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, 2000
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, 2000:
97,240,415.
2
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999.............................................................1
Condensed Consolidated Statements of Income for the three and six months
ended June 30, 2000 and 1999..................................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999..................................................3
Notes to Condensed Consolidated Financial Statements...............................4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................9
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................12
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.....................................................................13
ITEM 2: CHANGES IN SECURITIES.................................................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................14
ITEM 5: OTHER INFORMATION ....................................................................14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .....................................................15
SIGNATURES ....................................................................................16
3
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
June 30, 2000 December 31, 1999
------------- -----------------
Current assets:
Cash and cash equivalents ......................... $ 245,842 $ 294,645
Marketable equity securities ...................... 415 39,938
Accounts receivable, net .......................... 173,477 156,754
Prepaid expenses and other ........................ 52,034 51,160
--------- ---------
Total current assets .......................... 471,768 542,497
Property, equipment and purchased software, net ...... 39,148 38,965
Goodwill, net ........................................ 75,653 659
Other non-current assets ............................. 79,396 31,844
--------- ---------
Total assets .................................. $ 665,965 $ 613,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 32,285 $ 38,069
Accrued liabilities ............................... 80,687 94,203
Accrued compensation .............................. 9,808 53,057
Other current liabilities ......................... 40,136 30,900
--------- ---------
Total current liabilities ..................... 162,916 216,229
Other non-current liabilities ........................ 6,871 7,014
--------- ---------
Total liabilities ............................. 169,787 223,243
--------- ---------
Stockholders' equity:
Common stock ...................................... 967 926
Additional paid-in-capital ........................ 297,281 226,712
Other stockholders' equity ........................ 203,325 151,177
Accumulated other comprehensive income ............ (5,395) 11,907
--------- ---------
Total stockholders' equity .................... 496,178 390,722
--------- ---------
Total liabilities and stockholders' equity .... $ 665,965 $ 613,965
========= =========
The accompanying notes are an integral part of these financial statements.
Page 1
4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---------- ----------- --------- ----------
Revenue .................................................... $ 268,524 $ 282,256 $ 543,106 $ 556,624
Costs and expenses:
Direct cost of services ............................... 209,417 218,959 413,605 429,286
Selling, general and administrative expenses .......... 44,927 39,603 88,313 80,995
Compensation charge related to acquisition ............ -- -- 22,100 --
--------- --------- --------- ---------
Operating income ........................................... 14,180 23,694 19,088 46,343
Interest income, net ....................................... 3,738 2,351 8,660 4,536
Equity in earnings of unconsolidated affiliates ............ 1,228 2,470 4,315 4,662
Other income (expense), net ................................ 2,466 (339) 52,600 (383)
--------- --------- --------- ---------
Income before taxes ........................................ 21,612 28,176 84,663 55,158
Provision for income taxes ................................. 8,537 11,270 33,442 22,063
--------- --------- --------- ---------
Net income ............................................ $ 13,075 $ 16,906 $ 51,221 $ 33,095
========= ========= ========= =========
Basic and diluted earnings per common share:
Basic earnings per common share ....................... $ 0.14 $ 0.19 $ 0.54 $ 0.39
Weighted average common shares outstanding ............ 96,380 87,645 94,891 85,624
Diluted earnings per common share ..................... $ 0.12 $ 0.15 $ 0.45 $ 0.29
Weighted average diluted common shares
outstanding ........................................... 113,562 113,850 114,174 112,427
The accompanying notes are an integral part of these financial statements.
