<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-22495
PEROT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2230700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12404 PARK CENTRAL DRIVE
DALLAS, TEXAS 75251
(Address of principal executive offices) (Zip Code)
</TABLE>
(972) 340-5000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]Yes [ ]No
Number of shares of registrant's common stock outstanding as of May 10, 1999:
87,618,690.
<PAGE> 2
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
<TABLE>
<S> <C>
INDEX Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998.............................................................1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998.................................................2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.................................................3
Notes to Condensed Consolidated Financial Statements.............................4-6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................7-11
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.....................................................................12
ITEM 2: CHANGES IN SECURITIES.................................................................12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................12
ITEM 5: OTHER INFORMATION .....................................................................13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................................................13
SIGNATURES.....................................................................................14
EXHIBIT INDEX..................................................................................15
</TABLE>
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<S> <C> <C>
March 31, 1999 December 31, 1998
-------------- -----------------
Current assets:
Cash and cash equivalents...................................$ 225,849 $ 144,907
Accounts receivable, net.................................... 151,548 115,441
Prepaid expenses and other.................................. 48,365 48,044
----------- -----------
Total current assets.................................... 425,762 308,392
Property, equipment and purchased software, net................ 38,313 39,508
Goodwill, net.................................................. 4,096 5,587
Other assets................................................... 29,353 28,659
----------- -----------
Total assets............................................$ 497,524 $ 382,146
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and
long-term debt...........................................$ 769 $ 883
Accounts payable............................................ 41,815 41,824
Income taxes payable........................................ 20,106 16,420
Accrued liabilities......................................... 125,375 118,147
Deferred revenue............................................ 11,008 9,397
Accrued compensation........................................ 19,603 49,982
----------- -----------
Total current liabilities............................... 218,676 236,653
Capital lease obligations and long-term debt, less current
maturities.................................................. 429 661
Other long-term liabilities.................................... 4,842 2,249
----------- -----------
Total liabilities....................................... 223,947 239,563
----------- -----------
Stockholders' equity:
Common stock................................................ 895 820
Additional paid-in-capital.................................. 188,345 72,936
Other stockholders' equity.................................. 85,655 68,128
Accumulated other comprehensive (loss) income............... (1,318) 699
----------- -----------
Total stockholders' equity.............................. 273,577 142,583
----------- -----------
Total liabilities and stockholders' equity..............$ 497,524 $ 382,146
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1
<PAGE> 4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
Three months ended March 31,
1999 1998
----------- ------------
<S> <C> <C>
Revenue.......................................................... $ 274,368 $ 214,087
Costs and expenses:
Direct cost of services..................................... 210,327 169,917
Selling, general and administrative expenses................ 41,392 32,782
------------ ------------
Operating income................................................. 22,649 11,388
Interest income.................................................. 2,420 786
Interest expense................................................. (235) (81)
Equity in earnings of unconsolidated affiliates.................. 2,192 983
Other income/(expense)........................................... (44) 2,653
------------ ------------
Income before taxes.............................................. 26,982 15,729
Provision for income taxes....................................... 10,793 6,685
------------ ------------
Net income..................................................$ 16,189 $ 9,044
============ ============
Basic and diluted earnings per common share:
Basic earnings per common share.............................$ 0.19 $ 0.12
Weighted average common shares outstanding.................. 83,578 76,289
Diluted earnings per common share...........................$ 0.15 $ 0.10
Weighted average diluted common shares outstanding.......... 111,081 91,620
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE> 5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three months ended March 31,
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 16,189 $ 9,044
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization.................................. 7,219 8,899
Other non-cash items........................................... (885) (3,388)
Changes in current assets...................................... (34,657) (12,975)
Changes in current liabilities................................. (11,351) 24,618
---------- -----------
Net cash (used in) provided by operating activities..... (23,485) 26,198
---------- -----------
Cash flows from investing activities:
Purchase of property, equipment and software...................... (5,002) (5,037)
Proceeds from sale of property, equipment and software............ - 239
Proceeds from sale of nonmarketable equity securities............. - 5,162
Investments in and advances to minority interests................. - (51)
---------- -----------
Net cash (used in) provided by investing activities..... (5,002) 313
---------- -----------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations.......... (307) (194)
Proceeds from issuance of common stock............................ 109,999 -
Proceeds from issuance of treasury stock.......................... 4,115 453
Purchase of treasury stock........................................ (3) (257)
Repayment of stockholder notes receivable......................... 52 97
---------- -----------
Net cash provided by financing activities............... 113,856 99
---------- -----------
Effect of exchange rate changes on cash and cash equivalents........... (4,427) (324)
---------- -----------
Net increase in cash and cash equivalents.............................. 80,942 26,286
Cash and cash equivalents at beginning of period....................... 144,907 35,298
---------- -----------
Cash and cash equivalents at end of period............................. $ 225,849 $ 61,584
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE> 6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). The interim condensed consolidated
financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-owned subsidiaries (collectively, "the Company")
with all significant inter-company transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been condensed or omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1998 as filed in the Company's Annual
Report on Form 10-K filed with the SEC on March 23, 1999. Operating results for
the three-month period ended March 31, 1999 are not necessarily indicative of
the results for the year ending December 31, 1999. Dollar amounts presented are
in thousands, except as otherwise noted.
