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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
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Commission File Number 0-22495
PEROT SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2230700
(State of Incorporation) (I.R.S. Employer Identification No.)
2300 WEST PLANO PARKWAY
PLANO, TEXAS
75075
(Address of Principal Executive Offices)
(Zip Code)
(972) 577-0000
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- ------------------- -------------------
Class A Common Stock New York Stock Exchange
Par Value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 25, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock as reported on the New York Stock Exchange, was
approximately $1,172,855,603 (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding as of February 25,
2002: 102,805,723.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K: certain information required in Part III
of this Form 10-K is incorporated from the registrant's Proxy Statement for its
2002 Annual Meeting of Stockholders.
FORM 10-K
For the Year Ended December 31, 2001
INDEX
Part I
Item 1. Business .................................................... 1
Item 2. Properties .................................................. 15
Item 3. Legal Proceedings ........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ......... 16
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .................................................. 17
Item 6. Selected Financial Data ..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .. 30
Item 8. Financial Statements and Supplementary Data ................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................. 32
Part III
Item 10. Directors and Executive Officers of the Registrant .......... 32
Item 11. Executive Compensation ...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management ............................................... 33
Item 13. Certain Relationships and Related Transactions .............. 33
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................. 34
Signatures ........................................................... 36
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," "could," "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, including the risks outlined
below under the caption "Risk Factors." These factors may cause our actual
results to differ materially from any forward-looking statement. We do not
undertake to update any forward-looking statement.
ITEM 1. BUSINESS
OVERVIEW
Perot Systems Corporation, originally incorporated in 1988, is a worldwide
provider of information technology (commonly referred to as IT) services and
business solutions to a broad range of customers. We offer our customers
integrated solutions designed around their specific business objectives, chosen
from a breadth of services, including technology outsourcing, business process
outsourcing, development and integration of systems and applications, and
business and technology consulting services.
With this approach, our customers benefit from integrated service
offerings that help synchronize their strategy, systems, and infrastructure. As
a result, we help our customers achieve their business objectives, whether those
objectives are to accelerate growth, streamline operations, or enhance customer
service capabilities.
REALIGNMENT OF OUR OPERATING STRUCTURE
In 2001, we completed a series of actions designed to focus our service
offerings around key strengths. We took these actions to enhance our service
delivery to our customers, improving the integration and scalability of our
service offerings, and to enhance our returns to our shareholders, improving
both our near-term and long-term profitability and growth.
As a result of our actions, we now offer our services under two primary
lines of business - IT Solutions and Consulting. These lines of business are
considered reportable segments of our business, and therefore we have added
financial information and disclosures about these reportable segments to our
consolidated financial statements. This additional financial information can now
be found in Note 10, "Segment and Certain Geographic Data," of the Notes to
Consolidated Financial Statements, which are included herein.
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IT SOLUTIONS
IT Solutions, our largest line of business, provides services to our
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. Within IT
Solutions, we face the market through our four global vertical industry groups -
Healthcare, Financial Services, Industrial Services, and Strategic Markets.
Supporting these vertical industry groups is our Global Infrastructure Services
group, the delivery organization for our technology outsourcing and network and
system operations services.
Healthcare
Our Healthcare group provides technology services and business solutions
in four industry markets:
- - Providers - including integrated health systems, free standing hospitals,
physician practices, long-term care and home health providers, and behavioral
healthcare providers;
- - Payors - including national insurers, Blue Cross and Blue Shield plans, and
regional managed care organizations;
- - Pharmaceutical - including research-based pharmaceutical companies and
contract research organizations; and
- - Healthcare Supply Chain - including medical/surgical suppliers and
distributors.
Services that cross all markets include Health Insurance Portability and
Accountability Act compliance and remediation consulting, and full and unbundled
IT outsourcing. In addition, our Healthcare group provides numerous services and
solutions tailored to each market.
For customers in the provider market, we offer our Digital Health
System(TM) solutions for physician and consumer connectivity, employee
administration, care management, and supply chain management. We also provide
revenue cycle management solutions that include central billing and medical
records outsourcing. We are an application service provider, and we provide a
range of business and IT strategy and tactical consulting services.
For our payor customers, we offer our Digital Health Plan(TM)
application suite, which provides an integrated set of Web-based self-service
applications to improve payor processes, reduce costs, and improve customer
service. In addition, we provide claims processing outsourcing and act as an
application service provider for payor enterprise applications. We also offer
two enterprise application suites, DIAMOND(R) 725 and DIAMOND (R) 950,
which manage more than 12 million members in a variety of payor risk settings.
In addition, we provide a range of business and IT strategy and tactical
consulting services to companies in this market.
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For pharmaceutical customers, we provide services that address clinical
trials and research management, regulatory compliance, enterprise resource
planning and customer relationship management consulting, and IT strategic
planning and outsourcing.
For customers in the healthcare supply chain market, we offer supply chain
and distribution benchmarking and efficiency consulting, materials management
consulting, enterprise resource planning, customer relationship management,
warehousing solutions, healthcare supplies digital marketplace solutions,
including tools for analyzing supply chain data, and outsourcing.
Financial Services
Our Financial Services group provides end-to-end technology solutions to
financial institutions all over the world. We partner with select customers in
the financial services market and operate in markets where we can achieve a
leading position. We focus on solving strategic and operational concerns for
companies in three industry markets, focusing primarily on the investment and
retail banking sectors:
- - Financial Markets - including investment banks, brokerage firms, and
securities clearing banks;
- - Banking/Payments - including retail banks; and
- - Insurance - including life, property and casualty, and general insurance
companies.
We provide our customers with enterprise systems management, call centers,
outsourcing, applications services management, and acquisition integration
consulting. In addition, we have extensive experience with customer services
(help desks, desktop support, security services), market data services
(engineering support, business management), and messaging services.
We also provide specialized services to the sectors within the financial
services industry, including trading floor design and configuration services for
our financial markets customers; virtual banking design services and expertise
in electronic payment systems for our banking customers; and process automation
for our insurance customers.
Industrial Services
Our Industrial Services group focuses on providing business process and
technology solutions in three primary industry markets:
- - Automotive - including automotive manufacturers, light and heavy-duty
truck manufacturers, and suppliers to these manufacturers;
- - Engineering and Construction - including engineering, commercial and
residential construction, and real estate; and
- - Consumer Packaged Goods - including both the durable and non-durable sectors.
Our solutions are focused on helping customers reduce cost, improve
quality, and improve customer satisfaction. We accomplish this by providing
in-depth, specific business expertise as well as proven technology solutions.
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For the automotive market, we provide business and technology solutions
that improve the efficiencies of critical processes, including product design,
supply chain execution, warranty systems, collaborative commerce, and
manufacturing plant floor processes.
For the engineering and construction market, our team provides solutions
that help our customers lower overhead cost, manage project risk, and increase
return on assets. We focus on turning information into knowledge over the
project life cycle - from front-end design through detailed engineering,
procurement, construction, and facilities operation. Our domain specific
knowledge and tools, coupled with our traditional strength in IT management and
systems integration, make us a unique provider of technology services in the
engineering and construction market.
For the consumer packaged goods market, the solutions we offer center on
supply chain management and cost reduction, merger and acquisition integration,
order processing management and support and customer relationship management.
Additionally, we provide solutions that cross all markets within this
industry group including IT strategy development and implementation, enterprise
business application development and integration, supply chain management, IT
management, and collaborative product commerce.
Strategic Markets
Our Strategic Markets group focuses on the development and growth of a
selected set of vertical industry groups, as well as the identification and
development of future industry groups. We have strong senior industry leadership
and a dedicated sales and marketing team focused on the following markets:
- - Travel - including travel agencies and hospitality, food services and
vehicle rental companies;
- - Transportation - including companies in the airport, airline, air cargo,
shipping and rail markets;
- - Telecommunications - including wire line and wireless service providers,
equipment manufacturers and entertainment media providers; and
- - Energy - including companies in the retail (energy management) and wholesale
market segments.
Our solutions to these markets are focused on solving business critical
issues with technology solutions, including IT outsourcing, business process
outsourcing, application management, program management, and IT strategy
development.
By utilizing a single delivery and operations unit that supports the
entire group, we are able to optimize our delivery capability and concentrate
our resources on building industry expertise, solutions, and relevant
intellectual property to accelerate the growth of these targeted markets.
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Global Infrastructure Services
Our Global Infrastructure Services group is responsible for maintaining
and determining the technical direction for both our customers and ourselves and
uses its technical resources to accomplish three primary goals:
- - First and foremost, to support our customers and the initiatives defined
by our four market-facing global vertical industry groups;
- - Second, to develop technology solutions that our IT Solutions line of
business and business partners can take to market, including Web hosting,
messaging, desktop, wireless applications, and managed service provider
solutions; and
- - Third, to define and support our internal infrastructure.
CONSULTING
Our Consulting line of business includes Solutions Consulting, a company
that we acquired in 2000, and our Global Software Services group. We provide to
our customers high-value and repeatable services related to the design and
implementation of business and software solutions, business and technical
expertise, and intellectual property, primarily under short-term contracts
related to specific projects. In addition, we work closely with our IT Solutions
line of business to provide these same services to their customers.
Solutions Consulting
Solutions Consulting provides services ranging from strategy through full
implementation of software solutions. These solutions include enterprise
resource planning, supply chain management, e-commerce, and customer
relationship management solutions in the manufacturing, consumer packaged goods,
telecommunications, energy, and industrial sectors. We have experience in supply
chain solutions such as Manugistics and i2. In addition, we have expertise in
SAP, Oracle, JD Edwards, and PeopleSoft enterprise applications, as well as a
variety of specialized applications in customer relationship management,
fulfillment, and distribution. Our focus is on execution and customer
satisfaction, which is accomplished through the use of smaller, more integrated
teams that work more collaboratively with the customer team.
A substantial number of our projects involve helping customers formulate
electronic commerce strategies that define the best use of exchanges, technology
providers, and trading partners. We also have experience in setting new supply
chain strategies, which utilize newer collaborative processes and technologies,
and post-merger integration planning and execution.
We employ approximately 150 professionals who have an average of ten years
experience managing strategic and operational issues associated with using IT.
These professionals work both on independent assignments and in concert with our
IT Solutions line of business.
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Global Software Services
Our Global Software Services group optimizes the application services
delivery options for our IT Solutions customers by utilizing the proper mix of
delivery resources, innovative architectures, proprietary methodologies, and
repeatable processes.
We support the entire life cycle of software services. Our service
offerings include application architecture, package application selection and
implementation, design, development, implementation, and maintenance of
applications, as well as systems integration services.
These services are delivered through a combination of teams that leverage
our expertise in project management and software development. These teams
include the Technical Resource Connection (TRC) delivery unit and HCL Perot
Systems (HPS), our unconsolidated joint venture with HCL Technologies, Ltd., a
leading Indian technology and software engineering services firm. TRC focuses on
architecture-driven software development utilizing the latest technology, and
HPS, an SEI-CMM Level 5 certified company based in India, provides offshore
application development and management services.
PEROT SYSTEMS ASSOCIATES
The markets for IT personnel and business integration professionals are
intensely competitive. A key part of our business strategy is the hiring,
training, and retention of highly motivated personnel with strong character and
leadership traits. We believe that employing associates with such traits is --
and will continue to be -- an integral factor in differentiating us from our
competitors in the IT industry. In seeking such associates, we screen candidates
for employment through a rigorous interview process.
We devote a significant amount of resources to training our associates,
including entry-level apprentice training programs, periodic continuing
education, and a leadership training course for managers and executives. This
program includes a workshop stressing the fundamentals of team leadership. We
augment our extensive personnel and leadership training through our intranet,
called "TRAIN" (The Real-time Associate Information Network). This
award-winning, company-wide intranet features training courses that develop both
technical and leadership skills.
We employ a performance-based incentive compensation program that provides
guidelines for career development and encourages the development of skills. The
program utilizes a tool to manage the associate development process and
establishes compensation guidelines as part of our retention program. In
addition to competitive salaries, we distribute cash bonuses that are paid
promptly to reward excellent performance. We seek to align the interests of our
associates with those of our stockholders by compensating outstanding
performance with equity interests in our common stock, which we believe fosters
loyalty and commitment to our goals.
As of December 31, 2001, we employed approximately 8,100 associates
located in the United States and several other countries. None of our United
States associates is
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currently employed under an agreement with a collective bargaining unit. Our
associates in France and the Netherlands are generally members of work councils
and have worker representatives. We believe that our relations with our
associates are good.
UBS AGREEMENTS
In January 1996, we entered into a series of agreements to form a
strategic relationship with Swiss Bank Corporation, one of the predecessors to
UBS AG ("UBS"). This relationship involves a long-term services agreement (the
"IT Services Agreement") and a separate agreement to provide project services.
Other agreements with UBS provided for the sale to UBS of our stock and options
and the transfer to us of a 40% stake in UBS's European information technology
subsidiary, Systor AG ("Systor"). On January 14, 2000, we completed the sale of
our minority equity interest in Systor to a wholly owned subsidiary of UBS. The
transaction was effected as a sale of all stock in Systor held by us for a cash
purchase price of $55.5 million.
IT Services Agreement
Under the IT Services Agreement, we provide IT services to UBS Warburg,
the investment banking division of UBS, and certain other business units of UBS.
The term of the IT Services Agreement is 11 years, which began January 1, 1996.
Our charges for services provided under the IT Services Agreement are generally
based on reimbursement of all costs, other than our corporate overhead, incurred
by us in the performance of services covered by the contract. In addition to
this cost reimbursement, we receive an agreed annual fee, subject to bonuses and
penalties of up to 13% of such fee based on our performance. UBS determines the
bonus or penalty based on a good faith assessment of subjective criteria,
including service quality, product delivery, customer satisfaction, cost
effectiveness, and corporate level support.
Approximately 24.1% and 23.8% of our revenues were earned in connection
with services performed on behalf of UBS and its affiliates for the years ended
December 31, 2001 and 2000, respectively. If some competitors of UBS acquire
more than 25% of the shares of our Class A Common Stock or another party (other
than an affiliate of Ross Perot) acquires more than 50% of the shares of our
Class A Common Stock and, if in either case, that acquisition is reasonably
likely to have a significant adverse effect on the performance of or the charges
for our services, UBS has the right to terminate its agreements with us. The
loss of UBS as a customer would materially and adversely affect our business,
financial condition, and results of operations.
Equity Interests
Under the Amended and Restated PSC Stock Option and Purchase Agreement
(the "Stock Agreement"), we sold UBS 100,000 shares of our Class B Common Stock
for $3.65 a share and 7,234,320 options to purchase shares of Class B Common
Stock for $1.125 an option (the "UBS Options"). Shares of the Class B Common
Stock are convertible, on a share for share basis, into our Class A Common Stock
for the purpose of sales to non-affiliates of UBS in certain types of
transactions. UBS can exercise the UBS Options at any time for $3.65 a share,
subject to United States bank regulatory limits on
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UBS's shareholdings. UBS exercised options to purchase 850,000 and 834,320
shares of Class B Common Stock in June 1999 and September 1998, respectively. In
addition to other limits set forth in the Stock Agreement, the number of shares
of Class B Common Stock owned by UBS and its employees may not exceed 10% of the
number of shares of outstanding Common Stock. Once the underlying shares of
Class B Common Stock vest, the corresponding UBS Options are void unless
exercised by UBS within five years of such vesting. This five-year period is
tolled at any time when bank regulatory limits prohibit UBS from acquiring the
shares.
Beginning on January 1, 1997, the shares of our Class B Common Stock
subject to the UBS Options vested at a rate of 63,906 shares per month until
January 1, 2002. The remaining shares vest at a rate of 58,334 per month until
the IT Services Agreement terminates. Upon termination of the IT Services
Agreement, UBS is required to sell to us all unvested shares of our Class B
Common Stock, and the UBS Options with respect to unvested shares of our Class B
Common Stock will become void.
UBS cannot transfer the UBS Options. Subject to exceptions relating to
certain transfers to UBS affiliates and transfers in connection with widely
dispersed offerings or transactions that comply with Rule 144 (or any successors
thereto) under the Securities Exchange Act of 1933, as amended, UBS must first
offer such shares to us before transferring any shares of our Class B Common
Stock. In the first quarter of 2002, UBS converted all outstanding shares of
Class B Common Stock to shares of Class A Common Stock.
COMPETITION
Our markets are intensely competitive. Customer requirements and the
technology available to satisfy those requirements continually change.
Our principal competitors currently include Accenture, Cap Gemini Group,
Computer Sciences Corporation, Electronic Data Systems Corporation, Affiliated
Computer Services, Inc., IBM Global Services (a division of International
Business Machines Corporation), KPMG LLP, Oracle Corporation,
PricewaterhouseCoopers LLP, and Sapient Corporation. As we enter new markets, we
expect to encounter additional competitors.
We compete on the basis of a number of factors, including the
attractiveness of the business strategy and services that we offer, breadth of
services we offer, pricing, technological innovation, quality of service, and
ability to invest in or acquire assets of potential customers. Because some of
these factors are outside of our control and because many of our competitors may
have greater financial resources, larger customer bases, and larger technical,
sales, and marketing resources than we do, we cannot be sure that we will
compete successfully against them in the future. If we fail to compete
successfully against our competitors with respect to these or other factors, our
business, financial condition, and results of operations will be materially and
adversely affected.
We must frequently compete with our customers' own internal information
technology capability, which may constitute a fixed cost for our customer. This
may increase pricing pressure on us. If we are forced to lower our pricing or if
demand for our
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services decreases, our business, financial condition, and results of operations
will be materially and adversely affected.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See Note 10, "Segment and Certain Geographic Data," to the Consolidated
Financial Statements included elsewhere in this report.
INTELLECTUAL PROPERTY
While we attempt to retain intellectual property rights arising from
customer engagements, our customers often have the contractual right to retain
such intellectual property. We rely on a combination of nondisclosure and other
contractual arrangements and trade secret, copyright, and trademark laws to
protect our proprietary rights and the proprietary rights of third parties from
whom we license intellectual property. We enter into confidentiality agreements
with our associates and limit distribution of proprietary information. There can
be no assurance that the steps we take in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use thereof and take appropriate steps to enforce our intellectual
property rights.
We license the right to use the names "Perot Systems" and "Perot" in our
current and future businesses, products, or services from the Perot Systems
Family Corporation and Ross Perot. The license is a non-exclusive, royalty-free,
worldwide, non-transferable license. We may also sublicense our rights to the
Perot name to certain of our affiliates. Under the license agreement, as
amended, either party may, in their sole discretion, terminate the license at
any time, with or without cause and without penalty, by giving the other party
written notice of such termination. Upon termination by either party, we must
discontinue all use of the Perot name within one year following receipt of the
notice of termination. The termination of this license agreement may materially
and adversely affect our business, financial condition, and results of
operations. Except for the license of our name, we do not believe that any
particular copyright, trademark, or group of copyrights and trademarks is of
material importance to our business taken as a whole.
