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 March 31, 2002
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.)
2300 WEST PLANO PARKWAY
PLANO, TEXAS
75075
(Address of principal executive offices)
(Zip Code)
(972) 577-0000
(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 April 29, 2002:
106,222,173.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2002
INDEX
<Table>
<Caption>
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001.............................................................1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001.................................................2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001.................................................3
Notes to Condensed Consolidated Financial Statements...............................4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................12
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS...................................................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K....................................................14
SIGNATURES.....................................................................................15
</Table>
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
ASSETS
March 31, 2002 December 31, 2001
-------------- -----------------
Current assets:
Cash and cash equivalents ..................................... $ 190,904 $ 259,178
Accounts receivable, net ...................................... 163,083 160,907
Prepaid expenses and other .................................... 51,532 50,071
------------ ------------
Total current assets ...................................... 405,519 470,156
Property, equipment and purchased software, net .................. 55,853 52,426
Goodwill, net .................................................... 185,639 127,161
Other non-current assets ......................................... 110,925 107,855
------------ ------------
Total assets .............................................. $ 757,936 $ 757,598
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 37,844 $ 36,272
Accrued liabilities ........................................... 91,304 121,728
Other current liabilities ..................................... 34,510 48,159
------------ ------------
Total current liabilities ................................. 163,658 206,159
Other non-current liabilities .................................... 20,531 20,670
------------ ------------
Total liabilities ......................................... 184,189 226,829
------------ ------------
Stockholders' equity:
Common stock .................................................. 1,039 1,020
Additional paid-in-capital .................................... 355,430 331,057
Other stockholders' equity .................................... 225,359 206,147
Accumulated other comprehensive loss .......................... (8,081) (7,455)
------------ ------------
Total stockholders' equity ................................ 573,747 530,769
------------ ------------
Total liabilities and stockholders' equity ................ $ 757,936 $ 757,598
============ ============
</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 MONTHS ENDED MARCH 31, 2002 AND 2001
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months ended March 31,
2002 2001
------------ ------------
Revenue .......................................................... $ 325,779 $ 294,732
Costs and expenses:
Direct cost of services ..................................... 251,778 228,815
Selling, general and administrative expenses ................ 45,024 82,881
------------ ------------
Operating income (loss) .......................................... 28,977 (16,964)
Interest income, net ............................................. 1,046 3,099
Equity in earnings of unconsolidated affiliates .................. 1,948 1,622
Other income (expense), net ...................................... 130 (449)
------------ ------------
Income (loss) before taxes ....................................... 32,101 (12,692)
Income tax expense (benefit) ..................................... 12,680 (5,013)
------------ ------------
Net income (loss) ........................................... $ 19,421 $ (7,679)
============ ============
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share ...................... $ 0.19 $ (0.08)
Weighted average common shares outstanding .................. 103,240 97,600
Diluted earnings (loss) per common share .................... $ 0.17 $ (0.08)
Weighted average diluted common shares
outstanding ............................................ 115,633 97,600
</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 THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Three months ended March 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) ...................................................... $ 19,421 $ (7,679)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ....................................... 7,488 8,462
Other non-cash items ................................................ 5,892 (709)
Change in assets and liabilities:
Accounts receivable .............................................. (9,383) (5,946)
Accounts payable and accrued liabilities ......................... (9,149) 22,732
Accrued compensation ............................................. (13,163) (266)
Other current and non-current assets ............................. (12,563) (12,692)
Other current and non-current liabilities ........................ 8,067 1,681
------------ ------------
Net cash provided by (used in) operating activities .......... (3,390) 5,583
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and purchased software ................ (10,112) (6,880)
Acquisition of businesses, net of cash acquired of
$10,328 and $0, respectively ........................................ (59,581) (700)
Other .................................................................. 794 (145)
------------ ------------
Net cash used in investing activities ........................ (68,899) (7,725)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................. 3,921 12
Proceeds from issuance of treasury stock ............................... 474 2,308
Purchases of treasury stock ............................................ (234) (2,363)
Other .................................................................. (393) (225)
------------ ------------
Net cash provided by (used in) financing activities .......... 3,768 (268)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ................ 247 (3,540)
------------ ------------
Net decrease in cash and cash equivalents ................................... (68,274) (5,950)
Cash and cash equivalents at beginning of period ............................ 259,178 239,688
------------ ------------
Cash and cash equivalents at end of period .................................. $ 190,904 $ 233,738
============ ============
</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, 2001, included in the Company's Annual Report on
Form 10-K filed with the SEC on March 8, 2002. Operating results for the
three-month period ended March 31, 2002 are not necessarily indicative of the
results for the year ending December 31, 2002. Dollar amounts and shares are
presented in thousands.
