremental shares assuming dilution .................. 13,165 17,182
-------- --------
Weighted average diluted common shares outstanding .... 111,678 113,562
======== ========
Diluted earnings per common share ..................... $ 0.15 $ 0.12
======== ========
</Table>
Page 6
9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<Table>
<Caption>
For the six months ended June 30,
2001 2000
-------- --------
BASIC EARNINGS PER COMMON SHARE
Net income .......................................... $ 8,822 $ 51,221
======== ========
Weighted average common shares outstanding .......... 98,058 94,891
======== ========
Basic earnings per common share ..................... $ 0.09 $ 0.54
======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income .......................................... $ 8,822 $ 51,221
======== ========
Weighted average common shares outstanding .......... 98,058 94,891
Incremental shares assuming dilution ................ 12,847 19,283
-------- --------
Weighted average diluted common shares outstanding .. 110,905 114,174
======== ========
Diluted earnings per common share ................... $ 0.08 $ 0.45
======== ========
</Table>
For the three and six months ended June 30, 2001, options to purchase 17,059 and
17,383 shares, respectively, of the Company's common stock were excluded from
the calculation of diluted earnings per common share because the impact was
antidilutive. For the three and six months ended June 30, 2000, options to
purchase 17,933 and 13,046 shares, respectively, of the Company's common stock
were excluded.
NOTE 7. CONTINGENCIES
Litigation
In 1998, the Robert Plan Corporation ("Robert Plan") filed a complaint in New
York state court based on events early in the course of a service agreement
entered into in 1990, and the Company filed counterclaims. Effective June 30,
2001, the Company and Robert Plan entered into a new 12-year agreement to
outsource Robert Plan's information technology infrastructure and applications
development. The complaint and counterclaims between the parties have been
dismissed by mutual agreement.
NOTE 8. SUBSEQUENT EVENTS
Acquisition
On July 26, 2001, the Company acquired substantially all of the assets of
Advanced Receivables Strategy, Inc. ("ARS"). The purchase price consists of an
initial cash payment of $52,400 and possible additional payments of up to
$50,000 over the next three years. The possible future payments are contingent
on ARS achieving certain financial targets over the same period. The transaction
was accounted for as a purchase; accordingly, the results of operations of ARS
and the estimated fair value of assets acquired and liabilities assumed will be
included in the Company's consolidated financial statements as of the
acquisition date.
Downsizing and Facilities Consolidation
During the third quarter of 2001, the Company announced additional downsizing of
various project, consulting and technology practice groups and the acceleration
of the consolidation of certain facilities. These actions are expected to result
in a third quarter charge of approximately $30,000.
Page 7
10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2001 and 2000
Total revenue increased in the three months ended June 30, 2001 by 8.5% to
$291.3 million from $268.5 million for the same period in 2000. This increase
was primarily attributable to $20.4 million in revenue from contracts signed
during the past twelve months. Revenue from UBS AG ("UBS") increased $14.8
million to $77.6 million in 2001 from $62.8 million in 2000 due to increased
spending on infrastructure services. The acquisitions of Health Systems Design
Corporation during the fourth quarter of 2000 and certain assets of Covation,
LLC during the first quarter of 2001 contributed $8.0 million of the increase in
revenue. These increases were partially offset by a $16.4 million decrease in
revenue from project and consulting offerings, which is due to a weakening
market for such services, and an overall net decrease in other existing
accounts. The Company anticipates that year over year revenue comparisons from
project and consulting offerings will continue to be unfavorable for the
remainder of 2001.
Domestic revenue grew by 4.0% in the second quarter of 2001 to $209.1
million from $201.1 million in the second quarter of 2000, and decreased as a
percentage of total revenue to 71.8% from 74.9% over the same period.
Non-domestic revenue, consisting of European and Asian operations,
increased in the second quarter of 2001 by 22.0% to $82.2 million from $67.4
million in the second quarter of 2000, and increased as a percentage of total
revenue to 28.2% from 25.1%. The largest components of European operations were
the United Kingdom and Switzerland. In the United Kingdom, revenue increased
35.6% to $40.4 million in the second quarter of 2001 from $29.8 million in the
second quarter of 2000 due primarily to an increase in revenue from UBS. In
Switzerland, revenue increased 1.8% to $11.2 million in the second quarter of
2001 from $11.0 million in the second quarter of 2000. Asian operations
generated revenue of $6.8 million, or 2.3% of total revenue for the second
quarter of 2001 and $5.0 million, or 1.9% of total revenue for the second
quarter of 2000.