RISK FACTORS
You should carefully consider the following risk factors and warnings. The
risks described below are not the only ones facing us. Additional risks that we
do not yet know of or that we currently think are immaterial may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition, or results of operations could be materially and adversely
affected. In such case, the trading price of our Class A Common Stock could
decline, and you may lose all or part of your investment. You should also refer
to the other information set forth in this report, including our Consolidated
Financial Statements and the related notes.
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Loss of Major Customers Could Adversely Affect Our Business
Our five largest customers accounted for approximately 46.5% of our
revenue for the year ended December 31, 2001, and approximately 45.7% of our
revenue for the year ended December 31, 2000. Only one customer, UBS, accounted
for more than 10% of our revenue during 2001 and 2000.
Our largest customer is UBS. Approximately 24.1% and 23.8% of our revenue
came from services performed on behalf of UBS for the years ended December 31,
2001 and 2000, respectively. We expect UBS to account for a substantial portion
of our revenue and earnings for the foreseeable future.
After UBS, our next four largest customers accounted for approximately
22.4% of our revenue in 2001. Our success depends substantially upon the
retention of UBS and a majority of our other major customers as ongoing
customers. Generally, we may lose a customer as a result of a merger or
acquisition, contract expiration, the selection of another provider of IT
services, or business failure or bankruptcy. We cannot guarantee that we will be
able to retain long-term relationships or secure renewals of short-term
relationships with our major customers in the future. As an example, ANC Rental
Corporation ("ANC"), our sixth largest customer in 2001, filed for bankruptcy
protection in November 2001. While we are currently providing services to ANC
and we currently expect to continue to provide them services, the terms and
duration of any contract with ANC are subject to the proceedings of the
bankruptcy court.
Changes in Our UBS Relationship and Variability of Profits from UBS Could
Adversely Affect Our Business
Our relationship with UBS is a long-term strategic relationship that we
formed by entering into several agreements with UBS in January 1996. These
contracts were renegotiated in April 1997, June 1998, and September 2000. The
April 1997 renegotiation reduced the term of the agreements from 25 years to 11
years beginning January 1996. We cannot guarantee that our current relationship
with UBS will continue on the same terms in the future.
Revenue derived from this relationship depends upon the level of services
we perform, which may vary from period to period depending on UBS's
requirements. The agreement with UBS that covers a majority of our business with
UBS entitles us to recover our costs plus an annual fee in an agreed amount with
a bonus or penalty that can cause this annual fee to vary up or down by as much
as 13%, depending on our level of performance as determined by UBS.
Determination of whether our performance merits a bonus or a penalty depends on
many subjective factors, including service quality, product delivery, customer
satisfaction, cost effectiveness, and corporate level support. As a result, we
cannot predict with certainty the future level of revenue or profit from our
relationship with UBS.
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Failure to Recruit, Train, and Retain Skilled Personnel Could Increase Costs or
Limit Growth
We must continue to hire and train technically skilled people in order to
perform services under our existing contracts and new contracts into which we
will enter. The people capable of filling these positions have historically been
in great demand, and recruiting and training such personnel require substantial
resources. We may be required to pay an increasing amount to hire and retain a
technically skilled workforce. In addition, during periods in which demand for
technically skilled resources are great, our business may experience significant
turnover. These factors create variations and uncertainties in our compensation
expense and directly affect our profits. If we fail to attract, train, and
retain sufficient numbers of these technically skilled people, our business,
financial condition, and results of operations may be materially and adversely
affected.
We have issued a substantial number of options to purchase shares of Class
A Common Stock to our associates. We expect to continue to issue options to our
associates to reward performance and encourage retention. The exercise of any
additional options issued by us could adversely affect the prevailing market
price of the Class A Common Stock.
We Could Lose Rights to Our Company Name
We do not own the right to our company name. In 1988, we entered into a
license agreement with Ross Perot and the Perot Systems Family Corporation that
allows us to use the name "Perot" and "Perot Systems" in our business on a
royalty-free basis. Mr. Perot and the Perot Systems Family Corporation may
terminate this agreement at any time and for any reason. Beginning one year
following such a termination, we would not be allowed to use the names "Perot"
or "Perot Systems" in our business. Mr. Perot's or the Perot Systems Family
Corporation's termination of our license agreement could materially and
adversely affect our business, financial condition, and results of operations.
Ross Perot's Stock Ownership Provides Substantial Control Over Our Company
Ross Perot, our Chairman, is the managing general partner of HWGA, Ltd., a
partnership that owned 31,705,000 shares of our Class A Common Stock as of
December 31, 2001. Mr. Perot also beneficially owns 44,000 shares of our Class A
Common Stock. Accordingly, Mr. Perot, primarily through HWGA, Ltd., controls
approximately 32% of our outstanding voting common stock. As a result, Mr.
Perot, through HWGA, Ltd., effectively has the power to block corporate actions
such as an amendment to our Certificate of Incorporation, the consummation of
any merger, or the sale of all or substantially all of our assets. In addition,
Mr. Perot may significantly influence the election of directors and any other
action requiring shareholder approval. The other general partner of HWGA, Ltd.
is Ross Perot, Jr., our President and Chief Executive Officer, who has the
authority to manage the partnership and direct the voting or sale of the shares
of Class A Common Stock held by HWGA, Ltd. if Ross Perot is no longer the
managing general partner.
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Loss of Key Personnel Could Adversely Affect Our Business
Our success depends largely on the skills, experience, and performance of
some key members of our management, including our Chairman, Ross Perot, and our
President and Chief Executive Officer, Ross Perot, Jr. The loss of any key
member of our management may materially and adversely affect our business,
financial condition, and results of operations.
Our Contracts Contain Termination Provisions and Pricing Risks
Many of the services we provide are critical to our customers' business.
Some of our contracts with customers permit termination in the event our
performance is not consistent with service levels specified in those contracts.
The ability of our customers to terminate contracts creates an uncertain revenue
stream. If customers are not satisfied with our level of performance, our
reputation in the industry may suffer, which may also materially and adversely
affect our business, financial condition, and results of operations.
Some of our contracts contain pricing provisions that require the payment
of a set fee by the customer for our services regardless of the costs we incur
in performing these services, or provide for penalties in the event we fail to
achieve certain contract standards. In such situations, we are exposed to the
risk that we will incur significant unforeseen costs or such penalties in
performing the contract.
Failure to Properly Manage Growth Could Adversely Affect Our Business
We have expanded our operations in recent years. We intend to continue
expansion in the foreseeable future to pursue existing and potential market
opportunities. This growth places a significant demand on management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures, and controls on a timely basis.
If we fail to implement these systems, our business, financial condition, and
results of operations will be materially and adversely affected.
We Operate in Highly Competitive Markets
We operate in intensely competitive markets. See "Competition" above for a
discussion of some of the risks associated with our markets.
Variability of Quarterly Operating Results
We expect our revenues and operating results to vary from quarter to
quarter. Such variations are likely to be caused by many factors that are, to
some extent, outside our control, including:
- - mix and timing of customer projects;
- - completing customer projects;
- - hiring, integrating, and utilizing associates;
- - timing of new contracts;
12
- - issuance of common shares and options to associates; and
- - non-recurring and unusual charges.
Accordingly, we believe that quarter-to-quarter comparisons of operating
results for preceding quarters are not necessarily meaningful. You should not
rely on the results of any one quarter as an indication of our future
performance.
Changes in Technology Could Adversely Affect Our Business
The markets for our IT services change rapidly because of technological
innovation, new product introductions, changes in customer requirements,
declining prices, and evolving industry standards, among other factors. New
products and new technology often render existing information services or
technology infrastructure obsolete, excessively costly, or otherwise
unmarketable. As a result, our success depends on our ability to timely innovate
and integrate new technologies into our service offerings. We cannot guarantee
that we will be successful at adopting and integrating new technologies into our
service offerings in a timely manner.
Advances in technology also require us to commit substantial resources to
acquiring and deploying new technologies for use in our operations. We must
continue to commit resources to train our personnel and our customers' personnel
in the use of these new technologies. We must continue to train personnel to
maintain the compatibility of existing hardware and software systems with these
new technologies. We cannot be sure that we will be able to continue to commit
the resources necessary to refresh our technology infrastructure at the rate
demanded by our markets.
Intellectual Property Rights
In recent years, there has been significant litigation in the United
States involving patent and other intellectual property rights. We may be a
party to intellectual property litigation in the future to protect our trade
secrets or know-how.
Our suppliers, customers, and competitors may have patents and other
proprietary rights that cover technology employed by us. Such persons may also
seek patents in the future. United States patent applications are confidential
until a patent is issued and most technologies are developed in secret.
Accordingly, we are not, and cannot be, aware of all patents or other
intellectual property rights of which our services may pose a risk of
infringement. Others asserting rights against us could force us to defend
ourselves or our customers against alleged infringement of intellectual property
rights. We could incur substantial costs to prosecute or defend any such
litigation and intellectual property litigation could force us to do one or more
of the following:
- - cease selling or using products or services that incorporate the disputed
technology;
- - obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology; and
- - redesign those services or products that incorporate such technology.
13
Provisions of Our Certificate of Incorporation, Bylaws, and Delaware Law Could
Deter Takeover Attempts
Our Board of Directors may issue up to 5,000,000 shares of preferred stock
and may determine the price, rights, preferences, privileges, and restrictions,
including voting and conversion rights, of these shares of preferred stock.
These determinations may be made without any further vote or action by our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock may make it
more difficult for a third party to acquire a majority of our outstanding voting
stock.
In addition, we have adopted a stockholders' rights plan. Under this plan,
after the occurrence of specified events that may result in a change of control,
our stockholders will be able to buy stock from us or our successor at half the
then current market price. These rights will not extend, however, to persons
participating in takeover attempts without the consent of our Board of Directors
or that our Board of Directors determines to be adverse to the interests of the
stockholders. Accordingly, this plan could deter takeover attempts.
Some provisions of our Certificate of Incorporation and Bylaws and of
Delaware General Corporation Law could also delay, prevent, or make more
difficult a merger, tender offer, or proxy contest involving our company. Among
other things, these provisions:
- - require a 66 2/3% vote of the stockholders to amend our Certificate of
Incorporation or approve any merger or sale, lease, or exchange of all or
substantially all of our property and assets;
- - require an 80% vote of the stockholders to amend our Bylaws;
- - require advance notice for stockholder proposals and director nominations
to be considered at a vote of a meeting of stockholders;
- - permit only our Chairman, President, or a majority of our Board of
Directors to call stockholder meetings, unless our Board of Directors
otherwise approves;
- - prohibit actions by stockholders without a meeting, unless our Board of
Directors otherwise approves; and
- - limit transactions between our company and persons that acquire significant
amount of stock without approval of our Board of Directors.
Risks Related to International Operations
We have operations in many countries around the world. Risks that affect
these international operations include:
- - fluctuations in currency exchange rates;
- - complicated licensing and work permit requirements;
- - variations in the protection of intellectual property rights;
14
- - other changes in laws and regulations;
- - restrictions on the ability to convert currency; and
- - additional expenses and risks inherent in conducting operations in
geographically distant locations, with customers speaking different languages
and having different cultural approaches to the conduct of business.
To attempt to mitigate the effects of foreign currency fluctuations on the
results of our foreign operations, we sometimes use forward exchange contracts
and other hedging techniques. However, our foreign exchange policy does not call
for hedging foreign exchange exposures that are not likely to impact net income
or working capital.
Acquisitions Involve Numerous Risks
We have completed three acquisitions since January 1, 2001, and will
continue to analyze and consider potential acquisition candidates. Acquisitions
involve numerous risks, including the following: difficulties in integration of
the operations of the acquired companies; the risk of diverting our attention
from normal daily operations of the business; risks of entering markets; and the
potential loss of key employees of the acquired company. Mergers and
acquisitions of companies are inherently risky, and no assurance can be given
that our acquisitions will be successful and will not materially adversely
affect our business, operating results or financial conditions.
ITEM 2. PROPERTIES
As of December 31, 2001, Perot Systems Corporation (the "Company") had
offices in approximately 58 locations in the United States and five countries
outside the United States, all of which were leased. The Company's leases cover
approximately 1,400,000 square feet of office and other facilities and have
expiration dates ranging from 2002 to 2012. Upon expiration of its leases, the
Company does not anticipate any significant difficulty in obtaining renewals or
alternative space. In addition to the leased property referred to above, the
Company occupies office space at customer locations throughout the world. Such
space is generally occupied pursuant to the terms of the agreement with the
particular customer. The Company expects to complete the consolidation of its
Dallas, Texas, operations to Plano, Texas, in 2002. The Company's management
believes that its current facilities are suitable and adequate for its business.
OPERATING LEASES AND MAINTENANCE AGREEMENTS
The Company has commitments related to data processing facilities, office
space, and computer equipment under non-cancelable operating leases and fixed
maintenance agreements for remaining periods ranging from one to eleven years.
Future minimum commitments under these agreements as of December 31, 2001, are
disclosed in Note 11, "Commitments and Contingencies," to the Consolidated
Financial Statements included elsewhere in this report.
15
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various litigation matters
arising in the ordinary course of its business. The Company believes that the
resolution of currently pending legal proceedings, either individually or taken
as a whole, will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
In July and August 2001, the Company, as well as certain of its current
and former officers and certain investment banks, were named as defendants in
two purported class action lawsuits, which allege violations of Rule 10b-5,
promulgated under the Securities Act of 1934, as amended, and Sections 11,
12(a)(2) and 15 of the Securities Act of 1933, as amended. These lawsuits, Seth
Abrams v. Perot Systems Corp., et al. and Adrian Chin v. Perot Systems, Inc., et
al., have been filed in the United States District Court for the Southern
District of New York. Approximately 800 lawsuits that are substantially similar
to the lawsuits against the Company have been filed against approximately 180
issuers and 40 investment banks during the past year. The lawsuits involving the
Company focus on alleged improper practices by the investment banks in
connection with the Company's initial public offering in February 1999. The
lawsuits allege that certain investment banks, in exchange for allocations of
public offering shares to their customers, received undisclosed commissions from
their customers on the purchase of securities and required their customers to
purchase additional shares of the Company in aftermarket trading. The lawsuits
also allege that the Company should have disclosed in its public offering
prospectus the alleged practices of the investment banks, whether or not the
Company was aware that the practices were occurring. The Company believes the
claims against it and certain of its current and former officers are without
merit. The Company does not believe that the outcome of this litigation will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
In December 2001, Siemens Medical Solutions Health Services Corporation
filed a lawsuit against the Company's subsidiary, PSC Healthcare Software, Inc.
(formerly known as Health Systems Design Corporation ("HSD")) alleging breach of
contract and fraud by HSD for failing to complete the development and delivery
of a computer software product. Siemens seeks damages in excess of $10 million.
The Company does not believe that the outcome of this litigation will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year ended December 31, 2001.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol "PER." The table below shows the range of
reported per share sales prices on the NYSE Composite Tape for the Class A
Common Stock for each quarterly period during 2000 and 2001.
High Low
---- ---
2000
First Quarter $27.94 $17.00
Second Quarter 20.06 9.31
Third Quarter 11.63 8.88
Fourth Quarter 11.19 7.81
2001
First Quarter $13.50 $9.19
Second Quarter 18.28 9.53
Third Quarter 18.05 13.00
Fourth Quarter 21.11 15.15
The last reported sales price of the Class A Common Stock on the NYSE on
February 25, 2002, was $17.10 per share. As of February 25, 2002, the
approximate number of record holders of Class A Common Stock was 3,418.
The Company has never paid cash dividends on shares of its Class A Common
Stock and has no current intention of paying such dividends in the future.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 2001, 2000, 1999, 1998, and 1997 have been derived from the
Company's Consolidated Financial Statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related Notes to the Consolidated Financial Statements, which are
included herein.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in millions, except per share data)
OPERATING DATA(1):
Revenue ..................................... $ 1,204.7 $ 1,105.9 $ 1,151.6 $ 993.6 $ 781.6
Direct cost of services ..................... 949.7 851.6 875.8 787.9 636.3
----------- ----------- ----------- ----------- -----------
Gross profit ................................ 255.0 254.3 275.8 205.7 145.3
Selling, general and administrative
expenses ................................. 256.6 197.9 169.2 140.3 125.7
Compensation charge related to
acquisition .............................. -- 22.1 -- -- --
Goodwill impairment ......................... -- -- -- 4.1 --
Purchased research and development .......... -- -- -- -- 2.0
----------- ----------- ----------- ----------- -----------
Operating income (loss) ..................... (1.6) 34.3 106.6 61.3 17.6
Interest income, net ........................ 8.9 16.6 10.9 4.2 0.6
Equity in earnings (loss)
of unconsolidated affiliates ............. 8.4 (4.3) 9.0 7.9 4.1
Other income (expense), net ................. (1.9) 45.1 (0.7) 2.8 (2.8)
----------- ----------- ----------- ----------- -----------
Income before taxes ......................... 13.8 91.7 125.8 76.2 19.5
Provision for income taxes .................. 16.5 36.2 50.3 35.7 8.3
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................... $ (2.7) $ 55.5 $ 75.5 $ 40.5 $ 11.2
=========== =========== =========== =========== ===========
Basic earnings (loss) per common share (2) .. $ (0.03) $ 0.58 $ 0.85 $ 0.53 $ 0.14
Weighted average common shares
outstanding (2) .......................... 99.4 96.2 88.4 76.9 78.3
Diluted earnings (loss) per common
share(2) ................................. $ (0.03) $ 0.49 $ 0.67 $ 0.42 $ 0.12
Weighted average diluted common
shares outstanding(2) .................... 99.4 113.5 113.2 97.1 95.2
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ................... $ 259.2 $ 239.7 $ 294.6 $ 144.9 $ 35.3
Total assets ................................ 757.6 673.2 613.9 382.1 267.1
Long-term debt .............................. -- 0.4 0.6 1.5 2.9
Stockholders' equity ........................ 530.8 501.1 390.7 142.6 93.3
OTHER DATA:
Capital expenditures ........................ $ 30.7 $ 30.7 $ 25.2 $ 25.4 $ 46.1
(1) The Company's results of operations include the effects of business
acquisitions made in 2001, 2000 and 1997. See Note 4 of the Notes to the
Consolidated Financial Statements included herein for a discussion of the
business acquisitions made in 2000 and 2001. In addition see Notes 2, 5,
and 17 to the Consolidated Financial Statements included herein for
discussions of significant charges recorded during 2001 and 2000.