Page 2
5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six months ended June 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income ........................................................... $ 51,221 $ 33,095
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ..................................... 12,949 13,997
Gain on sale of marketable equity securities ...................... (17,503) --
Gain on sale of unconsolidated affiliate .......................... (38,851) --
Other non-cash items .............................................. (7,017) (4,266)
Change in assets and liabilities:
Accounts receivable ............................................ (11,307) (42,436)
Prepaid expenses ............................................... (13,880) (11,830)
Accounts payable and accrued liabilities ....................... (14,739) (6,653)
Accrued compensation ........................................... (42,163) (17,627)
Income taxes payable ........................................... 20,763 11,129
Other current and non-current assets ........................... (16,539) 1,377
Other current and non-current liabilities ...................... (198) 3,087
--------- ---------
Net cash used in operating activities ...................... (77,264) (20,127)
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software ........................ (11,854) (9,520)
Acquisition of business, net of cash acquired of $8,881 .............. (41,119) --
Proceeds from sale of unconsolidated affiliate ....................... 55,486 --
Purchase of marketable equity securities ............................. -- (17,000)
Proceeds from sale of marketable equity securities ................... 26,543 --
Other ................................................................ (2,327) 839
--------- ---------
Net cash provided by (used in) investing activities ........ 26,729 (25,681)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................... 4,433 111,290
Proceeds from issuance of treasury stock ............................. 490 5,004
Other ................................................................ (254) (839)
--------- ---------
Net cash provided by financing activities .................. 4,669 115,455
--------- ---------
Effect of exchange rate changes on cash and cash equivalents .............. (2,937) (6,625)
--------- ---------
Net (decrease) increase in cash and cash equivalents ...................... (48,803) 63,022
Cash and cash equivalents at beginning of period .......................... 294,645 144,907
--------- ---------
Cash and cash equivalents at end of period ................................ $ 245,842 $ 207,929
========= =========
The accompanying notes are an integral part of these financial statements
Page 3
6
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, 1999 as filed in the Company's Annual
Report on Form 10-K filed with the SEC on March 3, 2000. Operating results for
the three and six month periods ended June 30, 2000 are not necessarily
indicative of the results for the year ending December 31, 2000. Dollar amounts
presented are in thousands, except as otherwise noted.
Certain of the 1999 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
Accounting Bulletin Issued
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") which provides guidance on revenue recognition issues. In June 2000, the
SEC issued Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements" which delays the implementation of SAB 101
until the fourth fiscal quarter of fiscal years beginning after December 15,
1999. Management does not believe the implementation of SAB 101 will have a
material effect on the Company's financial position or results of operations.
NOTE 2. MARKETABLE EQUITY SECURITIES
TenFold Corporation Investment
Through a series of separate transactions during January and February of 2000,
the Company sold 500,000 shares of its 1,000,000 shares of TenFold Corporation
("TenFold") common stock which were being held for investment. The total
proceeds and realized gain on these transactions were $23,992 and $14,952
respectively. The gain is included in "Other income (expense), net" on the
condensed consolidated statements of income.
At June 30, 2000, the fair market value of the remaining shares of this
investment in TenFold is $8,219, and an unrealized loss of $171 (net of tax of
$110) is classified in "Accumulated other comprehensive income" on the condensed
consolidated balance sheet. Subsequent to December 31, 1999, this investment is
classified in "Other non-current assets" on the condensed consolidated balance
sheet.
Page 4
7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. ACQUISITIONS
On March 30, 2000, the Company acquired substantially all of the assets and
liabilities of Solutions Consulting, Inc. ("SCI"), 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 1,965,602 shares of
the Company's Class A Common Stock. The Company also paid $22,100 in cash for
the benefit of SCI 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 $76,605, which will be
amortized using the straight-line method of amortization over its estimated
useful life.
The revenues and operating expenses of SCI for the first quarter of 2000 were
included in the condensed consolidated statements of income for the six months
ended June 30, 2000, and pre-acquisition operating earnings were eliminated in
"Other income (expense), net for the same period as permitted by Accounting
Research Bulletin 51, "Consolidated Financial Statements". Specifically, SCI
contributed $11,960, $6,801, 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" on the condensed
consolidated statements of income for the six months ended June 30, 2000.
The following table reflects pro forma combined results of operations of the
Company and SCI on the basis that the acquisition had taken place at the
beginning of the calendar year for each of the periods presented:
Three months Six months
Ended June 30, Ended June 30,
-------------- -------------------
1999 2000 1999
---- ---- ----
Revenue $298,109 $543,106 $587,328
Income before taxes 22,990 86,969 54,203
Net income 13,795 52,616 32,522
Basic earnings per common share 0.15 0.55 0.37
Diluted earnings per common share 0.12 0.46 0.28
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.