Direct cost of services increased in the second quarter of 2001 by 6.3% to
$222.5 million from $209.4 million in the same period of 2000. Gross margin
increased to 23.6% of total revenue in the second quarter of 2001 as compared to
22.0% of total revenue in the second quarter of 2000. This increase was due
primarily to the elimination of certain costs in connection with the Company's
realigned operating structure, which was implemented in the first quarter of
2001. This increase was partially offset by a decline in revenue from project
and discretionary services, which typically have higher profit margins.
Selling, general and administrative expenses ("SG&A") increased in the
second quarter of 2001 by 2.7% to $46.1 million from $44.9 million in the same
period of 2000, and decreased as a percentage of total revenue to 15.8% from
16.7%. This decrease in percentage of revenue resulted primarily from the
Company's increase in revenue for the second quarter of 2001 over the comparable
prior year period.
Equity in earnings of unconsolidated affiliates was $2.6 million in the
three months ended June 30, 2001 compared to $1.2 million in the same period of
2000. Equity in earnings from HCL Perot Systems N.V. ("HPS"), a software joint
venture based in India, increased to $2.6 million in the second quarter of 2001
from $2.0 million in the same period of 2000. The Company expects that HPS's
earnings growth may be impacted in the remainder of 2001 as a result of the
weakening market for software services.
Page 8
11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 2001 and 2000
Total revenue increased in the six months ended June 30, 2001 by 7.9% to
$586.0 million from $543.1 million in the six months ended June 30, 2000. This
increase was primarily attributable to $43.1 million in revenue from contracts
signed during the past twelve months. The Company also had a $24.9 million
increase from the UBS contract, due to increased spending on infrastructure
services, and a $12.0 million increase from two acquisitions that occurred in
the last 12 months. These increases were partially offset by a $28.4 million
decrease in revenue from project and consulting offerings and an overall net
decrease in other existing accounts. As discussed above, the decrease in revenue
from project and consulting offerings is due to a weakening market for project
and discretionary services.
Domestic revenue grew by 3.8% in the six months ended June 30, 2001 to
$414.8 million from $399.5 million in the six months ended June 30, 2000, and
decreased as a percentage of total revenue to 70.8% from 73.6% over the same
period of the prior year.
Non-domestic revenue, consisting of European and Asian operations, grew by
19.2% in the six months ended June 30, 2001 to $171.2 million from $143.6
million in the same period of 2000, and increased as a percentage of total
revenue to 29.2% from 26.4%. The largest components of European operations were
the United Kingdom and Switzerland. In the United Kingdom revenue increased
18.5% to $84.1 million in the six-month period of 2001 from $71.0 million in the
same period of 2000 due primarily to an increase in revenue from UBS. In
Switzerland, revenue decreased 1.8% to $22.4 million in the six-month period of
2001 from $22.8 million in the six-month period of 2000. Asian operations
generated revenue of $12.7 million, or 2.2% of total revenue for the six months
ended June 30, 2001 and $10.0 million, or 1.8% of total revenue for the same
period of 2000.
Direct cost of services increased in the first six months of 2001 by 9.1%
to $451.3 million from $413.6 million over the same period of 2000. Gross margin
decreased to 23.0% of total revenue in the first six months of 2001 as compared
to 23.8% of total revenue in the first six months of 2000. This decrease was due
primarily to a $5.6 million net payment received from the restructuring of a
certain customer contract in the first quarter of 2000. Gross margin also
decreased due to an increase in certain personnel-related expenses and a decline
in revenue from project and discretionary services, which typically have higher
profit margins. These decreases were partially offset by the Company's realigned
operating structure, which was implemented in the first quarter of 2001.
SG&A increased in the first six months ended June 30, 2001 by 46.1% to
$129.0 million from $88.3 million in the same period of 2000, and increased as a
percentage of total revenue to 22.0% from 16.3%. The increase is due primarily
to the $33.7 million charge the Company recorded as a result of its realigned
operating structure, as described below.
In the first quarter of 2001, the Company implemented a new operating
structure in order to strengthen the Company's market position and reduce its
costs. In connection with this realigned structure, the Company consolidated and
closed certain facilities, eliminated administrative redundancies and
non-billable positions, and recorded asset basis adjustments. As a result of
these actions, the Company recorded a charge of $33.7 million.
