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, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X]Yes [ ]No
Number of shares of registrant's common stock outstanding as of April 29, 2003:
109,494,420.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2003
<Table>
<Caption>
INDEX
Page
----
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002................................................................1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002....................................................2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002....................................................3
Notes to Condensed Consolidated Financial Statements.................................4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................................16
ITEM 4: CONTROLS AND PROCEDURES..............................................................16
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS....................................................................17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.....................................................18
SIGNATURES.....................................................................................19
</Table>
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<Table>
<Caption>
March 31, 2003 December 31, 2002
-------------- -----------------
Current assets:
Cash and cash equivalents ............................. $ 127,802 $ 212,861
Accounts receivable, net .............................. 197,348 162,367
Prepaid expenses and other ............................ 47,821 42,415
--------- ---------
Total current assets .............................. 372,971 417,643
Property, equipment and purchased software, net .......... 61,894 62,543
Goodwill ................................................. 282,989 211,075
Long-term accrued revenue ................................ 45,418 74,489
Other non-current assets ................................. 104,054 76,563
--------- ---------
Total assets ...................................... $ 867,326 $ 842,313
========= =========
<Caption>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 29,166 $ 24,452
Accrued liabilities ................................... 100,829 92,948
Other current liabilities ............................. 58,991 38,116
--------- ---------
Total current liabilities ......................... 188,986 155,516
Other non-current liabilities ............................ 10,084 10,211
--------- ---------
Total liabilities ................................. 199,070 165,727
--------- ---------
Stockholders' equity:
Common stock .......................................... 1,093 1,087
Additional paid-in-capital ............................ 396,319 392,821
Other stockholders' equity ............................ 271,972 284,700
Accumulated other comprehensive loss .................. (1,128) (2,022)
--------- ---------
Total stockholders' equity ........................ 668,256 676,586
--------- ---------
Total liabilities and stockholders' equity ........ $ 867,326 $ 842,313
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
1
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Three months ended March 31,
----------------------------
2003 2002
---------- ----------
Revenue ...................................................................... $ 338,022 $ 325,779
Costs and expenses:
Direct cost of services ................................................. 272,087 251,778
Selling, general and administrative expenses ............................ 43,412 45,024
--------- ---------
Operating income ............................................................. 22,523 28,977
Interest income, net ......................................................... 700 1,046
Equity in earnings of unconsolidated affiliates .............................. 1,525 1,948
Other income (expense), net .................................................. 1,300 130
--------- ---------
Income before taxes .......................................................... 26,048 32,101
Income tax expense ........................................................... 10,158 12,680
--------- ---------
Income before cumulative effect of a change in accounting principle .......... 15,890 19,421
Cumulative effect of a change in accounting principle, net of tax ............ (28,589) --
--------- ---------
Net income (loss) ....................................................... $ (12,699) $ 19,421
========= =========
Basic earnings (loss) per common share:
Income before cumulative effect of a change in accounting principle ..... $ 0.15 $ 0.19
Cumulative effect of a change in accounting principle ................... (0.27) --
--------- ---------
Net income (loss) ....................................................... $ (0.12) $ 0.19
========= =========
Weighted average common shares outstanding .............................. 109,046 103,240
Diluted earnings (loss) per common share:
Income before cumulative effect of a change in accounting principle ..... $ 0.14 $ 0.17
Cumulative effect of a change in accounting principle ................... (0.25) --
--------- ---------
Net income (loss) ....................................................... $ (0.11) $ 0.17
========= =========
Weighted average diluted common shares outstanding ...................... 113,909 115,633
Pro forma amounts assuming the accounting change is applied retroactively:
Net income .............................................................. $ 15,890 $ 17,060
Basic earnings per common share ......................................... $ 0.15 $ 0.17
Diluted earnings per common share ....................................... $ 0.14 $ 0.15
</Table>
The accompanying notes are an integral part of these financial statements.