Certain of the 2001 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
NOTE 2. ACQUISITIONS
Claim Services Resource Group, Inc.
On January 1, 2002, the Company acquired all of the outstanding shares of Claim
Services Resource Group, Inc. ("CSRG"), a company that provides claims
processing and related services to the health insurance and managed care
customers in the healthcare industry. As a result of the acquisition, the
Company expanded its business process capabilities available to its customers.
Total consideration included $49,581 in cash (net of $10,328 of cash acquired)
and $3,131 in the form of 154 shares of the Company's Class A Common Stock and
was based on the estimated enterprise value of the acquired corporation. The
results of operations of CSRG and the estimated fair value of assets acquired
and liabilities assumed are included in the Company's consolidated financial
statements beginning on the acquisition date. The excess of the purchase price
over the net assets acquired (in the amount of $53,057) was recorded as
Goodwill, net on the condensed consolidated balance sheets, has been assigned to
the IT Solutions operating segment, and will not be deductible for tax purposes.
The purchase price may be adjusted within a contractual true-up period that ends
in third quarter of 2002.
Advanced Receivables Strategy, Inc.
The Company acquired Advanced Receivables Strategy, Inc ("ARS") in July 2001. At
December 31, 2001, the Company had accrued $20,000 for an additional
consideration payment as a result of ARS achieving a certain financial
performance target in 2001. This consideration was paid in the first quarter of
2002 in the form of $10,000 in cash and $10,756 in 549 shares of the Company's
Class A Common Stock, and resulted in additional goodwill of $756 which is
allocated to the IT Solutions segment. Additional consideration totaling up to
$30,000 may be paid over the next three years and is contingent on ARS achieving
certain financial targets over the same period. At the Company's discretion, up
to 50% of these potential payments may be settled in Class A Common Stock of the
Company, valued at the date of settlement.
Page 4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted certain provisions of Statement of
Financial Accounting Standards No. ("FAS") 141, "Business Combinations," and
effective January 1, 2002, the Company adopted the full provisions of FAS 141
and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets apart from goodwill. The Company evaluated its goodwill and intangibles
acquired prior to June 30, 2001, using the criteria of FAS 141, which resulted
in $4,665 (net of related deferred tax liability) of assembled workforce
intangibles being reclassified into goodwill at January 1, 2002. FAS 142
requires that purchased goodwill and certain indefinite-lived intangibles no
longer be amortized, but instead be tested for impairment at least annually.
This testing requires the comparison of carrying values to fair value and, when
appropriate, requires the reduction of the carrying value of impaired assets to
their fair value.
The transitional impairment analysis required upon adoption of FAS 142 was
completed during the first quarter of 2002, and the Company determined that
there is no impairment of the carrying value of goodwill. Goodwill will be
tested annually for impairment. Additionally, the Company evaluated its
intangible assets and determined that all such assets have determinable lives.