The $33.7 million charge is composed of the following: $23.8 million
related to employee work force reductions of approximately 550 positions in all
business functions and in all geographic areas of the Company, of which
substantially all were terminated as of March 31, 2001; $5.9 million for the
consolidation and closure of facilities; and $4.0 million related to adjustments
to reduce the basis of certain leasehold improvements, software and office
equipment, and other assets to their net realizable value. The $33.7 million
charge will result in cash expenditures of approximately $28.2 million which
excludes $4.0 million in asset basis adjustments and $1.5 million included in
the consolidation and
Page 9
12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
closure of facilities charge, which represents costs associated with the
write-off of certain deferred facility construction costs. Of the approximate
$28.2 million cash expenditures, $19.2 million has been paid as of June 30,
2001, with the majority of the remaining balance of $9.0 million expected to be
paid by September 30, 2001.
During the first quarter of 2000, the Company incurred a one-time $22.1
million compensation charge that was a direct result of the acquisition of
Solutions Consulting, Inc. ("SCI").
Other income (expense), net, decreased in the six months ended June 30,
2001 to $1.0 million of expense from $52.6 million of income in the six months
ended June 30, 2000 primarily due to non-recurring activities. Non-recurring
items during the first six months of 2000 included a $38.9 million realized net
gain from the sale of a 40% equity interest in Systor AG ("Systor"), a
subsidiary of UBS, and a net gain of $15.0 million due to the sale of 500,000
shares of TenFold Corporation ("TenFold") common stock, which were held as an
investment. These gains were partially offset by a $3.5 million expense that
eliminated the pre-acquisition earnings of SCI for the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, cash and cash equivalents
decreased 1.4% to $236.3 million from $239.7 million at December 31, 2000.
Net cash provided by operating activities was $15.6 million for the six
months ended June 30, 2001, compared to net cash used in operating activities of
$77.3 million for the six months ended June 30, 2000. This change was due
primarily to an increase in accrued compensation and decreases in accounts
receivable and income taxes. Accrued compensation increased as payments in 2001
for bonuses accrued in 2000 were less than payments in 2000 for bonuses accrued
in 1999, while bonuses accrued as of June 30, 2001 exceeded the amount accrued
as of June 30, 2000. Accounts receivable decreased as days sales outstanding
improved during the first six months of 2001 as compared to the prior year
period. Income taxes decreased primarily as a result of the taxes payable
related to the first quarter 2000 gains from the sale of marketable equity
securities and an equity investment, as discussed below.
Net cash used in investing activities was $13.4 million for the six months
ended June 30, 2001 compared to net cash provided by investing activities of
$26.7 million for the same period in 2000. The significant decrease in cash
provided by investing activities was due to the first quarter 2000 receipt of
$26.5 million in proceeds from the sale of marketable equity securities,
including the sale of 500,000 shares of TenFold common stock, and $55.5 million
in proceeds from the sale of Systor. These proceeds were partially offset by
$41.1 million of net cash paid in the first quarter of 2000 for the acquisition
of SCI.
For the six months ended June 30, 2001, net cash provided by financing
activities was $2.0 million compared to net cash provided by financing
activities of $4.7 million for the six months ended June 30, 2000. This decrease
is primarily due to the Company's purchase of $3.7 million of its Class A Common
Stock during the six months of 2001.
The Company routinely maintains cash balances in certain European and Asian
currencies to fund operations in those regions. During the six months ended June
30, 2001, foreign exchange rate fluctuations adversely impacted the Company's
non-domestic cash balances, as British pounds, Swiss francs and Euros weakened
against the U.S. dollar. The Company's foreign exchange policy does not call for
hedging foreign exchange exposures that are not likely to impact net income or
working capital.
The Company has no committed line of credit or other borrowings and
anticipates that existing cash and cash equivalents and expected net cash flows
from operating activities will provide sufficient funds to meet its needs for
the foreseeable future.
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13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ACQUISITION
On July 26, 2001, the Company acquired substantially all of the assets of
Advanced Receivables Strategy, Inc. ("ARS"). The purchase price consists of an
initial cash payment of $52.4 million and possible additional payments of up to
$50.0 million over the next three years. The possible future payments are
contingent on ARS achieving certain financial targets over the same period. The
transaction was accounted for as a purchase; accordingly, the results of
operations of ARS and the estimated fair value of assets acquired and
liabilities assumed will be included in the Company's consolidated financial
statements as of the acquisition date.