2
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Three months ended March 31,
----------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net income (loss) ................................................. $ (12,699) $ 19,421
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................. 7,346 7,488
Cumulative effect of a change in accounting principle .......... 28,589 --
Other non-cash items ........................................... 3,058 5,892
Changes in assets and liabilities (net of effects from
acquisitions of businesses):
Accounts receivable ......................................... (5,943) (9,383)
Long-term accrued revenue ................................... (6,127) (7,296)
Prepaid expenses ............................................ (10,841) (5,379)
Accounts payable and accrued liabilities .................... (11,051) (9,149)
Accrued compensation ........................................ (248) (13,163)
Income taxes ................................................ 18,918 8,350
Other current and non-current assets ........................ (1,168) 112
Other current and non-current liabilities ................... (1,525) (283)
--------- ---------
Net cash provided by (used in) operating activities ..... 8,309 (3,390)
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and purchased software ........... (13,175) (10,112)
Acquisition of businesses, net of cash acquired of
$2,222 and $10,328, respectively ............................... (82,778) (59,581)
Other ............................................................. (18) 794
--------- ---------
Net cash used in investing activities ................... (95,971) (68,899)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................ 984 3,921
Other ............................................................. (142) (153)
--------- ---------
Net cash provided by financing activities ............... 842 3,768
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ........... 1,761 247
--------- ---------
Net decrease in cash and cash equivalents .............................. (85,059) (68,274)
Cash and cash equivalents at beginning of period ....................... 212,861 259,178
--------- ---------
Cash and cash equivalents at end of period ............................. $ 127,802 $ 190,904
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
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 (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, 2002, included in the Company's Annual Report on
Form 10-K filed with the SEC on March 12, 2003. Operating results for the
three-month period ended March 31, 2003, are not necessarily indicative of the
results for the year ending December 31, 2003.
Certain of the 2002 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
Change in Accounting Principle for Revenue Arrangements with Multiple
Deliverables
The Company has long-term fixed-price contracts that include certain
deliverables and ongoing service elements. Prior to January 1, 2003, the Company
recognized revenue on these contracts under the percentage-of-completion method
using incurred costs as a measure of progress towards completion. On January 1,
2003, the Company adopted Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables" ("EITF 00-21"). As a result, the Company changed its
method of accounting for revenue from contracts with multiple elements for both
existing and prospective customer contracts.
The adoption of EITF 00-21 for existing customer contracts, which the Company
believes will provide greater transparency into the performance of its revenue
arrangements with multiple deliverables, resulted in a charge for the cumulative
effect of a change in accounting principle of $46,111 ($28,589, net of the
applicable income tax benefit), or $.25 per diluted share, which includes a
charge of approximately $19,500 ($12,090, net of the applicable income tax
benefit), or $.11 per diluted share, to recognize an estimated loss on a
contract element included in an otherwise profitable contract.
Costs and estimated earnings in excess of billings, or long-term accrued
revenue, on in-progress fixed-price contracts totaled $45,418 and $74,489 at
March 31, 2003, and December 31, 2002, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
compensation expense is recorded when the exercise price of employee stock
options is less than the fair value of the underlying stock on the date of
grant. The Company has implemented the disclosure-only provisions of Statement
of Financial Accounting Standards Board No. ("FAS") 123, "Accounting for
Stock-Based Compensation," and FAS 148, "Accounting for Stock-Based Compensation
Transition and Disclosure." Had the Company elected to adopt the expense
recognition provisions of FAS 123, the pro forma impact on net income and
earnings per share would have been as follows:
4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
Three months ended March 31,
----------------------------
2003 2002
---------- -----------
Net income (loss)
As reported ................................ $ (12,699) $ 19,421
Less: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects .... (4,433) (3,386)
---------- ----------
Pro forma .................................. $ (17,132) $ 16,035
Basic earnings (loss) per common share
As reported ................................ $ (0.12) $ 0.19
Pro forma .................................. $ (0.15) $ 0.16
Diluted earnings (loss) per common share
As reported ................................ $ (0.11) $ 0.17
Pro forma .................................. $ (0.15) $ 0.14
</Table>
The Company utilizes the Black-Scholes option pricing model to calculate its pro
forma stock-based compensation expense, and the assumptions used for each period
are as follows:
<Table>
<Caption>
Three months ended March 31,
----------------------------
2003 2002
---------- ----------
Weighted average risk free interest rates .... 2.34% 3.95%
Volatility ................................... 57% 58%
Expected dividend yield ...................... 0% 0%
Weighted average grant-date fair value per
share of options granted ..................... $ 4.38 $ 8.02
</Table>
With the exception of certain grants with cliff vesting and acceleration
features, the expected life of each grant was generally estimated to be a period
equal to one half of the vesting period, plus one year, for all periods
presented. The expected life for cliff vesting grants was equal to the vesting
period, and the expected life for grants with acceleration features was
estimated to be equal to the midpoint of the vesting period.
Financial Accounting Standards Board Interpretation No. 46
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which changes the criteria by which one
company includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and apply in the
first fiscal period beginning after June 15, 2003, for variable interest
entities created prior to February 1, 2003. FIN 46 may be applied by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The Company has an operating lease contract with a variable interest entity
(also called a special purpose entity) for the use of land and office buildings
in Plano, Texas, including its data center facilities. The Company currently
does not consolidate this entity. However, the Company will be required to
consolidate this entity beginning in the third quarter of 2003. Upon
consolidation of this entity, the Company will increase its assets and long-term
debt by approximately $75,000 and begin recording an additional
5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
depreciation expense of approximately $4,000 per year. The assets will be
recorded as land, buildings, and improvements.