(2) All common share numbers and per common share data reflect a two for one
stock split effected in January 1999.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary should be read in conjunction with the
Consolidated Financial Statements and related Notes to the Consolidated
Financial Statements, which are included herein.
OVERVIEW
The Company is a worldwide provider of technology services and business
solutions to a broad range of customers. The Company offers customers a breadth
of services, including technology outsourcing, the development and integration
of systems and applications, business and technology consulting, and business
process outsourcing services. The Company's operations are classified into two
primary lines of business (also called segments): 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 IT Solutions segment accounts
for approximately 95% of the Company's revenue in 2001 and is expected to
account for a majority of the Company's revenue in 2002.
The Company provides services under contracts containing pricing
provisions that relate to the level of services supplied by the Company
("level-of-effort"), provide for a set fee to be received by the Company
("fixed-price"), or link the revenue to be received by the Company to a
customer-specific data point, such as the number of transactions processed or
computing minutes consumed ("unit-price"). Many of the Company's contracts
combine more than one of these types of provisions. Revenue from level-of-effort
contracts is based on time and materials, direct costs plus an administrative
fee (which may be either a fixed amount or a percent of direct costs incurred),
or a combination of these methods and may be based on a set fee for a specified
level of resources that is adjusted for incremental resource usage. Revenue from
fixed-price contracts is recognized using the percentage-of-completion method
and is earned based on incurred contract costs to date as a percentage of the
most recent estimated total contract costs. Revenue from unit-price contracts is
recognized based on technology units utilized or by number of transactions
processed during a given period. For unit-price contracts, the Company
establishes a per-unit fee based on the cost structure associated with the
delivery of that unit of service.
19
The Company continuously monitors its contract performance in light of
customer expectations, the complexity of work, project plans, delivery
schedules, and other relevant factors. Provisions for estimated losses, if any,
are made in the period in which the loss first becomes probable and can be
reasonably estimated. Other contract-related accrued liabilities are also
recorded to match contract-related expenses in the period in which revenues from
those contracts are recognized.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 2001 to the year ended December 31,
2000
Total revenue increased in 2001 by 8.9% to $1,204.7 million from $1,105.9
million in 2000. This increase was due to the IT Solutions segment in which
revenue increased $128.9 million in 2001, offset by decreases in revenue of
$15.4 million in the Consulting segment and a $14.7 million decrease for all
other operating areas.
Revenue for the IT Solutions segment increased 12.7%, or $128.9 million,
in 2001 to $1,142.2 million from $1,013.3 million in 2000. This increase was
primarily attributable to $55.7 million in revenue from contracts signed during
the past twelve months, a $27.5 million increase in the UBS AG ("UBS") contract,
and $57.8 million in revenue from three recent acquisitions. These increases
were offset by an overall net decrease of $12.1 million due primarily to
declines in project related services performed in this segment. Revenue from UBS
increased to $290.5 million in 2001 from $263.0 million in 2000 due to increased
spending on infrastructure services. The acquisitions consist of Health Systems
Design Corporation, which was acquired during December of 2000, certain assets
of Covation, LLC acquired during the first quarter of 2001, and Advanced
Receivables Strategy, Inc. ("ARS") acquired during the third quarter of 2001.
Revenue declines in project related services are primarily due to the
discontinuation of geographic project sales efforts and a weakening market for
such services.
Revenue from the Consulting segment decreased 19.9%, or $15.4 million, to
$62.0 million in 2001 from $77.4 million in 2000 due to a weakening market for
such services.
Domestic revenue grew by 11.0% in 2001 to $891.0 million from $802.6
million in 2000, and increased as a percent of total revenue to 74.0% from 72.6%
in the prior year. This increase is a result of new contract signings and
acquisitions in 2001 and 2000 which were primarily domestic.
Non-domestic revenue, consisting of European and Asian operations,
increased by 3.4% in 2001 to $313.7 million from $303.3 million in 2000, but
decreased as a percent of total revenue to 26.0% from 27.4% over the same
periods. The largest components of European operations were the United Kingdom
and Switzerland. In the United Kingdom revenue for 2001 decreased slightly to
$152.1 million from $153.7 million in revenue for 2000. In Switzerland, revenue
for 2001 increased slightly to $43.7 million from $42.0 million in revenue for
2000. Asian operations generated revenue of $24.7 million, or 2.1% of total
revenue, and $21.3 million, or 1.9% of total revenue, in 2001 and 2000,
respectively.
20
On March 30, 2000, the Company completed the acquisition of Solutions
Consulting, Inc. ("Solutions Consulting"). All pre-acquisition revenues and
operating expenses of Solutions Consulting have been included in the
consolidated statements of operations for the year ended December 31, 2000, and
pre-acquisition operating earnings have been eliminated in Other income
(expense), net, as permitted by Accounting Research Bulletin 51, "Consolidated
Financial Statements." During the first quarter of 2000, the Company incurred a
$22.1 million compensation charge that was a direct result of the acquisition of
Solutions Consulting.
Direct costs of services increased in 2001 by 11.5% to $949.7 million from
$851.6 million in 2000. A portion of this increase was attributable to $25.9
million in charges in connection with certain non-recurring expenses recognized
by the Company during 2001. These non-recurring expenses included $20.9 million
in charges related to the bankruptcy of a customer, ANC Rental Corporation
("ANC"), and $5.0 million in asset basis adjustments recorded in connection with
the Company realigning its operating structure, as more fully described below.
The ANC charge consists of the write-down of an intangible asset associated with
the contract of $8.5 million, amounts owed for services performed of $8.2
million, and certain contract related costs of $4.2 million. Gross margin
decreased to 21.2% of total revenue in 2001 as compared to 23.0% of total
revenue in 2000. Excluding the $25.9 million in non-recurring charges incurred
during 2001, gross margin would have increased to 23.3% of total revenue. This
increase is primarily due to the exiting of a separately identifiable
unprofitable operation in the first quarter of 2001. These cost savings were
partially offset by a change in revenue mix from higher profit margin services,
including project and discretionary services, to infrastructure services and by
declines in margin on several telecommunications contracts.
Selling, general and administrative expenses ("SG&A") increased in 2001 by
29.7% to $256.6 million from $197.9 million in 2000 and increased as a percent
of total revenue to 21.3% from 17.9%. Both years were impacted by non-recurring
charges. As described in more detail below, during 2001 the Company recorded
$69.7 million of non-recurring charges as a result of its realigned operating
structure. During 2000, the Company recorded a non-recurring charge of $19.3
million, composed of $17.3 million of asset impairments and $2.0 million related
to the abandonment of certain facilities. Excluding these non-recurring charges,
SG&A would have been $186.9 million, or 15.5% of total revenue for 2001, and
$178.6 million or 16.2% of total revenue for 2000. The decrease as a percent of
total revenue is due to cost reductions made in connection with realigning the
Company's operating structure in 2001.
Interest income, net, decreased by 46.4% to $8.9 million in 2001 from
$16.6 million in 2000 due to a decrease in the average cash balance in 2001 as
compared to 2000 and an overall decrease in interest rates.
Equity in earnings of unconsolidated affiliates was $8.4 million in 2001
compared to equity in losses of $4.3 million in 2000. During 2001, equity in
earnings from HCL Perot Systems N.V. ("HPS"), a software joint venture based in
India, increased to $9.2 million from $8.5 million in 2000. In 2000, these
earnings were offset by equity losses of $14.2 million from start-up joint
ventures, which included a $9.1 million charge to adjust the carrying amount of
the Company's investment in one of these joint ventures. Losses
21
from these start-up joint ventures totaled only $0.7 million during 2001, and no
losses are anticipated during 2002.
Other income (expense), net, decreased in 2001 to $1.9 million of expense
from $45.1 million of income in 2000, primarily due to non-recurring activities
in 2000. Non-recurring items during 2000 included a $38.9 million realized net
gain from the sale of a 40% equity interest in Systor AG ("Systor"), a
subsidiary of UBS, and a net gain of $15.0 million from the partial sale of an
investment in marketable equity securities. These gains were partially offset by
the elimination of $3.5 million of the pre-acquisition earnings of Solutions
Consulting for the first quarter of 2000 and $7.7 million from the impairment of
an investment in marketable equity securities during 2000.
During 2001, the Company realigned its operating structure, resulting in
non-recurring charges of $74.7 million, of which $33.7 million was recorded
during the first quarter of 2001 and $41.0 million was recorded during the third
quarter of 2001. These charges are reflected in the consolidated statements of
operations as follows: $5.0 million is recorded in Direct cost of services and
$69.7 million is recorded in SG&A. These charges are composed of the following:
- - $39.6 million related to the elimination of approximately 900
administrative and non-billable positions in all business functions and in
all geographic areas of the Company;
- - $25.9 million for the consolidation and closure of facilities, including
those facilities impacted by the Company's realigned operating structure and
the consolidation of the Company's Dallas area operations into one facility
located in Plano, Texas; and
- - $9.2 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.
The $74.7 million in non-recurring charges during 2001 includes $13.6
million in asset basis adjustments and other non-cash items and $61.1 million of
liabilities that will be settled in cash, of which $33.2 has been paid as of
year-end. The remaining balance is expected to be substantially settled by
September 30, 2003.
The savings that resulted from these actions were used to offset profit
pressures from lower discretionary spending by customers on projects, to expand
profit margins and to return to at-market bonus and incentive programs for our
associates.
During 2001 the Company recorded an $11.0 million valuation allowance
against certain foreign deferred tax assets. This charge was recorded in
accordance with the provisions of Statement of Financial Accounting Standards
No. ("FAS") 109, "Accounting for Income Taxes," which requires that a valuation
allowance be established when there is significant uncertainty as to the
ultimate realization of deferred tax assets. Excluding this $11.0 million
charge, the Company's effective tax rate for 2001 would have been 39.5%, which
is consistent with the effective tax rate for 2000.
22
Comparison of the year ended December 31, 2000 to the year ended December 31,
1999
Total revenue decreased in 2000 by 4.0% to $1,105.9 million from $1,151.6
million in 1999. This decrease was due to the IT Solutions segment in which
revenue decreased $74.1 million in 2000. This decrease is offset by an increase
in revenue of $41.0 million in the Consulting segment in 2000. Revenue from all
other operating areas declined $12.6 million in 2000.
Revenue from the IT Solutions segment decreased 6.8%, or $74.1 million, in
2000 to $1,013.3 million from $1,087.4 million in 1999. This decrease was
primarily attributable to a $195.0 million decrease from three customers.
Revenue from UBS decreased $81.2 million to $263.0 million in 2000 from $344.2
million in 1999. This decrease from UBS is primarily attributable to the
completion in 1999 of merger-related integration work associated with the 1998
merger of Swiss Bank and Union Bank of Switzerland. Revenue from East Midlands
Electricity (IT) Limited ("EME") decreased $76.5 million (excluding $10.6
million in revenue from a termination related payment received in 1999) due to
the termination of the Company's contract with EME following the acquisition of
EME by PowerGen plc. Revenue from ANC decreased $37.3 million due to the
Company's completion of the development of the Odyssey reservation system and
the transition of this contract into the operating phase. These decreases were
offset by an $89.6 million increase from new sales signed during 2000 and a net
increase from other existing customers of $31.3 million.
Revenue from the Consulting segment increased 112.6%, or $41.0 million, to
$77.4 million in 2000 from $36.4 million in 1999 due to the acquisition of
Solutions Consulting during 2000, which contributed $47.1 million in revenue for
2000.
Domestic revenue grew by 5.5% in 2000 to $802.6 million from $760.9
million in 1999, and increased as a percent of total revenue to 72.6% from 66.1%
in the prior year, due primarily to the acquisition of Solutions Consulting.
Non-domestic revenue, consisting of European and Asian operations,
declined by 22.4% in 2000 to $303.3 million from $390.7 million in 1999, and
decreased as a percent of total revenue to 27.4% from 33.9% over the same
periods. The largest components of European operations were the United Kingdom
and Switzerland. In the United Kingdom revenue decreased 36.2% in 2000 to $153.7
million from $241.0 million in 1999 due primarily to the termination of the EME
agreement. In Switzerland, revenue decreased 34.0% in 2000 to $42.0 million from
$63.6 million in 1999 due to the revenue decrease from UBS. Asian operations
generated revenue of $21.3 million, or 1.9% of total revenue, and $18.9 million,
or 1.6% of total revenue, in 2000 and 1999, respectively.
Direct costs of services decreased in 2000 by 2.8% to $851.6 million from
$875.8 million in 1999. Gross margin decreased to 23.0% of total revenue in 2000
as compared to 23.9% of total revenue in 1999. This decrease was due primarily
to the termination of the EME agreement, reductions from UBS and ANC, and a
decrease in profitability from short-term projects, including projects
associated with new service offerings. These decreases were partially offset by
a reduction in some personnel related expenses of $35.6 million and an increase
of $18.4 million from Solutions Consulting. In 1999, gross margin
23
benefited from the revised Year 2000 exposure estimate by $11.1 million and a
net gain of $8.0 million from the termination of the EME agreement (revenue of
$10.6 million less $2.6 million in termination related direct cost of services
incurred).
Selling, general and administrative expenses increased in 2000 by 17.0% to
$197.9 million from $169.2 million in 1999 and increased as a percent of total
revenue to 17.9% from 14.7%. In the fourth quarter of 2000, the Company recorded
a non-recurring charge of $19.3 million, composed of $17.3 million of asset
impairments and $2.0 million related to the abandonment of certain facilities.
Excluding this non-recurring charge, the remaining increase is due primarily to
spending related to business development and sales. During the first quarter of
2000, the Company incurred a one-time $22.1 million compensation charge that was
a direct result of the acquisition of Solutions Consulting.
Interest income, net, increased by 52.3% to $16.6 million in 2000 from
$10.9 million in 1999 due to an increase in the average cash balance in 2000 as
compared to 1999 and an overall increase in interest rates.
Equity in losses of unconsolidated affiliates was $4.3 million in 2000
compared to equity in earnings of $9.0 million in 1999. During 2000 the Company
had equity in losses of $14.2 million from start-up joint ventures, which
included a $9.1 million charge to adjust the carrying amount of the Company's
investment in one of these joint ventures. In addition, equity in earnings from
Systor decreased $2.4 million to $1.4 million in 2000 from $3.8 million in 1999,
resulting from the first quarter of 2000 sale of this investment. These losses
and decreases were partially offset by an increase in equity in earnings from
HPS which increased to $8.5 million in 2000 from $5.2 million in 1999.
Other income (expense), net, increased in 2000 to income of $45.1 million
from an expense of $0.7 million in 1999, primarily due to non-recurring
activities in 2000. As discussed above, non-recurring items during 2000 included
a $38.9 million realized net gain from the sale of our equity interest in Systor
and a net gain of $15.0 million from the partial sale of our investment in
marketable equity securities. These gains were partially offset by the
elimination of $3.5 million of the pre-acquisition earnings of Solutions
Consulting for the first quarter of 2000 and $7.7 million from the impairment of
an investment in marketable equity securities.
LIQUIDITY AND CAPITAL RESOURCES
In 2001, cash and cash equivalents increased 8.1% to $259.2 million from
$239.7 million at December 31, 2000.
Net cash provided by operating activities was $95.0 million in 2001
compared to net cash used in operating activities of $19.4 million in 2000. This
increase was due primarily to a decline in year-end bonuses paid to associates
during 2001 compared to 2000 of approximately $39.4 million and a $39.1 million
change in the cash paid for income taxes, as the Company received a net income
tax refund in 2001 of $17.8 million compared to net income tax payments of $21.3
million during 2000. The remaining increase in cash provided by operations is
due to an increase in net income from operations adjusted for non-cash
activities and charges.
24
Net cash used in investing activities was $84.2 million in 2001 compared
to $31.3 million in 2000. This increase is primarily due to non-recurring items
during 2000, including the receipt of proceeds of $26.5 million from the sale of
marketable equity securities and $55.5 million from the sale of Systor.
Partially offsetting these proceeds in 2000 were non-recurring expenditures of
$15.0 million in a start-up joint venture and the purchase of an intangible
asset from a customer in the amount of $14.9 million.
In 2001, net cash provided by financing activities was approximately $11.8
million compared to net cash used in financing activities of $0.9 million in
2000. This increase is due to proceeds received from the exercise of options to
purchase the Company's Class A Common Stock in the amount of $15.8 million in
2001 compared to proceeds of $6.5 million during 2000. Additionally, the Company
paid $8.8 million to repurchase shares of its Class A Common Stock during 2000
compared to $3.7 million of such purchases during 2001.
The Company routinely maintains cash balances in certain European and
Asian currencies to fund operations in those regions. During 2001, foreign
exchange rate fluctuations adversely impacted the Company's non-domestic cash
balances by $3.2 million, as British pounds, Swiss francs, and Euros all
weakened against the U.S. dollar. The Company's foreign exchange policy does not
call for hedging foreign exchange exposures that are not likely to impact net
income or working capital.
Commitments
In June 2000, the Company entered into an operating lease agreement with a
special purpose entity for the use of land, existing office buildings,
improvements, as well as the development of data center facilities in Plano,
Texas. This special purpose entity is a trust that is owned by a consortium of
financial institutions, and the Company has no equity ownership and no
managerial involvement in this entity.
The initial term of this lease extends through June 2005, with one
optional two-year renewal period. At the end of the lease, the Company is
required to either renew the lease, purchase the property for the lease balance,
or arrange for the sale of the property to a third party, with the Company
guaranteeing to the lessor proceeds on such sale of 100% of the original fair
value of the land, plus 83% of the original fair value of the buildings and any
additional improvements. The fair value of the facilities, upon completion of
certain construction activities, is expected to be approximately $75.0 million.
Rent expense under this operating lease is equal to the interest expense owed by
the special purpose entity to the banks and is a variable amount equal to LIBOR
plus 104 basis points (2.9% at December 31, 2001) on approximately $75.0
million. Management believes this lease rate is less than prevailing market
lease rates for similar facilities.
The Company does not consolidate this entity. If accounting rules were to
change and the Company was required to consolidate this entity, assets and debt
would increase by approximately $75.0 million and the Company would incur an
additional depreciation charge of approximately $4.3 million per year. This
lease contains certain standard financial covenants which, if not met, may
require the Company to repay the
25
approximately $75.0 million to the special purpose entity. The Company is
currently in compliance with all covenants and expects to remain in compliance.
If the Company were ever required to repay the approximately $75.0 million, then
this payment would be recorded as the purchase of land, buildings, and
improvements, which the Company is currently leasing. As a result of such
payment, the Company would record an asset on its consolidated balance sheet of
approximately $75.0 million and would incur an additional depreciation charge of
approximately $4.3 million per year.
