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 September 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 October 26,
2001: 100,752,017.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2001
<Table>
<Caption>
INDEX
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000.............................................................1
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2001 and 2000.................................2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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.................................9
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................14
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS...................................................................15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K....................................................15
SIGNATURES.....................................................................................16
</Table>
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
ASSETS
September 30, 2001 December 31, 2000
------------------ -----------------
Current assets:
Cash and cash equivalents ............................... $ 201,940 $ 239,688
Accounts receivable, net ................................ 175,125 176,004
Prepaid expenses and other .............................. 30,042 24,877
Deferred income taxes ................................... 25,009 16,775
------------ ------------
Total current assets ................................ 432,116 457,344
Property, equipment and purchased software, net ............ 54,002 48,108
Goodwill, net .............................................. 106,498 83,703
Deferred income taxes ...................................... 13,440 24,655
Other non-current assets ................................... 87,787 59,342
------------ ------------
Total assets ........................................ $ 693,843 $ 673,152
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 24,122 $ 35,294
Accrued liabilities ..................................... 108,190 82,620
Deferred revenue ........................................ 10,177 20,090
Accrued compensation .................................... 22,248 16,333
Other current liabilities ............................... 10,267 9,517
------------ ------------
Total current liabilities ........................... 175,004 163,854
Other non-current liabilities .............................. 7,974 8,243
------------ ------------
Total liabilities ................................... 182,978 172,097
------------ ------------
Stockholders' equity:
Common stock ............................................ 1,005 981
Additional paid-in-capital .............................. 317,737 305,320
Other stockholders' equity .............................. 198,759 200,637
Accumulated other comprehensive loss .................... (6,636) (5,883)
------------ ------------
Total stockholders' equity .......................... 510,865 501,055
------------ ------------
Total liabilities and stockholders' equity .......... $ 693,843 $ 673,152
============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
Page 1
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue .................................................. $ 306,973 $ 276,092 $ 892,992 $ 819,198
Costs and expenses:
Direct cost of services ............................. 239,857 214,673 691,177 628,278
Selling, general and administrative expenses ........ 82,740 44,580 211,748 132,893
Compensation charge related to acquisition .......... -- -- -- 22,100
------------ ------------ ------------ ------------
Operating income (loss) .................................. (15,624) 16,839 (9,933) 35,927
Interest income, net ..................................... 1,787 4,446 7,512 13,106
Equity in earnings (loss) of unconsolidated affiliates ... 2,305 (505) 6,531 3,810
Other income (expense), net .............................. (138) (762) (1,198) 51,838
------------ ------------ ------------ ------------
Income (loss) before taxes ............................... (11,670) 20,018 2,912 104,681
Provision for income taxes ............................... 6,392 7,907 12,152 41,349
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (18,062) $ 12,111 $ (9,240) $ 63,332
============ ============ ============ ============
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share .............. $ (0.18) $ 0.12 $ (0.09) $ 0.66
Weighted average common shares outstanding .......... 99,926 97,260 98,687 95,687
Diluted earnings (loss) per common share ............ $ (0.18) $ 0.11 $ (0.09) $ 0.56
Weighted average diluted common shares
outstanding ......................................... 99,926 110,364 98,687 114,032
</Table>
The accompanying notes are an integral part of these financial statements.