Additionally, the Company has not yet determined whether to restate any
previously issued financial statements in connection with the adoption of FIN
46. If the Company elects to adopt FIN 46 by not restating previously issued
financial statements for years before 2003, then the Company estimates that it
would record a cumulative effect adjustment of approximately $6,000
(approximately $3,700, net of the applicable income tax benefit) as of January
1, 2003, representing depreciation expense on the buildings and improvements
through December 31, 2002. In connection with the adoption of FIN 46, the
Company will be required to restate the financial statements for the first and
second quarters of 2003 to consolidate the special purpose entity. The net
impact of this restatement on the Company's earnings for each of the restated
quarters in 2003 is estimated to be approximately $1,000, representing
depreciation expense on the buildings and improvements.
NOTE 2. ACQUISITIONS
Soza & Company, Ltd.
On February 20, 2003, the Company acquired Soza & Company, Ltd. ("Soza"), a
professional services company that provides information technology, management
consulting, financial services and environmental services primarily to public
sector customers. As a result of the acquisition, the Company increased its
customer base and service offerings in the Government Services segment.
The purchase price includes $72,778 in cash (net of $2,222 of cash acquired),
including $5,000 of which is being held in an escrow account for up to two
years, and may include additional payments totaling up to $32,000 in cash or
stock over the next two years. The possible future payments are contingent upon
Soza achieving certain financial targets over the same period, and at the
Company's discretion, up to 70% of these payments may be settled in Class A
Common Stock of the Company. The results of operations of Soza and the estimated
fair value of assets acquired and liabilities assumed are included in the
Company's condensed consolidated financial statements beginning on the
acquisition date.
The allocation of the excess of the purchase price over the net assets acquired
is pending completion of the tangible and intangible asset appraisals; however,
the estimated excess of the purchase price over the net assets acquired in the
amount of $58,914 was recorded as goodwill on the condensed consolidated balance
sheets, was assigned to the Government Services segment and is not deductible
for tax purposes.
Other
During the first quarter of 2003, the Company determined that financial
performance targets for two acquisitions were achieved. As a result, an
additional $10,000 in cash was paid to the previous shareholders of Advanced
Receivable Strategy, Inc. ("ARS"), a corporation the Company purchased in 2001.
The related goodwill was assigned to the IT Solutions segment and is deductible
for tax purposes. In addition, at March 31, 2003, the Company accrued $3,000 for
ADI Technology Corporation ("ADI"), which the Company acquired in 2002. The
$3,000 was paid in cash to the previous shareholders of ADI in the second
quarter of 2003, and the related goodwill was assigned to the Government
Services segment and is not deductible for tax purposes.
6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended March
31, 2003, by reporting segment are as follows:
<Table>
<Caption>
Government
IT Solutions Services Consulting Total
------------ ---------- ---------- --------
Balance as of December 31, 2002 ........... $112,805 $26,899 $71,371 $211,075
Additional goodwill for ADI acquisition ... -- 3,000 -- 3,000
Additional goodwill for ARS acquisition ... 10,000 -- -- 10,000
Estimated goodwill for Soza acquisition ... -- 58,914 -- 58,914
-------- ------- ------- --------
Balance as of March 31, 2003 .............. $122,805 $88,813 $71,371 $282,989
======== ======= ======= ========
</Table>
Identifiable intangible assets as of March 31, 2003, are recorded in other
non-current assets in the condensed consolidated balance sheets and comprise:
<Table>
<Caption>
Gross Net
Carrying Accumulated Book
Value Amortization Value
-------- ------------ ------
Service marks ........................ $ 5,552 $(2,436) $3,116
Customer based assets ................ 4,249 (1,128) 3,121
Other intangible assets .............. 2,311 (654) 1,657
------- ------- ------
Balance at March 31, 2003 ............ $12,112 $(4,218) $7,894
======= ======= ======
</Table>
Total amortization expense for identifiable intangible assets was $707 and $484
for the quarters ended March 31, 2003 and 2002, respectively. Amortization
expense is estimated at $2,481, $1,989, $1,570, $907, $486 and $161 for the
years ended December 31, 2003 through 2008, 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,
------------------------
2003 2002
-------- --------
Net income (loss) ................................ $(12,699) $ 19,421
Foreign currency translation adjustments ......... 848 (597)
Other ............................................ 46 (29)
-------- --------
Total comprehensive income (loss) ................ $(11,805) $ 18,795
======== ========
</Table>
7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 5. STOCKHOLDERS' EQUITY
The components of "Other stockholders' equity" were as follows:
<Table>
<Caption>
March 31, 2003 December 31, 2002
-------------- -----------------
Retained earnings ...................... $ 273,410 $ 286,109
Other .................................. (1,438) (1,409)
--------- ---------
Total other stockholders' equity ....... $ 271,972 $ 284,700
========= =========
</Table>
At March 31, 2003, there were 105,718 shares of the Company's Class A Common
Stock outstanding and 3,567 shares of Class B Common Stock outstanding. At
December 31, 2002, there were 105,272 shares of the Company's Class A Common
Stock outstanding and 3,392 shares of the Company's Class B Common Stock
outstanding. The increase in the Class A Common Stock is due to the exercise of
options and the issuance of shares to participants in the Employee Stock
Purchase Plan.