Certain of the 1998 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
NOTE 2. COMPREHENSIVE INCOME
The Company's total comprehensive income, net of tax, was as follows:
<TABLE>
For the three months
ended March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 16,189 $ 9,044
Foreign currency translation adjustments (2,017) (201)
--------- ---------
Total comprehensive income $ 14,172 $ 8,843
========= =========
</TABLE>
NOTE 3. STOCKHOLDERS' EQUITY
The components of other stockholders' equity were as follows:
<TABLE>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Retained earnings......................................... $ 95,701 $ 79,512
Treasury stock............................................ (5,059) (5,815)
Notes receivable from stockholders ....................... (1,725) (1,915)
Deferred compensation .................................. (3,262) (3,654)
----------- ------------
Total other stockholders' equity ......................... $ 85,655 $ 68,128
=========== ============
</TABLE>
Page 4
<PAGE> 7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Additional paid-in-capital increased by $115,409 from December 31, 1998 to March
31, 1999. The components of the increase include a $109,924 increase due to the
Company's initial public offering ("IPO") and a $5,262 increase due to income
tax benefits resulting from employee options exercised during the period.
At March 31, 1999, there were 85,702,020 shares of the Company's Class A Common
Stock outstanding, 934,320 shares of the Company's Class B Common Stock
outstanding and 2,780,965 Class A shares held in treasury. At December 31, 1998,
there were 77,126,048 shares of the Company's Class A Common Stock outstanding,
934,320 shares of the Company's Class B Common Stock outstanding and 3,940,302
Class A shares held in treasury. The increase in common stock was due primarily
to 7,475,000 shares issued in the IPO.
NOTE 4. EARNINGS PER SHARE
The calculation of the basic and diluted earnings per share were as follows:
<TABLE>
<S> <C> <C> <C>
WEIGHTED
AVERAGE
SHARES PER-SHARE
INCOME (IN THOUSANDS) AMOUNT
--------- -------------- ---------
FOR THE QUARTER ENDED MARCH 31, 1999
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders............ $ 16,189 83,578 $ 0.19
=========
Dilutive options........................................ - 27,503
--------- ---------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.............................. $ 16,189 111,081 $ 0.15
======== ======= ==========
FOR THE QUARTER ENDED MARCH 31, 1998
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders............ $ 9,044 76,289 $ 0.12
==========
Dilutive options........................................ - 15,331
--------- ---------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.............................. $ 9,044 91,620 $ 0.10
========= ====== ==========
</TABLE>
Page 5
<PAGE> 8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 5: TERMINATION OF MAJOR CONTRACT
The Company provides services for East Midlands Electricity (IT) Limited
(together with its parent company, East Midlands Electricity plc, "EME") under
an Information Technology Services Agreement initially entered into on April 8,
1992, as amended. Under the terms and conditions of this agreement, EME has the
right to terminate its relationship with the Company following a change in
control of EME. In July 1998, PowerGen plc acquired EME from Dominion Resources,
Inc. During the first quarter of 1999, PowerGen plc and EME exercised this
right. The termination takes effect in October 1999. The Company will receive
termination payments and incur termination costs in accordance with the terms of
the agreement. The Company does not believe this event will have a material
adverse impact on 1999 financial position or results of operations.