The following table provides comparative net income (loss) and earnings (loss)
per common share had the non-amortization provision of FAS 142 been adopted for
all periods presented:
<Table>
<Caption>
Three months ended March 31,
2002 2001
------------ ------------
Net income (loss) .................................................... $ 19,421 $ (7,679)
Adjustments:
Assembled workforce amortization, net of tax benefit of $87 ..... -- 143
Goodwill amortization, net of tax benefit of $421 ............... -- 1,292
------------ ------------
Adjusted net income (loss) ........................................... $ 19,421 $ (6,244)
============ ============
Basic earnings (loss) per common share:
Reported basic earnings (loss) per common share ................. $ 0.188 $ (0.079)
Adjusted basic earnings (loss) per common share ................. $ 0.188 $ (0.064)
Diluted earnings (loss) per common share:
Reported diluted earnings (loss) per common share ............... $ 0.168 $ (0.079)
Adjusted diluted earnings (loss) per common share ............... $ 0.168 $ (0.064)
</Table>
The changes in carrying amount of goodwill for the quarter ended March 31, 2002,
by reporting segment are as follows:
<Table>
<Caption>
IT Solutions Consulting Total
------------ ------------ ------------
Balance as of December 31, 2001 ...................................... $ 59,683 $ 67,478 $ 127,161
Reclassification of assembled workforce intangibles to goodwill ...... 772 3,893 4,665
Additional goodwill for ARS acquisition .............................. 756 -- 756
Goodwill resulting from CSRG acquisition ............................. 53,057 -- 53,057
------------ ------------ ------------
Balance as of March 31, 2002 ......................................... $ 114,268 $ 71,371 $ 185,639
============ ============ ============
</Table>
Page 5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Identifiable intangible assets as of March 31, 2002, are recorded in Other
non-current assets in the condensed consolidated balance sheets and are
comprised of:
<Table>
<Caption>
Gross Net
Carrying Accumulated Book
Value Amortization Value
------------ ------------ ------------
Service marks ........................................................ $ 5,552 $ (1,322) $ 4,230
Customer based assets ................................................ 1,200 (93) 1,107
Other intangible assets .............................................. 2,041 (239) 1,802
------------ ------------ ------------
Balance at March 31, 2002 ............................................ $ 8,793 $ (1,654) $ 7,139
============ ============ ============
</Table>
Total amortization expense for identifiable intangible assets was $484 and $256
for the quarter ended March 31, 2002 and 2001, respectively. Amortization
expense is estimated at $1,973, $1,441, $1,294, $1,048, $501 and $161 for the
years ended December 31, 2002 through 2007, respectively. Identifiable
intangible assets will be amortized over a weighted average of approximately
seven years.
NOTE 4. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss), net of tax, was as follows:
<Table>
<Caption>
Three Months
Ended March 31,
--------------------------
2002 2001
---------- ----------
Net income (loss) ..................................... $ 19,421 $ (7,679)
Foreign currency translation adjustments .............. (597) (3,388)
Unrealized loss on marketable equity securities,
net of tax of ($18) and ($11), respectively ...... (29) (17)
---------- ----------
Total comprehensive income (loss) ..................... $ 18,795 $ (11,084)
========== ==========
</Table>
NOTE 5. STOCKHOLDERS' EQUITY
The components of "Other stockholders' equity" were as follows:
<Table>
<Caption>
March 31, 2002 December 31, 2001
-------------- -----------------
Retained earnings .......................... $ 227,242 $ 207,821
Other ...................................... (1,883) (1,674)
------------ ------------
Total other stockholders' equity ........... $ 225,359 $ 206,147
============ ============
</Table>
Additional paid-in-capital increased by $24,373 during the three months ended
March 31, 2002, due primarily to the issuance of $13,872 of Class A Common Stock
for the purchases of ARS and CSRG. The majority of the remaining increase
relates to $5,469 from the issuances of shares of the Company's Class A Common
Stock for the exercise of options and for the Employee Stock Purchase Plan and
the related $4,389 tax benefit attributable to the exercise of the options.
At March 31, 2002, there were 103,723 shares of the Company's Class A Common
Stock outstanding. The Company has no outstanding Class B Common Stock due to
the conversion of 1,784 Class B shares to Class A shares in January of 2002. At
December 31, 2001, there were 100,085 shares of the Company's
Page 6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Class A Common Stock outstanding and 1,784 shares of the Company's Class B
Common Stock outstanding. The remaining increase in the Company's Class A Common
Stock is primarily due to the exercise of options to purchase 1,163 shares and
the issuance of 703 shares of Class A Common Stock for two acquisitions.
NOTE 6. SEGMENT DATA
The Company's operations are classified into two primary lines of business,
which are also reportable segments. These lines of business are IT Solutions and
Consulting. The IT Solutions segment provides services to customers primarily
under long-term contracts in strategic relationships. These services include
technology and business process outsourcing as well as high value short-term
projects and consulting capabilities. The Consulting segment provides services
relating to the implementation of enterprise resource planning, supply chain
management, design, development, implementation, and maintenance of
applications, and various other activities. The Company's remaining operating
areas and corporate activities are included in the "Other" category.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements as described in the summary of
significant accounting policies. The Company evaluates segment performance based
on income from operations before income taxes, exclusive of charges related to
the Company's realigned operating structure and unusual and nonrecurring items.