NOTE 6. SEGMENT DATA
The Company's operations are classified into three primary lines of business,
which are also reportable segments. These lines of business are IT Solutions,
Government Services, 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
industry domain-based short-term project and consulting capabilities. The
Government Services segment provides consulting and technology-based business
process solutions for the Department of Defense and various other governmental
agencies. The Consulting segment provides services related to business and
technical expertise and the design and implementation of business and software
solutions, primarily under short-term contracts related to specific projects.
The Company's remaining operating areas and corporate activities are included in
"Other" and include profits and expenses that are not related to the operations
of the other reportable segments.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements. The Company evaluates segment
performance based on income (loss) from operations before income taxes,
exclusive of profits and expenses that are included in the "Other" category. All
corporate and centrally incurred costs are allocated to the segments based
principally on expenses, employees, square footage, or usage.
The following is a summary of certain financial information by reportable
segment:
<Table>
<Caption>
IT GOVERNMENT
SOLUTIONS SERVICES CONSULTING OTHER TOTAL
--------- ---------- ---------- ----- -----
For the quarter ended March 31, 2003:
Revenue .............................. $289,607 $35,029 $ 13,007 $ 379 $338,022
Income (loss) before taxes ........... 21,855 2,726 (706) 2,173 26,048
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
</Table>
8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 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. In
2002, the Company continued efforts to streamline its operations and recorded
charges of $8,151 in the second quarter and $2,936 in the third quarter related
to severance and other costs to exit certain activities.
The payments made against these charges during the first quarter of 2003 were as
follows:
<Table>
<Caption>
Employee Facility
Related Related
Costs Costs Total
-------- --------- --------
Provision balance at December 31, 2002 ... $ 7,629 $ 14,382 $ 22,011
Less: cash payments ...................... (797) (4,254) (5,051)
------- -------- --------
Remaining balance at March 31, 2003 ...... $ 6,832 $ 10,128 $ 16,960
======= ======== ========
</Table>
The remaining balance of $16,960 is included on the condensed consolidated
balance sheets in the amounts of $10,847 in accrued liabilities and $6,113 in
other non-current liabilities and is expected to be settled by the end of 2006.
NOTE 8. 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>
Three months ended March 31,
----------------------------
2003 2002
------------ ----------
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of a change in accounting principle ... $ 15,890 $ 19,421
======== ========
Weighted average common shares outstanding ............................ 109,046 103,240
======== ========
Income before cumulative effect of a change in accounting principle ... $ 0.15 $ 0.19
======== ========
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of a change in accounting principle ... $ 15,890 $ 19,421
======== ========
Weighted average common shares outstanding ............................ 109,046 103,240
Incremental shares assuming dilution .................................. 4,863 12,393
-------- --------
Weighted average diluted common shares outstanding .................... 113,909 115,633
Income before cumulative effect of a change in accounting principle ... $ 0.14 $ 0.17
======== ========
</Table>
For the three months ended March 31, 2003 and 2002, options to purchase 23,791
and 14,469 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 greater than
the average actual share price for the respective quarter.
9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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
outcomes 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 Securities Litigation
In July and August 2001, the Company, as well as some of its current and former
officers and the investment banks that underwrote the Company's initial public
offering, were named as defendants in two purported class action lawsuits. 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. The suits allege violations of Rule 10b-5,
promulgated under the Securities Exchange Act of 1934, and Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933. Approximately 300 issuers and 40
investment banks have been sued in similar cases. The suits against the issuers
and underwriters have been consolidated for pretrial purposes in the IPO
Allocation Securities Litigation. The lawsuit involving Perot Systems focuses on
alleged improper practices by the investment banks in connection with the
Company's initial public offering in February 1999. The plaintiffs allege that
the investment banks, in exchange for allocating public offering shares to their
customers, received undisclosed commissions from their customers on the purchase
of securities and required their customers to purchase additional Perot Systems
shares 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 this case.