NOTE 6: RELOCATION CHARGE
In March 1999, the Company formulated a plan for relocating certain general and
administrative support groups from Reston, Virginia to the corporate
headquarters in Dallas, Texas. This plan was announced to affected employees in
April 1999. The Company estimates the total cost of this relocation to be
between $2,000 and $3,000, and anticipates that the transition will be
substantially complete by the end of 1999. Approximately $650 of related costs
were accrued in the first quarter of 1999.
Page 6
<PAGE> 9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 1999 and 1998
Total revenue increased in the three months ended March 31, 1999 by
28.2% to $274.4 million from $214.1 million in the three months ended March 31,
1998 due to increases of $22.9 million from several new contracts entered into
after the first quarter of 1998, $28.7 million from UBS (the Company's largest
customer) and $8.7 million from other new and existing business.
Domestic revenue grew by 30.7% in the first quarter of 1999 to $182.3
million from $139.5 million in the first quarter of 1998, and increased slightly
as a percentage of total contract revenue to 66.5% from 65.2% over the same
period.
Non-domestic revenue, consisting of European and Asian operations, grew
by 23.5% in the first quarter of 1999 to $92.1 million from $74.6 million in the
first quarter of 1998, and decreased as a percentage of total contract revenue
to 33.5% from 34.8%. The largest components of European operations were the
United Kingdom, where revenue increased 10.6% to $59.4 million in the first
quarter of 1999 from $53.7 million in the first quarter of 1998, and
Switzerland, where revenue increased 51.1% to $13.7 million in the first quarter
of 1999 from $9.1 million in the first quarter of 1998. Asian operations
represented $4.8 million, or 1.8%, and $2.4 million, or 1.1%, of total revenue
for the three months ended March 31, 1999 and 1998, respectively.
Direct cost of services increased in the first quarter of 1999 by 23.8%
to $210.3 million from $169.9 million over the same period of 1998, due
primarily to continued growth in the Company's business. Gross margin as a
percentage of revenue increased to 23.4% from 20.6% for the first quarter of
1999 compared to the first quarter of 1998, due primarily to significant
improvements in profitability on short-term projects.
Selling, general, and administrative expenses ("SG&A") increased in the
first quarter of 1999 by 26.2% to $41.4 million from $32.8 million over the same
period of 1998, but decreased slightly as a percentage of total contract revenue
to 15.1% from 15.3%. While the Company continued to control its normal general
and administrative spending during the first quarter of 1999, there were $3.5
million of charges for departmental relocations, special payroll tax accruals
and litigation-related costs, collectively increasing first quarter of 1999 SG&A
as a percentage of revenue by 1.3 percentage points.
As a result of the factors noted above, operating income increased in
the first quarter of 1999 to $22.7 million from $11.4 million in the first
quarter of 1998, and operating margin (operating income as a percentage of
contract revenue) increased to 8.3% from 5.3%.
Interest income increased to $2.4 million in the first quarter of 1999
compared to $0.8 million in the prior year period due primarily to a significant
increase in cash and cash equivalents, resulting from $110.0 million of net
proceeds received from the Company's initial public offering ("IPO") of common
stock on February 5, 1999.
Page 7
<PAGE> 10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Equity in earnings of unconsolidated affiliates increased in the
quarter ended March 31, 1999 to $2.2 million from $1.0 million during the
quarter ended March 31, 1998 due to improved results at Systor AG ("Systor"), a
subsidiary of UBS, and at HCL Perot Systems N.V. ("HPS"), a software development
joint venture based in India. The equity in earnings for Systor increased to
$0.8 million from $0.4 million and equity in earnings for HPS increased to $1.4
million from $0.6 million for the quarters ended March 31, 1999 and 1998,
respectively. Other income/(expense) in the first quarter of 1998 of $2.6
million was principally due to a $3.0 million gain on the sale of the Company's
limited partnership interest in a venture capital fund in 1998.