NOTE 4. SALE OF EQUITY INTEREST
On January 14, 2000, the Company sold its 40% equity interest in Systor A.G.
("Systor"), a Swiss information services company, 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 condensed consolidated statements of
income. UBS Capital B.V. was the holder of the remaining 60% interest in Systor.
Page 5
8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss), net of tax, was as follows:
Three months Six months
Ended June 30, Ended June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 13,075 $ 16,906 $ 51,221 $ 33,095
Foreign currency translation adjustments (1,961) (1,002) (3,392) (3,019)
Unrealized gain (loss) on marketable equity
securities, net of tax of $(10,518), $6,047,
$(8,894), and $6,047, respectively (16,450) 8,703 (13,910) 8,703
-------- -------- -------- --------
Total comprehensive income (loss) $ (5,336) $ 24,607 $ 33,919 $ 38,779
======== ======== ======== ========
NOTE 6. STOCKHOLDERS' EQUITY
The components of other stockholders' equity were as follows:
June 30, 2000 December 31, 1999
------------- -----------------
Retained earnings ...................... $ 206,230 $ 155,009
Deferred compensation .................. (2,634) (2,822)
Other .................................. (271) (1,010)
--------- ---------
Total other stockholders' equity ....... $ 203,325 $ 151,177
========= =========
Additional paid-in-capital increased by $70,569 during the six months ended June
30, 2000. The major components of the increase include $49,980 from the issuance
of Class A common shares in the acquisition of SCI, $11,377 relating to tax
benefits resulting from the exercise of options to purchase shares of the
Company's Class A Common Stock, $4,444 from the issuance of Class A common
shares through the Employee Stock Purchase Plan, and $4,377 from the exercise of
options to purchase shares of the Company's Class A Common Stock.
At June 30, 2000, there were 94,895,076 shares of the Company's Class A Common
Stock outstanding and 1,784,320 shares of the Company's Class B Common Stock
outstanding. At December 31, 1999, there were 90,819,898 shares of the Company's
Class A Common Stock outstanding and 1,784,320 shares of the Company's Class B
Common Stock outstanding. The increase in the Company's Class A Common Stock is
due primarily to the exercise of options to purchase 2,138,720 Class A shares
and the issuance of 1,965,602 Class A shares to acquire SCI.
NOTE 7. STRATEGIC ALLIANCE AGREEMENT
In January of 2000, the Company paid $20,000 to Sykes Enterprises, Incorporated
as part of a five year strategic alliance agreement to provide each party a
variety of business solutions and services. This balance is included in "Other
non-current assets" in the condensed consolidated balance sheet.
Page 6
9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE (SHARES IN THOUSANDS)
The following is a reconciliation of the numerators and the denominators of the
basic and diluted earnings per share computations.
For the quarter ended June 30,
2000 1999
-------- --------
BASIC EARNINGS PER COMMON SHARE
Net income ................................................. $ 13,075 $ 16,906
======== ========
Weighted average common shares outstanding ................. 96,380 87,645
======== ========
Basic earnings per common share ............................ $ 0.14 $ 0.19
======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income ................................................. $ 13,075 $ 16,906
======== ========
Weighted average common shares outstanding ................. 96,380 87,645
Incremental shares assuming dilution ....................... 17,182 26,205
-------- --------
Weighted average diluted common shares outstanding ......... 113,562 113,850
======== ========
Diluted earnings per common share .......................... $ 0.12 $ 0.15
======== ========
For the six months ended June 30,
2000 1999
-------- --------
BASIC EARNINGS PER COMMON SHARE
Net income ................................................. $ 51,221 $ 33,095
======== ========
Weighted average common shares outstanding ................. 94,891 85,624
======== ========
Basic earnings per common share ............................ $ 0.54 $ 0.39
======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income ................................................. $ 51,221 $ 33,095
======== ========
Weighted average common shares outstanding ................. 94,891 85,624
Incremental shares assuming dilution ....................... 19,283 26,803
-------- --------
Weighted average diluted common shares outstanding ......... 114,174 112,427
======== ========
Diluted earnings per common share .......................... $ 0.45 $ 0.29
======== ========
For the three and six months ended June 30, 2000, respectively, options to
purchase approximately 17,933 and 13,046 shares of the Company's common stock
were excluded from the calculation of diluted earnings per common share because
the impact was antidilutive.
