<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 June 30, 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)
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)
(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 July 31, 1999:
87,873,923.
<PAGE> 2
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1999
<TABLE>
<CAPTION>
INDEX
Page
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.............................................................1
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998..................................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998..................................................3
Notes to Condensed Consolidated Financial Statements...............................4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................14
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.....................................................................15
ITEM 2: CHANGES IN SECURITIES.................................................................15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................16
ITEM 5: OTHER INFORMATION ....................................................................16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .....................................................16
SIGNATURES ....................................................................................17
EXHIBIT INDEX .................................................................................18
</TABLE>
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 207,929 $ 144,907
Accounts receivable, net ................................ 158,147 115,441
Prepaid expenses and other .............................. 60,664 48,044
---------- ----------
Total current assets ................................ 426,740 308,392
Investments in and advances to unconsolidated companies .... 52,369 16,324
Property, equipment and purchased software, net ............ 36,479 39,508
Goodwill, net .............................................. 2,761 5,587
Other assets ............................................... 5,079 12,335
---------- ----------
Total assets ........................................ $ 523,428 $ 382,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and
long-term debt ......................................... $ 706 $ 883
Accounts payable ........................................ 34,546 41,824
Accrued liabilities ..................................... 118,561 118,147
Accrued compensation .................................... 31,082 49,982
Other current liabilities ............................... 26,119 25,817
---------- ----------
Total current liabilities ........................... 211,014 236,653
Capital lease obligations and long-term debt, less current
maturities ................................................ 336 661
Other long-term liabilities ................................ 5,288 2,249
---------- ----------
Total liabilities ................................... 216,638 239,563
---------- ----------
Stockholders' equity:
Common stock ............................................ 903 820
Additional paid-in-capital .............................. 196,782 72,936
Other stockholders' equity .............................. 102,722 68,128
Accumulated other comprehensive income .................. 6,383 699
---------- ----------
Total stockholders' equity .......................... 306,790 142,583
---------- ----------
Total liabilities and stockholders' equity .......... $ 523,428 $ 382,146
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue ............................................. $ 282,256 $ 238,625 $ 556,624 $ 452,712
Costs and expenses:
Direct cost of services ........................ 218,959 189,973 429,286 359,891
Selling, general and administrative expenses ... 39,603 33,269 80,995 66,050
--------- --------- --------- ---------
Operating income .................................... 23,694 15,383 46,343 26,771
Interest income ..................................... 2,522 793 4,941 1,579
Interest expense .................................... (171) (45) (405) (126)
Equity in earnings of unconsolidated affiliates ..... 2,470 1,529 4,662 2,511
Other income (expense), net ......................... (339) (100) (383) 2,554
--------- --------- --------- ---------
Income before taxes ................................. 28,176 17,560 55,158 33,289
Provision for income taxes .......................... 11,270 7,460 22,063 14,145
--------- --------- --------- ---------
Net income ..................................... $ 16,906 $ 10,100 $ 33,095 $ 19,144
========= ========= ========= =========
Basic and diluted earnings per common share:
Basic earnings per common share ................ $ 0.19 $ 0.13 $ 0.39 $ 0.25
Weighted average common shares outstanding ..... 87,645 76,603 85,624 76,447
Diluted earnings per common share .............. $ 0.15 $ 0.10 $ 0.29 $ 0.20
Weighted average diluted common shares
outstanding .................................... 113,850 96,635 112,427 94,902
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 33,095 $ 19,144
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ................................ 13,997 16,826
Other non-cash items ......................................... (1,101) (3,650)
Changes in current assets .................................... (52,889) (39,829)
Changes in current liabilities ............................... (13,229) 39,938
--------- --------
Net cash (used in) provided by operating activities ... (20,127) 32,429
--------- --------
Cash flows from investing activities:
Purchases of property, equipment and software ................... (9,520) (12,613)
Proceeds from sale of property, equipment and software .......... 839 7,530
Proceeds from sale of nonmarketable equity securities ........... -- 5,162
Purchase of marketable equity securities ........................ (17,000) --
Investments in and advances to minority interests ............... -- (358)
--------- --------
Net cash used in investing activities ................. (25,681) (279)
--------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations ........ (448) (513)
Proceeds from issuance of common stock .......................... 111,290 --
Proceeds from issuance of treasury stock ........................ 5,004 2,247
Other ........................................................... (391) (726)
--------- --------
Net cash provided by financing activities ............. 115,455 1,008
--------- --------
Effect of exchange rate changes on cash and cash equivalents ......... (6,625) (200)
--------- --------
Net increase in cash and cash equivalents ............................ 63,022 32,958
Cash and cash equivalents at beginning of period ..................... 144,907 35,298
--------- --------
Cash and cash equivalents at end of period ........................... $ 207,929 $ 68,256
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 3
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). The interim condensed consolidated
financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-owned subsidiaries (collectively, "the Company")
with all significant intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("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 and six month periods ended June 30, 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial instruments
The Company accounts for its marketable equity securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Management determines
the appropriate classification of marketable securities at the time of purchase
and reevaluates such designation at each balance sheet date. All marketable
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 separate component of stockholders' equity.