During 2002, the individual Perot Systems defendants were dismissed from the
case. In exchange for the dismissal, the individual defendants entered
agreements with the plaintiffs that toll the running of the statute of
limitations and permit the plaintiffs to refile claims against them in the
future. In February 2003, in response to the defendant's motion to dismiss, the
court dismissed the plaintiffs' Rule 10b-5 claims against Perot Systems, but did
not dismiss the remaining claims.
Litigation Relating to the California Energy Market
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., is pending in the Superior Court of California,
County of San Diego.
In June, July and August 2002, Perot Systems, Ross Perot and Ross Perot, Jr.,
were named as defendants in eight purported class action lawsuits that allege
violations of Rule 10b-5, and, in some of the cases, 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. 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. Two lawsuits, Joffre
Berger v. Perot Systems Corp. et al., and Daniel Taubenfeld v. Perot Systems
Corp. et al., were filed in the United States
10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
District Court for the Eastern District of Texas, Sherman Division. All of these
eight cases have been consolidated in the Northern District of Texas, Dallas
Division.
The Company believes the claims against it are without merit and will vigorously
defend itself in these cases.
OTHER CONTINGENCIES
Contract-Related Contingency
The Company is currently working on a significant software development project
for which the estimated actual cost of development will significantly exceed the
fee specified in the contract. While the contract enables the Company to collect
for some of the overages above the specified fee, the Company believes that it
will not fully recover all of the overages and will therefore suffer a loss on
this development project. The Company expects the IT outsourcing contract with
this customer to be profitable over the full term of the agreement even after
considering the expected loss on the software development project. As discussed
in Note 1, upon adoption of EITF 00-21, the Company recorded an estimated loss
on this software development project of approximately $19,500, which is included
in the cumulative effect of a change in accounting principle. Given the
uncertainties regarding the Company's estimate of the amount of overage billings
that will ultimately be collected, the actual losses with respect to this
development project may eventually exceed the Company's current estimates.
11
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
CHANGE IN ACCOUNTING PRINCIPLE FOR REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES
We have long-term fixed-price contracts that include certain deliverables and
ongoing service elements. Prior to January 1, 2003, we recognized revenue on
these contracts under the percentage-of-completion method using incurred costs
as a measure of progress towards completion. On January 1, 2003, we adopted
Financial Accounting Standards Board (FASB) Emerging Issues Task Force Issue No.
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (EITF
00-21). As a result, we changed our method of accounting for revenue from
contracts with multiple elements for both existing and prospective customer
contracts.
The adoption of EITF 00-21 for existing customer contracts, which we believe
will provide greater transparency into the performance of our revenue
arrangements with multiple deliverables, resulted in a charge for the cumulative
effect of a change in accounting principle of $46.1 million ($28.6 million, net
of the applicable income tax benefit), or $.25 per diluted share, which includes
a charge of approximately $19.5 million ($12.1 million, net of the applicable
income tax benefit), or $.11 per diluted share, to recognize an estimated loss
on a contract element included in an otherwise profitable contract.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenue
Total revenue for the first quarter of 2003 increased by $12.2 million, or 3.7%,
to $338.0 million from $325.8 million in the first quarter of 2002. This
increase in revenue is due to an increase in revenue for the Government Services
segment, partially offset by decreases in the IT Solutions and Consulting
segments.
In July 2002, we acquired ADI Technology Corporation and formed our Government
Services segment. In February 2003, we acquired Soza & Company, Ltd. Revenue
from this segment was $35.0 million for the first quarter of 2003.
Revenue for the IT Solutions segment decreased 6.6% to $289.6 million in the
first quarter of 2003 from $310.2 million in the same period of 2002. Included
in this decrease is the effect of the adoption of EITF 00-21, which resulted in
a cumulative effect of a change in accounting principle that includes $3.8
million of revenue recorded in the first quarter of 2002. The remaining decrease
was attributable to:
o $18.2 million decrease from existing accounts, short-term offerings,
and project work that is contained within our long-term account base.
Within our long-term client contracts we typically perform services
above our base level of services. Given the discretionary nature of
these additional services, the amount of these services that we
provide to our customers may fluctuate from period to period depending
on many factors, including economic conditions and specific client
needs;
o $12.8 million decrease in revenue as a result of exiting certain
business relationships and under-performing delivery units during 2002
including two joint ventures;
o $4.3 million decrease from UBS to $58.8 million in 2003 from $63.1
million in 2002.
These decreases in revenue were partially offset by an $18.5 million increase in
revenue from contracts signed since the first quarter of 2002 with new customers
and with existing customers for whom the scope of services was expanded.
12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue for the Consulting segment decreased 13.9% to $13.0 million in the first
quarter of 2003 from $15.1 million in the first quarter of 2002 due primarily to
the weak demand for custom application solutions and package implementation
services.