The decrease in the effective tax rate for the first quarter of 1999 to
40.0% from 42.5% for the first quarter of 1998 was due primarily to lower
overall foreign taxes in 1999 and lower 1999 goodwill amortization.
Net income increased 80.0% in the first quarter of 1999 to $16.2
million from $9.0 million in the first quarter of 1998 and net income margin
increased to 5.9% from 4.2%.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, cash and cash equivalents
increased 55.8% to $225.8 million from $144.9 million at December 31, 1998
primarily due to the proceeds from the Company's IPO.
Net cash used in operating activities was $23.5 million for the first
quarter of 1999 compared to net cash provided by operating activities of $26.2
million for the first quarter of 1998. The decrease was due primarily to a $36.0
million decrease in current liabilities such as accrued liabilities and accrued
compensation and a $21.7 million increase in current assets consisting primarily
of increased accounts receivable.
Net cash used in investing activities was $5.0 million for the first
quarter of 1999 compared to net cash provided by investing activities of $0.3
million for the first quarter of 1998. Cash paid for property, equipment and
software was $5.0 million for both periods, but the expenditures in 1998 were
offset by $5.2 million in proceeds from the sale of the Company's limited
partnership interest in a venture capital fund.
For the three months ended March 31, 1999, net cash provided by
financing activities was approximately $113.9 million, compared to $0.1 million
for the three months ended March 31, 1998. This increase was due primarily to
proceeds of $110.0 million from the Company's IPO. In addition, the Company
received $4.1 million in proceeds from the issuance of treasury stock in the
first quarter of 1999 compared to $0.5 million in the first quarter of 1998 in
connection with the increased exercise of stock options by employees during the
period.
The Company routinely maintains cash balances in certain European and
Asian currencies to fund operations in those regions. During the first quarter
of 1999, foreign exchange rate fluctuations adversely impacted the Company's
non-domestic cash balances by $4.4 million, as British pounds, Swiss francs and
Netherlands guilders 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.
The Company has no committed line of credit or other borrowings and
anticipates that cash flows from operating activities and proceeds from its IPO
will provide sufficient funds to meet its needs for the foreseeable future. From
time to time, the Company may consider repurchasing its Class A Common Stock
depending on price and availability and alternative uses for its financial
resources.
Page 8
<PAGE> 11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUES
The following statements and all other statements made in this
quarterly report or the accompanying financial statements with respect to the
Company's Year 2000 processing capabilities or readiness are "Year 2000
Readiness Disclosures" in conformance with the Year 2000 Information and
Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386).
Some computers, software, and other equipment includes computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "Year 2000 Problem".
Assessment. The Year 2000 Problem affects computers, software, and
other equipment used, operated, or maintained by the Company for itself and its
customers. Accordingly, the Company is currently assessing the potential impact
of, and costs of remediating, the Year 2000 Problem for its internal systems
and, where the Company is contractually obligated to remediate the Year 2000
Problem, on systems operated or maintained on behalf of its customers. In
addition, the Company is performing assessments for some other customers.
For each of these areas, the Company is using a methodology involving
the following six phases: Discovery, Assessment, Planning, Remediation, Testing,
and Implementation. At March 31, 1999, the discovery, assessment, and planning
phases were substantially complete for most program areas. The target completion
dates for priority items by remaining steps are as follows: Remediation -
September 1999; Testing - September 1999; and Implementation - September 1999.
Because the Company's business involves the assessment, implementation,
and operation of computer systems, the Company has not generally obtained
verification or validation by independent third parties of its processes to
assess Year 2000 Problems, its corrections of Year 2000 Problems, or the costs
associated with these activities. However, the Company's Year 2000 project team
is reviewing the project plans prepared by each of the Company's business units
and monitoring their methods and progress against those plans.
Internal Infrastructure. The Company believes that it has identified
most of the major computers, software applications, and related equipment used
in connection with its internal operations that must be modified, upgraded, or
replaced to minimize the possibility of a material disruption to its business.