Page 7
10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Lease
In June 2000, the Company entered into an operating lease agreement for the use
of land, existing office buildings, improvements, as well as the development of
data center facilities in Plano, Texas. The initial term of the lease extends
through June 2005, with one optional two-year renewal period thereafter. 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 original fair value
of the facilities, including land and improvements, could be as high as $90,000.
Commitments under this operating lease are currently expected to be $4,599 in
2002, $6,899 in 2003, $6,900 in 2004 and $2,877 in 2005.
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 flow.
On October 19, 1998, the Robert Plan Corporation ("Robert Plan") filed a
complaint, which it subsequently amended, in New York state court against the
Company 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, and similar claims relating to the
contract. Although the complaint seeks substantial monetary awards and
injunctive relief, the 1990 contract 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 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 court has dismissed six of
Robert Plan's claims while declining to dismiss the other six claims at this
stage. Both parties have appealed the court's decision. In addition, the Company
has filed an answer to the remaining six claims and has asserted counterclaims
against Robert Plan. The Company intends to continue a vigorous defense of the
lawsuit and to conduct a vigorous prosecution of its counterclaims. The Company
does not believe that the outcome of this litigation will have a material
adverse effect on its financial condition, results of operations or cash flow.
Page 8
11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2000 and 1999
Total revenue decreased in the three months ended June 30, 2000 by 4.9% to
$268.5 million from $282.3 million in the three months ended June 30, 1999. This
decrease was attributable to a $29.9 million decrease from the UBS AG ("UBS")
contract, a $23.7 million decrease from the termination of the East Midlands
Electricity (IT) Limited (together with its parent company East Midlands
Electricity plc, "EME") contract, and a net decrease from other short-term
projects and existing clients. These decreases were offset by a $45.7 million
increase from new sales signed subsequent to June 30, 1999 and $11.3 million
from Solutions Consulting, Inc. ("SCI") which was acquired in the first quarter
of 2000. During the three months ended June 30, 2000, revenue from UBS totaled
$62.8 million as compared to $92.7 million in the second quarter of 1999. This
period over period decrease from UBS is attributable to a decrease in IT
spending as merger-related integration work associated with the 1998 merger of
Swiss Bank and Union Bank of Switzerland was completed. The Company does not
expect significant further decline in revenue from UBS during the remainder of
2000.
Domestic revenue grew by 11.4% in the second quarter of 2000 to $201.1
million from $180.6 million in the second quarter of 1999, and increased as a
percentage of total revenue to 74.9% from 64.0% over the same period.
Non-domestic revenue, consisting of European and Asian operations,
decreased by 33.7% in the second quarter of 2000 to $67.4 million from $101.7
million in the second quarter of 1999, and decreased as a percentage of total
revenue to 25.1% from 36.0%. The largest components of European operations were
the United Kingdom and Switzerland. In the United Kingdom revenue decreased
53.3% to $29.8 million in the second quarter of 2000 from $63.8 million in the
second quarter of 1999 due primarily to the termination of the EME contract,
which may result in continued declines in period over period comparisons
throughout 2000. In Switzerland, revenue decreased 35.3% to $11.0 million in the
second quarter of 2000 from $17.0 million in the second quarter of 1999, due to
a revenue decrease in the UBS contract. Asian operations represented $5.0
million, or 1.9%, and $4.9 million, or 1.7%, of total revenue for the three
months ended June 30, 2000 and 1999, respectively.
Direct cost of services decreased in the second quarter of 2000 by 4.4% to
$209.4 million from $219.0 million over the same period of 1999. Gross margin as
a percentage of total revenue decreased slightly to 22.0% from 22.4% for the
second quarter of 2000 compared to the second quarter of 1999. This decrease in
gross margin as a percentage of total revenue was due to the termination of the
EME contract and a decrease in profitability from short-term projects, including
projects associated with new service offerings. These decreases were partially
offset by the addition of SCI in the amount of $4.1 million and a decrease of
$4.5 million in certain personnel related expenses.