NOTE 3. MARKETABLE EQUITY SECURITIES
In May 1999, the Company purchased 1,000,000 common shares (approximately 3%
voting interest) in the initial public offering of TenFold Corporation
("TenFold") for $17,000 as part of a strategic alliance agreement with TenFold
to develop and deliver applications, products, and services to clients of Perot
Systems and TenFold.
If the Company does not provide TenFold with opportunities to contract for
revenue of at least $15,000 in each of the two years following May 1, 1999, the
Company will pay TenFold 20% of the shortfall, subject to reduction in the
second year to the extent that the opportunities to contract for revenue
provided in the first or third year following May 1, 1999 exceed $15,000.
The investment is classified in Investments in and advances to unconsolidated
companies, and the unrealized gain of $8,703 (net of tax of $6,047) is
classified in Accumulated other comprehensive income on the balance sheet.
There were no sales of marketable securities, and thus no realized gains or
losses, during the six months ended June 30, 1999.
Page 4
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. COMPREHENSIVE INCOME
The Company's total comprehensive income, net of tax, was as follows:
<TABLE>
<CAPTION>
Three months Six months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 16,906 $ 10,100 $ 33,095 $ 19,144
Foreign currency translation adjustments (1,002) 163 (3,019) (35)
Unrealized gain on marketable equity securities,
net of tax of $6,047 8,703 -- 8,703 --
-------- -------- -------- --------
Total comprehensive income $ 24,607 $ 10,263 $ 38,779 $ 19,109
======== ======== ======== ========
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
The components of other stockholders' equity were as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Retained earnings ......................... $ 112,607 $ 79,512
Treasury stock ............................ (5,184) (5,815)
Notes receivable from stockholders ........ (1,536) (1,915)
Deferred compensation ..................... (3,165) (3,654)
--------- --------
Total other stockholders' equity .......... $ 102,722 $ 68,128
========= ========
</TABLE>
Additional paid-in-capital increased by $123,846 during the six months ended
June 30, 1999. The components of the increase include $108,112 from the issuance
of Class A common shares in the Company's initial public offering ("IPO"),
$10,882 relating to tax benefits resulting from the exercise of options to
purchase shares of the Company's Class A Common Stock and $3,094 from the
exercise of options to purchase 850,000 shares of the Company's Class B Common
Stock by UBS AG.
At June 30, 1999, there were 86,030,888 shares of the Company's Class A Common
Stock outstanding, 1,784,320 shares of the Company's Class B Common Stock
outstanding and 2,586,971 shares of the Company's Class A Common Stock 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 shares of the Company's Class A Common Stock
held in treasury. The increase in common stock was due primarily to 7,475,000
shares issued in the IPO.
Page 5
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. EARNINGS PER SHARE
The calculations of the basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET SHARES PER SHARE
INCOME (IN THOUSANDS) AMOUNT
------ -------------- ---------
<S> <C> <C> <C>
FOR THE QUARTER ENDED JUNE 30, 1999
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders ... $16,906 87,645 $0.19
=====
Dilutive options ............................... -- 26,205
------- -------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions ..................... $16,906 113,850 $0.15
======= ======= =====
FOR THE QUARTER ENDED JUNE 30, 1998
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders ... $10,100 76,603 $0.13
=====
Dilutive options ............................... -- 20,032
------- -------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions ..................... $10,100 96,635 $0.10
======= ======= =====
FOR THE SIX MONTHS ENDED JUNE 30, 1999
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders ... $33,095 85,624 $0.39
=====
Dilutive options ............................... -- 26,803
------- -------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions ..................... $33,095 112,427 $0.29
======= ======= =====
FOR THE SIX MONTHS ENDED JUNE 30, 1998
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders ... $19,144 76,447 $0.25
=====
Dilutive options ............................... -- 18,455
------- -------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions ..................... $19,144 94,902 $0.20
======= ======= =====
</TABLE>
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7: 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 8: 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 and is expected to be substantially complete by the end of 1999. The
Company recorded a charge of $3,149 during the six months ended June 30, 1999
and does not anticipate further significant accruals related to the relocation.