Page 2
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Nine months ended September 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) ...................................................... $ (9,240) $ 63,332
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ....................................... 26,213 20,261
Impairment of long-lived assets ..................................... 10,739 --
Gain on sale of marketable equity securities ........................ -- (17,503)
Gain on sale of unconsolidated affiliate ............................ -- (38,851)
Other non-cash items ................................................ (13) (2,705)
Changes in assets and liabilities:
Accounts receivable, net ......................................... 12,569 (17,659)
Accounts payable and accrued liabilities ......................... 18,260 (16,734)
Accrued compensation ............................................. 6,269 (35,697)
Income taxes ..................................................... 14,915 25,718
Other current and non-current assets ............................. (33,127) (17,838)
Other current and non-current liabilities ........................ (10,132) (10,668)
------------ ------------
Net cash provided by (used in) operating activities .......... 36,453 (48,344)
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and software .......................... (24,594) (21,216)
Acquisition of businesses, net of cash acquired of
$250 and $8,881, respectively ....................................... (53,364) (41,119)
Proceeds from sale of unconsolidated affiliate ......................... -- 55,486
Proceeds from sale of marketable equity securities ..................... -- 26,543
Investment in unconsolidated affiliate ................................. -- (15,000)
Other .................................................................. (788) (2,502)
------------ ------------
Net cash provided by (used in) investing activities .......... (78,746) 2,192
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................. 6,573 5,281
Proceeds from issuance of treasury stock ............................... 2,660 --
Purchases of treasury stock ............................................ (3,738) --
Other .................................................................. 151 (391)
------------ ------------
Net cash provided by financing activities .................... 5,646 4,890
Effect of exchange rate changes on cash and cash equivalents ................ (1,101) (5,225)
------------ ------------
Net decrease in cash and cash equivalents ................................... (37,748) (46,487)
Cash and cash equivalents at beginning of period ............................ 239,688 294,645
------------ ------------
Cash and cash equivalents at end of period .................................. $ 201,940 $ 248,158
============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
Page 3
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 nine month periods ended September 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 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.
In October 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("FAS 121") and related literature and establishes a single accounting
model, based on the framework established in FAS 121, for long-lived assets to
be disposed of by sale. The Company is required to adopt FAS 144 no later than
January 1, 2002. The Company does not believe that the adoption of FAS 144 will
have a material impact on its consolidated financial statements.
Page 4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ("SG&A") 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.
During the third quarter of 2001, the Company refined its operations and
recorded non-recurring charges of $51,978. Of this charge, $4,952 is classified
as Direct cost of services, $36,025 is classified as SG&A, and $11,001 is
included in Provision for income taxes in the condensed consolidated statements
of operations. This charge is composed of the following:
o $15,812 related to the elimination of approximately 350
administrative and non-billable positions in various business
functions and in numerous geographic areas of the Company, of
which substantially all were terminated as of September 30,
2001;
o $19,964 related to the consolidation and closure of
facilities, primarily caused by the acceleration of the
consolidation of the Company's Dallas area operations into one
facility located in Plano, Texas, and an increase in the
provision for facilities closed during the first quarter of
2001;
o $5,201 related to adjustments to reduce the basis of software
and other assets used in exited service offerings to their net
realizable value; and an
o $11,001 valuation allowance against certain foreign deferred
tax assets.
The amounts accrued and the related payments and adjustments against these
charges were as follows:
<Table>
<Caption>
Employee Facility Asset Tax
Related Related Basis Valuation
Costs Costs Adjustments Allowance Total
---------- ----------- ----------- ---------- ----------
Charge for the quarter ended March 31 .......... $ 23,812 $ 5,896 $ 4,005 $ -- $ 33,713
Charge for the quarter ended September 30 ...... 15,812 19,964 5,201 11,001 51,978
Less: cash payments and asset write-downs ..... (22,969) (3,873) (8,320) (11,001) (46,163)
Reclassification of categories ................. (900) 900 -- -- --
---------- ---------- ---------- ---------- ----------
Remaining balance at September 30, 2001 ........ $ 15,755 $ 22,887 $ 886 $ -- $ 39,528
========== ========== ========== ========== ==========
</Table>
The remaining balance of $39,528 is included in Accrued liabilities on the
condensed consolidated balance sheets and is expected to be substantially
settled by September 30, 2003.
As a part of the realigned operating structure, the Company exited a separately
identifiable operation. For the nine months ended September 30, 2001, revenue
and net operating losses for this operation were $0 and ($3,997), respectively.
For the nine months ended September 30, 2000, revenue and net operating losses
for this operation were $2,137 and ($21,318), respectively.
