UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 July 30, 2002:
106,688,803.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2002
INDEX
<Table>
<Caption>
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001........................................................... 1
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2002 and 2001..................................... 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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............................... 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................. 17
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.................................................................. 18
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K................................................... 20
SIGNATURES.................................................................................... 21
</Table>
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 208,163 $ 259,178
Accounts receivable, net ............................................ 161,021 160,907
Prepaid expenses and other........................................... 46,810 50,071
------------- -----------------
Total current assets............................................. 415,994 470,156
Property, equipment and purchased software, net......................... 57,499 52,426
Goodwill, net........................................................... 184,744 127,161
Long-term accrued revenue............................................... 51,748 34,003
Other non-current assets, net........................................... 85,613 73,852
------------- -----------------
Total assets..................................................... $ 795,598 $ 757,598
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 34,879 $ 36,272
Accrued liabilities.................................................. 96,812 121,728
Other current liabilities............................................ 22,370 48,159
------------- -----------------
Total current liabilities........................................ 154,061 206,159
Other non-current liabilities........................................... 16,185 20,670
------------- -----------------
Total liabilities................................................ 170,246 226,829
------------- -----------------
Stockholders' equity:
Common stock......................................................... 1,071 1,020
Additional paid-in capital........................................... 384,949 331,057
Other stockholders' equity........................................... 243,506 206,147
Accumulated other comprehensive loss................................. (4,174) (7,455)
------------- -----------------
Total stockholders' equity....................................... 625,352 530,769
------------- -----------------
Total liabilities and stockholders' equity....................... $ 795,598 $ 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 AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue.................................................. $ 333,465 $ 291,287 $ 659,244 $ 586,019
Costs and expenses:
Direct cost of services............................. 249,976 222,505 501,754 451,320
Selling, general and administrative expenses........ 54,937 46,127 99,961 129,008
------------ ------------ ------------ ------------
Operating income......................................... 28,552 22,655 57,529 5,691
Interest income, net..................................... 1,042 2,626 2,088 5,725
Equity in earnings of unconsolidated affiliates.......... 1,979 2,604 3,927 4,226
Other income (expense), net.............................. (803) (611) (673) (1,060)
------------ ------------ ------------ ------------
Income before taxes...................................... 30,770 27,274 62,871 14,582
Provision for income taxes............................... 10,590 10,773 23,270 5,760
------------ ------------ ------------ ------------
Net income.......................................... $ 20,180 $ 16,501 $ 39,601 $ 8,822
============ ============ ============ ============
Basic and diluted earnings per common share:
Basic earnings per common share..................... $ 0.19 $ 0.17 $ 0.38 $ 0.09
Weighted average common shares outstanding.......... 106,050 98,513 104,652 98,058
Diluted earnings per common share................... $ 0.17 $ 0.15 $ 0.34 $ 0.08
Weighted average diluted common shares
outstanding......................................... 116,389 111,678 116,022 110,905
</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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months ended June 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income.................................................... $ 39,601 $ 8,822
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 15,117 17,136
Other non-cash items....................................... 6,873 5,093
Changes in assets and liabilities:
Accounts receivable, net................................ (4,797) 6,851
Long-term accrued revenue............................... (17,745) (6,573)
Accounts payable and accrued liabilities................ (9,229) (10,627)
Accrued compensation.................................... (14,301) 2,802
Other current and non-current assets, net............... (16,466) (13,735)
Other current and non-current liabilities............... 7,027 5,871
----------- -----------
Net cash provided by operating activities........... 6,080 15,640
----------- -----------
Cash flows from investing activities:
Purchases of property, equipment and purchased software, net.. (18,019) (11,530)
Acquisition of businesses, net of cash acquired of
$10,328 and $0, respectively............................... (59,581) (1,000)
Other......................................................... 712 (847)
----------- -----------
Net cash used in investing activities............... (76,888) (13,377)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock........................ 17,910 2,834
Proceeds from issuance of treasury stock...................... 591 2,660
Purchases of treasury stock................................... (4,030) (3,714)
Other......................................................... (852) 179
----------- -----------
Net cash provided by financing activities........... 13,619 1,959
----------- -----------
Effect of exchange rate changes on cash and cash equivalents....... 6,174 (7,641)
----------- -----------
Net decrease in cash and cash equivalents.......................... (51,015) (3,419)
Cash and cash equivalents at beginning of period................... 259,178 239,688
----------- -----------
Cash and cash equivalents at end of period......................... $ 208,163 $ 236,269
=========== ===========
</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
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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, which are of a normal recurring nature and
necessary for a fair presentation, have been included for the interim periods
presented. 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, as filed in
the Company's Annual Report on Form 10-K. Operating results for the three and
six month periods ended June 30, 2002 are not necessarily indicative of the
results for the year ending December 31, 2002.