As discussed in Note 11, "Commitments and Contingencies," of Notes to
Consolidated Financial Statements, the Company may be required to repurchase
shares of its Class A Common Stock under a certain stock agreement and has other
commitments under operating leases for data processing facilities, office space
and computer equipment.
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.
During 2001, the Company acquired substantially all of the assets of ARS.
The purchase price consists of cash payments of $52.2 million and possible
additional payments totaling up to $50.0 million over the next three years. The
possible future payments are contingent on ARS achieving certain financial
targets over the same period. ARS achieved its financial targets for 2001 and is
due a $20.0 million payment during the first quarter of 2002. At the Company's
discretion, up to 50% of this payment may be settled in Class A Common Stock of
the Company valued at the date of settlement.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. The Company believes that
its critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to Consolidated Financial Statements.
26
Revenue Recognition
The Company provides services under level-of-effort, fixed-price, and
unit-price contracts, with the length of contracts ranging up to twelve years.
Revenue from level-of-effort contracts is based on time and materials,
direct costs plus an administrative fee (which may be either a fixed amount or a
percent of direct costs incurred), or a combination of these methods and may be
based on a set fee for a specified level of resources that is adjusted for
incremental resource usage. For unit-price contracts, the Company establishes a
per-unit fee based on the cost structure associated with the delivery of that
unit of service. Revenue under these contracts is recognized when the Company
performs the services in accordance with contractual performance standards.
Customer prepayments are deferred and recognized over future periods as services
are delivered or performed.
For fixed-price contracts, the Company recognizes revenue and profit as
these contracts progress using the percentage-of-completion method of
accounting, which relies on estimates of total expected contract revenue and
costs. The Company follows this method since reasonably dependable estimates of
the revenue and costs applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends on estimates, which are
assessed continually during the term of these contracts, recognized revenue and
profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue and profit recognition, and unfavorable
changes in estimates result in a reduction of recognized revenue and profit.
When estimates indicate that a loss will be incurred on a contract on
completion, a provision for the expected loss is recorded in the period in which
the loss becomes evident. Costs and estimated earnings in excess of billings, or
unbilled revenue, on uncompleted fixed-price contracts totaled $34.0 million and
$10.1 million at December 31, 2001 and 2000, respectively, and are included in
Other non-current assets in the Company's Consolidated Balance Sheets.
Income Taxes
The Company accounts for income taxes in accordance with FAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
FAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
At December 31, 2001, the Company had deferred tax assets in excess of
deferred tax liabilities of $54.8 million. Based upon the Company's estimates of
future taxable income and review of available tax planning strategies,
management determined that it is more likely than not that only $43.8 million of
such assets will be realized, resulting in a valuation allowance of $11.0
million relating to certain foreign jurisdictions.
The Company evaluates quarterly the realizability of its deferred tax
assets by assessing its valuation allowance and by adjusting the amount of such
allowance, if
27
necessary. The factors used to assess the likelihood of realization are the
Company's forecast of future taxable income and available tax planning
strategies that could be implemented to realize the net deferred tax assets. The
Company has used tax planning strategies to realize or renew net deferred tax
assets in order to avoid the potential loss of future tax benefits.
Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. Factors that may affect the
Company's ability to achieve sufficient forecasted taxable income include
increased competition and a decline in sales or margins.
ACCOUNTING STANDARDS ISSUED
Financial Accounting Standards 141 & 142
In June 2001, the Financial Accounting Standards Board issued FAS 141,
"Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets." FAS
141 provides guidance on the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination completed after June
30, 2001, and requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. FAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives, and
instead requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives.
The Company will apply FAS 142 beginning in the first quarter of 2002.
Application of the nonamortization provisions of FAS 142 is expected to result
in an increase in net income of approximately $4.5 million ($0.04 per dilutive
share) in 2002. Consistent with the treatment of intangible assets with
indefinite lives under FAS 142, the Company will reclassify an assembled
workforce intangible asset with an unamortized balance of $5.1 million (along
with a related deferred tax liability of $0.5 million) at December 31, 2001, to
goodwill at the date of adoption. The Company will test goodwill for impairment
as of January 1, 2002, in the first quarter of 2002. The results of such tests
are not expected to impact 2002 earnings.
Financial Accounting Standards 144
In October 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and related literature and establishes a
single accounting model, based on the framework established in FAS 121, for
long-lived assets to be disposed of by sale, but it retains the fundamental
provisions of FAS 121 for the recognition and measurement of the impairment of
long-lived assets to be held and used. The Company is required to adopt FAS 144
no later than January 1, 2002. The Company believes that the adoption of FAS 144
will not have a material impact on its Consolidated Financial Statements.
28
Financial Accounting Standards Emerging Issues Task Force Issue 01-09
In November 2001, the Financial Accounting Standards Board Emerging Task
Force ("EITF") reached a consensus on EITF Issue 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products." This EITF consensus concludes that consideration from a vendor to a
customer is a reduction of the selling price of the vendor's products or
services and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement. Companies are required to adopt
EITF 01-09 for fiscal years beginning after December 15, 2001, and are required
to reclassify all prior period amounts to conform to the current period
presentation. The results of such adoption will have no impact on the Company's
financial statements as they have been prepared consistent with the guidance of
EITF 01-09 for all periods presented.
Financial Accounting Standards Topic No. D-103
In November 2001, the Financial Accounting Standards Boards staff
announced Topic No. D-103 ("Topic D-103"), "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred." This staff
announcement is applicable to companies that provide services as part of their
central on-going operations and incur incidental expenses that in practice are
commonly referred to as "out-of-pocket" expenses, such as airfare, mileage,
hotel stays, out-of-town meals, photocopies, and telecommunications and
facsimile charges. Under Topic D-103, reimbursements received for these expenses
incurred should be characterized as revenue in the income statement. In some
cases, depending on the facts and circumstances, the Company had been recording
these reimbursements as a reduction of expense. The Company is required to apply
Topic D-103 for fiscal years beginning after December 15, 2001, and is required
to reclassify all prior period amounts to conform to the current period
presentation. The results of such adoption will increase revenue and expense by
approximately $20.0 million for the year ended December 31, 2002, but will have
no impact on net income. Due to the immateriality of such reimbursements in
prior periods, previously reported revenues and expenses will not be restated
upon adoption of this staff announcement.
SUBSEQUENT EVENT
On January 1, 2002, the Company acquired all of the outstanding shares of
Claim Services Resource Group, Inc. ("CSRG"), a corporation 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 $49.4 million in cash (net of $10.3 million of cash
acquired) and $3.1 million in the form of 154,376 shares of the Company's Class
A Common Stock. The transaction was accounted for as a purchase; accordingly,
the results of operations of CSRG 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 allocation of the
excess of the purchase price over the net assets acquired (in the amount of
$54.1 million) is pending completion
29
of asset appraisals. The estimated fair value of goodwill will be assigned to
the IT Solutions segment and will not be deductible for tax purposes.
RELATED PARTY TRANSACTIONS
In September 2000, Ross Perot resigned as chief executive officer of the
Company. He continues to serve the Company as chairman of the board of directors
without cash or non-cash compensation. For the years ended December 31, 2000 and
1999, the Company has recorded compensation expense of $0.6 million and $0.8
million, respectively, with an offset to Additional paid-in capital on the
consolidated balance sheets.
The Company is providing, under a three-year contract, information
technology and energy management services for Hillwood Enterprises L.P., which
is controlled and partially owned by Ross Perot, Jr. This contract includes
provisions under which the Company may be penalized if its actual performance
does not meet the levels of service specified in the contract, and such
provisions are consistent with those included in other customer contracts. For
the years ended December 31, 2001 and 2000, the Company recorded revenue of $1.5
million and $0.4 million and direct cost of services of $1.0 million and $0.2
million, respectively, and is expected to record revenue of approximately $4.6
million over the three-year term. Prior to entering into this arrangement, the
Audit Committee reviewed and approved this contract.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements .............................F-1
Report of Independent Accountants ......................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ...........F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ....................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999 ....................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ....................................F-6
Notes to Consolidated Financial Statements .............................F-7 to F-39
The Financial Statement Schedule is submitted as Exhibit 99(a) to this Annual
Report on Form 10-K.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Schedules other than that listed above have been omitted since they are either
not required, are not applicable, or the required information is shown in the
financial statements or related notes.
31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants .....................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ..........F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ...................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999 ...................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ...................................F-6
Notes to Consolidated Financial Statements ............................F-7 to F-39
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Perot Systems Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Perot Systems Corporation and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 12, 2002
F-2
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(DOLLARS AND SHARES IN THOUSANDS)
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 259,178 $ 239,688
Accounts receivable, net ................................................. 160,907 176,004
Prepaid expenses and other ............................................... 24,420 24,877
Deferred income taxes .................................................... 25,651 16,775
------------ ------------
Total current assets ................................................... 470,156 457,344
Property, equipment and purchased software, net ........................... 52,426 48,108
Goodwill, net ............................................................. 127,161 83,703
Deferred income taxes ..................................................... 18,104 24,655
Other non-current assets .................................................. 89,751 59,342
------------ ------------
Total assets ........................................................... $ 757,598 $ 673,152
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 36,272 $ 35,294
Deferred revenue ......................................................... 8,707 20,090
Accrued compensation ..................................................... 20,009 16,333
Income taxes payable ..................................................... 19,443 9,148
Accrued and other current liabilities .................................... 121,728 82,989
------------ ------------
Total current liabilities .............................................. 206,159 163,854
Other non-current liabilities ............................................. 20,670 8,243
------------ ------------
Total liabilities ...................................................... 226,829 172,097
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock; par value $.01; authorized 200,000 shares; issued
100,239 and 96,295 shares in 2001 and 2000, respectively ............... 1,002 963
Class B Convertible Common Stock; par value $.01; authorized
24,000 shares; issued and outstanding 1,784 in 2001 and 2000 ........... 18 18
Additional paid-in capital ............................................... 331,057 305,320
Other stockholders' equity ............................................... 206,147 200,637
Accumulated other comprehensive loss ..................................... (7,455) (5,883)
------------ ------------
Total stockholders' equity ............................................. 530,769 501,055
------------ ------------
Total liabilities and stockholders' equity ............................. $ 757,598 $ 673,152
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
----------- ----------- -----------
Revenue .................................................... $ 1,204,701 $ 1,105,946 $ 1,151,553
Costs and expenses:
Direct cost of services ................................. 949,708 851,678 875,779
Selling, general and administrative expenses ............ 256,635 197,854 169,176
Compensation charge related to acquisition .............. -- 22,100 --
----------- ----------- -----------
Operating income (loss) .................................... (1,642) 34,314 106,598
Interest income, net ....................................... 8,860 16,576 10,905
Equity in earnings (loss) of unconsolidated affiliates ..... 8,379 (4,342) 8,976
Other income (expense), net ................................ (1,827) 45,160 (650)
----------- ----------- -----------
Income before taxes ........................................ 13,770 91,708 125,829
Provision for income taxes ................................. 16,441 36,225 50,332
----------- ----------- -----------
Net income (loss) ................................... $ (2,671) $ 55,483 $ 75,497
=========== =========== ===========
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share .................. $ (0.03) $ 0.58 $ 0.85
Weighted average common shares outstanding .............. 99,437 96,189 88,350
Diluted earnings (loss) per common share ................ $ (0.03) $ 0.49 $ 0.67
Weighted average diluted common shares outstanding ...... 99,437 113,480 113,229
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) OTHER* EQUITY
------- ---------- -------- -------- ------------- -------- ------------
Balance at January 1, 1999 .................. $ 820 $ 72,936 $ 79,512 $ (5,815) $ 699 $ (5,569) $ 142,583
Issuance of Class A shares at
initial public offering (7,475 shares) ... 75 108,051 -- -- -- -- 108,126
Issuance of Class A shares under
incentive plans (332 shares) ............. 2 4,871 -- 129 -- -- 5,002
Exercise of stock options for
Class A shares (5,938 shares) ............ 20 1,522 -- 6,354 -- (512) 7,384
Exercise of stock options for
Class B shares (850 shares) .............. 9 3,094 -- -- -- -- 3,103
Class A shares repurchased (51 shares) ...... -- -- -- (668) -- -- (668)
Note repayments and other ................... -- -- -- -- -- 1,417 1,417
Tax benefit of employee options exercised ... -- 35,909 -- -- -- -- 35,909
Deferred compensation, net of amortization .. -- 329 -- -- -- 832 1,161
Net income .................................. -- -- 75,497 -- -- -- 75,497
Other comprehensive income, net of tax
Unrealized gain on marketable equity
securities ............................. -- -- -- -- 13,992 -- 13,992
Translation adjustment ................... -- -- -- -- (2,784) -- (2,784)
---------
Comprehensive income ....................... 86,705
------- -------- -------- --------- ------- --------- ---------
Balance at December 31, 1999 ................ $ 926 $226,712 $155,009 $ -- $11,907 $ (3,832) $ 390,722
Issuance of Class A shares under
incentive plans (679 shares) ............. 7 7,429 -- -- -- -- 7,436
Issuance of Class A shares related to an
acquisition (1,966 shares) ............... 20 49,980 -- -- -- -- 50,000
Exercise of stock options for Class A
shares (3,251 shares, including 420
shares from treasury) .................... 28 4,741 -- 1,407 -- 486 6,662
Class A shares repurchased (1,148 shares) ... -- -- -- (8,795) -- -- (8,795)
Note repayments and other ................... -- -- -- -- -- 329 329
Tax benefit of employee options exercised ... -- 16,078 -- -- -- -- 16,078
Deferred compensation, net of amortization .. -- 380 -- -- -- 550 930
Net income .................................. -- -- 55,483 -- -- -- 55,483
Other comprehensive income, net of tax
Unrealized loss on marketable equity
securities ............................. -- -- -- -- (13,974) -- (13,974)
Translation adjustment ................... -- -- -- -- (3,816) -- (3,816)
---------
Comprehensive income ....................... 37,693
------- -------- -------- --------- ------- --------- ---------
Balance at December 31, 2000 ................ $ 981 $305,320 $210,492 $ (7,388) $(5,883) $ (2,467) $ 501,055
Issuance of Class A shares under
incentive plans (429 shares, including
119 shares from treasury) ................ 3 3,692 -- 1,206 -- -- 4,901
Exercise of stock options for Class A
shares (4,873 shares, including 1,239
shares from treasury) .................... 36 5,427 -- 9,920 -- (68) 15,315
Class A shares repurchased (784 shares) ..... -- -- -- (3,738) -- -- (3,738)
Tax benefit of employee options exercised ... -- 17,128 -- -- -- -- 17,128
Deferred compensation, net of amortization .. -- (510) -- -- -- 861 351
Net loss .................................... -- -- (2,671) -- -- -- (2,671)
Other comprehensive loss, net of tax
Unrealized gain on marketable equity
securities ............................. -- -- -- -- 94 -- 94
Translation adjustment ................... -- -- -- -- (1,666) -- (1,666)
---------
Comprehensive loss ......................... (4,243)
------- -------- -------- --------- ------- --------- ---------
Balance at December 31, 2001 ................ $ 1,020 $331,057 $207,821 $ -- $(7,455) $ (1,674) $ 530,769
======= ======== ======== ========= ======= ========= =========
* The Other balance as of January 1, 1999 includes $(3,654) of Deferred
Compensation and $(1,915) of notes receivable from stockholders.
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) .................................................................. $ (2,671) $ 55,483 $ 75,497
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................... 35,100 28,154 27,434
Gain on sale of marketable equity securities .................................... -- (17,503) --
Gain on sale of unconsolidated affiliate ........................................ -- (38,851) --
Impairment of long-lived assets ................................................. 19,164 17,318 --
Impairment of investments ....................................................... 1,385 16,861 --
Equity in earnings of unconsolidated affiliates ................................. (9,171) (4,769) (8,976)
Change in deferred income taxes ................................................. 2,652 3,242 4,936
Other ........................................................................... 2,732 2,986 3,888
Changes in assets and liabilities (net of effects from acquisition of
businesses):
Accounts receivable, net ..................................................... 24,690 (11,877) (40,863)
Prepaid expenses ............................................................. (4,673) (4,691) 1,303
Other current and non-current assets ......................................... (31,802) (27,569) (3,240)
Accounts payable and accrued liabilities ..................................... 20,932 (10,393) (21,714)
Deferred revenue ............................................................. (10,414) (4,282) 11,363
Accrued compensation ......................................................... 4,352 (35,035) 4,154
Income taxes ................................................................. 30,881 11,900 19,904
Other current and non-current liabilities .................................... 11,889 (369) 3,692
--------- --------- ---------
Total adjustments ......................................................... 97,717 (74,878) 1,881
--------- --------- ---------
Net cash provided by (used in) operating activities ....................... 95,046 (19,395) 77,378
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software ...................................... (30,710) (30,650) (25,205)
Proceeds from sale of property, equipment and software ............................. -- 111 883
Proceeds from sale of marketable equity securities ................................. -- 26,543 --
Proceeds from sale of unconsolidated affiliate ..................................... -- 55,486 --
Purchase of software royalty intangible asset ...................................... -- (14,900) --
Investment in unconsolidated affiliate ............................................. -- (15,000) --
Investments in marketable equity securities ........................................ -- -- (17,000)
Acquisition of businesses, net of cash acquired of $250 and $13,152, respectively .. (53,225) (50,393) --
Other .............................................................................. (233) (2,489) --
--------- --------- ---------
Net cash used in investing activities ..................................... (84,168) (31,292) (41,322)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations ........................... (369) (447) (863)
Proceeds from issuance of common stock ............................................. 12,957 5,802 113,336
Proceeds from issuance of treasury stock ........................................... 2,794 734 5,731
Purchases of treasury stock ........................................................ (3,738) (8,795) (466)
Other .............................................................................. 198 1,854 1,262
--------- --------- ---------
Net cash provided by (used in) financing activities ....................... 11,842 (852) 119,000
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents .......................... (3,230) (3,418) (5,318)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .................................. 19,490 (54,957) 149,738
Cash and cash equivalents at beginning of year ........................................ 239,688 294,645 144,907
--------- --------- ---------
Cash and cash equivalents at end of year .............................................. $ 259,178 $ 239,688 $ 294,645
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Perot Systems Corporation (the "Company" or "Perot Systems") was
originally incorporated in the state of Texas in 1988 and on December 18,
1995, the Company reincorporated in the state of Delaware. The Company
provides information technology services and business solutions to
customers on a worldwide basis. The significant accounting policies of the
Company are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all domestic and foreign subsidiaries, and all significant
intercompany balances and transactions have been eliminated.