Selling, general and administrative expenses ("SG&A") increased in the
second quarter of 2000 by 13.4% to $44.9 million from $39.6 million over the
same period of 1999, and increased as a percentage of total revenue to 16.7%
from 14.0%. The three months ended June 30, 1999 included a $2.5 million charge
for departmental relocations. While the Company's normal general and
administrative spending as a percentage of total revenue remained flat period
over period, the increase over the same period of 1999 is due to intentional
increases in spending related to business development and sales and the
inclusion of SCI in SG&A in the amount of $1.3 million.
Page 9
12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of the factors noted above, operating income decreased in the
second quarter of 2000 to $14.2 million from $23.7 million in the second quarter
of 1999. Operating income as a percentage of total revenue decreased to 5.3%
from 8.4%.
Net income decreased 22.5% in the second quarter of 2000 to $13.1 million
from $16.9 million in the second quarter of 1999, and net income as a percentage
of total revenue decreased to 4.9% from 6.0%.
Comparison of the six months ended June 30, 2000 and 1999
On March 30, 2000, the Company completed the acquisition of SCI. All
pre-acquisition revenues and operating expenses of SCI have been included in the
condensed consolidated statements of income for the six months ended June 30,
2000, and pre-acquisition operating earnings have been eliminated in "Other
income (expense), net" as permitted by Accounting Research Bulletin 51,
"Consolidated Financial Statements".
Total revenue decreased in the six months ended June 30, 2000 by 2.4% to
$543.1 million from $556.6 million in the six months ended June 30, 1999. This
decrease was attributable to a $38.0 million decrease from the UBS contract, a
$49.2 million decrease from the termination of the EME contract, a $14.3 million
decrease due to contracts which ended in 1999, and an overall net decrease from
short-term projects and existing clients. These decreases were partially offset
by an $83.3 million increase from new sales signed subsequent to June 30, 1999
and $23.3 million from SCI.
Domestic revenue grew by 10.1% in the six months ended June 30, 2000 to
$399.5 million from $362.9 million in the six months ended June 30, 1999, and
increased as a percentage of total revenue to 73.6% from 65.2% over the same
period of the prior year.
Non-domestic revenue, consisting of European and Asian operations, declined
by 25.9% in the six months ended June 30, 2000 to $143.6 million from $193.7
million in the same period of 1999, and decreased as a percentage of total
revenue to 26.4% from 34.8%. The largest components of European operations were
the United Kingdom and Switzerland. In the United Kingdom revenue decreased
42.4% to $71.0 million in the six month period of 2000 from $123.2 million in
the same period of 1999 due primarily to the termination of the EME contract. In
Switzerland, revenue decreased 25.7% to $22.8 million in the six month period of
2000 from $30.7 million in the six month period of 1999, due to a revenue
decrease in the UBS contract. Asian operations represented 1.8% of total revenue
for each of the six month periods.
Direct cost of services decreased in the first six months of 2000 by 3.7%
to $413.6 million from $429.3 million over the same period of 1999. Gross margin
increased to 23.8% of total revenue in the first six months of 2000 as compared
to 22.9% of total revenue in the first six months of 1999. This increase in
gross margin as a percentage of total revenue was due to the addition of $9.3
million from SCI and a decrease in certain personnel related expenses in the
amount of $13.3 million. These increases were partially offset by the
termination of the EME contract.
SG&A increased in the first six months ended June 30, 2000 by 9.0% to $88.3
million from $81.0 million in the same period of 1999, and increased as a
percentage of total revenue to 16.3% from 14.6%. The six months ended June 30,
1999 included $5.9 million of charges for departmental relocations, special
payroll tax accruals and litigation-related costs. The period over period
increase is due to intentional increases in spending related to business
development and sales and the inclusion of SCI in SG&A in the amount of $3.0
million. 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 SCI.
Page 10
13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of the factors noted above, operating income decreased in the
six months ended June 30, 2000 to $19.1 million from $46.3 million in the six
months ended June 30, 1999. Operating income as a percentage of total revenue
decreased to 3.5% from 8.3%. This decrease was due primarily to the one-time
$22.1 million compensation charge the Company incurred during the first quarter
of 2000 related to the acquisition of SCI.