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<PAGE> 10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 1999 and 1998
Total revenue increased in the three months ended June 30, 1999 by
18.3% to $282.3 million from $238.6 million in the three months ended June 30,
1998 due to increases of $13.9 million from several new contracts entered into
after the second quarter of 1998, $35.3 million from UBS AG and $4.9 million
from other new and existing business. There was a $10.4 million decrease from
two contracts which ended prior to the second quarter of 1999.
Domestic revenue grew by 15.3% in the second quarter of 1999 to $180.6
million from $156.6 million in the second quarter of 1998, and decreased as a
percentage of total contract revenue to 64.0% from 65.6% over the same period.
Non-domestic revenue, consisting of European and Asian operations,
grew by 24.0% in the second quarter of 1999 to $101.7 million from $82.0
million in the second quarter of 1998, and increased as a percentage of total
contract revenue to 36.0% from 34.4%. The largest components of European
operations were the United Kingdom, where revenue increased 7.6% to $63.8
million in the second quarter of 1999 from $59.3 million in the second quarter
of 1998, and Switzerland, where revenue increased 80.9% to $17.0 million in the
second quarter of 1999 from $9.4 million in the second quarter of 1998. Asian
operations represented $4.9 million, or 1.7%, and $3.5 million, or 1.5%, of
total revenue for the three months ended June 30, 1999 and 1998, respectively.
Direct cost of services increased in the second quarter of 1999 by
15.3% to $219.0 million from $190.0 million over the same period of 1998, due to
continued growth in the Company's business. Gross margin as a percentage of
revenue increased to 22.4% from 20.4% for the second quarter of 1999 compared to
the second quarter of 1998, due primarily to significant improvements in
profitability on short-term projects. Gross margin in the second quarter of 1999
and 1998 was adversely impacted by $0.7 million and $5.2 million, respectively,
in charges to address Year 2000 exposures for certain client contracts.
Selling, general and administrative expenses ("SG&A") increased in the
second quarter of 1999 by 18.9% to $39.6 million from $33.3 million over the
same period of 1998, but remained constant as a percentage of total contract
revenue at 14.0%. While the Company continued to control its normal general and
administrative spending, there was a $2.5 million charge for departmental
relocations during the second quarter of 1999.
As a result of the factors noted above, operating income increased in
the second quarter of 1999 to $23.7 million from $15.3 million in the second
quarter of 1998, and operating margin (operating income as a percentage of
contract revenue) increased to 8.4% from 6.4%.
Interest income increased to $2.5 million in the second 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 $108.1
million of net proceeds received from the Company's initial public offering
("IPO") of Class A Common Stock on February 5, 1999.
Page 8
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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 June 30, 1999 to $2.5 million from $1.5 million during the
quarter ended June 30, 1998 due to improved results at Systor AG ("Systor"), a
subsidiary of UBS AG, and at HCL Perot Systems N.V. ("HPS"), a software
development joint venture based in India. The equity in earnings for Systor
increased to $1.3 million from $0.8 million and equity in earnings for HPS
increased to $1.2 million from $0.7 million for the quarters ended June 30,
1999 and 1998, respectively.
The decrease in the effective tax rate for the second quarter of 1999
to 40.0% from 42.5% for the second quarter of 1998 was due primarily to lower
overall foreign taxes in 1999 and lower 1999 goodwill amortization.
Net income increased 67.3% in the second quarter of 1999 to $16.9
million from $10.1 million in the second quarter of 1998 and net income margin
increased to 6.0% from 4.2%.