The Company's investments in companies in which it has the ability
to exercise significant influence over operating and financial policies
are accounted for by the equity method. Accordingly, the Company's share
of the earnings (losses) of these companies is included in consolidated
net income. Investments in unconsolidated companies and limited
partnerships that are less than 20% owned, where the Company has no
significant influence over operating and financial policies, are carried
at cost. The Company periodically evaluates whether impairment losses must
be recorded on each investment by comparing the projection of the
undiscounted future operating cash flows to the carrying amount of the
investment. If this evaluation indicates that future undiscounted
operating cash flows are less than the carrying amount of the investments,
the underlying assets are written down by charges to expense so that the
carrying amount equals the future discounted cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense
during the reporting period. These estimates involve judgments with
respect to, among other things, various future economic factors which are
difficult to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
CASH EQUIVALENTS
All highly liquid investments with original maturities of three
months or less are considered to be cash equivalents.
REVENUE RECOGNITION
The Company provides services under level-of-effort, fixed-price,
and unit-price contracts, with the length of contracts ranging up to
twelve years. Revenue from
F-7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
level-of-effort contracts is based on time and materials, direct costs
plus an administrative fee (which may be either a fixed amount or a
percentage of direct costs incurred), or a combination of these methods
and may be based on a set fee for a specified level of resources that is
adjusted for incremental resource usage. Revenue from fixed-price
contracts is recognized using the percentage-of-completion method and is
earned based on incurred contract costs to date as a percentage of the
most recent estimated total contract costs. Provisions for estimated
losses, if any, are made in the period in which the loss first becomes
probable and reasonably estimable. Revenue from unit-price contracts is
recognized based on technology units utilized or by number of transactions
processed during a given period. For unit-price contracts, the Company
establishes a per-unit fee based on the cost structure associated with the
delivery of that unit of service.
Billings for products or services for which the Company acts as an
agent on behalf of the customer are excluded from the Company's revenue
and expense, except to the extent of any mark-up.
Deferred revenue comprises payments from customers for which
services have not yet been performed or prepayments against development
work in process. These unearned revenues are deferred and recognized as
future contract costs are incurred and as contract services are rendered.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred
and were $4,125, $1,614 and $1,058 in 2001, 2000 and 1999, respectively.
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Computer equipment and furniture are stated at cost and are
depreciated on a straight-line basis using estimated useful lives of two
to seven years. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the improvement. Software
purchased by the Company and utilized either internally or in providing
contract services is capitalized at cost and amortized on a straight-line
basis over the lesser of its useful life or the term of the related
contract.
Upon sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the accounts, and any
gain or loss on such disposition is reflected in the consolidated
statements of operations. Expenditures for repairs and maintenance are
charged to operations as incurred.
F-8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles primarily represent the excess of
cost over the fair value of tangible net assets acquired and are amortized
on a straight-line basis over their estimated useful lives. Goodwill is
amortized over three to fifteen years, and other intangibles are amortized
over two to fifteen years.
The Company periodically evaluates the carrying amount of goodwill,
other intangibles and other long-lived assets, as well as the related
amortization periods, to determine whether adjustments to these amounts or
useful lives are required based on current events and circumstances. The
evaluation is based on the Company's projection of the undiscounted future
operating cash flows of the underlying assets. To the extent such
projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of related assets, a charge is
recorded to reduce the carrying amount to equal projected future
discounted cash flows.
INCOME TAXES
The Company uses the liability method to compute the income tax
provision. Under this method, deferred income taxes are determined based
on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense consists of the Company's
current and deferred provision for US and foreign income taxes.
The Company does not provide for foreign withholding and income
taxes on the undistributed earnings for its foreign subsidiaries amounting
cumulatively to $50,010 at December 31, 2001, and $67,427 at December 31,
2000, as such earnings are intended to be permanently invested in those
operations. The ultimate tax liability related to repatriation of such
earnings is dependent upon future tax planning opportunities and is not
estimable at the present time.
FOREIGN OPERATIONS
The consolidated balance sheets include foreign assets and
liabilities of $90,850 and $79,013, respectively, as of December 31, 2001,
and $112,714 and $81,172, respectively, as of December 31, 2000.
Assets and liabilities of subsidiaries located outside the United
States are translated into U.S. dollars at current exchange rates as of
the respective balance sheet date, and revenue and expenses are translated
at average exchange rates during each reporting period. Translation gains
and losses are recorded as a component of Accumulated other comprehensive
income (loss) on the consolidated balance sheets.
F-9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
The Company periodically enters into foreign currency exchange
forward contracts to hedge certain foreign currency transactions for
periods consistent with the terms of the underlying transactions. The
forward exchange contracts generally have maturities that do not exceed
one year.
The net foreign currency transaction losses reflected in Other
income (expense), net, in the consolidated statements of operations, were
($393), ($838) and ($604) for the years ended December 31, 2001, 2000, and
1999, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash equivalents and accounts
receivable. The Company's cash equivalents consist primarily of short-term
money market deposits. The Company has deposited its cash equivalents with
reputable financial institutions, from which the Company believes the risk
of loss to be remote. The Company has accounts receivable from its
customers that are engaged in the banking, insurance, healthcare,
manufacturing, telecommunications, travel and energy industries and are
not concentrated in any specific geographic region. These specific
industries may be affected by economic factors, and, therefore, accounts
receivable may be impacted. Generally, the Company does not require
collateral from its customers, since the receivables are supported by
long-term contracts. Management does not believe that any single customer,
industry or geographic area represents significant credit risk.
One customer accounted for 13% of the Company's accounts receivable
at December 31, 2001. No customer accounted for 10% or more of the
Company's accounts receivable at December 31, 2000.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments is estimated
using bank or market quotes. The fair value of the financial instruments
is disclosed in the relevant notes to the financial statements. The
carrying amount of short-term financial instruments (cash and cash
equivalents, accounts receivable, and certain other liabilities)
approximates fair value due to the short maturity of those instruments.
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program and
holds all derivatives for purposes other than trading. To date, the
Company's use of such instruments has been limited to foreign currency
forward contracts. The Company does not currently utilize hedge accounting
with regard to these derivatives and records all gains and losses
associated with such derivatives in the earnings of the appropriate
period. In compliance with Statement of Financial Accounting Standards
Board No. ("FAS") 133, "Accounting for Derivative Instruments and Hedging
Activities," the Company
F-10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
records the net fair value of the derivatives in Accounts receivable, net,
on the consolidated balance sheets.
The Company accounts for its marketable equity securities in
accordance with FAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." Management determines the appropriate classification
of marketable equity securities at the time of purchase and re-evaluates
such designation at each balance sheet date. All marketable equity
securities held by the Company have been classified as available-for-sale
and are carried at fair value, with unrealized holding gains and losses,
net of taxes, reported as a component of Accumulated other comprehensive
loss on the consolidated balance sheets. Realized gains and losses are
recorded based on the specific identification method.
TREASURY STOCK
Treasury stock transactions are accounted for under the cost method.
Repurchased treasury stock will be utilized for employee stock plans,
acquisitions, and other Company uses. At December 31, 2001, the Company
had 154 shares in treasury.
RECLASSIFICATIONS
Certain of the amounts in the accompanying financial statements have
been reclassified to conform to the current year presentation. These
reclassifications had no material effect on the Company's consolidated
financial statements.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. ("APB") 25, "Accounting for Stock Issued to Employees," 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 FAS 123, "Accounting for Stock Based Compensation," as
reflected in Note 8, "Stock Awards and Options."
F-11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
ACCOUNTING STANDARDS ISSUED
Financial Accounting Standards 141 & 142
In June 2001, the Financial Accounting Standards Board issued
FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other
Intangible Assets." FAS 141 provides guidance on the initial
recognition and measurement of goodwill and other intangible assets
acquired in a business combination completed after June 30, 2001, and
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. FAS 142 prohibits
the amortization of goodwill and intangible assets with indefinite
useful lives, and instead requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives.
The Company will apply FAS 142 beginning in the first quarter
of 2002. Application of the nonamortization provisions of FAS 142 is
expected to result in an increase in net income of approximately $4,500
($0.04 per dilutive share) in 2002. Consistent with the treatment of
intangible assets with indefinite lives under FAS 142, the Company will
reclassify an assembled workforce intangible asset with an unamortized
balance of $5,138 (along with a related deferred tax liability of $473)
at December 31, 2001, to goodwill at the date of adoption. The Company
will test goodwill for impairment as of January 1, 2002, in the first
quarter of 2002. The results of such tests are not expected to impact
2002 earnings.
Financial Accounting Standards 144
In October 2001, the Financial Accounting Standards Board
issued FAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement supersedes FAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and related literature and establishes a single accounting
model, based on the framework established in FAS 121, for long-lived
assets to be disposed of by sale. However, the statement retains the
fundamental provisions of FAS 121 for the recognition and measurement
of the impairment of long-lived assets to be held and used. The Company
is required to adopt FAS 144 no later than January 1, 2002. The Company
believes that the adoption of FAS 144 will not have a material impact
on its consolidated financial statements.
Financial Accounting Standards Emerging Issues Task Force Issue 01-09
In November 2001, the Financial Accounting Standards Board
Emerging Task Force ("EITF") reached a consensus on EITF Issue 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." This EITF consensus concludes that
consideration from a vendor to a
F-12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
customer is a reduction of the selling price of the vendor's products
or services and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. Companies are
required to adopt EITF 01-09 for fiscal years beginning after December
15, 2001, and are required to reclassify all prior period amounts to
conform to the current period presentation. The results of such
adoption will have no impact on the Company's financial statements as
they have been prepared consistent with the guidance of EITF 01-09 for
all periods presented.
Financial Accounting Standards Topic No. D-103
In November 2001, the Financial Accounting Standards Boards
staff announced Topic No. D-103 ("Topic D-103"), "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred." This staff announcement is applicable to companies
that provide services as part of their central on-going operations and
incur incidental expenses that in practice are commonly referred to as
"out-of-pocket" expenses, such as airfare, mileage, hotel stays,
out-of-town meals, photocopies, and telecommunications and facsimile
charges. Under Topic D-103, reimbursements received for these expenses
incurred should be characterized as revenue in the income statement. In
some cases, depending on the facts and circumstances, the Company had
been recording these reimbursements as a reduction of expense. The
Company is required to apply Topic D-103 for fiscal years beginning
after December 15, 2001, and is required to reclassify all prior period
amounts to conform to the current period presentation. The results of
such adoption will increase revenue and expense by approximately
$20,000 for the year ended December 31, 2002, but will have no impact
on net income. Due to the immateriality of such reimbursements in prior
periods, previously reported revenues and expenses will not be restated
upon adoption of this staff announcement.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December
31:
2001 2000
--------- ---------
Amounts billed ................... $ 120,998 $ 109,408
Amounts to be invoiced ........... 41,316 42,196
Recoverable costs and profits .... 2,484 10,366
Other ............................ 11,959 21,326
Allowance for doubtful accounts... (15,850) (7,292)
--------- ---------
$ 160,907 $ 176,004
========= =========
With regard to amounts billed, allowances for doubtful
accounts are provided based on specific identification where less than
full recovery of accounts receivable is expected. Amounts to be
invoiced represent revenue contractually earned for services performed
that are invoiced to the customer in the following month. Recoverable
costs
F-13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
and profits represent amounts recognized as revenue that have not yet
been billed in accordance with the contract terms but are anticipated
to be billed within one year. Included in Allowance for doubtful
accounts for 2001 is an allowance related to $8,264 in pre-petition
receivables from ANC Rental Corporation ("ANC"), which filed for
protection from its creditors under Chapter 11 of the United States
Bankruptcy Code in November 2001.
3. PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software consist of the
following as of December 31:
2001 2000
------------ ------------
Owned assets:
Computer equipment .................. $ 49,194 $ 49,800
Furniture and equipment ............. 31,739 32,033
Leasehold improvements .............. 23,539 17,335
------------ ------------
104,472 99,168
Less accumulated depreciation
and amortization .............. (67,684) (64,234)
------------ ------------
36,788 34,934
------------ ------------
Purchased software ..................... 39,752 35,186
Less accumulated amortization ..... (24,114) (22,012)
------------ ------------
15,638 13,174
------------ ------------
Total property, equipment and
purchased software, net ....... $ 52,426 $ 48,108
============ ============
Depreciation and amortization expense for property, equipment
and purchased software was $26,056, $22,944 and $22,387 for the years
ended December 31, 2001, 2000 and 1999, respectively.
4. ACQUISITIONS
On July 26, 2001, the Company acquired substantially all of
the assets of Advanced Receivables Strategy, Inc. ("ARS"), a
corporation that provides on-site accelerated revenue recovery,
consulting and outsourcing services to the healthcare industry. As a
result of the acquisition, the Company expanded its business process
capabilities available to its customers. The purchase price consisted
of cash payments which totaled $52,225 (net of $250 in cash acquired)
and may include additional payments totaling up to $50,000 in cash or
stock, over the next three years. The possible future payments are
contingent on ARS achieving certain financial targets over the same
period and, at the Company's discretion, up to 50% of this payment
F-14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
may be settled in Class A Common Stock of the Company, valued at the
date of settlement. The financial targets for 2001 were met and will
result in an additional consideration payment of $20,000 during the
first quarter of 2002. Such consideration was accrued as of December
31, 2001. The transaction was accounted for as a purchase; accordingly,
the results of operations of ARS and the estimated fair value of assets
acquired and liabilities assumed were included in the Company's
consolidated financial statements beginning on the acquisition date.
The following table summarizes the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition.
AS OF
JULY 26, 2001
-------------
Current assets ........................................ $ 12,455
Property, equipment and purchased software, net ....... 1,689
Goodwill .............................................. 58,174
Other non-current assets .............................. 670
------------
72,988
Current liabilities ................................... (168)
------------
Net assets acquired ................................... $ 72,820
============
The $58,174 goodwill amount includes $20,000 of additional
consideration that was earned in 2001. The estimated fair value of
goodwill was assigned to the IT Solutions segment and is expected to be
deductible for tax purposes.
On March 30, 2000, the Company acquired substantially all of
the assets and liabilities of Solutions Consulting, Inc. ("Solutions
Consulting"), a Pittsburgh-based enterprise software and e-commerce
company. Total consideration included $41,119 in cash (net of $8,881 of
cash acquired) and $50,000 in the form of 1,966 shares of the Company's
Class A Common Stock. The Company also paid $22,100 in cash for the
benefit of Solutions Consulting employees, which was recorded as a
compensation charge. The transaction was accounted for as a purchase;
accordingly, the purchase price has been allocated to assets and
liabilities based on estimated fair values as of the acquisition date.
The costs in excess of the estimated fair value of net assets acquired
was recorded as goodwill in the amount of $76,411, which is amortized
using the straight-line method of amortization over its estimated
useful life of fifteen years.
The revenues and operating expenses of Solutions Consulting
for the first three months of 2000 were included in the consolidated
statements of operations for the year ended December 31, 2000, and
pre-acquisition operating earnings were eliminated in Other income
(expense), net, in the consolidated statements of operations for the
same period, as permitted by Accounting Research Bulletin 51,
"Consolidated Financial Statements." Specifically, Solutions Consulting
contributed $11,960, $6,801,
F-15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
and $1,658 toward revenue, direct cost of services, and selling,
general and administrative expenses, respectively, during the first
quarter of 2000, and $3,501 in pre-tax income related to the first
quarter of 2000 was eliminated in Other income (expense), net, in the
consolidated statements of operations.
The following table reflects pro forma combined results of
operations of the Company and Solutions Consulting on the basis that
the acquisition had taken place at the beginning of the calendar year
for each of the years presented:
2000 1999
---- ----
(unaudited)
Revenue $1,105,946 $1,211,332
Income before taxes 93,681 126,396
Net income 56,677 75,838
Basic earnings per common share 0.59 0.84
Diluted earnings per common share 0.50 0.66
In management's opinion, the unaudited pro forma combined
results of operations are not indicative of the actual results that
would have occurred had the acquisition been consummated at the
beginning of 2000 and 1999 or of future operations of the combined
companies under the ownership and management of the Company.
On December 15, 2000, the Company acquired 100% of the equity
interests of the outstanding shares of Health Systems Design
Corporation ("HSD") for $9,274 in cash (net of $4,271 in cash
acquired). HSD provides information systems solutions for organizations
that administer health benefits. The transaction was accounted for as a
purchase; accordingly, the results of operations of HSD and the
estimated fair value of assets acquired and liabilities assumed are
included in the Company's consolidated financial statements as of the
acquisition date through the end of the year. The costs in excess of
the estimated fair value of net assets acquired was recorded as
goodwill in the amount of $1,902, which is amortized using the
straight-line method of amortization over its estimated useful life of
five years.
Accumulated amortization relating to goodwill was $9,325 and
$3,840 as of December 31, 2001 and 2000, respectively.
F-16
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
5. OTHER NON-CURRENT ASSETS
UNBILLED REVENUE FROM LONG-TERM SERVICE CONTRACTS
Costs and estimated earnings in excess of billings on
uncompleted contracts totaled $34,003 and $10,050 at December 31, 2001
and 2000, respectively. These amounts represent revenues earned under
long-term service contracts, calculated and recognized using the
percentage-of-completion method of accounting. These revenues will be
billed in the future as specified in the terms of the related
contracts.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
In 1996, the Company entered into a joint venture with HCL
Corporation Limited and HCL Europe Limited whereby the Company owns 50%
of HCL Perot Systems N.V. ("HPS"), an information technology services
company based in India. The Company contributed capital of $500 and
$1,760 to HPS during 1997 and 1996, respectively, and is required to
contribute additional capital up to a limit of $6,900, on a call basis.
The Company's investment in HPS at December 31, 2001 and 2000 was
$27,299 and $18,128, respectively. HPS provided subcontractor services
to the Company totaling $20,649, $26,071 and $28,670 for 2001, 2000 and
1999, respectively.
In 1996, the Company acquired 40% of the equity interest in
Systor AG ("Systor"), a Swiss information services company, from UBS AG
as part of a larger services agreement. In January 2000, the Company
sold its 40% equity interest in Systor to UBS Capital B.V. for a
purchase price of $55,486, resulting in a $38,851 pretax gain, which is
included in Other income (expense), net in the consolidated statements
of operations. UBS Capital B.V. was the holder of the remaining 60%
interest in Systor.
In July 2000, the Company entered into a joint venture whereby
the Company owns 50% of BillingZone, LLC ("BillingZone"), which
provides business-to-business electronic bill presentment and payment
services. The Company made cash contributions to the joint venture
totaling $15,000 in 2000 and recorded losses of $791 and $13,438 for
2001 and 2000, respectively, which are included in Equity in earnings
(loss) of unconsolidated affiliates in the consolidated statements of
operations. In 2000, the loss included a charge of $9,111 to adjust the
carrying amount of this investment in accordance with the provisions of
APB 18, "The Equity Method of Accounting for Investments in Common
Stock," reflecting the revised projections by BillingZone of future
product development costs and operating expenses.