Gross Margin
Direct costs of services increased in the first quarter of 2003 by 8.1% to
$272.1 million from $251.8 million in the first quarter of 2002. Gross margin
for the first quarter of 2003 was 19.5% of total revenue, which is lower than
the gross margin for the first quarter of 2002 of 22.7% of total revenue.
Included in this decrease is the effect of the adoption of EITF 00-21, which
negatively affected gross margin by 0.9 percentage points. The remaining year
over year decline in gross margin is primarily due to lower demand for
short-term services, lower profit margins on two government services companies
acquired since the second quarter of 2002, and $2.0 million of expense
associated with unfulfilled minimum purchase commitments.
Selling, General and Administrative Expenses
For the first quarter of 2003, SG&A was $43.4 million, or 12.8% 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 a
temporary decline in selling expense as well as our efforts to reduce SG&A costs
as a percentage of revenue. Partially offsetting these savings are $2.4 million
of SG&A costs associated with ADI and Soza, which were both acquired after March
31, 2002. We expect SG&A as a percentage of revenue to increase in the second
quarter of 2003 due to additional costs associated with corporate compliance,
upgrading our corporate information technology systems, and changes or actions
that may result from our ongoing review of operations.
Other Statement of Operations Items
Interest income, net, decreased in the first quarter of 2003 to $0.7 million
from $1.0 million in the first quarter of 2002. This decrease is due to both a
lower average cash balance and lower interest rates during 2003 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, was $1.5
million in the three months ended March 31, 2003, compared to $1.9 million in
the same period of 2002.
Other income (expense), net, increased in the three months ended March 31, 2003,
to income of $1.3 million from income of $0.1 million in the three months ended
March 31, 2002, due to the receipt of a $1.2 million non-investment interest
payment.
BUSINESS OUTLOOK
The following statements regarding our business outlook are based on current
expectations. These statements are forward-looking and actual results may differ
materially. In formulating this outlook, we considered recent and potential
sales, acquisitions and current market conditions.
For the second quarter of 2003, we expect revenue to range from $353.0 million
to $363.0 million, representing an increase of between 5.8% and 8.8% as compared
to the same prior year period. Comparing revenue for the first quarter of 2003
to our expected revenue for the second quarter of 2003:
o new customer contracts and a full quarter of revenue from the
acquisition of Soza are expected to add between $27.0 and $37.0
million of revenue, and
13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
o potential revenue declines within our long-term account base of
between $10.0 million and $15.0 million may occur.
For the second quarter of 2003, earnings per diluted share is expected to range
from $0.12 to $0.14, excluding additional costs that we anticipate incurring due
to changes or actions that may result from an ongoing review of our operations.
We have considered potential reductions in our long-term account base, as well
as additional start-up costs on new contracts, in reaching our determination of
the expected range.
We currently estimate that costs due to changes or actions that may result from
our review of operations will exceed $3.0 million over the next two quarters. We
are not able to provide the expected range of earnings per diluted share
calculated in accordance with generally accepted accounting principles and a
reconciliation to that range because we have not yet completed our review of
operations and have not determined the likely timing of actions under
consideration.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2003, cash and cash equivalents
decreased 40.0% to $127.8 million from $212.9 million at December 31, 2002.
Net cash provided by operating activities was $8.3 million for the three months
ended March 31, 2003, compared to net cash used in operating activities of $3.4
million for the three months ended March 31, 2002. The primary reason for the
increase in cash provided by operations is a $14.9 million change in the net
cash paid for income taxes, with net refunds of $13.7 million in 2003 compared
to net payments of $1.2 million in 2002. Additionally, year-end bonuses paid to
associates in 2003 decreased as compared to 2002 by approximately $9.3 million.
These cash inflows were partially offset by an increase in prepaid insurance and
a decrease in income before cumulative effect of a change in accounting
principle for the first quarter of 2003 as compared to the first quarter of
2002.
Net cash used in investing activities was $96.0 million for the three months
ended March 31, 2003, compared to $68.9 million for the same period in 2002.
This increase in cash used in investing activities is due primarily to a $23.2
million increase in the amount of net cash paid for acquisitions of businesses.
During the three months ended March 31, 2003, we paid $72.8 million (net of cash
received) for the acquisition of Soza and an additional $10.0 million for the
acquisition of ARS.
For the three months ended March 31, 2003, net cash provided by financing
activities was $0.8 million compared to $3.8 million for the three months ended
March 31, 2002. This reduction in cash provided by financing activities is due
primarily to a decrease in cash received from the exercise of stock options.
We routinely maintain cash balances in certain European and Asian currencies to
fund operations in those regions. During the three months ended March 31, 2003,
foreign exchange rate fluctuations positively impacted our non-domestic cash
balances by $1.8 million, as Euros strengthened against the U.S. dollar. Our
foreign exchange policy does not call for hedging foreign exchange exposures
that are not likely to impact net income or working capital.