Certain of the 2001 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
Accounting Standards Issued
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Board No. ("FAS") 146, "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The Company is required to adopt FAS 146 no later than January 1,
2003. The Company does not believe that the adoption of FAS 146 will have a
material impact on its consolidated financial statements.
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 $52,162) was recorded as
Goodwill, net on the condensed consolidated balance sheets, has been assigned to
the IT Solutions segment, and will not be deductible for tax purposes. The
purchase price may be adjusted within a contractual true-up period that ends in
the 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 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 $20,000 recorded in
2001 and $756 recorded in 2002, all of which was allocated to the IT Solutions
segment. Additional consideration totaling up to $30,000 may be paid over the
next
Page 4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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.
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted certain provisions of 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 other than 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 tables provide comparative net income and earnings per common
share had the non-amortization provision of FAS 142 been adopted for all periods
presented:
<Table>
<Caption>
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income............................................ $ 20,180 $ 16,501 $ 39,601 $ 8,822
Adjustments:
Assembled workforce amortization, net of tax
benefit of $148 and $235.................... -- 241 -- 384
Goodwill amortization, net of tax
benefit of $421 and $842.................... -- 469 -- 1,761
------------ ------------ ------------ ------------
Adjusted net income................................... $ 20,180 $ 17,211 $ 39,601 $ 10,967
============ ============ ============ ============
Basic earnings per common share:
Reported basic earnings per common share......... $ 0.190 $ 0.168 $ 0.378 $ 0.090
Adjusted basic earnings per common share......... $ 0.190 $ 0.175 $ 0.378 $ 0.112
Diluted earnings per common share:
Reported diluted earnings per common share....... $ 0.173 $ 0.148 $ 0.341 $ 0.080
Adjusted diluted earnings per common share....... $ 0.173 $ 0.154 $ 0.341 $ 0.099
</Table>
Page 5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The changes in carrying amount of goodwill for the six months ended June 30,
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.......................... 52,162 -- 52,162
------------ ------------ ------------
Balance as of June 30, 2002....................................... $ 113,373 $ 71,371 $ 184,744
============ ============ ============
</Table>
Identifiable intangible assets as of June 30, 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 $ (1,656) $ 3,896
Customer based assets.................... 1,200 (186) 1,014
Other intangible assets.................. 2,041 (333) 1,708
------------ ------------ ------------
Balance at June 30, 2002................. $ 8,793 $ (2,175) $ 6,618
============ ============ ============
</Table>
Total amortization expense for identifiable intangible assets was $521 and
$1,005 for the quarter and six months ended June 30, 2002, respectively, and
$696 and $952 for the quarter and six months ended June 30, 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. ACCRUED LIABILITIES
At December 31, 2001, the Company had recorded $4,200 for contract-related
expenses associated with the bankruptcy of a certain customer as certain amounts
were believed to be unrecoverable. During the second quarter of 2002, the
Company received payment for $3,000 of these contract-related expenses and
therefore recorded a reduction to Direct cost of services for $3,000.
NOTE 5. COMPREHENSIVE INCOME
The Company's total comprehensive income, net of tax, was as follows:
<Table>
<Caption>
Three months Six months
ended June 30, ended June 30,
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income................................ $ 20,180 $ 16,501 $ 39,601 $ 8,822
Foreign currency translation adjustments.. 3,907 (575) 3,310 (3,963)
Other..................................... -- 38 (29) 21
---------- ---------- ---------- ----------
Total comprehensive income................ $ 24,087 $ 15,964 $ 42,882 $ 4,880
========== ========== ========== ==========
</Table>
Page 6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 6. STOCKHOLDERS' EQUITY
The components of "Other stockholders' equity" were as follows:
<Table>
<Caption>
June 30, 2002 December 31, 2001
------------- -----------------
Retained earnings....................................... $ 247,422 $ 207,821
Treasury stock.......................................... (2,617) --
Other................................................... (1,299) (1,674)
------------- -----------------
Total other stockholders' equity........................ $ 243,506 $ 206,147
============= =================
</Table>
Additional paid-in capital increased by $53,892 during the six months ended June
30, 2002, due primarily to the issuance of the Company's Class A and Class B
Common Stock for the exercise of options in the amount of $8,715 and $8,099,
respectively, and the related $19,885 tax benefit. The majority of the remaining
increase related to the issuance of $13,872 of Class A Common Stock for the
purchases of ARS and CSRG.