The Company provided certain services to the joint venture and
recorded revenues of $110 and $4,708 and direct cost of services of
$653 and $2,408 during 2001 and 2000, respectively. In connection with
these services, the Company
F-17
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
recorded a net return of its investment in the joint venture totaling
$771 for 2001 and 2000, respectively.
No dividends or distributions were received from investments
in unconsolidated affiliates in 2001. The amount of cumulative
undistributed earnings from investments in unconsolidated affiliates
recorded in retained earnings was $26,271, $17,041 and $21,172 for
2001, 2000 and 1999, respectively.
SOFTWARE ROYALTY AND CONTRACT RIGHTS
In August 2000, the Company and ANC committed to enter into an
agreement to extend the term of ANC's original services contract and to
reduce the Company's royalty obligations to them. Royalties are
generally payable to ANC in connection with the future licensing to
third parties of the intellectual property developed by the Company for
them. As part of the agreement, which was executed in October 2000, the
Company paid ANC $25,000. Utilizing the guidance in APB 17, "Intangible
Assets," the Company allocated $10,100 to contract rights and the
remaining $14,900 to a software royalty intangible asset.
At December 31, 2000, the Company reviewed these assets for
impairment and determined that the value assigned to the software
royalty intangible asset of $14,900 was impaired. This impairment was
the result of the loss of sales prospects for the license of the
related intellectual property. Further, no material viable alternative
market for this intangible asset could be identified. Accordingly, the
entire amount allocated to the software royalty intangible asset was
charged to Selling, general and administrative expenses in the
consolidated statements of operations.
The net book value of the contract rights of $10,100 was being
amortized to revenue over the seven-year contract extension. In
November 2001, ANC filed for bankruptcy protection. At that time, the
Company determined that the contract rights were impaired. Accordingly,
the unamortized balance of $8,477 was charged to Direct costs of
services in the consolidated statements of operations.
MARKETABLE EQUITY SECURITIES
In May 1999, the Company purchased 1,000 common shares
(approximately 3% voting interest) in the initial public offering of
TenFold Corporation ("TenFold") for $17,000. Through a series of
transactions during 2000, the Company sold 500 shares of its 1,000
shares of TenFold common stock. The total proceeds and realized gains
on these transactions were $23,992 and $14,952 ($9,046 net of tax),
respectively. At December 31, 2000, the Company concluded that the
remaining investment in TenFold had experienced a decline in value that
was considered to be other than temporary. Accordingly, the remaining
shares were written down to their fair market value of $750, thereby
realizing a loss of $7,750 ($4,689 net of tax). At March 31, 2001, the
Company concluded that this investment had experienced an
F-18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
additional decline in value, which was considered to be other than
temporary, and the remaining shares were written down to their fair
market value of $156, thereby realizing a loss of $594 ($359 net of
tax). All realized gains and losses related to the investment in
TenFold are included in Other income (expense), net, in the
consolidated statements of operations.
At December 31, 2001, the fair market value of this investment
was $330 and the unrealized gain of $174 ($108 net of tax) was
classified in Accumulated other comprehensive loss on the consolidated
balance sheets.
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following
as of December 31:
2001 2000
------------ ------------
Operating expenses ..................... $ 102,503 $ 60,092
Taxes other than income, insurance,
rents, licenses and maintenance ... 5,834 5,541
Contract-related and other ............. 13,391 17,356
------------ ------------
$ 121,728 $ 82,989
============ ============
OPERATING EXPENSES
At December 31, 2001, Operating expenses includes the accrual
for $20,000 of additional consideration for ARS that was earned in 2001
but will not be paid until the first quarter of 2002 (as discussed in
Note 4). In addition, this amount includes $18,454 related to the
current portion of the remaining liabilities associated with the
Company's realigned operating structure (see Note 17) and $4,200 for
contract-related expenses associated with ANC's bankruptcy.
CONTRACT-RELATED AND OTHER
Contract-related and other accrued liabilities includes
liabilities recorded for both corporate and contract-related needs.
Contract-related accrued liabilities represent provisions to match
contract-related expenses to the period in which revenues from those
contracts are recognized. These include claims made by customers for
services that require additional effort, costs or settlements by the
Company to satisfy contractual requirements. The Company continually
monitors contract performance in light of customer expectations, the
complexity of work, project plans, delivery schedules and other
relevant factors. Provisions for estimated losses, if any, are made in
the period in which the loss first becomes probable and reasonably
estimable.
F-19
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
7. COMMON AND PREFERRED STOCK
CLASS A COMMON STOCK
On February 2, 1999 (the "IPO Date"), the Company completed an
initial public offering of 7,475 shares of Class A Common Stock at an
initial public offering price of $16.00 per share. Net proceeds to the
Company were $108,126.
CLASS B CONVERTIBLE COMMON STOCK
The Class B shares were authorized in conjunction with the
provisions of the original UBS AG service agreements, which were signed
in January 1996. Class B shares are non-voting and convertible, but
otherwise are equivalent to the Class A shares.
Under the terms and conditions of the UBS AG agreements, each
Class B share shall be converted, at the option of the holder, on a
share-for-share basis, into a fully paid and non-assessable Class A
share upon sale of the share to a third-party purchaser under one of
the following circumstances: 1) in a widely dispersed offering of the
Class A shares; 2) to a purchaser of Class A shares who prior to the
sale holds a majority of the Company's stock; 3) to a purchaser who
after the sale holds less than 2% of the Company's stock; 4) in a
transaction that complies with Rule 144 under the Securities Act of
1933, as amended; or 5) any sale approved by the Federal Reserve Board
of the United States.
During 1997, the Company concluded the renegotiation of the
terms of its strategic alliance with UBS AG. Under these terms and
conditions the Company sold to UBS AG 100 shares of the Company's Class
B stock at a purchase price of $3.65 per share. These Class B shares
are subject to certain transferability and holding-period restrictions,
which lapse over a defined vesting period. These shares vest ratable
over the ten-year term of the agreement on a monthly basis. In the
event of termination of the agreement, the Company would have the right
to buy back any previously acquired unvested shares for the original
purchase price of $3.65 per share. Additionally, as discussed in Note
8, "Stock Awards and Options," options were issued to UBS under this
agreement.
Pursuant to the Bank Holding Company Act of 1956 and
subsequent regulations and interpretations by the Federal Reserve
Board, UBS AG's holdings in terms of shares of the Company's Class B
Common Stock may not exceed 10% of the total of all classes of the
Company's common stock. Similarly, the total consideration paid by UBS
AG for the purchase of shares plus the purchase and exercise of options
may not exceed 10% of the Company's consolidated stockholders' equity
as determined in accordance with generally accepted accounting
principles. If, however, on certain specified anniversaries of the
execution date of the new agreement,
F-20
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
beginning in 2004, the number of Class B shares, for which UBS AG's
options are exercisable, is limited due to an insufficient number of
shares outstanding, UBS AG has the right to initiate procedures to
eliminate such deficiency. These procedures may involve (i) issuance of
additional Class A shares by the Company, (ii) a formal request to the
Federal Reserve Board from UBS AG for authorization to exceed the 10%
limit on ownership, or (iii) the purchase of Class B shares by the
Company from UBS AG at a defined fair value. In addition, the exercise
period for options to purchase vested shares would be increased beyond
the normal five years to account for any time during such exercise
period in which UBS AG is unable to exercise its options as a result of
the regulations.
In the first quarter of 2002, UBS converted all outstanding
shares of Class B Common Stock to shares of Class A Common Stock.
OTHER COMMON STOCK ACTIVITY
On January 5, 1999, the Company's Board of Directors declared
a two-for-one split of the Class A and Class B Common Stock to be
effected in the form of a stock dividend. The record date for the stock
dividend was January 6, 1999 and the distribution date was January 19,
1999. All share and per share amounts included in these consolidated
financial statements have been retroactively adjusted to reflect this
split.
PREFERRED STOCK
In July 1998, the Board of Directors of the Company approved
an amendment to the Company's Certificate of Incorporation which
authorized 5,000 shares of Preferred Stock, the rights, designations,
and preferences of which may be designated from time to time by the
Board of Directors.
On January 5, 1999, the Company's Board of Directors
authorized two series of Preferred Stock in connection with the
adoption of a Shareholder Rights Plan: 200 shares of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), and 10 shares of Series B Junior Participating
Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock" and, together with the Series A Preferred Stock, the "Preferred
Stock").
STOCKHOLDER RIGHTS PLAN
The Company has entered into a Stockholder Rights Plan,
pursuant to which one Class A Right and one Class B Right ("Right," or
together, the "Rights") is attached to each respective share of Class A
and Class B Common Stock. Each Right entitles the registered holder to
purchase from the Company a unit consisting of one one-thousandth of a
share of Series A or Series B Preferred Stock, at a purchase price
F-21
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
of $55.00 per share, subject to adjustment. These Rights have certain
anti-takeover effects and will cause substantial dilution to a person
or group that attempts to acquire the Company in certain circumstances.
Accordingly, the existence of these Rights may deter certain acquirors
from making takeover proposals or tender offers.
EMPLOYEE STOCK PURCHASE PLAN
In July 1998, the Board of Directors adopted an employee stock
purchase plan (the "ESPP"), which provides for the issuance of a
maximum of 20,000 shares of Class A Common Stock. The ESPP became
effective on the IPO Date. During 2000, the ESPP was amended such that
this plan was divided into separate U.S. and Non U.S. plans in order to
ensure that United States employees continue to receive tax benefits
under Section 421 and 423 of the United States Internal Revenue Code.
Following this division of the ESPP into the two separate plans, an
aggregate of 19,736 shares of Class A Common Stock were authorized for
sale and issuance under the two plans. Eligible employees may have up
to 10% of their earnings withheld to be used to purchase shares of the
Company's common stock on specified dates determined by the Board of
Directors. The price of the common stock purchased under the ESPP will
be equal to 85% of the fair value of the stock on the exercise date for
the offering period.
8. STOCK AWARDS AND OPTIONS
RESTRICTED STOCK PLAN
In 1988, the Company adopted a Restricted Stock Plan, which
was amended in 1993, to attract and retain key employees and to reward
outstanding performance. The Company may issue up to a total of 109,000
shares of the Company's Class A Common Stock under this plan, the 2001
Plan, the 1991 Plan, and the Advisor Plan. Employees selected by
management may elect to become participants in the plan by entering
into an agreement that provides for vesting of the Class A common
shares over a five-to-ten year period. Each participant has voting,
dividend and distribution rights with respect to all shares of both
vested and unvested common stock. The Company may repurchase unvested
shares and, under certain circumstances, vested shares of participants
whose employment with the Company terminates. The repurchase price
under these provisions is determined by the underlying agreement,
generally the employees' cost plus interest at 8%. Common stock issued
under the Restricted Stock Plan has been purchased by the employees at
varying prices, determined by the Board of Directors and estimated to
be the fair value of the shares based upon an independent third-party
appraisal. For the year ended December 31, 1999, 81 shares of the
Company's Class A common stock were granted under the Restricted Stock
Plan. The aggregate weighted average grant-date fair value for the
shares granted in 1999 was $2,075. No shares were granted under the
plan during 2001 and 2000. During 2001 this plan was terminated;
however, provisions of the Restricted Stock Plan will remain in effect
for outstanding stock.
F-22
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
2001 STOCK OPTION PLAN
In 2001, the Company adopted the 2001 Long-Term Incentive Plan
(the "2001 Plan") under which employees, directors, or consultants may
be granted stock options, stock appreciation rights, and restricted
stock or may be issued cash awards, or a combination thereof. Under the
2001 Plan, stock option awards may be granted in the form of incentive
stock options or nonstatutory stock options. The exercise price of any
incentive stock option issued is the fair market value on the date of
grant, the term of which may be no longer than ten years. The exercise
price of a nonstatutory stock option may be no less than 85% of the
fair market value on the date of grant, the term of which may be no
longer than eleven years. The vesting period for all options are
determined upon grant date and usually vest over a three-to-ten year
period, and in some cases can be accelerated through attainment of
performance criteria.
1991 STOCK OPTION PLAN
In 1991, the Company adopted the 1991 Stock Option Plan (the
"1991 Plan"), which was amended in 1993 and 1998. Pursuant to the 1991
Plan, options to purchase the Company's Class A common shares can be
granted to eligible employees. Prior to the IPO Date, such options were
generally granted at a price not less than 100% of the fair value of
the Company's Class A common shares, as determined by the Board of
Directors, and based upon an independent third-party valuation.
Subsequent to the IPO Date, the exercise price for options issued is
the fair market value of the shares on the date of grant. The stock
options vest over a three-to-ten year period based on the provisions of
each grant, and in some cases can be accelerated through attainment of
financial performance criteria. The options are usually exercisable
from the vesting date until the date one year after the entire option
grant has vested. Unexercised vested options are cancelled following
the expiration of a certain period after the employee leaves the
employment of the Company. During 2001 this plan was terminated;
however, provisions of the 1991 Plan will remain in effect for
outstanding options.
ADVISOR STOCK OPTION/RESTRICTED STOCK INCENTIVE PLAN
In 1992, the Company adopted the Advisor Stock
Option/Restricted Stock Incentive Plan (the "Advisor Plan"), which was
modified in 1993, to enable non-employee directors and advisors to the
Company and consultants under contract with the Company to acquire
shares of the Company's Class A Common Stock at a price not less than
100% of the fair value of the Company's stock, as determined by the
Board of Directors and based upon an independent third-party valuation.
The options and shares are subject to a vesting schedule and to
restrictions associated with their transfer. Under certain
circumstances, the shares can be repurchased by the Company at cost
plus interest at 8% from the date of issuance. During 2001 this plan
was
F-23
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
terminated; however, provisions of the Advisor Plan will remain in
effect for outstanding stock and options, but no new issuances will be
made pursuant to the plan.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION/RESTRICTED STOCK INCENTIVE PLAN
In 1996, the Company adopted the 1996 Non-Employee Director
Stock Option/Restricted Stock Incentive Plan (the "Director Plan"). The
Director Plan provides for the issuance of up to 800 Class A common
shares or options to Board members who are not employees of the
Company. Shares or options issued under the plan would be subject to
five-year vesting, with options expiring after an eleven-year term. The
purchase price for shares issued and exercise price for options issued
is the fair value of the shares at the date of issuance. Other
restrictions are established upon issuance.
CLASS B STOCK OPTIONS UNDER THE UBS AG AGREEMENT
Under the terms and conditions of the UBS AG agreement, which
was renegotiated in 1997, the Company sold to UBS AG options to
purchase 7,234 shares of the Company's Class B Common Stock at a
non-refundable cash purchase price of $1.125 per option. These options
are exercisable immediately and, for a period of five years after the
date that such options become vested, at an exercise price of $3.65 per
share. The 7,234 shares of Class B Common Stock subject to options vest
at a rate of 63 shares per month for the first five years of the
ten-year agreement, and at a rate of 58 shares per month thereafter. In
the event of termination of the UBS Warburg EPI Agreement, options to
acquire unvested shares would be forfeited. UBS AG exercised 834
options in the third quarter of 1998 and an additional 850 options in
the second quarter of 1999.
DEFERRED COMPENSATION
The Company recorded $4,027 of deferred compensation expense
for options granted in 1998, representing the difference between the
option exercise price and the fair value of the underlying common
stock. The Company recognized $284, $374 and $360 of compensation
expense during the years ended December 31, 2001, 2000 and 1999,
respectively, and will amortize the remaining deferred compensation
ratably over the respective vesting periods of the option grants. The
estimated amount of compensation expense to be recognized, excluding
consideration of future forfeitures, is approximately $202 for each
year from 2002 through 2008.
F-24
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
STOCK OPTIONS
Activity in options for Class A Common Stock:
DIRECTOR & WEIGHTED
ADVISOR OTHER AVERAGE
2001 PLAN 1991 PLAN PLANS OPTIONS TOTAL PRICE
----------- ----------- ----------- ----------- ----------- ------------
Outstanding at January 1, 1999 ..... -- 28,431 244 327 29,002 $ 1.62
Granted ............................ -- 13,749 40 -- 13,789 11.70
Exercised .......................... -- (5,699) (12) (227) (5,938) 1.33
Forfeited .......................... -- (3,036) (56) (6) (3,098) 6.07
----------- ----------- ----------- ----------- -----------
Outstanding at December 31, 1999 ... -- 33,445 216 94 33,755 5.38
=========== =========== =========== =========== ===========
Exercisable at December 31, 1999 ... -- 5,420 53 59 5,532 2.62
Outstanding at January 1, 2000 ..... -- 33,445 216 94 33,755 5.38
Granted ............................ -- 28,846 -- -- 28,846 19.05
Exercised .......................... -- (3,251) -- -- (3,251) 1.90
Forfeited .......................... -- (7,508) (8) (94) (7,610) 13.89
----------- ----------- ----------- ----------- -----------
Outstanding at December 31, 2000 ... -- 51,532 208 -- 51,740 11.97
=========== =========== =========== =========== ===========
Exercisable at December 31, 2000 ... -- 7,518 84 -- 7,602 5.83
Outstanding at January 1, 2001 ..... -- 51,532 208 -- 51,740 11.97
Granted ............................ 2,717 1,216 80 -- 4,013 15.17
Exercised .......................... -- (4,874) -- -- (4,874) 3.26
Forfeited .......................... -- (10,387) -- -- (10,387) 12.08
----------- ----------- ----------- ----------- -----------
Outstanding at December 31, 2001 ... 2,717 37,487 288 -- 40,492 13.30
=========== =========== =========== =========== ===========
Exercisable at December 31, 2001 ... 2 8,593 118 -- 8,713 10.14
The following table summarizes information about options for Class A
Common Stock outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE EXERCISE REMAINING EXERCISE
OF PRICES NUMBER PRICE LIFE NUMBER PRICE
--------- ------ -------- --------- ------ --------
$0.25 - $5.00 9,596 $ 1.70 4.80 3,501 $ 1.82
$5.01 - $10.00 3,219 9.73 6.70 463 9.69
$10.01 - $15.00 11,609 11.33 7.19 2,558 10.97
$15.01 - $20.00 4,717 17.75 6.18 711 17.92
$20.01 - $25.00 11,351 24.29 7.45 1,480 24.80
------ -----
Total 40,492 13.30 6.54 8,713 10.14
====== =====
F-25
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
As previously noted, the Company has continued to account for
its employee and non-employee director stock option activity under APB
25. Had the Company elected to adopt FAS 123, the pro forma impact on
net income and earnings per share would have been as follows:
2001 2000 1999
----------- ----------- -----------
Net income (loss)
As reported ...................... $ (2,671) $ 55,483 $ 75,497
Pro forma ........................ $ (14,371) $ 41,091 $ 72,562
Basic earnings (loss) per common share
As reported ...................... $ (0.03) $ 0.58 $ 0.85
Pro forma ........................ $ (0.14) $ 0.43 $ 0.82
Diluted earnings (loss) per common share
As reported ...................... $ (0.03) $ 0.49 $ 0.67
Pro forma ........................ $ (0.14) $ 0.36 $ 0.64
All options granted by the Company in 2001, 2000 and 1999 were
granted at the per share fair market value in effect on the grant date.