All corporate and centrally incurred costs are allocated to the segments based
principally on expenses, employees, square footage, or usage. The "Other"
category includes charges related to the Company's realigned operating structure
and unusual and nonrecurring items, including a separately identifiable
operation that the Company exited. At December 31, 2001, goodwill and related
intangible assets associated with the acquisition of Solutions Consulting and
the related amortization expense were included in "Other." At March 31, 2002,
these amounts are included in the Consulting segment for all periods presented.
The following is a summary of certain financial information by reportable
segment:
<Table>
<Caption>
IT
SOLUTIONS CONSULTING OTHER TOTAL
---------- ---------- ---------- ----------
For the quarter ended March 31, 2002:
Revenue ................................. $ 310,196 $ 15,059 $ 524 $ 325,779
Income (loss) before taxes .............. 29,813 (515) 2,803 32,101
For the quarter ended March 31, 2001:
Revenue ................................. $ 276,348 $ 17,838 $ 546 $ 294,732
Income (loss) before taxes .............. 20,055 (742) (32,005) (12,692)
</Table>
NOTE 7. REALIGNED OPERATING STRUCTURE
During 2001 the Company realigned its operating structure in order to strengthen
the Company's market position and reduce its costs. This realignment resulted in
non-recurring charges of $74,690, of which $33,713 was recorded during the first
quarter of 2001 and $40,977 was recorded during the third quarter of 2001. The
charges for the first quarter of 2001 are reflected in the consolidated
statements of operations in Selling, general and administrative expenses.
Page 7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amounts accrued and the related payments and adjustments against these
charges were as follows:
<Table>
<Caption>
Employee Facility Asset
Related Related Basis
Costs Costs Adjustments Total
---------- ---------- ----------- ----------
Charge for the quarter ended March 31, 2001 ........... $ 23,812 $ 5,896 $ 4,005 $ 33,713
Charge for the quarter ended September 30, 2001 ....... 15,812 19,964 5,201 40,977
Less: cash payments and asset write-downs ............ (29,626) (6,149) (9,206) (44,981)
Reclassification of categories ........................ (900) 900 -- --
---------- ---------- ---------- ----------
Remaining balance at March 31, 2002 ................... $ 9,098 $ 20,611 $ -- $ 29,709
========== ========== ========== ==========
</Table>
The remaining balance of $29,709 is included on the condensed consolidated
balance sheets in the amounts of $16,542 in Accrued liabilities and $13,167 in
Other non-current liabilities. The remaining balance is expected to be
substantially settled by September 30, 2003.
As a part of the realigned operating structure, in 2001 the Company exited a
separately identifiable operation. For the quarter ended March 31, 2001, revenue
and net operating losses for this operation were $39 and ($3,138), respectively.
There was no activity for this operation for the quarter ended March 31, 2002.
NOTE 8. EARNINGS (LOSS) PER SHARE
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 March 31,
2002 2001
---------- ----------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) ..................................... $ 19,421 $ (7,679)
========== ==========
Weighted average common shares outstanding ............ 103,240 97,600
========== ==========
Basic earnings (loss) per common share ................ $ 0.19 $ (0.08)
========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) ..................................... $ 19,421 $ (7,679)
========== ==========
Weighted average common shares outstanding ............ 103,240 97,600
Incremental shares assuming dilution .................. 12,393 --
---------- ----------
Weighted average diluted common shares outstanding .... 115,633 97,600
========== ==========
Diluted earnings (loss) per common share .............. $ 0.17 $ (0.08)
========== ==========
</Table>
For the three months ended March 31, 2002, options to purchase 14,469 shares of
the Company's common stock were excluded from the calculation of diluted
earnings per common share because the impact was antidilutive given that the
exercise prices for these options were greater than the average actual share
price for the quarter ended March 31, 2002. For the three months ended March 31,
2001, 50,984 options to purchase shares of the Company's common stock were
excluded from the calculation of diluted earnings (loss) per common share
because the impact was antidilutive given the reported net loss for the period.