Other income (expense), net increased in the six months ended June 30, 2000
to $56.9 million of income from $4.3 million of income in the six months ended
June 30, 1999 primarily due to non-recurring activities. Non-recurring items
during the first six months of 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 due to the sale of 500,000 shares of
TenFold Corporation ("TenFold") common stock, which were held as an investment.
These gains were partially offset by a $3.5 million expense which eliminated the
pre-acquisition earnings of SCI for the first quarter of 2000.
Net income increased 54.7% in the six months ended June 30, 2000 to $51.2
million from $33.1 million in the six months ended June 30, 1999, and net income
as a percentage of total revenue increased to 9.4% from 5.9%.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, cash and cash equivalents
decreased 16.6% to $245.8 million from $294.6 million at December 31, 1999.
Net cash used in operating activities was $77.3 million for the six months
ended June 30, 2000 compared to net cash used in operating activities of $20.1
million for the six months ended June 30, 1999. This change was due primarily to
a decline in accrued compensation, as bonuses earned in 1999 and paid in 2000
exceeded those bonuses earned in 1998 and paid in 1999 and due to a lower
accrued compensation balance at June 30, 2000 as compared to June 30, 1999.
Further change was due to an increase in other current and non-current assets of
which $20.0 million related to cash expenditures in connection with a strategic
alliance agreement with Sykes Enterprises. These were partially offset by a
decrease in accounts receivable.
Net cash provided by investing activities was $26.7 million for the six
months ended June 30, 2000 compared to net cash used in investing activities of
$25.7 million for the same period in 1999. The increase in cash provided by
investing activities was due to the receipt of $26.5 million in proceeds from
the sale of marketable equity securities, including the sale of 500,000 shares
of TenFold common stock, and $55.5 million in proceeds from the sale of Systor
in the first quarter of 2000. This cash received was offset by $41.1 million of
cash paid (net of cash acquired) for the acquisition of SCI during the first
quarter of 2000. Included in the first six months of 1999 was the purchase of
1,000,000 shares in the initial public offering of TenFold for $17.0 million.
For the six months ended June 30, 2000, net cash provided by financing
activities was approximately $4.7 million compared to $115.5 million for the six
months ended June 30, 1999. The six months ended June 30, 1999 reflects the
proceeds of $108.1 million from the Company's initial public offering.
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, 2000, foreign exchange rate fluctuations adversely impacted the Company's
non-domestic cash balances by $2.9 million, as British pounds and Swiss francs
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.
Page 11
14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
During the second quarter of 2000, the Company entered into an operating
lease agreement for the use of land, existing office buildings, improvements, as
well as the development of data center facilities in Plano, Texas. The
additional cash requirements related to this agreement over the next twelve
months are not expected to be material in relation to current rental payments.
NEW ACCOUNTING DEVELOPMENT
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance on revenue recognition issues. In June 2000,
the SEC issued Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements" which delays the implementation of SAB 101
until the fourth fiscal quarter of fiscal years beginning after December 15,
1999. Management does not believe the implementation of SAB 101 will have a
material effect on the Company's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained within this report may contain forward-looking
statements, which involve risks and uncertainties that may cause actual results
to vary from those contained in the forward-looking statements. In some cases,
you can identify such forward-looking statements by terminology such as "may,"
"will," "could," "forecasts," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue." In evaluating these
statements, you should specifically consider various factors that may cause
actual results to vary from those contained in the forward-looking statements,
such as: the loss of major clients; Perot Systems' ability to achieve future
sales; changes in its relationship and variability of revenue and expense
associated with its largest customer; the loss of key personnel; risks
associated with establishing and growing start-up businesses; the highly
competitive market in which Perot Systems operates; the variability of quarterly
operating results; changes in technology; and risks related to international
operations. Please refer to the Perot Systems Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, as filed with the U.S. Securities and
Exchange Commission and available at www.sec.gov, for additional information
regarding risk factors. Perot Systems disclaims any intention or obligation to
revise any forward-looking statements whether as a result of new information,
future developments, or otherwise.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
Page 12
15
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
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 condition, results of operations or cash flow.