At June 30, 2002, there were 104,491 shares of the Company's Class A Common
Stock and 2,225 shares of the Company's Class B Common Stock outstanding. At
December 31, 2001, there were 100,085 shares of the Company's Class A Common
Stock and 1,784 shares of the Company's Class B Common Stock outstanding. The
increase in the Company's Class A Common Stock is primarily due to the exercise
of stock options to purchase 2,120 shares, the conversion of 1,784 shares of
Class B Common Stock to Class A Common Stock, and the issuance of 703 shares for
two acquisitions. These issuances were partly offset by the repurchase of 377
shares during the period. In April of 2002, the Company issued 2,225 shares of
Class B Common Stock upon the exercise of options.
NOTE 7. TERMINATION OF BUSINESS RELATIONSHIP
During the three months ended June 30, 2002, the Company terminated a certain
business relationship. As a result, the Company received a termination fee of
$7,289 and incurred expenses of $759 that were recorded in Revenue and Direct
costs of services, respectively. In addition, in connection with this
termination, the Company reduced a deferred tax asset valuation allowance,
resulting in an income tax benefit of $1,565.
NOTE 8. REALIGNED OPERATING STRUCTURE
During 2001 the Company realigned its operating structure and recorded 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 Selling, general and administrative expenses
("SG&A").
In the second quarter of 2002, the Company continued efforts to streamline its
operations and recorded in SG&A charges of $8,151 related to severance and other
costs to exit certain activities. These charges included the following:
o $6,885 related to the elimination of approximately 235 positions in
various business functions and geographic areas of the Company;
o $312 for the closure of a facility; and
o $954 related to adjustments to reduce the basis of certain facility
related assets and the basis of software and other assets used in
exited service offerings to their net realizable value.
Page 7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The amounts accrued and the related payments and adjustments against these 2002
and 2001 charges were as follows:
<Table>
<Caption>
Employee Facility Asset
Related Related Basis
Costs Costs Adjustments Total
----------- ----------- ----------- -----------
Provision balance at December 31, 2001........ $ 10,453 $ 21,217 $ -- $ 31,670
Charge for the quarter ended June 30, 2002.... 6,885 312 954 8,151
Less: cash payments and asset write-downs.... (2,057) (1,875) (954) (4,886)
Change in estimate............................ (4,800) 4,800 -- --
----------- ----------- ----------- -----------
Provision balance at June 30, 2002............ $ 10,481 $ 24,454 $ -- $ 34,935
=========== =========== =========== ===========
</Table>
During the first six months of 2002, the Company revised its estimates of the
remaining provision needed for employee related and facility related costs. The
Company decreased its estimates for employee related costs primarily due to
lower than expected outplacement and other severance related costs. The Company
increased its estimates for facility related costs as expected subleases for
certain facilities are now believed to be less likely to occur because of the
deterioration in the real estate markets for these facilities. The remaining
balance of $34,935 is included on the condensed consolidated balance sheets in
the amounts of $25,472 in Accrued liabilities and $9,463 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 six months ended June 30, 2001,
revenue and net operating losses for this operation were $0 and ($3,916),
respectively. There was no activity for this operation for the six months ended
June 30, 2002.
NOTE 9. INCOME TAXES
During the second quarter of 2002, the Company reduced a deferred tax asset
valuation allowance of $1,565 in connection with the termination of a certain
business relationship. Excluding this $1,565 benefit, the effective tax rate for
the second quarter of 2002 was 39.5%, which is consistent with the effective tax
rate in the second quarter of 2001.
NOTE 10. 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, including profits and expenses that are
determined to be non-recurring, are included in "Other."
Page 8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. The Company evaluates segment
performance based on income from operations before income taxes, exclusive of
profits and expenses that are determined to be non-recurring. All corporate and
centrally incurred costs are allocated to the segments based principally on
expenses, employees, square footage, or usage. In the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, goodwill, other intangible
assets and related amortization expense associated with the acquisition of
Solutions Consulting were included in "Other." In the summary below, 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 three months ended June 30, 2002:
Revenue................................... $ 318,004 $ 14,871 $ 590 $ 333,465
Income before taxes....................... 28,607 1,649 514 30,770
For the three months ended June 30, 2001:
Revenue................................... 274,717 14,888 1,682 291,287
Income (loss) before taxes................ 22,855 (1,448) 5,867 27,274
For the six months ended June 30, 2002:
Revenue................................... 628,200 29,930 1,114 659,244
Income before taxes....................... 58,420 1,134 3,317 62,871
For the six months ended June 30, 2001:
Revenue................................... 551,065 32,726 2,228 586,019
Income (loss) before taxes................ 42,910 (2,190) (26,138) 14,582
</Table>
During the second quarter of 2002, the Company recorded $7,289 of revenue
associated with the termination of a certain business relationship, and this
revenue is included in the IT Solutions segment. Because of the non-recurring
nature of this revenue, the Company has reported the related gross profit of
$6,530 in "Other." Also included in "Other" are a payment received by a customer
in bankruptcy that was previously believed to be unrecoverable, severance and
other costs to exit certain activities, and expenses associated with the
California energy investigations and related litigation.