Page 5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. ACQUISITION
On July 26, 2001, the Company acquired substantially all of the assets of
Advanced Receivables Strategy, Inc. ("ARS"), a corporation that provides on-site
accelerated recovery, consulting and outsourcing services to the healthcare
industry. As a result of the acquisition, the Company expanded the business
process capabilities available to its customers. The purchase price consisted of
an initial cash payment of $52,150 (net of $250 in cash acquired) and may
include additional payments totaling up to $50,000 in cash or stock, 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.
The excess of the purchase price over the net assets acquired (in the amount of
$37,034) was recorded as Goodwill, net, on the condensed consolidated balance
sheets and will be deductible for tax purposes.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss), net of tax, was as follows:
<Table>
<Caption>
Three months Nine months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss) ................................ $ (18,062) $ 12,111 $ (9,240) $ 63,332
Foreign currency translation adjustments ......... 3,032 (2,061) (931) (5,453)
Unrealized gain (loss) on marketable equity
securities, net of tax of $100, $(2,447),
$114, and $(11,341), respectively ........... 157 (3,828) 178 (17,738)
---------- ---------- ---------- ----------
Total comprehensive income (loss) ................ $ (14,873) $ 6,222 $ (9,993) $ 40,141
========== ========== ========== ==========
</Table>
NOTE 5. STOCKHOLDERS' EQUITY
The components of "Other stockholders' equity" were as follows:
<Table>
<Caption>
September 30, 2001 December 31, 2000
------------------ -----------------
Retained earnings .......................... $ 201,252 $ 210,492
Deferred compensation ...................... (1,923) (2,272)
Treasury stock ............................. (42) (7,388)
Other ...................................... (528) (195)
---------- ----------
Total other stockholders' equity ........... $ 198,759 $ 200,637
========== ==========
</Table>
Additional paid-in-capital increased by $12,417 during the nine months ended
September 30, 2001. The major components of the increase are $10,427 relating to
tax benefits resulting from the exercise of options to purchase shares of the
Company's Class A Common Stock and $2,069 relating to the purchase of shares of
the Company's Class A Common Stock from the exercise of options and from
purchases in the Employee Stock Purchase Plan.
Page 6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At September 30, 2001, there were 98,608,887 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 due to the exercise of options to purchase 3,448,292 shares and the
issuance of 346,796 shares to participants in the Employee Stock Purchase Plan,
less 753,429 shares purchased by the Company.
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE (SHARES IN THOUSANDS)
The following chart is a reconciliation of the numerators and the denominators
of the basic and diluted earnings (loss) per common share computations.
<Table>
<Caption>
Three months ended September 30,
2001 2000
------------- -------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) .......................................... $ (18,062) $ 12,111
============ ============
Weighted average common shares outstanding ................. 99,926 97,260
============ ============
Basic earnings (loss) per common share ..................... $ (0.18) $ 0.12
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) .......................................... $ (18,062) $ 12,111
============ ============
Weighted average common shares outstanding ................. 99,926 97,260
Incremental shares assuming dilution ....................... -- 13,104
------------ ------------
Weighted average diluted common shares outstanding ......... 99,926 110,364
Diluted earnings (loss) per common share ................... $ (0.18) $ 0.11
============ ============
</Table>
<Table>
<Caption>
Nine months ended September 30,
2001 2000
------------- -------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) .......................................... $ (9,240) $ 63,332
============ ============
Weighted average common shares outstanding ................. 98,687 95,687
============ ============
Basic earnings (loss) per common share ..................... $ (0.09) $ 0.66
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) .......................................... $ (9,240) $ 63,332
============ ============
Weighted average common shares outstanding ................. 98,687 95,687
Incremental shares assuming dilution ....................... -- 18,345
------------ ------------
Weighted average diluted common shares outstanding ......... 98,687 114,032
Diluted earnings (loss) per common share ................... $ (0.09) $ 0.56
============ ============
</Table>
For the three and nine months ended September 30, 2001, all options to purchase
shares of the Company's common stock were excluded from the calculation of
diluted earnings per common share
Page 7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
because the impact was antidilutive given the reported losses for the periods.
For the three and nine months ended September 30, 2000, options to purchase
31,775 and 17,253 shares, respectively, of the Company's common stock were also
excluded because the impact was antidilutive.