Vesting of options differs based on the terms of each option.
Typically, options either vest ratably over the vesting period, vest at
the end of the vesting period, or vest based on the attainment of
various criteria. Prior to the IPO Date, the fair value of each option
grant was estimated on the grant date using the Minimum Value Stock
option-pricing model. Subsequent to this date, the Black-Scholes option
pricing model was utilized by the Company. The weighted average risk
free interest rates used were 4.54%, 6.42%, and 4.68% for the years
ended December 31, 2001, 2000, and 1999, respectively. Volatility was
estimated to be 55%, 45% and 35% for the years ended December 31, 2001,
2000 and 1999, respectively. 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. The expected dividend
yield for all periods is 0%. The weighted average grant-date fair value
per share of options granted in 2001, 2000 and 1999 was $7.67, $9.19
and $4.56, respectively.
F-26
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
9. INCOME TAXES
Income (loss) before taxes for the years ended December 31 was
as follows:
2001 2000 1999
-------- -------- --------
Domestic ....... $ 25,888 $ 87,707 $ 83,192
Foreign ........ (12,118) 4,001 42,637
-------- -------- --------
$ 13,770 $ 91,708 $125,829
======== ======== ========
The provision for income taxes charged to operations was as
follows:
2001 2000 1999
----------- ----------- -----------
Current:
U.S. federal .................... $ 12,922 $ 29,681 $ 26,092
State and local ................. 1,719 5,052 4,268
Foreign ......................... (852) (1,750) 15,036
----------- ----------- -----------
Total current ..................... 13,789 32,983 45,396
----------- ----------- -----------
Deferred:
U.S. federal .................... (2,922) 473 5,107
State and local ................. 820 89 957
Foreign ......................... 4,754 2,680 (1,128)
----------- ----------- -----------
Total deferred .................... 2,652 3,242 4,936
----------- ----------- -----------
Total provision for income taxes .. $ 16,441 $ 36,225 $ 50,332
=========== =========== ===========
Taxes payable are reduced by $17,128, $16,078 and $35,909 in
2001, 2000 and 1999, respectively, due to the benefit of stock options
exercised during those years. This benefit is recorded as an increase
to Additional paid-in-capital on the consolidated balance sheets.
The Company has foreign net operating loss carryforwards of
$20,693 to offset future foreign taxable income that do not expire,
except for $191 which expires in 2006 and $15 which expires in 2007.
The Company also has U.S. federal net operating loss carryforwards of
$14,372 which may be used to offset future taxable income and will
begin to expire in 2010.
F-27
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
Deferred tax assets (liabilities) are comprised of the
following at December 31:
2001 2000
-------- --------
Property and equipment ............. $ 7,514 $ 7,230
Accrued liabilities ................ 24,680 14,467
Intangible assets .................. 12,793 15,888
Bad debt reserve ................... 5,824 2,162
Loss carryforwards ................. 12,057 1,642
Equity investments ................. 4,765 6,544
Other .............................. 1,262 798
-------- --------
Gross deferred tax assets .......... 68,895 48,731
-------- --------
Unrealized gain on marketable equity
securities .................... (69) (11)
Equity investments ................. (9,895) (6,579)
Intangible assets .................. (3,487) --
Other .............................. (688) (711)
-------- --------
Gross deferred tax liabilities ..... (14,139) (7,301)
-------- --------
Valuation allowance ................ (11,001) --
-------- --------
Net deferred tax asset ............. $ 43,755 $ 41,430
======== ========
The Company has established a valuation allowance for deferred
tax assets related to certain foreign operations, as management
believes there is significant uncertainty regarding the realization of
those foreign deferred tax assets.
The provision for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory federal
income tax rate to income before taxes, as a result of the following
differences:
2001 2000 1999
------------ ------------ ------------
Statutory U.S. tax rate ................. $ 4,819 $ 32,098 $ 44,040
State and local taxes ................... 777 3,508 3,328
Nondeductible items ..................... 614 459 1,255
Nondeductible amortization and
write-off of intangible assets ..... 445 281 1,108
U.S. rates in excess of foreign
rates and other .................... (1,215) (121) 601
------------ ------------ ------------
5,440 36,225 50,332
Valuation allowance ..................... 11,001 -- --
------------ ------------ ------------
Total provision for income taxes ................. $ 16,441 $ 36,225 $ 50,332
============ ============ ============
F-28
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
10. SEGMENT AND CERTAIN GEOGRAPHIC DATA
The Company's operations are classified into two primary lines
of business, which are also reportable segments. These lines of
business are IT Solutions and Consulting. The IT Solutions segment
provides services to customers primarily under long-term contracts in
strategic relationships. These services include technology and business
process outsourcing as well as high value short-term projects and
consulting capabilities. The Consulting segment provides services
relating to the implementation of enterprise resource planning, supply
chain management, design, development, implementation, and maintenance
of applications, and various other activities. The Company's remaining
operating areas and corporate activities are included in the "Other"
category.
The reporting segments follow the same accounting policies
used for the Company's consolidated financial statements as described
in the summary of significant accounting policies. The Company
evaluates segment performance based on income from operations before
income taxes, exclusive of charges related to the Company's realigned
operating structure and unusual and nonrecurring items. All corporate
and centrally incurred costs are allocated to the segments based
principally on expenses, employees, square footage, or usage. The
"Other" category includes charges related to the Company's realigned
operating structure and unusual and nonrecurring items, including a
separately identifiable operation that the Company exited, and the
amortization of goodwill and related intangible assets associated with
the acquisition of Solutions Consulting.
Corporate controlled assets, such as cash and cash equivalents
and deferred income taxes, are included in the "Other" category, as
well as goodwill and related intangible assets associated with
Solutions Consulting.
The following is a summary of certain financial information by
reportable segment as of and for the years ended December 31, 2001,
2000 and 1999:
F-29
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
IT
SOLUTIONS CONSULTING OTHER TOTAL
------------ ------------ ------------ ------------
2001:
Revenue ......................... $ 1,142,181 $ 62,031 $ 489 $ 1,204,701
Depreciation and amortization ... 18,008 2,570 14,522 35,100
Income (loss) before taxes ...... 104,981 2,142 (93,353) 13,770
Total assets .................... 383,362 10,808 363,428 757,598
2000:
Revenue ......................... $ 1,013,277 $ 77,436 $ 15,233 $ 1,105,946
Depreciation and amortization ... 12,250 2,411 13,493 28,154
Income (loss) before taxes ...... 94,386 13,800 (16,478) 91,708
Total assets .................... 308,684 26,166 338,205 673,152
1999:
Revenue ......................... $ 1,087,410 $ 36,457 $ 27,686 $ 1,151,553
Depreciation and amortization ... 13,782 1,465 12,187 27,434
Income (loss) before taxes ...... 100,707 10,922 14,200 125,829
Total assets .................... 226,531 6,381 381,053 613,965
Summarized below is the financial information for each
geographic area as defined by FAS 131, "Disclosures about Segments of
an Enterprise and Related Information." "All Other" includes financial
information from the following geographic areas: Hong Kong, Japan,
Singapore, Netherlands, Germany, France, Ireland, Switzerland,
Luxembourg, and Belgium.
2001 2000 1999
------------ ------------ ------------
United States:
Total revenue ..................... $ 891,044 $ 802,570 $ 760,873
Long-lived assets at December 31 .. 265,772 174,884 103,033
United Kingdom:
Total revenue ..................... 152,094 153,701 241,002
Long-lived assets at December 31 .. 2,166 4,235 4,347
All Other:
Total revenue ..................... 161,563 149,675 149,678
Long-lived assets at December 31 .. 1,400 1,809 2,702
Consolidated:
Total revenue ..................... 1,204,701 1,105,946 1,151,553
Long-lived assets at December 31 .. 269,338 180,928 110,082
Greater than 10% of the Company's revenue was earned from one
customer for the year ended December 31, 2001, 2000 and 1999. Revenue
from this customer comprised 24% of total revenue in 2001, 24% of total
revenue in 2000, and 30% of total revenue in 1999.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES AND MAINTENANCE AGREEMENTS
In June 2000, the Company entered into an operating lease
agreement with a special purpose entity for the use of land, existing
office buildings, improvements, as well as the development of data
center facilities in Plano, Texas. This special purpose
F-30
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
entity is a trust that is owned by a consortium of financial
institutions, and the Company has no equity ownership and no managerial
involvement in this entity.
The initial term of this lease extends through June 2005, with
one optional two-year renewal period. At the end of the lease, the
Company is required to either renew the lease, purchase the property
for the lease balance, or arrange for the sale of the property to a
third party, with the Company guaranteeing to the lessor proceeds on
such sale of 100% of the original fair value of the land, plus 83% of
the original fair value of the buildings and any additional
improvements. The fair value of the facilities, upon completion of
certain construction activities, is expected to be approximately
$75,000. Commitments for rent under this operating lease are included
in future minimum commitments below. Rent expense under this operating
lease is equal to the interest expense owed by the special purpose
entity to the banks, and is a variable amount equal to LIBOR plus 104
basis points (2.9% at December 31, 2001) on approximately $75,000.
Management believes this lease rate is currently less than prevailing
market lease rates for similar facilities.
The Company does not consolidate this entity. If accounting
rules were to change and the Company was required to consolidate this
entity, assets and debt would increase by approximately $75,000 and the
Company would incur an additional depreciation charge of approximately
$4,300 per year. This lease contains certain standard financial
covenants which, if not met, may require the Company to repay
approximately $75,000 to the special purpose entity. The Company is
currently in compliance with all covenants and expects to remain in
compliance. If the Company were ever required to repay approximately
$75,000, then this payment would be recorded as the purchase of land,
buildings, and improvements, which the Company is currently leasing. As
a result of such payment, the Company would record an asset on its
consolidated balance sheet of approximately $75,000 and would incur an
additional depreciation charge of approximately $4,300 per year.
The Company has commitments related to data processing
facilities, office space and computer equipment under non-cancelable
operating leases and fixed maintenance agreements for remaining periods
ranging from one to eleven years.
F-31
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
Future minimum commitments under these agreements as of December 31,
2001, are as follows:
YEAR ENDING LEASE AND MAINTENANCE
DECEMBER 31: COMMITMENTS
------------ ---------------------
2002 ............................ $ 36,600
2003 ............................ 25,879
2004 ............................ 22,608
2005 ............................ 18,076
2006 ............................ 15,426
Thereafter ...................... 30,327
---------
Total $ 148,916
=========
Minimum payments have not been reduced by minimum sublease
rentals of $3,982 due in the future under non-cancelable subleases. The
Company is obligated under certain operating leases for its pro rata
share of the lessors' operating expenses. Rent expense was $32,215,
$33,765, and $35,517 for 2001, 2000, and 1999, respectively.
Additionally, as of December 31, 2001, the Company maintained a loss
accrual of $29,769 in connection with the planned abandonment of
certain leased properties.
CONTRACT-RELATED CONTINGENCIES
The Company has certain contingent liabilities that arise in
the ordinary course of providing services to its customers. These
contingencies are generally the result of contracts that require the
Company to comply with certain level-of-effort or performance
measurements, certain cost-savings guarantees or the delivery of
certain services by a specified deadline. The Company believes that the
ultimate liability, if any, incurred under these contract provisions
will not have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
FOREIGN CURRENCY EXCHANGE FORWARD CONTRACTS
At December 31, 2001, the Company had seven forward contracts
in various currencies in the amount of $9,430. These contracts expired
on January 31, 2002.
The estimated fair value of the Company's forward exchange
contracts using bank or market quotes and the year end foreign exchange
rates was a net liability of $60 as of December 31, 2001. The Company's
remaining risk associated with this transaction is the risk of default
by the bank, which the Company believes to be remote.
F-32
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
CONTINGENT PUT RIGHTS
Under the terms of a certain stock agreement, a total of 1,000
shares of Class A Common Stock are subject to contingent put rights at
December 31, 2001. Under this agreement the holder may require the
Company to repurchase the shares at the original cost plus 8% interest,
accrued from the date of purchase, in the event the holder's employment
or directorship terminates.
LITIGATION
The Company is, from time to time, involved in various
litigation matters arising in the ordinary course of its business. The
Company believes that the resolution of currently pending legal
proceedings, either individually or taken as a whole, will not have a
material adverse effect on the Company's consolidated financial
condition, results of operations or cash flows.
In July and August 2001, the Company, as well as certain of
its current and former officers and certain investment banks, were
named as defendants in two purported class action lawsuits, which
allege violations of Rule 10b-5, promulgated under the Securities Act
of 1934, as amended, and Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933, as amended. These lawsuits, Seth Abrams v. Perot Systems
Corp., et al. and Adrian Chin v. Perot Systems, Inc., et al., have been
filed in the United States District Court for the Southern District of
New York. Approximately 800 lawsuits that are substantially similar to
the lawsuits against the Company have been filed against approximately
180 issuers and 40 investment banks during the past year. The lawsuits
involving the Company focus on alleged improper practices by the
investment banks in connection with the Company's initial public
offering in February 1999. The lawsuits allege that certain investment
banks, in exchange for allocations of public offering shares to their
customers, received undisclosed commissions from their customers on the
purchase of securities and required their customers to purchase
additional shares of the Company in aftermarket trading. The lawsuits
also allege that the Company should have disclosed in its public
offering prospectus the alleged practices of the investment banks,
whether or not the Company was aware that the practices were occurring.
The Company believes the claims against it and certain of its current
and former officers are without merit. The Company does not believe
that the outcome of this litigation will have a material adverse effect
on the Company's financial condition, results of operations or cash
flows.
In December 2001, Siemens Medical Solutions Health Services
Corporation filed a lawsuit against the Company's subsidiary, PSC
Healthcare Software, Inc. (formerly known as Health Systems Design
Corporation ("HSD")) alleging breach of contract and fraud by HSD for
failing to complete the development and delivery of a computer software
product. Siemens seeks damages in excess of $10,000. The Company does
not believe that the outcome of this litigation will have a material
F-33
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
adverse effect on the Company's financial condition, results of
operations or cash flows.
LICENSE AGREEMENT
In 1988, the Company entered into a license agreement with the
Perot Systems Family Corporation and Ross Perot that allowed the
Company to use the name "Perot" and "Perot Systems" in its business on
a royalty-free basis. Mr. Perot and the Perot Systems Family
Corporation may terminate this agreement at any time and for any
reason. Beginning one year following such a termination, the Company
would not be allowed to use the "Perot" name in its business. Mr.
Perot's or the Perot Systems Family Corporation's termination of the
Company's license agreement could materially and adversely affect the
Company's business, financial condition, results of operations or cash
flows.
12. RETIREMENT PLAN AND OTHER EMPLOYEE TRUSTS
During 1989, the Company established the Perot Systems 401(k)
Retirement Plan, a qualified defined contribution retirement plan. The
plan year is the calendar year. In 2001, the plan allowed eligible
employees to contribute between 1% and 20% of their annual
compensation, including overtime pay, bonuses and commissions. The plan
was amended effective January 1, 2000, to change the Company's
contribution to a formula matching 100% of employees' contributions, up
to a maximum Company contribution of 4%. The plan was also amended to
provide 100% vesting of all existing Company matching contributions for
active employees and immediate vesting of any future Company matching
contributions. Employees are not allowed to invest funds in the
Company's Class A Common Stock. The plan does allow for the Company's
matching contribution to be paid in the form of Class A Common Stock,
and employees are not restricted in selling any such stock. The
Company's contributions, which were all made in cash, were $12,527,
$12,319, and $11,830 for the years ended December 31, 2001, 2000, and
1999, respectively.
13. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999
------------ ------------ ------------
Cash paid (received) during the year for:
Interest ................................................................ $ 229 $ 83 $ 321
============ ============ ============
Income taxes ............................................................ $ (17,839) $ 21,284 $ 27,681
============ ============ ============
Non-cash investing and financing activities:
Issuance of common stock for acquisition of businesses .................. $ -- $ 50,000 $ --
============ ============ ============
Tax benefit of employee options exercised ............................... $ 17,128 $ 16,078 $ 35,909
============ ============ ============
Unrealized gain (loss) on marketable equity securities, net of tax ...... $ 94 $ (13,974) $ 13,992
============ ============ ============
F-34
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
14. RELATED PARTY TRANSACTIONS
In September 2000, Ross Perot resigned as chief executive
officer of the Company. He continues to serve the Company as chairman
of the board of directors without cash or non-cash compensation. For
the years ended December 31, 2000 and 1999, the Company has recorded
compensation expense of $556 and $780, respectively, with an offset to
Additional paid-in capital on the consolidated balance sheets.
The Company is providing, under a three-year contract,
information technology and energy management services for Hillwood
Enterprises L.P., which is controlled and partially owned by Ross
Perot, Jr. This contract includes provisions under which the Company
may be penalized if its actual performance does not meet the levels of
service specified in the contract, and such provisions are consistent
with those included in other customer contracts. For the years ended
December 31, 2001 and 2000, the Company recorded revenue of $1,511 and
$358 and direct cost of services of $1,032 and $203, respectively, and
is expected to record revenue of approximately $4,600 over the
three-year term. Prior to entering into this arrangement, the Audit
Committee reviewed and approved this contract.
15. EARNINGS (LOSS) PER SHARE
The following chart is a reconciliation of the numerators and
the denominators of the basic and diluted per common share
computations.