Page 9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 11. EARNINGS PER SHARE
The following chart is a reconciliation of the numerators and the denominators
of the basic and diluted per share computations.
<Table>
<Caption>
For the three months ended June 30,
2002 2001
------------ ------------
BASIC EARNINGS PER COMMON SHARE
Net income............................................... $ 20,180 $ 16,501
============ ============
Weighted average common shares outstanding............... 106,050 98,513
============ ============
Basic earnings per common share.......................... $ 0.19 $ 0.17
============ ============
DILUTED EARNINGS PER COMMON SHARE
Net income............................................... $ 20,180 $ 16,501
============ ============
Weighted average common shares outstanding............... 106,050 98,513
Incremental shares assuming dilution..................... 10,339 13,165
------------ ------------
Weighted average diluted common shares outstanding....... 116,389 111,678
============ ============
Diluted earnings per common share........................ $ 0.17 $ 0.15
============ ============
</Table>
<Table>
<Caption>
For the six months ended June 30,
2002 2001
------------ ------------
BASIC EARNINGS PER COMMON SHARE
Net income............................................... $ 39,601 $ 8,822
============ ============
Weighted average common shares outstanding............... 104,652 98,058
============ ============
Basic earnings per common share.......................... $ 0.38 $ 0.09
============ ============
DILUTED EARNINGS PER COMMON SHARE
Net income............................................... $ 39,601 $ 8,822
============ ============
Weighted average common shares outstanding............... 104,652 98,058
Incremental shares assuming dilution..................... 11,370 12,847
------------ ------------
Weighted average diluted common shares outstanding....... 116,022 110,905
============ ============
Diluted earnings per common share........................ $ 0.34 $ 0.08
============ ============
</Table>
For the three and six months ended June 30, 2002, options to purchase 15,332 and
15,011 shares, respectively, 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 higher than
the Company's average stock price for these periods. For the three and six
months ended June 30, 2001, options to purchase 17,059 and 17,383 shares,
respectively, of the Company's common stock were excluded for the same reason as
discussed above.
Page 10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 12. 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
outcome of these litigation matters, 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.
IPO Allocation Litigation
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 the
following 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 are without merit and will vigorously defend itself in these
cases. 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.
Litigation Relating to the California Energy Crisis
In June 2002, the Company was named as a defendant in a purported class action
lawsuit that alleges that the Company conspired with energy traders to
manipulate the California energy market. This lawsuit, Art Madrid v. Perot
Systems Corporation, et al., was filed in the Superior Court of California,
County of San Diego.
In June and July 2002, the Company, Ross Perot and Ross Perot, Jr., were named
as defendants in six purported class action lawsuits that allege violations of
Rule 10b-5, promulgated under the Securities Act of 1934, as amended, and, in
certain of the cases, allege common law fraud. These suits allege that the
Company's SEC filings contained material misstatements or omissions of material
facts with respect to the Company's activities related to the California energy
market. Two lawsuits, Herbert Condell v. Perot Systems Corp., et al. and Richard
J. Dowling v. Perot Systems Corp., et al. were filed in the United States
District Court for the Southern District of New York, and four lawsuits, Robert
Markewich v. Perot Systems Corp., et al., Vincent Milano v. Perot Systems Corp.,
et al., Lori Will v. Perot Systems Corp., et al. and June Zordich v. Perot
Systems Corp., et al. were filed in the United States District Court for the
Northern District of Texas, Dallas Division. June Zordich v. Perot Systems
Corp., et al. has been transferred to the United States District Court for the
Eastern District of Texas, Sherman Division.
The Company believes the claims against it are without merit and will vigorously
defend itself in these cases. 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 11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
California Senate Select Committee and California Attorney General Inquiries
In connection with investigations of the California energy markets, in June
2002, the California Attorney General subpoenaed documents from the Company and,
in July 2002, the Company, or its former employees, provided testimony to a
select committee of the California Senate and a subcommittee of the U.S. House
of Representatives relating to the Company's involvement in the California
energy market in 1999 and 2000.
During the three months ended June 30, 2002, the Company incurred expenses of
$3,530 associated with the California energy investigations and related
litigation and have included these costs within SG&A.