Comparison of the six months ended June 30, 1999 and 1998
Total revenue increased in the six months ended June 30, 1999 by 23.0%
to $556.6 million from $452.7 million in the six months ended June 30, 1998 due
to increases of $27.5 million from several new contracts entered into after the
second quarter of 1998, $63.9 million from UBS AG, and $28.4 million from other
new and existing business. There was a $15.9 million decrease from two
contracts which ended prior to the second quarter of 1999.
Domestic revenue grew by 22.6% in the six months ended June 30, 1999
to $362.9 million from $296.1 million in the six months ended June 30, 1998,
and decreased slightly as a percentage of total contract revenue to 65.2% from
65.4% over the same period.
Non-domestic revenue, consisting of European and Asian operations,
grew by 23.7% in the six months ended June 30, 1999 to $193.7 million from
$156.6 million in the same period of 1998, and increased as a percentage of
total contract revenue to 34.8% from 34.6%. The largest components of European
operations were the United Kingdom, where revenue increased 9.0% to $123.2
million in the six month period of 1999 from $113.0 million in the same period
of 1998, and Switzerland, where revenue increased 65.9% to $30.7 million in the
six month period of 1999 from $18.5 million in the six month period of 1998.
Asian operations represented $9.8 million, or 1.8%, and $6.0 million, or 1.3%,
of total revenue for the six months ended June 30, 1999 and 1998, respectively.
Direct cost of services increased in the first six months of 1999 by
19.3% to $429.3 million from $359.9 million over the same period of 1998, due to
continued growth in the Company's business. Gross margin as a percentage of
revenue increased to 22.9% from 20.5% for the six months ended June 30, 1999
compared to the same period of 1998, due primarily to significant improvements
in profitability on short-term projects. Gross margin for the first six months
of 1999 and 1998 was adversely impacted by $2.5 million and $5.2 million,
respectively, in charges to address Year 2000 exposures for certain client
contracts.
SG&A increased in the six months ended June 30, 1999 by 22.5% to $81.0
million from $66.1 million over the same period of 1998, but remained constant
as a percentage of total contract revenue at 14.6%. While the Company continued
to control its normal general and administrative spending, there were $5.9
million of charges for departmental relocations, special payroll tax accruals
and litigation-related costs during the six months ended June 30, 1999.
As a result of the factors noted above, operating income increased in
the six months ended June 30, 1999 to $46.3 million from $26.7 million in the
six months ended June 30, 1998, and operating margin (operating income as a
percentage of contract revenue) increased to 8.3% from 5.9%.
Page 9
<PAGE> 12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest income increased to $4.9 million in the six months ended June
30, 1999 compared to $1.6 million in the prior year period due primarily to a
significant increase in cash and cash equivalents, resulting from $108.1
million of net proceeds received from the Company's IPO of common stock on
February 5, 1999.
Equity in earnings of unconsolidated affiliates increased in the six
months ended June 30, 1999 to $4.7 million from $2.5 million during the six
months ended June 30, 1998 due to improved results at Systor, a subsidiary of
UBS AG, and at HPS, a software development joint venture based in India. The
equity in earnings for Systor increased to $2.1 million from $1.2 million and
equity in earnings for HPS increased to $2.6 million from $1.3 million for the
six month periods ended June 30, 1999 and 1998, respectively.
The decrease in the effective tax rate for the six months ended June
30, 1999 to 40.0% from 42.5% for the same period of 1998 was due primarily to
lower overall foreign taxes in 1999 and lower 1999 goodwill amortization.
Net income increased 73.3% in the six months ended June 30, 1999 to
$33.1 million from $19.1 million in the six months ended June 30, 1998 and net
income margin increased to 5.9% from 4.2%.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, cash and cash equivalents
increased 43.5% to $207.9 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 $20.1 million for the six
months ended June 30, 1999 compared to net cash provided by operating
activities of $32.4 million for the six months ended June 30, 1998. The
decrease was due primarily to a $53.2 million decrease in current liabilities
such as accrued liabilities and accrued compensation and a $13.1 million
increase in current assets consisting primarily of increased accounts
receivable.
Net cash used in investing activities was $25.7 million for the six
months ended June 30, 1999 and $0.3 million for the same period in 1998. The
significant increase in cash used in investing was the Company's purchase of
1,000,000 shares in the initial public offering of TenFold Corporation for
$17.0 million during the second quarter of 1999. In addition, cash paid for
property, equipment and software was $9.5 million for the 1999 six month period
and $12.6 million for the 1998 six month period. 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 and $7.5 million in proceeds
from the sale of property, equipment, and software.