NOTE 7. CONTINGENCIES
Litigation
In July and August 2001, the Company, as well as certain of its current and
former officers and certain investment banks, have been named as defendants in
the following two purported class action lawsuits, which allege violations of
Rule 10b-5, promulgated under the Securities Exchange Act of 1934, as amended,
and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended.
These lawsuits, Seth Abrams v. Perot Systems Corp., et al. and Adrian Chin v.
Perot Systems, Inc., et al., have been filed in the United States District Court
for the Southern District of New York. Approximately 800 lawsuits that are
substantially similar to the suits against the Company have been filed against
approximately 180 issuers and 40 investment banks during the past year. The
lawsuits involving the Company focus on alleged improper practices by the
investment banks in connection with the Company's initial public offering in
February 1999. The lawsuits allege that certain investment banks, in exchange
for allocations of public offering shares to their customers, received
undisclosed commissions from their customers on the purchase of securities and
required their customers to purchase additional shares of the Company in
aftermarket trading. The lawsuits also allege that the Company should have
disclosed in its public offering prospectus the alleged practices of the
investment banks, whether or not the Company was aware that the practices were
occurring. The Company believes the claims against it and certain of its current
and former officers are without merit. The Company does not believe that the
outcome of this litigation will have a material adverse effect on the Company's
financial condition, results of operation or cash flow.
Page 8
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 September 30, 2001 and 2000
Total revenue increased in the three months ended September 30, 2001,
by 11.2% to $307.0 million from $276.1 million for the same period in 2000. This
increase was primarily attributable to $25.9 million in revenue from contracts
signed during the past twelve months. Revenue from UBS AG ("UBS") increased $8.7
million to $70.2 million in 2001 from $61.5 million in 2000 due to increased
spending on infrastructure services. The acquisitions of Health Systems Design
Corporation during the fourth quarter of 2000, certain assets of Covation, LLC
during the first quarter of 2001, and Advanced Receivables Strategy, Inc. during
the third quarter of 2001 contributed $20.2 million of the increase in revenue.
These increases were offset by a $21.9 million decrease in revenue from project
and consulting offerings and an overall net decrease of $2.0 million in other
existing accounts. The decrease in revenue from project and consulting offerings
is due to a weakening market for such services and the discontinuation of
geographic project sales efforts. 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 17.2% in the third quarter of 2001 to $232.4
million from $198.3 million in the third quarter of 2000, and increased as a
percentage of total revenue to 75.7% from 71.8% over the same period. This
increase is a result of new contract signings and acquisitions in 2000 and 2001
being primarily domestic.
Non-domestic revenue, consisting of European and Asian operations,
decreased in the third quarter of 2001 by 4.1% to $74.6 million from $77.8
million in the third quarter of 2000, and decreased as a percentage of total
revenue to 24.3% from 28.2%. The largest components of European operations were
the United Kingdom and Switzerland. In the United Kingdom, revenue decreased
6.1% to $36.7 million in the third quarter of 2001 from $39.1 million in the
third quarter of 2000 due primarily to the wind down and completion of certain
projects. In Switzerland, revenue for the third quarter of 2001 remained flat
with the third quarter of 2000 at $10.0 million. Asian operations generated
revenue of $6.3 million, or 2.1% of total revenue for the third quarter of 2001,
and $5.1 million, or 1.9% of total revenue for the third quarter of 2000.
Direct cost of services increased in the third quarter of 2001 by 11.7%
to $239.9 million from $214.7 million in the same period of 2000. A portion of
this increase was attributable to a $5.0 million charge in connection with
certain non-recurring expenses recognized by the Company during the third
quarter of 2001 as more fully described below. Gross margin decreased to 21.9%
of total revenue in the third quarter of 2001 as compared to 22.2% of total
revenue in the third quarter of 2000. Excluding the $5.0 million non-recurring
charge incurred during the three months ended September 30, 2001, gross margin
would have increased to 23.5% of total revenue. This increase is primarily due
to the exiting of a separately identifiable unprofitable operation in the first
quarter of 2001. These cost savings were partially offset by a change in revenue
mix from higher profit margin services, including project and discretionary
services, to infrastructure services.