NOTE 13. SUBSEQUENT EVENT
On July 1, 2002, the Company acquired ADI Technology Corporation ("ADI"), a
professional services company that provides technical, information, and
management disciplines to the defense, intelligence and law enforcement
communities. As a result of the acquisition, the Company expanded into a new
Government Services reportable segment. The purchase price includes $37,700 in
cash ($4,186 of which is being held in escrow during a contractual purchase
price true-up period) and may include additional payments totaling up to $15,000
in cash or stock over the next two and one-half years. The possible future
payments are contingent on ADI achieving certain financial targets over the same
period, and at the Company's discretion, up to 60% of these payments may be
settled in Class A Common Stock of the Company, valued at the date of
settlement. The transaction will be accounted for as a purchase; accordingly,
the results of operations of ADI and the estimated fair value of assets acquired
and liabilities assumed will be included in the Company's consolidated financial
statements beginning on the acquisition date. The Company is in the process of
obtaining tangible and intangible asset appraisals and completing the plan of
integration into the Company's operations, and therefore the allocation of
purchase price has not been completed. Upon completion of the appraisals, the
estimated fair value of goodwill will be assigned to the new Government Services
reportable segment and will not be deductible for tax purposes.
Page 12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2002 and 2001
Revenue for the three months ended June 30, 2002 was $333.5 million. Excluding
$7.3 million of revenue relating to the termination of a certain business
relationship, revenue for the second quarter of 2002 was $326.2 million, which
is an increase of 12.0% over revenue for the second quarter of 2001 of $291.3
million. This increase in revenue is due to an increase in revenue for the IT
Solutions segment.
Revenue for the IT Solutions segment increased 15.8% to $318.0 million in the
second quarter of 2002 from $274.7 million in the same period of 2001. This
increase is primarily attributable to $37.2 million in revenue from contracts
signed during the past twelve months, $25.9 million in revenue from two
acquisitions, $7.3 million of revenue relating to the termination of a certain
business relationship, and $5.1 million from other existing accounts. The two
acquisitions are 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 $17.7 million decrease in revenue from customers in our telecommunications and
capital markets sectors. Revenue from UBS AG ("UBS"), which is primarily in the
capital markets sector, decreased to $64.4 million in 2002 from $77.6 million in
2001 due to lower spending on infrastructure services, resulting from cost
savings initiatives implemented by UBS and the Company. In addition, in 2001 the
Company focused on exiting certain business relationships and under-performing
delivery units and closing geographic project sales efforts. Revenue in the
second quarter of 2002 from these exited activities was $14.5 million less than
the revenue from these activities in the second quarter of 2001.
Revenue for the Consulting segment was $14.9 million for both the second quarter
of 2002 and the second quarter of 2001.
During the second quarter of 2002, the Company recorded $0.8 million of Direct
cost of services and $6.5 million of gross profit associated with the
termination of a certain business relationship. In addition, during the second
quarter of 2002 the Company received a $3.0 million payment from a customer in
bankruptcy reorganization, which was previously believed to be unrecoverable and
recorded as a non-recurring expense during 2001. Excluding these two items,
gross margin for the second quarter of 2002 was 22.7% of total revenue, which is
lower than the gross margin in the second quarter of 2001 of 23.6%. This year
over year decrease in gross margin was due primarily to lower profit margins on
newly signed contracts and renewals and the underperformance of a claims
processing acquisition. In addition, during the second quarter of 2002 the
Company revised its cost estimates on a certain fixed price contract, resulting
in an adjustment to reverse $1.9 million of previously recognized revenues and
profits. Partially offsetting these declines is the higher profit margin
generated by a business process services acquisition. As a result of market
conditions and earnings pressures, the Company recorded less expense for
associate incentive programs in the second quarter of 2002 as compared to the
prior year period, which offset the gross margin decline by approximately 1.5
percentage points.
Selling, general and administrative expense ("SG&A") for the second quarter of
2002 increased to $54.9 million from $46.1 million for the second quarter of
2001. In the second quarter of 2002, the Company continued efforts to streamline
its operations and recorded in SG&A non-recurring charges of $8.1 million
related to severance and other costs to exit certain activities. These charges
included the following:
Page 13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o $6.9 million related to the elimination of approximately 235 positions
in various business functions and geographic areas of the Company;
o $0.3 million for the closure of a facility; and
o $0.9 million related to adjustments to reduce the basis of certain
facility related assets and the basis of software and other assets
used in exited service offerings to their net realizable value.
In addition, the Company recorded $3.5 million of expense relating to an
investigation of the Company's involvement in the California energy crisis.