Page 8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. CONTINGENCIES
Litigation
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, were named as defendants in two
purported class action lawsuits, which allege violations of Rule 10b-5,
promulgated under the Securities 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., were filed in the United States District Court for the Southern District of
New York and subsequently consolidated. Approximately 300 issuers and 40
investment banks have been sued. These suits have been consolidated for pretrial
purposes in the IPO Allocation Securities Litigation. The lawsuit involving the
Company focuses on alleged improper practices by the investment banks in
connection with the Company's initial public offering in February 1999. The
lawsuit alleges 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 lawsuit
also alleges 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 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.
In December 2001, Siemens Medical Solutions Health Services Corporation filed a
lawsuit against the Company's subsidiary, PSC Healthcare Software, Inc.
(formerly known as Health Systems Design Corporation ("HSD")) alleging breach of
contract and fraud by HSD for failing to complete the development and delivery
of a computer software product. Siemens seeks damages in excess of $10,000. 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 9
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 March 31, 2002 and 2001
Total revenue for the first quarter of 2002 increased by $31.1 million, or
10.6%, to $325.8 million from $294.7 million in the first quarter of 2001. This
increase in revenue is due to an increase in revenue for the IT Solutions
segment of $33.9 million, offset by a $2.7 million decrease in revenue for the
Consulting segment.
Revenue for the IT Solutions segment increased 12.3% to $310.2 million in the
first quarter of 2002 from $276.3 million in the same period of 2001. This
increase is primarily attributable to $40.6 million in revenue from contracts
signed during the past twelve months and $29.5 million in revenue from the
acquisitions of Advanced Receivables Strategy, Inc. ("ARS"), which was acquired
in the third quarter of 2001, and Claim Services Resource Group, Inc. ("CSRG"),
which was acquired on January 1, 2002. These increases were partially offset by
a $16.2 million decrease in revenue from UBS AG ("UBS") and a $20.0 million net
decrease in revenue from other customers. The decrease in revenue from UBS to
$63.1 million in 2002 from $79.3 million in 2001 is due to lower spending on
infrastructure services, resulting from cost savings initiatives implemented by
UBS and the Company. The decrease in revenue from other customers is primarily
due to continued weak demand for discretionary services and projects, the
discontinuation of geographic project sales efforts, and the completion of
certain customer projects and contracts.
Revenue for the Consulting segment decreased 15.2% to $15.1 million in 2002 from
$17.8 million in 2001 due primarily to the continued weak demand for custom
application development services.
In the first quarter of 2001, the Company exited a separately identifiable
operation, which negatively impacted gross profit by $3.2 million. Excluding the
impact from this operation, gross margin for the first quarter of 2001 would
have been 23.4% of total revenue, which is higher than the gross margin in the
first quarter of 2002 of 22.7% of total revenue. This year over year decline in
gross margin is due primarily to a change in revenue mix from higher profit
margin services, including project and discretionary services, to lower profit
margin services, including certain business process and infrastructure services.
In addition, gross margin has declined due to the weak demand for discretionary
services and projects, as the Company is maintaining a certain level of
resources to meet anticipated demand in the second half of 2002. As a result of
this decline in gross margin, the Company recorded less expense for associate
incentive programs in the first quarter of 2002 as compared to the prior year
period, which offset the year over year gross margin decline by approximately
1.5 percentage points.
During the first quarter of 2001, the Company recorded a $33.7 million charge in
Selling, general and administrative expenses ("SG&A") as a result of realigning
its operations, as discussed below. Excluding this charge, SG&A for the first
quarter of 2001 would have been $49.2 million, or 16.7% of total revenue. For
the first quarter of 2002, SG&A was $45.0 million, or 13.8% of total revenue.
This year over year decline is primarily the result of savings that have been
realized from the Company's realignment activities in 2001. In addition, in the
first quarter of 2001 the Company recorded $2.0 million of amortization expense
on goodwill and certain other intangibles, which are no longer required to be
amortized as a result of a new accounting standard, which was adopted on January
1, 2002. Partially offsetting these savings are the incremental SG&A costs
associated with the recent acquisitions of ARS and CSRG.