Selling, general and administrative expenses ("SG&A") increased in the
third quarter of 2001 by 85.4% to $82.7 million from $44.6 million in the same
period of 2000, and increased as a percentage of total revenue to 26.9% from
16.2%. This increase resulted primarily from the $36.0 million non-recurring
charge recognized by the Company during the third quarter of 2001, as described
below.
Page 9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Excluding this non-recurring charge, SG&A as a percentage of total revenue would
have decreased to 15.2% due to cost reductions made in connection with
realigning the Company's operating structure.
Equity in earnings of unconsolidated affiliates was $2.3 million in the
three months ended September 30, 2001, compared to a loss of $0.5 million in the
same period of 2000. Equity in earnings from HCL Perot Systems N.V. ("HPS"), a
software joint venture based in India, were $2.3 million for the three months
ended September 30, 2001 and 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. In the third quarter of 2000, the Company also
recorded an equity loss of $2.8 million related to its investment in another
joint venture which was written off by the Company at the end of 2000.
In the third quarter of 2001, the Company refined its operations and
recorded a charge of $52.0 million, of which $5.0 million is recorded in Direct
cost of services, $36.0 million is recorded in SG&A, and $11.0 million is
recorded in Provision for income taxes. The $52.0 million charge is composed of
the following:
o $15.8 million related to the elimination of approximately 350
administrative and non-billable positions in various business
functions and in numerous geographic areas of the Company, of
which substantially all have been terminated as of September
30, 2001;
o $20.0 million for the consolidation and closure of facilities,
primarily caused by the acceleration of the consolidation of
the Company's Dallas area operations into one facility located
in Plano, Texas, and an increase in the provision for
facilities closed during the first quarter of 2001;
o $5.2 million related to adjustments to reduce the basis of
software and other assets used in exited service offerings to
their net realizable value; and an
o $11.0 million valuation allowance against certain foreign
deferred tax assets.
The $52.0 million in non-recurring charges in the third quarter of 2001
includes $4.3 million in asset basis adjustments, $11.0 million non-cash charge
for the valuation allowance against certain deferred tax assets, and $36.7
million of liabilities that will be settled in cash, of which $3.5 million has
been paid as of September 30, 2001.
The Company expects that all savings resulting from these actions will
be offset by profit pressure from lower discretionary spending on projects and
an increase in selling expenses associated with pursuing new business
opportunities.
As noted above, during the third quarter of 2001 the Company recorded
an $11.0 million valuation allowance against certain foreign deferred tax
assets. This charge was recorded in accordance with the provisions of Statement
of Financial Accounting Standards No. ("FAS") 109, "Accounting for Income
Taxes," which requires that a valuation allowance be established when there is
significant uncertainty as to the ultimate realization of deferred tax assets.
Excluding this $11.0 million charge, the Company's effective tax rate for the
third quarter of 2001 would have been 39.5%, and an income tax benefit of
approximately $4.6 million would have been recorded.
Page 10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 2001 and 2000
Total revenue increased in the nine months ended September 30, 2001 by
9.0% to $893.0 million from $819.2 million in the nine months ended September
30, 2000. This increase was primarily attributable to $35.9 million in revenue
from contracts signed during the past twelve months, a $33.7 million increase
from the UBS contract, $32.2 million in revenue from three acquisitions that
occurred in the last twelve months, and an overall increase in other existing
accounts of $22.6 million. Increases from the UBS contract are due to increased
spending by UBS on infrastructure services. These increases were partially
offset by a $50.6 million decrease in revenue from project and consulting
offerings. As discussed above, the decrease in revenue from project and
consulting offerings is due to a weakening market for project and discretionary
services and a de-emphasis by the Company in certain project units.
Domestic revenue grew by 8.3% in the nine months ended September 30,
2001 to $647.2 million from $597.8 million in the nine months ended September
30, 2000, and decreased as a percentage of total revenue to 72.5% from 73.0%
over the same period of the prior year.