Excluding these items, SG&A for the second quarter of 2002 was $43.3 million, or
13.3% of revenue (after excluding the $7.3 million of non-recurring revenue),
which is a decrease from 15.8% of total revenue for the second quarter of 2001.
This decrease is due primarily to the focused efforts of the Company to reduce
SG&A costs as a percentage of revenue, the elimination of the amortization of
goodwill and certain other intangibles, which was $1.3 million in the second
quarter of 2001, and the reduction of amounts recorded for associate incentive
programs.
The $8.1 million in non-recurring charges during 2002 includes $0.9 million in
asset basis adjustments and $7.2 million of liabilities that will be settled in
cash, of which $1.0 million has been paid as of June 30, 2002. The remaining
balance is expected to be substantially settled by December 31, 2002. The
savings that resulted from these actions will be used to offset profit pressures
from lower discretionary spending by customers on projects and to expand profit
margins.
Interest income, net, decreased in the second quarter of 2002 to $1.0 million
from $2.6 million in the second 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, comprised of equity in earnings
from HCL Perot Systems N.V., a software joint venture based in India ("HPS"),
was $2.0 million in the three months ended June 30, 2002, compared to $2.6
million in the same period of 2001.
During the second quarter of 2002, the Company reduced a deferred tax asset
valuation allowance of $1.6 million in connection with the termination of a
certain business relationship. Excluding this $1.6 million benefit, the
effective tax rate for the second quarter of 2002 was 39.5%, which is consistent
with the effective tax rate in the second quarter of 2001.
Comparison of the six months ended June 30, 2002 and 2001
Revenue for the six months ended June 30, 2002 was $659.2 million. Excluding
$7.3 million of revenue relating to the termination of a certain business
relationship, revenue for the first six months of 2002 is $651.9 million, which
is an increase of 11.2% over revenue for the first six months of 2001 of $586.0
million. This increase in revenue is due to an increase in revenue for the IT
Solutions segment, partially offset by a decrease in revenue for the Consulting
segment.
During the six months ended June 30, 2002, revenue for the IT Solutions segment
increased 14.0% to $628.2 million from $551.1 million in the same period of
2001. This increase is primarily attributable to $76.4 million in revenue from
contracts signed during the past twelve months, $55.4 million in revenue from
the acquisitions of ARS and CSRG, $7.3 million of revenue relating to the
termination of a certain business relationship, and $9.6 million from other
existing accounts. These increases were partially offset by a $41.6 million
decrease in revenue from customers in our telecommunications and capital markets
sectors. Revenue from UBS AG ("UBS"), which is primarily in the capital markets
sector, decreased to $127.5 million in 2002 from $156.9 million in 2001 due to
lower spending on infrastructure services, resulting from cost savings
initiatives implemented by UBS and the Company. Revenue also decreased by $30.0
million as a result of the Company exiting certain business relationships and
under-performing delivery units and the closing of geographic project sales
efforts in 2001.
Page 14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue for the Consulting segment decreased 8.6% to $29.9 million in the six
months ended June 30, 2002 from $32.7 million in the same period of 2001 due
primarily to the continued weak demand for custom application development
services.
In the first six months of 2001, the Company exited a separately identifiable
operation, which negatively impacted gross profit by $3.9 million. Excluding the
impact from this operation, gross margin for the first six months of 2001 would
have been 23.7% of total revenue. During the first six months of 2002, the
Company recorded $0.8 million of Direct cost of services and $6.5 million of
gross profit associated with the termination of a certain business relationship
and received a $3.0 million payment from a customer in bankruptcy
reorganization, which was previously believed to be unrecoverable. Excluding
these two items, gross margin for the six months ended June 30, 2002 was 22.7%
of total revenue. This year over year decrease in gross margin was due primarily
to lower profit margins on newly signed contracts, renewals, projects and
consulting engagements, and the underperformance of a claims processing
acquisition. In addition, during the second quarter of 2002 the Company revised
its cost estimates on a certain fixed price contract, resulting in an adjustment
to reverse $1.9 million of previously recognized revenues and profits. Partially
offsetting these declines is the higher profit margin generated by a business
process services acquisition. As a result of market conditions and earnings
pressures, the Company recorded less expense for associate incentive programs in
the first six months of 2002 as compared to the prior year period, which offset
the gross margin decline by approximately 1.5 percentage points.
During the six months ended June 30, 2001, the Company recorded $33.7 million in
SG&A as a result of realigning its operating structure. Excluding this charge,
SG&A for the first six months of 2001 would have been $95.3 million, or 16.3% of
total revenue. During the first six months of 2002, the Company continued
efforts to streamline its operations and recorded in SG&A non-recurring charges
of $8.1 million related to severance and other costs to exit certain activities.