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
Page 10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
million, which is composed of the following: $23.8 million related to employee
work force reductions of approximately 550; $5.9 million for the consolidation
and closure of facilities; and $4.0 million related to adjustments to reduce the
basis of certain assets to their net realizable value.
Interest income, net, decreased in the first quarter of 2002 to $1.0 million
from $3.1 million in the first quarter of 2001. This decrease is due to both a
lower average cash balance and lower interest rates during 2002 as compared to
the prior year period.
Equity in earnings of unconsolidated affiliates was $1.9 million in the three
months ended March 31, 2002, compared to $1.6 million in the same period of
2001. Equity in earnings from HCL Perot Systems N.V., a software joint venture
based in India, decreased to $1.9 million in the first quarter of 2002 from $2.4
million in the same period of 2001. In the first quarter of 2001, the Company
also recorded a $0.7 million charge to adjust the carrying amount of the
Company's investment in a start-up joint venture.
Other income (expense), net, increased in the three months ended March 31, 2002,
to income of $0.1 million from an expense of $0.4 million in the three months
ended March 31, 2001. During the first quarter of 2001 the Company recorded an
expense of $0.6 million from the impairment of an investment in marketable
equity securities.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2002, cash and cash equivalents
decreased 26.4% to $190.9 million from $259.2 million at December 31, 2001.
Net cash used in operating activities was $3.4 million for the three months
ended March 31, 2002, compared to net cash provided by operating activities of
$5.6 million for the three months ended March 31, 2001. The primary reason for
the decline in cash provided by operations is an increase in year-end bonuses
paid to associates during 2002 as compared to 2001 of approximately $6.8
million.
Net cash used in investing activities was $68.9 million for the three months
ended March 31, 2002 compared to $7.7 million for the same period in 2001. This
increase in cash used in investing activities is due primarily to $59.6 million
of cash payments for businesses acquired: $10.0 million of additional
consideration for the acquisition of ARS and $49.6 million (net of $10.3 million
of cash acquired) for the purchase of CSRG.
For the three months ended March 31, 2002, net cash provided by financing
activities was $3.8 million compared to net cash used in financing activities of
$0.3 million for the three months ended March 31, 2001. This increase in cash
provided by financing activities is due primarily to an increase in cash
received as the result of stock option exercises as well as a reduction in cash
used for purchases of treasury stock.
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.
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
Page 11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2002
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, were named as defendants in two
purported class action lawsuits, which allege violations of Rule 10b-5,
promulgated under the Securities 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., were filed in the United States District Court for the Southern District of
New York and subsequently consolidated. Approximately 300 issuers and 40
investment banks have been sued. These suits have been consolidated for pretrial
purposes in the IPO Allocation Securities Litigation. The lawsuit involving the
Company focuses on alleged improper practices by the investment banks in
connection with the Company's initial public offering in February 1999. The
lawsuit alleges 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 lawsuit
also alleges 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 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.
In December 2001, Siemens Medical Solutions Health Services Corporation filed a
lawsuit against the Company's subsidiary, PSC Healthcare Software, Inc.
(formerly known as Health Systems Design Corporation ("HSD")) alleging breach of
contract and fraud by HSD for failing to complete the development and delivery
of a computer software product. Siemens seeks damages in excess of $10 million.
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.
Page 13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2002
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
<Table>
<Caption>
Exhibit No. Document
----------- --------
10.48 Employment Agreement dated March 11, 2002,
between the Company and Brian T. Maloney
10.49 Nonstatutory Stock Option Agreement dated
March 11, 2002, between the Company and
Brian T. Maloney
</Table>
(b) Reports on Form 8-K
On January 2, 2002, the Company filed a Current Report on Form
8-K to report its agreement to acquire all of the outstanding common
stock of Claim Services Resource Group, Inc. The transaction was
reported under Item 5 of Form 8-K and included the press release.
Page 14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2002
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: May 6, 2002 By /s/ ROBERT J. KELLY
--------------------------------------
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer
Page 15
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.48 Employment Agreement dated March 11, 2002,
between the Company and Brian T. Maloney
10.49 Nonstatutory Stock Option Agreement dated
March 11, 2002, between the Company and
Brian T. Maloney
</Table>