2001 2000 1999
------------ ------------ ------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) ..................................... $ (2,671) $ 55,483 $ 75,497
============ ============ ============
Weighted average common shares outstanding ............ 99,437 96,189 88,350
============ ============ ============
Basic earnings (loss) per common share ................ $ (0.03) $ 0.58 $ 0.85
============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) ..................................... $ (2,671) $ 55,483 $ 75,497
============ ============ ============
Weighted average common shares outstanding ............ 99,437 96,189 88,350
Incremental shares assuming dilution .................. -- 17,291 24,879
------------ ------------ ------------
Weighted average diluted common shares outstanding .... 99,437 113,480 113,229
============ ============ ============
Diluted earnings (loss) per common share .............. $ (0.03) $ 0.49 $ 0.67
============ ============ ============
For the year ended December 31, 2001, 46,042 options to
purchase shares of the Company's common stock were excluded from the
calculation of diluted earnings (loss) per common share because the
impact was antidilutive given the reported net loss for the period. At
December 31, 2000, options to purchase 18,662 shares of the Company's
common stock were excluded from the calculation of diluted earnings per
common share because the impact was antidilutive given that the
exercise price for
F-35
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
these options were greater than the average actual share price for the
year ended December 31, 2000.
16. TERMINATION OF MAJOR CONTRACT
The Company provided services for East Midlands Electricity
(IT) Limited ("EME") under an agreement entered into during 1992, as
amended. Under the terms and conditions of this agreement, EME had the
right to terminate its relationship with the Company following a change
in control of EME. In July 1998, EME was acquired and exercised this
right. This termination was completed during 1999, and the Company
received a cash payment of $10,620, which was fully recognized as
revenue. Related expenses of $2,591 were charged to Direct cost of
services and the resulting gain of $8,029 was included in Operating
income (loss) in the consolidated statements of operations for the year
ended December 31, 1999.
17. REALIGNED OPERATING STRUCTURE
During 2001, the Company realigned its operating structure in
order to strengthen the Company's market position and reduce its costs.
This realignment resulted in non-recurring charges of $74,690, of which
$33,713 was recorded during the first quarter of 2001 and $40,977 was
recorded during the third quarter of 2001. These charges are reflected
in the consolidated statements of operations as follows: $4,952 is
recorded in Direct cost of services and $69,738 is recorded in Selling,
general and administrative expenses. These charges included the
following:
- $39,624 related to the elimination of approximately 900
administrative and non-billable positions in all business
functions and in all geographic areas of the Company;
- $25,860 for the consolidation and closure of facilities,
including those facilities impacted by the Company's realigned
operating structure and the consolidation of the Company's
Dallas area operations into one facility located in Plano,
Texas; and
- $9,206 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.
F-36
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
The amounts accrued and the related payments and adjustments
against these charges were as follows:
Employee Facility Asset
Related Related Basis
Costs Costs Adjustments Total
------------ ------------ ------------ ------------
Charge for the quarter ended March 31 ............ $ 23,812 $ 5,896 $ 4,005 $ 33,713
Charge for the quarter ended September 30 ........ 15,812 19,964 5,201 40,977
Less: cash payments and asset write-downs ....... (28,271) (5,543) (9,206) (43,020)
Reclassification of categories ................... (900) 900 -- --
------------ ------------ ------------ ------------
Remaining balance at December 31, 2001 ........... $ 10,453 $ 21,217 $ -- $ 31,670
============ ============ ============ ============
The remaining balance of $31,670 is included on the
consolidated balance sheets in the amounts of $18,454 in Accrued and
other current liabilities and $13,216 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, the Company
exited a separately identifiable operation. For the year ended December
31, 2001, revenue and net operating losses for this operation were $0
and ($4,126), respectively. For the year ended December 31, 2000,
revenue and net operating losses for this operation were $2,759 and
($29,066), respectively.
18. SUBSEQUENT EVENT
On January 1, 2002, the Company acquired all of the equity
interests of the outstanding shares of Claim Services Resource Group,
Inc. ("CSRG"), a corporation 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 $49,422 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. The transaction was accounted for as a purchase;
accordingly, the results of operations of CSRG 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 following table summarizes the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition.
The Company is in the process of obtaining tangible and intangible
asset appraisals and completing the plan of integration into the
Company's operations; accordingly, the allocation of the purchase price
is subject to refinement.
F-37
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
AS OF
JANUARY 1, 2002
---------------
Current assets .................................... $ 15,907
Property, equipment and purchased software ........ 2,115
Other non-current assets .......................... 399
Goodwill and other intangible assets .............. 54,108
--------
72,529
Current liabilities ............................... (9,317)
Non-current capital lease obligation .............. (330)
--------
Net assets acquired ............................... $ 62,882
========
Upon completion of the appraisals, the estimated fair value of
goodwill will be assigned to the IT Solutions segment and will not be
deductible for tax purposes.
19. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 2001:
Revenue ..................................... $ 294,732 $ 291,287 $ 306,973 $ 311,709
Direct cost of services (1) ................. 228,815 222,505 239,857 258,531
Gross profit ................................ 65,917 68,782 67,116 53,178
Net income (loss) (2) ....................... (7,679) 16,501 (18,062) 6,569
Basic earnings (loss) per common
share (3) ................................. $ (0.08) $ 0.17 $ (0.18) $ 0.06
Diluted earnings (loss) per common
share (3) ................................. $ (0.08) $ 0.15 $ (0.18) $ 0.06
Weighted average common
shares outstanding ........................ 97,600 98,513 99,926 101,659
Weighted average diluted
common shares outstanding (4) ............. 97,600 111,678 99,926 114,989
F-38
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
YEAR ENDED DECEMBER 31, 2000:
Revenue .................................... $ 274,582 $ 268,524 $ 276,092 $ 286,748
Direct cost of services .................... 204,188 209,417 214,673 223,400
Gross profit ............................... 70,394 59,107 61,419 63,348
Net income (loss) (5) ...................... 38,146 13,075 12,111 (7,849)
Basic earnings (loss) per common
share (3) ................................ $ 0.41 $ 0.14 $ 0.12 $ (0.08)
Diluted earnings (loss) per common
share (3) ................................ $ 0.33 $ 0.12 $ 0.11 $ (0.08)
Weighted average common
shares outstanding ....................... 93,381 96,380 97,260 97,686
Weighted average diluted
common shares outstanding (6) ............ 114,274 113,562 110,364 97,686
(1) Direct cost of services for the first quarter of 2001 includes
$3,138 of expense associated with activities Perot Systems
exited during the first quarter of 2001. Direct cost of
services for the third quarter of 2001 includes $4,952 of
asset basis adjustments for assets used in exited service
offerings. Direct cost of services for the fourth quarter of
2001 includes $20,941 of expense attributable to the
bankruptcy of ANC.
(2) Net income (loss) for the first and third quarters of 2001
includes $33,713 and $36,025, respectively, of expense
associated with severance, asset basis adjustments and office
consolidations and closures related to the Company's refined
operations. Net income (loss) for the third quarter of 2001
also includes an $11,001 valuation allowance for certain
foreign deferred tax assets.
(3) Due to changes in the weighted average common shares
outstanding per quarter, the sum of basic and diluted earnings
per common share per quarter may not equal the basic and
diluted earnings per common share for the applicable year.
(4) Weighted average diluted common shares outstanding exclude the
impact of all options to purchase shares of the Company's
common stock for the first and third quarters of 2001, as
inclusion would be considered anti-dilutive given the reported
net losses for the two periods.
(5) In the first quarter of 2000, the Company paid $22,100 in cash
for the benefit of Solutions Consulting employees, which was
recorded as a compensation charge. Net income (loss) for the
first quarter of 2000 also includes a pretax gain of $38,851
on the sale of a minority equity interest and a pretax gain of
$14,952 on the sale of marketable equity securities. In the
fourth quarter of 2000, the Company incurred pretax lease exit
costs of $1,920 and a pretax charge of $34,179 for asset
impairments.
(6) Weighted average diluted common shares outstanding for the
fourth quarter of 2000 exclude the impact of 12,099 shares of
common stock equivalents, as inclusion would be considered
anti-dilutive given the reported net loss for the period.
F-39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of Perot Systems who are standing for
reelection is incorporated by reference to the registrant's definitive proxy
statement for its Annual Meeting of Stockholders to be held on May 8, 2002,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2001.
EXECUTIVE OFFICERS
The following is a description of the business experience of Perot Systems'
executive officers who are not on the Board of Directors. Perot Systems'
executive officers serve at the discretion of the Board of Directors.
Joined Perot
Executive Officer Business Experience Systems
- --------------------------------------------------------------------------------------------------------
Darcy Anderson Elected Vice President in December 2000. From 1987 to December 2000
December 2000 served as Vice President of Hillwood Development
Corporation. Age 45.
Peter Altabef Elected Vice President in June 1995 and Secretary in March June 1993
1996. Became General Counsel in April 1994. From January 1991
until May 1993, partner in the Dallas law firm of Hughes &
Luce, L.L.P. Age 42.
Russell Freeman Elected Vice President and Chief Financial Officer in August December 1989
2000. From November 1997 to August 2000 served as Controller
of Perot Systems. Previously, was a division Financial Manager
for Perot Systems. Age 38.
John King One of Perot Systems' founders. Elected as Vice President in June 1988
April 1989. Currently serves as General Manager of Strategic
Alliances. Formerly General Manager of IT Solutions, Marketing
and Communications and until August 2000 was responsible
for Perot Systems' Financial Services Group. Age 55.
32
ITEM 11. EXECUTIVE COMPENSATION
All information required by Item 11 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All information required by Item 12 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All information required by Item 13 is incorporated by reference to the
registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2001.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) and (2) Financial Statements and Financial Statement Schedule
The consolidated financial statements of Perot Systems Corporation and
subsidiaries and the required financial statement schedule are incorporated by
reference in Part II, Item 8 of this report.
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -----------------------------------------------------------------
3.1** Amended and Restated Certificate of Incorporation
3.2+++ Second Amended and Restated Bylaws
4.1** Specimen of Class A Common Stock Certificate
4.2** Form of Rights Agreement
4.3** Form of Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock (included as
Exhibit A-1 to the Rights Agreement)
4.4** Form of Certificate of Designation, Preferences, and Rights of
Series B Junior Participating Preferred Stock (included as
Exhibit A-2 to the Rights Agreement)
10.1+ 1991 Stock Option Plan
10.2+ Form of Option Agreement (1991 Option Plan)
10.3+ Restricted Stock Plan
10.4+ Form of Restricted Stock Agreement (Restricted Stock Plan)
10.5+ 1996 Non-Employee Director Stock Option/Restricted Stock Plan
10.6+ Form of Restricted Stock Agreement (Non-Employee Stock
Option/Restricted Stock Plan)
10.7+ Form of Option Agreement (Non-Employee Stock Option/Restricted
Stock Plan)
10.8+ Advisor Stock Option/Restricted Stock Incentive Plan
10.9+ Form of Restricted Stock Option Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ Form of Option Agreement (Advisor Stock Option/Restricted Stock
Incentive Plan)
10.20+ Associate Agreement dated July 8, 1996 between the Company and
James Champy
10.21+ Restricted Stock Agreement dated July 8, 1996 between the Company
and James Champy
10.22+ Letter Agreement dated July 8, 1996 between James Champy and the
Company
10.27+ Amended and Restated PSC Stock Option and Purchase Agreement
dated April 24, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.30 to the
Company's Form 10 dated April 30, 1997)
34
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -----------------------------------------------------------------
10.28+ Amended and Restated Master Operating Agreement dated January 1,
1997 between Swiss Bank Corporation and the Company (incorporated
by reference to Exhibit 10.31 to the Company's Form 10 dated
April 30, 1997)
10.29+ Amended and Restated Agreement for EPI Operational Management
Services dated January 1, 1997 (incorporated by reference to
Exhibit 10.32 to the Company's Form 10 dated April 30, 1997)
10.30** Amendment to Amended and Restated Master Operating Agreement
dated June 28, 1998 between UBS AG and the Company
10.31** Amendment to Amended and Restated Agreement for EPI Operational
Management Services dated June 28, 1998 between Swiss Bank
Corporation and the Company
10.32++ 1999 Employee Stock Purchase Plan
10.33** Form of Amended and Restated 1991 Stock Option Plan
10.34** Form of Amended Stock Option Agreement
10.41*** Share Purchase Agreement dated January 14, 2000, between the
Company and UBS Capital B.V.
10.42++ Asset Purchase Agreement entered into March 1, 2000 by and
among the Company, PSSC Acquisition Corporation, Solutions
Consulting, Inc., Mark G. Miller, and Sanford B. Ferguson.
10.43+++ Amendment No. 1 to Amended and Restated Master Operating
Agreement dated September 15, 2000, between UBS AG and the
Company.
10.44+++ Amendment No. 1 to Second Amended and Restated Agreement for EPI
Operational Management Services dated September 15, 2000, between
UBS AG and the Company.
10.45# Memorandum Agreement dated August 24, 2001, between UBS AG and
Perot Systems Corporation.
10.46* Second Amended and Restated Agreement for EPI Operational
Management Services dated June 28, 1998 between Swiss Bank
Corporation and the Company
10.47* 2001 Long-Term Incentive Plan
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP dated March 8, 2002
23.2* Report of PricewaterhouseCoopers LLP on the financial statement
schedule dated February 12, 2002
99(a)* Schedule II - Valuation and Qualifying Accounts
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 333-60755, to the exhibit of the same number
except as otherwise indicated.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated January 28, 2000.
+ Incorporated by reference to the Registrant's Form 10, dated April 30,
1997, to the exhibit of the same number except as otherwise indicated.
++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, to the exhibit of the same
number except as otherwise indicated
+++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, to the exhibit of the same
number except as otherwise indicated.
# Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001, to the exhibit of
the same number except as otherwise indicated.
B. There were no reports on Form 8-K filed during the fourth quarter of
2001.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 8, 2002
By: /s/ ROSS PEROT, JR.
-------------------------------
Ross Perot, Jr.
President, Director and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROSS PEROT Chairman March 8, 2002
- -----------------------
Ross Perot
/s/ ROSS PEROT, JR. President, Director and Chief Executive March 8, 2002
- ----------------------- Officer (Principal Executive Officer)
Ross Perot, Jr.
/s/ JAMES CHAMPY Vice President and Director March 8, 2002
- -----------------------
James Champy
/s/ RUSSELL FREEMAN Vice President and Chief Financial March 8, 2002
- ----------------------- Officer (Principal Financial Officer)
Russell Freeman
/s/ ROBERT J. KELLY Corporate Controller and Principal March 8, 2002
- ----------------------- Accounting Officer
Robert J. Kelly
/s/ STEVE BLASNIK Director March 8, 2002
- -----------------------
Steve Blasnik
/s/ JOHN S.T. GALLAGHER Director March 8, 2002
- -----------------------
John S.T. Gallagher
/s/ WILLIAM K. GAYDEN Director March 8, 2002
- -----------------------
William K. Gayden
/s/ CARL HAHN Director March 8, 2002
- -----------------------
Carl Hahn
/s/ THOMAS MEURER Director March 8, 2002
- -----------------------
Thomas Meurer
36
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -----------------------------------------------------------------
3.1** Amended and Restated Certificate of Incorporation
3.2+++ Second Amended and Restated Bylaws
4.1** Specimen of Class A Common Stock Certificate
4.2** Form of Rights Agreement
4.3** Form of Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock (included as
Exhibit A-1 to the Rights Agreement)
4.4** Form of Certificate of Designation, Preferences, and Rights of
Series B Junior Participating Preferred Stock (included as
Exhibit A-2 to the Rights Agreement)
10.1+ 1991 Stock Option Plan
10.2+ Form of Option Agreement (1991 Option Plan)
10.3+ Restricted Stock Plan
10.4+ Form of Restricted Stock Agreement (Restricted Stock Plan)
10.5+ 1996 Non-Employee Director Stock Option/Restricted Stock Plan
10.6+ Form of Restricted Stock Agreement (Non-Employee Stock
Option/Restricted Stock Plan)
10.7+ Form of Option Agreement (Non-Employee Stock Option/Restricted
Stock Plan)
10.8+ Advisor Stock Option/Restricted Stock Incentive Plan
10.9+ Form of Restricted Stock Option Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ Form of Option Agreement (Advisor Stock Option/Restricted Stock
Incentive Plan)
10.20+ Associate Agreement dated July 8, 1996 between the Company and
James Champy
10.21+ Restricted Stock Agreement dated July 8, 1996 between the Company
and James Champy
10.22+ Letter Agreement dated July 8, 1996 between James Champy and the
Company
10.27+ Amended and Restated PSC Stock Option and Purchase Agreement
dated April 24, 1997 between Swiss Bank Corporation and the
Company (incorporated by reference to Exhibit 10.30 to the
Company's Form 10 dated April 30, 1997)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- -----------------------------------------------------------------
10.28+ Amended and Restated Master Operating Agreement dated January 1,
1997 between Swiss Bank Corporation and the Company (incorporated
by reference to Exhibit 10.31 to the Company's Form 10 dated
April 30, 1997)
10.29+ Amended and Restated Agreement for EPI Operational Management
Services dated January 1, 1997 (incorporated by reference to
Exhibit 10.32 to the Company's Form 10 dated April 30, 1997)
10.30** Amendment to Amended and Restated Master Operating Agreement
dated June 28, 1998 between UBS AG and the Company
10.31** Amendment to Amended and Restated Agreement for EPI Operational
Management Services dated June 28, 1998 between Swiss Bank
Corporation and the Company
10.32++ 1999 Employee Stock Purchase Plan
10.33** Form of Amended and Restated 1991 Stock Option Plan
10.34** Form of Amended Stock Option Agreement
10.41*** Share Purchase Agreement dated January 14, 2000, between the
Company and UBS Capital B.V.
10.42++ Asset Purchase Agreement entered into March 1, 2000 by and
among the Company, PSSC Acquisition Corporation, Solutions
Consulting, Inc., Mark G. Miller, and Sanford B. Ferguson.
10.43+++ Amendment No. 1 to Amended and Restated Master Operating
Agreement dated September 15, 2000, between UBS AG and the
Company.
10.44+++ Amendment No. 1 to Second Amended and Restated Agreement for EPI
Operational Management Services dated September 15, 2000, between
UBS AG and the Company.
10.45# Memorandum Agreement dated August 24, 2001, between UBS AG and
Perot Systems Corporation.
10.46* Second Amended and Restated Agreement for EPI Operational
Management Services dated June 28, 1998 between Swiss Bank
Corporation and the Company
10.47* 2001 Long-Term Incentive Plan
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP dated March 8, 2002
23.2* Report of PricewaterhouseCoopers LLP on the financial statement
schedule dated February 12, 2002
99(a)* Schedule II - Valuation and Qualifying Accounts
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 333-60755, to the exhibit of the same number
except as otherwise indicated.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated January 28, 2000.
+ Incorporated by reference to the Registrant's Form 10, dated April 30,
1997, to the exhibit of the same number except as otherwise indicated.
++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, to the exhibit of the same
number except as otherwise indicated
+++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, to the exhibit of the same
number except as otherwise indicated.
# Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001, to the exhibit of
the same number except as otherwise indicated.