Non-domestic revenue, consisting of European and Asian operations, grew
by 11.0% in the nine months ended September 30, 2001 to $245.8 million from
$221.4 million in the same period of 2000, and increased as a percentage of
total revenue to 27.5% from 27.0%. The largest components of European operations
were the United Kingdom and Switzerland. In the United Kingdom, revenue
increased 8.8% to $119.8 million in the nine-month period of 2001 from $110.1
million in the same period of 2000 due primarily to an increase in revenue from
UBS. In Switzerland, revenue decreased slightly to $32.6 million in the
nine-month period of 2001 from $32.8 million in the nine-month period of 2000.
Asian operations generated revenue of $19.0 million, or 2.1% of total revenue
for the nine months ended September 30, 2001 and $15.1 million, or 1.8% of total
revenue for the same period in 2000.
Direct cost of services increased in the first nine months of 2001 by
10.0% to $691.2 million from $628.3 million over the same period of 2000. Gross
margin decreased to 22.6% of total revenue in the first nine months of 2001 as
compared to 23.3% of total revenue in the first nine months of 2000. A portion
of this decrease was attributable to a $5.0 million charge in connection with
certain non-recurring expenses recognized by the Company during the third
quarter of 2001. Excluding the $5.0 million non-recurring charge incurred during
the three months ended September 30, 2001, gross margin for the first nine
months of 2001 would have decreased to 23.2%. This decrease is primarily due to
a change in revenue mix from higher profit margin services, including project
and discretionary services, to infrastructure services. This decrease was
partially offset by the elimination of certain costs associated with a
separately identifiable unprofitable operation that was exited in the first
quarter of 2001.
SG&A increased in the first nine months ended September 30, 2001, by
59.3% to $211.7 million from $132.9 million in the same period of 2000, and
increased as a percentage of total revenue to 23.7% from 16.2%. This increase
resulted primarily from $69.7 million of non-recurring charges recorded by the
Company during the nine months ended September 30, 2001, as a result of its
realigned operating structure. Excluding these non-recurring charges, SG&A for
the nine months ended September 30, 2001, would have been $142.0 million and
would have decreased slightly as a percentage of total revenue to 15.9%.
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 nine months ended
September 30, 2001, to $1.2 million of expense from $51.8 million of income in
the nine months ended September 30, 2000, primarily due to non-recurring
activities. Non-recurring items during the first nine 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
Page 11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
During the first nine months of 2001, the Company realigned its
operating structure, resulting in non-recurring charges of $85.7 million, of
which $33.7 million was recorded during the first quarter of 2001 and $52.0
million was recorded during the third quarter of 2001. These charges are
reflected in the Condensed Consolidated Statements of Operations as follows:
$5.0 million is recorded in Direct cost of services; $69.7 million is recorded
in SG&A, and $11.0 million is recorded in Provision for income taxes; and, are
composed of the following:
o $39.6 million related to the elimination of approximately 900
administrative and non-billable positions in all business
functions and in all geographic areas of the Company, of which
substantially all have been terminated as of September 30,
2001;
o $25.9 million for the consolidation and closure of facilities,
primarily caused by the acceleration of the consolidation of
the Company's Dallas area operations into one facility located
in Plano, Texas;
o $9.2 million related to adjustments to reduce the basis of
software and other assets used in exited service offerings to
their net realizable value; and an
o $11.0 million valuation allowance against certain foreign
deferred tax assets.
As discussed above, during the third quarter of 2001, the Company
recorded an $11.0 million valuation allowance against certain foreign deferred
tax assets. Excluding this $11.0 million charge, the Company's effective tax
rate for the first nine months of 2001 would have been 39.5%, which is
consistent with the effective tax rate for the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, cash and cash
equivalents decreased 15.8% to $201.9 million from $239.7 million at December
31, 2000.
Net cash provided by operating activities was $36.5 million for the
nine months ended September 30, 2001, compared to net cash used in operating
activities of $48.3 million for the nine months ended September 30, 2000. This
change was due primarily to increases in accrued compensation and accounts
payable and accrued liabilities combined with a decrease in accounts receivable.