Also during the first six months of 2002, the Company recorded $3.5 million of
expense relating to an investigation of the Company's involvement in the
California energy crisis. Excluding these items, SG&A for the first six months
of 2002 was $88.4 million, or 13.6% of revenue (after excluding the $7.3 million
of non-recurring revenue). This decrease is due primarily to the focused efforts
of the Company to reduce SG&A costs as a percentage of revenue, the elimination
of the amortization of goodwill and certain other intangibles, which was $3.2
million for the first six months of 2001, and the reduction of amounts recorded
for associate incentive programs.
Interest income, net, decreased in the six months ended June 30, 2002 to $2.1
million from $5.7 million in the same period 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 $3.9 million in the six
months ended June 30, 2002, compared to $4.2 million in the same period of 2001.
Equity in earnings from HPS decreased to $3.9 million in the six months ended
June 30, 2002 from $5.0 million in the same period of 2001.
During the second quarter of 2002, the Company reduced a deferred tax asset
valuation allowance of $1.6 million in connection with the termination of a
certain business relationship. Excluding this $1.6 million benefit, the
effective tax rate for the first six months of 2002 was 39.5%, which is
consistent with the effective tax rate for the first six months of 2001.
BUSINESS OUTLOOK
The following statements regarding Perot Systems business outlook are based on
current expectations. These statements are forward-looking, and actual results
may differ materially. In formulating this outlook, the Company has considered
recent and potential sales, acquisitions and current market conditions.
For the third quarter of 2002, the Company expects approximately $20.0 million
to $25.0 million of incremental revenue from the July 2002 acquisition of ADI
Technology Corporation ("ADI") and recently
Page 15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
signed new contracts, offset by approximately $10.0 million of potential
sequential declines in its existing account base related to normal operating
events. Additionally, the Company believes there is the potential for weakened
market conditions to result in a sequential decline for consulting services. The
Company expects that such weakened market conditions will persist in the near
term and may cause pressure on profitability.
As a result of the acquisition of ADI, operating in the new Government Services
reportable segment, the Company expects that SG&A as a percentage of revenue
will increase in the third quarter, while operating profits as a percentage of
revenue will decrease.
The Company also expects to continue to incur costs in responding to the
California energy investigation and related litigation, which amounts cannot
currently be estimated.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002, cash and cash equivalents decreased
19.7% to $208.2 million from $259.2 million at December 31, 2001.
Net cash provided by operating activities decreased to $6.1 million for the six
months ended June 30, 2002, from $15.6 million for the six months ended June 30,
2001. This decrease is partially due to an increase in Long-term accrued revenue
of $11.2 million, which represents revenues earned under long-term service
contracts that will be billed in the future as specified in the terms of the
related contracts. In addition, the decrease in cash provided by operating
activities is also due to an increase in year-end bonuses paid to associates in
2002 as compared to 2001 of approximately $6.8 million.
Net cash used in investing activities increased to $76.9 million for the six
months ended June 30, 2002, from $13.4 million for the same period in 2001. This
increase was due primarily to $49.6 million of net cash paid in the first
quarter of 2002 for the acquisition of CSRG and $10.0 million in cash paid as
additional consideration related to the ARS acquisition.
For the six months ended June 30, 2002, net cash provided by financing
activities increased to $13.6 million from $2.0 million for the six months ended
June 30, 2001. This increase is primarily due to an increase in the exercise of
options to purchase Class A Common Stock during the six months of 2002 and the
exercise of options to purchase shares of Class B Common Stock, which did not
occur during the prior year period.
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.
SUBSEQUENT EVENT
On July 1, 2002, the Company acquired ADI, a professional services company that
provides technical, information, and management disciplines to the defense,
intelligence and law enforcement communities. As a result of the acquisition,
the Company expanded into a new Government Services reportable segment. The
purchase price includes $37.7 million in cash ($4.2 million of which is being
held in escrow during a contractual purchase price true-up period) and may
include additional payments totaling up to $15.0 million in cash or stock over
the next two and one-half years. The possible future payments are contingent on
ADI achieving certain financial targets over the same period, and at the
Company's discretion, up to 60% of these payments may be settled in Class A
Common Stock of the Company, valued at the date of settlement. The transaction
will be accounted for as a purchase; accordingly, the results of operations of
ADI and the estimated fair value of assets acquired and liabilities assumed will
be included in the Company's consolidated financial statements beginning on the
acquisition date. The Company is in the process of obtaining tangible and
intangible asset appraisals and completing the plan of integration into the
Company's operations, and therefore the allocation of purchase price has not
been completed. Upon completion of the
Page 16
appraisals, the estimated fair value of goodwill will be assigned to the new
Government Services reportable segment and will not be deductible for tax
purposes.