The Company has commenced the process of modifying, upgrading, and replacing
major systems that have been assessed as adversely affected, and expects to
complete this process before the occurrence of any material disruption of its
business.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems to
be approximately $0.8 million, almost all of which the Company believes will be
incurred during 1999. This estimate is being monitored and will be revised as
additional information becomes available. In addition, the Company recorded a
$1.8 million charge in direct cost of services for the three months ended March
31, 1999 to address Year 2000 exposures for certain client contracts.
Page 9
<PAGE> 12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Based on the activities described above, the Company does not believe
that the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations. In addition, the Company has not deferred any
material information technology projects as a result of its Year 2000 Problem
activities.
Client Systems. During 1997, the Company initiated assessments of the
effect of the Year 2000 Problem on computers, software, and other equipment it
operates or maintains for its customers, and its obligations to modify, upgrade,
or replace these systems. As part of this process, the Company has been
estimating the costs and revenues to the Company for performing any necessary
services. The Company is monitoring and updating this assessment on an ongoing
basis. The estimated cost associated with making clients' systems Year 2000
compliant for contracts where the Company is obligated to perform these services
at its expense has been and will be treated as a contract cost and is included
in the estimate of total contract costs for the respective contract under the
Company's revenue recognition policy. The Company believes that its clients have
been deferring other projects pending resolution of their Year 2000 Problems.
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company for itself or its customers to identify and, to the
extent possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 Problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to timely
resolve Year 2000 Problems with their systems could have a material adverse
effect on the Company's business, financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company or its clients have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, no one can accurately predict how
many Year 2000 Problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management expects that the Company will likely suffer the following
consequences:
o a significant number of operational inconveniences and inefficiencies for
the Company and its clients that will divert management's time and
attention and financial and human resources from its ordinary business
activities;
o a lesser number of serious system failures that will require significant
efforts by the Company or its clients to prevent or alleviate material
business disruptions;
o several routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 Problems by clients, which will be resolved in
the ordinary course of business; and
o a few serious business disputes alleging that the Company failed to comply
with the terms of its contracts or industry standards of performance, some
of which could result in litigation or contract termination.
Page 10
<PAGE> 13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Contingency Plans. The Company is currently developing contingency
plans to be implemented if its efforts to identify and correct Year 2000
Problems affecting its internal systems are not effective. The Company expects
to complete its contingency plans by the end of May 1999. Depending on the
systems affected, these plans could include accelerated replacement of affected
equipment or software, short-to medium-term use of backup sites, equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise or to provide manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
The Company is also developing contingency plans for certain clients
where such plans are contractually required or are otherwise appropriate to be
developed. In most cases, these contingency plans are being developed jointly by
the Company and its clients. Depending on the systems affected, these plans
could include accelerated replacement of affected equipment or software, short-
to medium-term use of backup sites, equipment and software, increased work hours
for company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
IMPACT OF EUROPEAN MONETARY UNION
Effective January 1, 1999, the European Union adopted economic and
monetary union in Europe, resulting in the introduction of a single currency
called the EURO. The Company is currently assessing the potential effects of,
and costs of adopting, the EURO conversion for its internal systems and, where
the Company is contractually obligated to take these steps, on systems operated
or maintained on behalf of its clients. For each of these areas, the Company is
using the six phase methodology described above for the Year 2000 Problem. The
Company has substantially completed the discovery phase and the EURO conversion
is not expected to have a material effect on the Company's operations, financial
condition or results of operations.
The discussion of the Company's efforts, and management's expectations,
relating to the EURO conversion are forward-looking statements. The Company's
ability to adapt for the EURO conversion and the level of incremental costs
associated therewith could be adversely affected by, among other things, the
availability and cost of programming and testing resources and unanticipated
problems identified in the ongoing conversion review.