For the six months ended June 30, 1999, net cash provided by financing
activities was approximately $115.5 million compared to $1.0 million for the six
months ended June 30, 1998. This increase was due to proceeds of $108.1 million
from the Company's IPO and $3.1 million from the exercise of options to purchase
850,000 shares of the Company's Class B Common Stock by UBS AG during the second
quarter of 1999. In addition, the Company received $5.0 million in proceeds from
the issuance of treasury stock in the first six month period of 1999 compared to
$2.2 million in the first six month period of 1998 in connection with the
increased exercise of stock options by employees during the period.
Page 10
<PAGE> 13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company routinely maintains cash balances in certain European and
Asian currencies to fund operations in those regions. During the six months
ended June 30, 1999, foreign exchange rate fluctuations adversely impacted the
Company's non-domestic cash balances by $6.6 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 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. 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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "forecasts," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
in our annual report on Form 10-K, which is on file with the Securities and
Exchange Commission and available at www.sec.gov. These factors may cause our
actual results to differ materially from any forward-looking statement.
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 include 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 has assessed and will continue to assess
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.
For each of these areas, the Company is using a methodology involving
the following six phases: Discovery, Assessment, Planning, Remediation,
Testing, and Implementation. At June 30, 1999, the discovery, assessment, and
planning phases was 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.
Page 11
<PAGE> 14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 is nearing completion 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 has assessed and will continue to assess 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
$2.5 million charge in direct cost of services for the six months ended June
30, 1999 to address Year 2000 exposures for certain client contracts.
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 been communicating 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
operations.
Page 12
<PAGE> 15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Contingency Plans. The Company has substantially completed 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's
contingency plans were substantially complete at June 30, 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 has and is continuing to develop 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.
Page 13
<PAGE> 16
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPACT OF EUROPEAN MONETARY UNION
Effective January 1, 1999, the majority of the members of the European
Union adopted economic and monetary union, resulting in the introduction of a
single currency called the EURO in those countries. 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
Page 14
<PAGE> 17
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 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. The Company has filed a motion to dismiss Robert
Plan's claims and intends to continue vigorously defending 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
relating to the Company's IPO, effective.
The Company incurred the following offering expenses in connection
with the IPO:
<TABLE>
<S> <C>
Underwriting discounts and commissions.......... $ 8,372,000
Other expenses (estimated)...................... 3,340,000
------------
Total expenses.................................. $ 11,712,000
============
</TABLE>
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, the Company has used
$17,000,000 in proceeds from the IPO to purchase 1,000,000 shares of common
stock in a publicly traded company as a temporary investment.
Page 15
<PAGE> 18
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1999
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of shareholders of the Company on
May 17, 1999. The purpose of the meeting was to elect six nominees to serve as
directors of the Company and ratify the selection of PricewaterhouseCoopers LLP
as the Company's independent accountants for the fiscal year ending December
31, 1999. The number of shares voted with respect to each nominee was as
follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Ross Perot.................................. 51,705,624 119,681
Steven Blasnik.............................. 51,730,603 94,702
James Champy................................ 51,719,802 105,503
William K. Gaydon........................... 51,718,582 106,723
Carl Hahn................................... 51,716,452 108,853
Ross Perot, Jr.............................. 51,722,692 102,613
</TABLE>
There were no broker non-votes. All of the nominees were elected to
the Board of Directors. These directors constituted the entire board of
Directors of the Company. The selection of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ended December 31, 1999
was ratified by the shareholders. The vote was 51,655,598 for and 47,843
against with the holders of 121,864 abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the three months ended June
30, 1999.
Page 16
<PAGE> 19
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 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: August 6, 1999 By /s/ TERRY ASHWILL
----------------------
Terry Ashwill
Vice President and Chief Financial Officer
(principal financial officer and
chief accounting officer)
Page 17
<PAGE> 20
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule as of June 30, 1999.
</TABLE>
Page 18
<TABLE> <S> <C>
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<NAME> PEROT SYSTEMS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 207,929
<SECURITIES> 0
<RECEIVABLES> 161,839
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<PP&E> 125,365
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0
0
<COMMON> 903
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<TOTAL-LIABILITY-AND-EQUITY> 523,428
<SALES> 556,624
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