On October 19, 1998, the Robert Plan Corporation ("Robert Plan") filed a
complaint, which it subsequently amended, in New York state court against the
Company 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, and similar claims relating to the
contract. Although the complaint seeks substantial monetary awards and
injunctive relief, the 1990 contract 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 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 court has dismissed six of
Robert Plan's claims while declining to dismiss the other six claims at this
stage. Both parties have appealed the court's decision. In addition, the Company
has filed an answer to the remaining six claims and has asserted counterclaims
against Robert Plan. The Company intends to continue a vigorous defense of the
lawsuit and to conduct a vigorous prosecution of its counterclaims. The Company
does not believe that the outcome of this litigation will have a material
adverse effect on its financial condition, results of operations, or cash flow.
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 initial public offering ("IPO"), effective.
As of the date of filing of this Form 10-Q, the Company has used $100.2
million in proceeds from the IPO: $17.0 million was utilized to purchase
1,000,000 shares of common stock in a publicly traded company, $20.0 million was
paid in connection with a strategic alliance agreement, $41.1 million was used
for an acquisition, and $22.1 million in compensation was paid as a direct
result of an acquisition.
Page 13
16
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders of the Company on May
10, 2000. The purpose of the meeting was to elect six nominees to serve as
directors of the Company, ratify the division of the 1999 Employee Stock
Purchase Plan into a plan for United States employees and a plan for non-United
States employees and to approve such plans, and ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending December 31, 2000. The number of shares voted with respect to
each nominee was as follows:
Nominee For Withheld
------- --- --------
Ross Perot....................... 74,582,854 217,853
Steven Blasnik................... 74,597,642 203,065
James Champy..................... 74,549,376 251,331
William K. Gayden................ 74,595,135 205,572
Carl Hahn........................ 74,584,718 215,989
Ross Perot, Jr................... 74,574,212 226,495
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 division of the 1999 Employee Stock Purchase Plan into a plan
for United States employees and a plan for non-United States employees and each
of such plans has been approved. The vote was 71,766,720 for and 2,865,425
against with the holders of 168,562 abstaining. The selection of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending December 31, 2000 was ratified by the shareholders. The vote
was 74,612,909 for and 94,761 against with the holders of 93,037 abstaining.
ITEM 5. OTHER INFORMATION
None
Page 14
17
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.43 Participation Agreement dated as of June 22, 2000, among PSC
Management Limited Partnership, Perot Systems Corporation,
Perot Systems Business Trust No. 2000-1, Wilmington Trust
Company, Banc One Leasing Services Corp., Certificate
Holders, Bank One, NA, the Tranche A and Tranche B Lenders,
and Bank One, NA.
10.44 Master Lease Agreement And Mortgage And Deed Of Trust dated
as of June 22, 2000, between Perot Systems Business Trust
No. 2000-1 and PSC Management Limited Partnership.
27.0 Financial Data Schedule
(b) Reports of Form 8-K
On April 14, 2000, the Company filed a Current Report on Form 8-K, and
filed an amendment to such Current Report on May 11, 2000, to report the
acquisition, through a wholly-owned subsidiary, of substantially all of the
assets of Solutions Consulting, Inc. The transaction was reported under Item 2
of Form 8-K and included pro forma financial information under Item 7 of Form
8-K, which information was presented as if the transaction had occurred as of
specified times.
Page 15
18
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEROT SYSTEMS CORPORATION
(Registrant)
Date: August 8, 2000 By /s/ TERRY ASHWILL
------------------------------------------
Terry Ashwill
Vice President and Chief Financial Officer
(principal financial officer and
chief accounting officer)
Page 16
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.43 Participation Agreement dated as of June 22, 2000, among PSC
Management Limited Partnership, Perot Systems Corporation, Perot
Systems Business Trust No. 2000-1, Wilmington Trust Company, Banc
One Leasing Services Corp., Certificate Holders, Bank One, NA, the
Tranche A and Tranche B Lenders, and Bank One, NA.
10.44 Master Lease Agreement And Mortgage And Deed Of Trust dated as of
June 22, 2000, between Perot Systems Business Trust No. 2000-1 and
PSC Management Limited Partnership.
27.0 Financial Data Schedule