DOWNSIZING AND FACILITIES CONSOLIDATION
During the third quarter of 2001, the Company announced additional
downsizing of various project, consulting and technology practice groups and the
acceleration of the consolidation of certain facilities. These actions are
expected to result in a third quarter charge of approximately $30.0 million.
ACCOUNTING STANDARDS ISSUED
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("FAS") 141, "Business
Combinations" ("FAS 141") and FAS 142, "Goodwill and Other Intangible Assets"
("FAS 142"). FAS 141 addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. FAS 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination, whether acquired individually or with a group
of other assets, and the accounting and reporting for goodwill and other
intangibles subsequent to their acquisition. These standards require all future
business combinations to be accounted for using the purchase method of
accounting. Goodwill will no longer be amortized but instead will be subject to
impairment tests at least annually. The Company is required to adopt FAS 141 and
FAS 142 on a prospective basis as of January 1, 2002; however, certain
provisions of these new standards may also apply to any acquisitions concluded
subsequent to June 30, 2001. As a result of implementing these new standards,
the Company will discontinue the amortization of goodwill as of December 31,
2001.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "forecasts," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, such as: the loss of major
clients; the Company's ability to achieve future sales; changes in our
relationship and variability of revenue and expense associated with our largest
customer; the loss of key personnel; the highly competitive market in which we
operate; the variability of quarterly operating results; changes in technology;
risks related to international operations; risks related to acquisitions; and
general economic conditions. These and other risks are outlined in our annual
report on Form 10-K, which is on file with the Securities and Exchange
Commission and available at www.sec.gov. These factors may cause our actual
results to differ materially from any forward-looking statement.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PEROT SYSTEMS CORPORATION AND SUBSIDIRIES
FORM 10-Q
For the Quarter Ended June 30, 2001
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is, from time to time, involved in various litigation matters
arising in the ordinary course of its business. The Company believes that the
resolution of currently pending legal proceedings, either individually or taken
as a whole, will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
In 1998, the Robert Plan Corporation ("Robert Plan") filed a complaint in
New York state court based on events early in the course of a service agreement
entered into in 1990, and the Company filed counterclaims. Effective June 30,
2001, the Company and Robert Plan entered into a new 12-year agreement to
outsource Robert Plan's information technology infrastructure and applications
development. The complaint and counterclaims between the parties have been
dismissed by mutual agreement.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders of the Company on May
9, 2001. The purpose of the meeting was to elect six nominees to serve as
directors of the Company, approve the 2001 Long-Term Incentive Plan and the
reservation of shares under the plan, ratify the grant of a stock option to the
Chief Executive Officer of the Company, and ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year ending December 31, 2001. The number of shares voted with
respect to each nominee was as follows:
<Table>
<Caption>
Nominee For Withheld
- ------- ----------- ---------
Ross Perot............................................. 84,294,559 1,098,581
Steven Blasnik ........................................ 84,564,727 828,413
James Champy........................................... 83,902,391 1,490,749
William K. Gayden...................................... 84,556,229 836,911
Carl Hahn ............................................. 84,442,338 950,802
Ross Perot, Jr......................................... 83,771,444 1,621,696
</Table>
All of the nominees were elected to the Board of Directors. At the time of
the shareholders meeting, these directors constituted the entire Board of
Directors of the Company. Subsequently, the Company expanded its Board of
Directors to eight members and appointed John S.T. Gallagher and Thomas Meurer
to fill the vacancies. The 2001 Long-Term Incentive Plan and reservation of
shares under the plan have been approved. The vote was 54,411,902 for and
6,563,252 against with the holders of 786,861 abstaining. The proposal to ratify
the grant of a stock option to the Chief Executive Officer of the Company has
been approved. The vote was 52,328,714 for and 8,494,149 against with the
holders of 939,147 abstaining. The appointment of PricewaterhouseCoopers LLP as
the Company's independent public accountants for the fiscal year ending December
31, 2001 was ratified by the shareholders. The vote was 84,721,425 for and
538,417 against with the holders of 133,298 abstaining.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
None.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the three months ended
June 30, 2001.
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PEROT SYSTEMS CORPORATION AND SUBSIDIRIES
FORM 10-Q
For the Quarter Ended June 30, 2001
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date: August 6, 2001 By /s/ ROBERT J. KELLY
-------------------------------
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer
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