We have no committed line of credit or other borrowings and anticipate that
existing cash and cash equivalents and expected net cash flows from operating
activities will provide sufficient funds to meet our operating needs for the
foreseeable future. We are currently considering obtaining a line of credit,
which we may need if we make additional acquisitions using cash. As discussed
below, upon adoption of FIN 46 and the consolidation of our variable interest
entity, we will increase our long-term debt by $75.0 million.
Contract-Related Contingency
We are currently working on a significant software development project for which
the estimated actual cost of development will significantly exceed the fee
specified in the contract. While the contract enables us to
14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
collect for some of the overages above the specified fee, we believe that we
will not fully recover all of the overages and will therefore suffer a loss on
this development project. We expect the IT outsourcing contract with this
customer to be profitable over the full term of the agreement even after
considering the expected loss on the software development project. As discussed
above, upon adoption of EITF 00-21, we recorded an estimated loss on this
software development project of approximately $19.5 million, which is included
in the cumulative effect of a change in accounting principle. Given the
uncertainties regarding our estimate of the amount of overage billings that will
ultimately be collected, the actual losses with respect to this development
project may eventually exceed our current estimates.
ACCOUNTING STANDARDS ISSUED
Financial Accounting Standards Board Interpretation No. 46
In January 2003, the FASB issued FIN 46, which changes the criteria by which one
company includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and apply in the
first fiscal period beginning after June 15, 2003, for variable interest
entities created prior to February 1, 2003. FIN 46 may be applied by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
We have an operating lease contract with a variable interest entity (also called
a special purpose entity) for the use of land and office buildings in Plano,
Texas, including our data center facilities. We currently do not consolidate
this entity. However, we will be required to consolidate this entity beginning
in the third quarter of 2003. Upon consolidation of this entity, we will
increase our assets and long-term debt by approximately $75.0 million and begin
recording an additional depreciation expense of approximately $4.0 million per
year. The assets will be recorded as land, buildings, and improvements.
Additionally, we have not yet determined whether to restate any previously
issued financial statements in connection with the adoption of FIN 46. If we
elect to adopt FIN 46 by not restating previously issued financial statements
for years before 2003, then we estimate that we would record a cumulative effect
adjustment of approximately $6.0 million (approximately $3.7 million, net of the
applicable income tax benefit) as of January 1, 2003, representing depreciation
expense on the buildings and improvements through December 31, 2002. In
connection with the adoption of FIN 46, we will be required to restate the
financial statements for the first and second quarters of 2003 to consolidate
the special purpose entity. The net impact of this restatement on our earnings
for each of the restated quarters in 2003 is estimated to be approximately $1.0
million, representing depreciation expense on the buildings and improvements.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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 all
forward-looking statements, you should specifically consider various factors
that may cause actual results to vary from those contained in the
forward-looking statements, such as the loss of major clients; deterioration of
project and consulting-based revenue and profit associated with deteriorating
market conditions; our ability to achieve future sales; changes in our UBS
relationship and variability of revenue and expense associated with our largest
customer, as well as other clients; a portion of client revenue and profits
represent spending above contractual minimums, which could be deemed as
discretionary by clients and result in lower revenue and earnings for us with
limited notice; the current and
15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
future performance of client contracts; risks associated with non-recoverable
cost overruns on software development contracts; growing start-up businesses;
the highly competitive market in which we operate; risks associated with signed
contracts that must receive regulatory approval; the variability of quarterly
operating results; the reliance on estimates that involve successful completion
of future actions; guaranteed purchase agreements; changes in technology;
changes to accounting methods; risks associated with acquisitions and
divestitures; and risks related to international operations. Please refer to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002, as filed
with the U.S. Securities and Exchange Commission and available at www.sec.gov,
for additional information regarding risk factors. We disclaim any intention or
obligation to revise any forward-looking statements whether as a result of new
information, future developments, or otherwise.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our market-risk associated with foreign currencies as of
December 31, 2002, see "Quantitative and Qualitative Disclosures about Market
Risk" in Part II, Item 7A, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of our Annual Report on Form 10-K for the
fiscal year then ended. For the three months ended March 31, 2003, there has
been no significant change in related market risk factors.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective.
No significant changes were made in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation (including any corrective actions with regard to significant
deficiencies and material weaknesses).
16
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2003
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are, from time to time, involved in various litigation matters arising in the
ordinary course of our business. We believe that the outcomes of these
litigation matters, either individually or taken as a whole, will not have a
material adverse effect on our consolidated financial condition, results of
operations or cash flows.