Page 11
<PAGE> 14
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in various litigation
matters arising in the ordinary course of its business. The Company believes
that the resolution of currently pending legal proceedings, either individually
or taken as a whole, will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
On October 19, 1998, the Robert Plan Corporation ("Robert Plan") filed
a complaint, which was subsequently amended, in New York state court against the
Company and Ross Perot in connection with a September 1, 1990 contract under
which the Company provides data processing and software development needs for
some of Robert Plan's operations. The complaint, as amended, alleges breach of
the 1990 contract, misappropriation of Robert Plan's proprietary information and
business methods in connection with an imaging system, breach of warranty, and
similar claims relating to the contract. Although the complaint seeks
substantial monetary awards and injunctive relief, the 1990 contract
substantially limits each party's liability except in limited circumstances,
including for "wanton or willful misconduct." Accordingly, Robert Plan has
alleged that the Company has acted in a "wanton" and "willful" fashion, even
though Robert Plan has used and continues to use the services of the Company
under the 1990 contract. The Company believes that it has meritorious defenses
to Robert Plan's claims and intends to vigorously defend the lawsuit. The
Company does not believe that the outcome of this litigation will have a
material adverse effect on the Company.
ITEM 2: CHANGES IN SECURITIES
On February 1, 1999, the Securities and Exchange Commission declared
the Company's Registration Statement on Form S-1, Registration No. 333-60755
(the"Registration Statement"), relating to the Company's initial public offering
effective.
The Company incurred the following offering expenses in connection with
this offering:
Underwriting discounts and commissions.......... $ 8,372,000
Other expenses (estimated)...................... 2,066,000
-----------
Total expenses.................................. $10,438,000
===========
None of the above expenses were paid either directly or indirectly to
directors, officers, general partners of the Company or its associates, or to
persons owning more than 10% of any class of equity security of the Company or
to affiliates of the Company.
As of the date of filing of this Form 10-Q, none of the proceeds from
the initial public offering have been used.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's securities holders
during the quarter ended March 31, 1999.
Page 12
<PAGE> 15
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
ITEM 5. OTHER INFORMATION
SHAREHOLDER PROPOSALS FOR 2000 PROXY STATEMENT
Shareholder proposals that are intended to be presented at the annual
meeting to be held in 2000 must be received by the Company no later than
December 8, 1999 in order to be included in the proxy statement and related
proxy materials.
OTHER MATTERS TO COME BEFORE THE MEETING
If a shareholder desires to bring business before the meeting which is
not the subject of a proposal timely submitted for inclusion in the proxy
statement or if the shareholder desires to nominate a person for election to the
Board other than a director nominated at the direction of the Board, the
shareholder must follow procedures outlined in the Company's Bylaws. The
procedural requirements in the Bylaws require timely notice in writing of the
business the shareholder proposes to bring before the annual meeting or the
proposed nomination. To be timely, notice of shareholders' proposals or
nominations must be received by the Company not less than 60 days nor more than
90 days prior to the annual meeting; provided however, that in the event that
less than 70 days notice or prior public disclosure of the date of the annual
meeting is given or made to shareholders, notice by a shareholder, to be timely,
must be received no later than the close of business on the 10th day following
the date on which such notice of the date of the annual meeting was made or such
public disclosure was made, whichever first occurs.
A copy of these procedures is available upon request from the Secretary
of the Company, 12404 Park Central Drive, Dallas, Texas 75251.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Document
----------- --------
27 Financial Data Schedule
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the three months ended March 31, 1999.
Page 13
<PAGE> 16
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEROT SYSTEMS CORPORATION
(Registrant)
Date: May 17, 1999 By /s/ TERRY ASHWILL
----------------------
Terry Ashwill
Vice President and
Chief Financial Officer
Page 14
<PAGE> 17
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
EXHIBIT INDEX
<TABLE>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule as of March 31, 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000894253
<NAME> PEROT SYSTEMS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 225,849
<SECURITIES> 0
<RECEIVABLES> 153,261
<ALLOWANCES> 1,713
<INVENTORY> 0
<CURRENT-ASSETS> 425,762
<PP&E> 128,776
<DEPRECIATION> 90,463
<TOTAL-ASSETS> 497,524
<CURRENT-LIABILITIES> 218,676
<BONDS> 0
0
0
<COMMON> 895
<OTHER-SE> 272,682
<TOTAL-LIABILITY-AND-EQUITY> 497,524
<SALES> 274,368
<TOTAL-REVENUES> 274,368
<CGS> 210,327
<TOTAL-COSTS> 251,719
<OTHER-EXPENSES> 44
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235
<INCOME-PRETAX> 26,982
<INCOME-TAX> 10,793
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,189
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.15
</TABLE>