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 September 30, 2001 exceeded the amount accrued as of September 30,
2000. Accounts payable and accrued liabilities increased as a result of the
restructuring charges recorded in the first and third quarters of 2001. Accounts
receivable decreased as days sales outstanding improved during the first nine
months of 2001 as compared to the prior year period.
Net cash used in investing activities was $78.7 million for the nine
months ended September 30, 2001 compared to net cash provided by investing
activities of $2.2 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 which activities did not recur
in 2001.
For the nine months ended September 30, 2001, net cash provided by
financing activities was $5.6 million compared to net cash provided by financing
activities of $4.9 million for the nine months ended September 30, 2000. This
increase is primarily due to an increase in proceeds from the issuance of its
Class A Common Stock during the nine months of 2001.
Page 12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company routinely maintains cash balances in certain European and
Asian currencies to fund operations in those regions. During the nine months
ended September 30, 2001, foreign exchange rate fluctuations positively 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.
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
totaling 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 are included in the Company's consolidated financial
statements as of the acquisition date. The excess of the purchase price over the
net assets acquired (in the amount of $37.0 million) was recorded as Goodwill,
net on the condensed consolidated balance sheets and will be deductible for tax
purposes.
ACCOUNTING STANDARDS ISSUED
In July 2001, the Financial Accounting Standards Board issued 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.
In October 2001, the Financial Accounting Standards Board issued FAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (FAS 121) and related literature and establishes a single accounting model,
based on the framework established in FAS 121, for long-lived assets to be
disposed of by sale. The Company is required to adopt FAS 144 for fiscal years
beginning after December 15, 2001.
Page 13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Page 14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 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 July and August 2001, the Company, as well as certain of its current
and former officers and certain investment banks, have been named as defendants
in the following two purported class action lawsuits, which allege violations of
Rule 10b-5, promulgated under the Securities Exchange Act of 1934, as amended,
and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended.
These lawsuits, Seth Abrams v. Perot Systems Corp., et al. and Adrian Chin v.
Perot Systems, Inc., et al., have been filed in the United States District Court
for the Southern District of New York. Approximately 800 lawsuits that are
substantially similar to the suits against the Company have been filed against
approximately 180 issuers and 40 investment banks during the past year. The
lawsuits involving the Company focus on alleged improper practices by the
investment banks in connection with the Company's initial public offering in
February 1999. The lawsuits allege that certain investment banks, in exchange
for allocations of public offering shares to their customers, received
undisclosed commissions from their customers on the purchase of securities and
required their customers to purchase additional shares of the Company in
aftermarket trading. The lawsuits also allege that the Company should have
disclosed in its public offering prospectus the alleged practices of the
investment banks, whether or not the Company was aware that the practices were
occurring. The Company believes the claims against it and certain of its current
and former officers are without merit. The Company does not believe that the
outcome of this litigation will have a material adverse effect on the Company's
financial condition, results of operation or cash flow.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security
holders during the period covered by this report.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.45 Memorandum Agreement dated August 24, 2001,
between UBS AG and Perot Systems Corporation
(b) Reports on Form 8-K
On July 16, 2001, the Company filed a Current Report on Form 8-K
to report its agreement to acquire substantially all of the assets of Advanced
Receivables Strategy, Inc. The proposed transaction was reported under Item 5 of
Form 8-K and included the press release under Item 7 of Form 8-K.
On August 10, 2001, the Company filed a Current Report on Form 8-K
to report the completed acquisition, through two wholly-owned subsidiaries, of
substantially all of the assets of Advanced Receivables Strategy, Inc., Advanced
Receivables Strategy - Government Accounts Division, Inc., Meridian Healthcare
Staffing LLC, and Cash-Net, LLC. The transaction was reported under Item 2 of
Form 8-K. Neither historical financial information nor pro forma financial
information was required to be filed as part of Form 8-K.
Page 15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 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: November 5, 2001 By /s/ ROBERT J. KELLY
------------------------
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer
Page 16
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.45 Memorandum Agreement dated August 24, 2001, between
UBS AG and Perot Systems Corporation.
</Table>