IPO ALLOCATION SECURITIES LITIGATION
In July and August 2001, we, as well as some of our current and former officers
and the investment banks that underwrote our initial public offering, were named
as defendants in two purported class action lawsuits. 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. The suits allege violations of Rule 10b-5, promulgated under the
Securities Exchange Act of 1934, and Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933. Approximately 300 issuers and 40 investment banks have
been sued in similar cases. The suits against the issuers and underwriters have
been consolidated for pretrial purposes in the IPO Allocation Securities
Litigation. The lawsuit involving Perot Systems focuses on alleged improper
practices by the investment banks in connection with our initial public offering
in February 1999. The plaintiffs allege that the investment banks, in exchange
for allocating public offering shares to their customers, received undisclosed
commissions from their customers on the purchase of securities and required
their customers to purchase additional Perot Systems shares in aftermarket
trading. The lawsuit also alleges that we should have disclosed in our public
offering prospectus the alleged practices of the investment banks, whether or
not we were aware that the practices were occurring. We believe the claims
against us are without merit and will vigorously defend ourselves in this case.
During 2002, the individual Perot Systems defendants were dismissed from the
case. In exchange for the dismissal, the individual defendants entered
agreements with the plaintiffs that toll the running of the statute of
limitations and permit the plaintiffs to refile claims against them in the
future. In February 2003, in response to the defendant's motion to dismiss, the
court dismissed the plaintiffs' Rule 10b-5 claims against Perot Systems, but did
not dismiss the remaining claims.
LITIGATION RELATING TO THE CALIFORNIA ENERGY MARKET
In June 2002, we were named as a defendant in a purported class action lawsuit
that alleges that we conspired with energy traders to manipulate the California
energy market. This lawsuit, Art Madrid v. Perot Systems Corporation et al., is
pending in the Superior Court of California, County of San Diego.
In June, July and August 2002, Perot Systems, Ross Perot and Ross Perot, Jr.,
were named as defendants in eight purported class action lawsuits that allege
violations of Rule 10b-5, and, in some of the cases, common law fraud. These
suits allege that our SEC filings contained material misstatements or omissions
of material facts with respect to our 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. 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. Two lawsuits, Joffre Berger v.
Perot Systems Corp. et al., and Daniel Taubenfeld v. Perot Systems Corp. et al.,
were filed in the United States District Court for the Eastern District of
Texas, Sherman Division. All of these eight cases have been consolidated in the
Northern District of Texas, Dallas Division.
We believe the claims against us are without merit and will vigorously defend
ourselves in these cases.
17
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2003
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
period covered by this report.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Document
----------- --------
3.1** Third Amended and Restated Certificate
of Incorporation
3.2++ Third Amended and Restated Bylaws
10.29* Employment Agreement dated April 7, 2003,
between the Company and Jeff Renzi.
99.1+ Certifications pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002). Signed originals of the written
statements required by Section 906 have
been provided to Perot Systems
Corporation and will be retained by
Perot Systems Corporation and furnished
to the Securities and Exchange
Commission or its staff upon request.
(b) Reports on Form 8-K
On March 7, 2003, we filed a Current Report on Form 8-K to report an
acquisition, through our wholly owned subsidiary, Perot Systems Government
Services, Inc., of all of the issued and outstanding stock of Soza &
Company, Ltd. The transaction was reported under Item 2 of Form 8-K.
* Filed herewith.
+ Furnished herewith.
** Incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form
10-Q for the quarterly period ended June 30,2002.
++ Incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002.
18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2003
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 9, 2003 By /s/ ROBERT J. KELLY
------------------------
Robert J. Kelly
Corporate Controller and Principal
Accounting Officer
19
CERTIFICATIONS PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED
I, Ross Perot, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perot Systems
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 9, 2003
/s/ ROSS PEROT, JR.
- ---------------------------
Ross Perot, Jr.
Principal Executive Officer
20
CERTIFICATIONS PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED
I, Russell Freeman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perot Systems
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 9, 2003
/s/ RUSSELL FREEMAN
- ---------------------------
Russell Freeman
Principal Financial Officer
21
EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Document
----------- --------
3.1** Third Amended and Restated Certificate
of Incorporation
3.2++ Third Amended and Restated Bylaws
10.29* Employment Agreement dated April 7, 2003,
between the Company and Jeff Renzi.
99.1+ Certifications pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002). Signed originals of the written
statements required by Section 906 have
been provided to Perot Systems
Corporation and will be retained by
Perot Systems Corporation and furnished
to the Securities and Exchange
Commission or its staff upon request.
</Table>
* Filed herewith.
+ Furnished herewith.
** Incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form
10-Q for the quarterly period ended June 30,2002.
++ Incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002.