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; costs
associated with a California State Senate Committee and California Attorney
General investigation into the California energy crisis; 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 17
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2002
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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
outcome of these litigation matters, 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.
IPO Allocation Litigation
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 the
following 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 are without merit and will vigorously defend itself in these
cases. 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.
Litigation Relating to the California Energy Crisis
In June 2002, the Company was named as a defendant in a purported class action
lawsuit that alleges that the Company conspired with energy traders to
manipulate the California energy market. This lawsuit, Art Madrid v. Perot
Systems Corporation, et al., was filed in the Superior Court of California,
County of San Diego.
In June and July 2002, the Company, Ross Perot and Ross Perot, Jr., were named
as defendants in six purported class action lawsuits that allege violations of
Rule 10b-5, promulgated under the Securities Act of 1934, as amended, and, in
certain of the cases, allege common law fraud. These suits allege that the
Company's SEC filings contained material misstatements or omissions of material
facts with respect to the Company's activities related to the California energy
market. Two lawsuits, Herbert Condell v. Perot Systems Corp., et al. and Richard
J. Dowling v. Perot Systems Corp., et al. were filed in the United States
District Court for the Southern District of New York, and four lawsuits, Robert
Markewich v. Perot Systems Corp., et al., Vincent Milano v. Perot Systems Corp.,
et al., Lori Will v. Perot Systems Corp., et al. and June Zordich v. Perot
Systems Corp., et al. were filed in the United States District Court for the
Northern District of Texas, Dallas Division. June Zordich v. Perot Systems
Corp., et al. has been transferred to the United States District Court for the
Eastern District of Texas, Sherman Division.
The Company believes the claims against it are without merit and will vigorously
defend itself in these cases. 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 18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2002
California Senate Select Committee and California Attorney General Inquiries
In connection with investigations of the California energy markets, in June
2002, the California Attorney General subpoenaed documents from the Company and,
in July 2002, the Company, or its former employees, provided testimony to a
select committee of the California Senate and a subcommittee of the U.S. House
of Representatives relating to the Company's involvement in the California
energy market in 1999 and 2000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders of the Company on May 8,
2002. The purpose of the meeting was to elect eight nominees to serve as
directors of the Company, approve the amendment and restatement of the
certificate of incorporation to increase the authorized number of shares of
Class A Common Stock, and ratify the appointment of PricewaterhouseCoopers LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 2002. The number of shares voted with respect to each nominee was
as follows:
<Table>
<Caption>
Nominee For Withheld
------- ---------- ---------
Ross Perot .................. 91,820,560 2,785,585
Steven Blasnik .............. 93,946,309 659,836
James Champy ................ 89,015,420 5,590,725
John S.T. Gallagher ......... 93,576,628 1,029,517
William K. Gayden ........... 93,589,550 1,016,595
Carl Hahn ................... 93,411,384 1,194,761
Thomas Meurer ............... 94,132,320 473,825
Ross Perot, Jr .............. 90,200,194 4,405,951
</Table>
All of the nominees were elected to the Board of Directors. At the time of the
shareholders meeting, these directors constituted the entire Board of Directors
of the Company. The amendment and restatement of the certificate of
incorporation to increase the authorized shares of Class A Common Stock from
200,000,000 to 300,000,000 shares has been approved. The vote was 92,836,365 for
and 1,701,028 against with the holders of 68,750 abstaining. The appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year ending December 31, 2002 was ratified by the shareholders. The
vote was 93,376,965 for and 1,187,230 against with the holders of 41,950
abstaining.
Page 19
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2002
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Document
----------- --------
3.1 Third Amended and Restated Certificate of Incorporation
dated May 9, 2002, and filed with the Delaware Secretary
of State on May 16, 2002
(b) Reports on Form 8-K
On June 6, 2002, the Company filed a Current Report on Form 8-K
reporting a press release. The matter was reported under Item 5 of Form
8-K.
On June 24, 2002, the Company filed a Current Report on Form 8-K
reporting a press release and the production of documents in response
to the subpoena from the Attorney General of the State of California
and the provision of those documents to the California State Senate
Committee investigating the California energy markets. The matter was
reported under Item 9 of Form 8-K.
Page 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEROT SYSTEMS CORPORATION
(Registrant)
Date: August 8, 2002 By /s/ ROBERT J. KELLY
------------------------
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer
Page 21
EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Document
----------- --------
3.1 Third Amended and Restated Certificate of Incorporation
dated May 9, 2002, and filed with the Delaware Secretary
of State on May 16, 2002
</Table>