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 September 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 October 31,
2000: 97,887,884
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PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999.............................................................1
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2000 and 1999.............................................2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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..................................................................13
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.................................13
ITEM 5: OTHER INFORMATION ..................................................................13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K ...................................................14
SIGNATURES ....................................................................................15
EXHIBIT INDEX .................................................................................16
3
ITEM 1: FINANCIAL STATEMENTS
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
September 30, 2000 December 31, 1999
------------------ -----------------
Current assets:
Cash and cash equivalents ............................... $ 248,158 $ 294,645
Marketable equity securities ............................ 139 39,938
Accounts receivable, net ................................ 178,019 156,754
Prepaid expenses and other .............................. 48,843 51,160
--------- ---------
Total current assets ................................ 475,159 542,497
Property, equipment and purchased software, net ............ 41,701 38,965
Goodwill, net .............................................. 74,246 659
Other non-current assets ................................... 69,417 31,844
--------- ---------
Total assets ........................................ $ 660,523 $ 613,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 25,917 $ 38,069
Accrued liabilities ..................................... 81,449 94,203
Deferred revenue ........................................ 10,233 20,533
Accrued compensation .................................... 15,488 53,057
Other current liabilities ............................... 14,575 10,367
--------- ---------
Total current liabilities ........................... 147,662 216,229
Other non-current liabilities .............................. 6,362 7,014
--------- ---------
Total liabilities ................................... 154,024 223,243
--------- ---------
Stockholders' equity:
Common stock ............................................ 976 926
Additional paid-in-capital .............................. 300,990 226,712
Other stockholders' equity .............................. 215,817 151,177
Accumulated other comprehensive income .................. (11,284) 11,907
--------- ---------
Total stockholders' equity .......................... 506,499 390,722
--------- ---------
Total liabilities and stockholders' equity .......... $ 660,523 $ 613,965
========= =========
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 INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Revenue .................................................. $ 276,092 $ 304,788 $ 819,198 $ 861,412
Costs and expenses:
Direct cost of services ............................. 214,673 231,230 628,278 660,516
Selling, general and administrative expenses ........ 44,580 44,366 132,893 125,361
Compensation charge related to acquisition .......... -- -- 22,100 --
--------------- --------------- --------------- ---------------
Operating income ......................................... 16,839 29,192 35,927 75,535
Interest income, net ..................................... 4,446 2,768 13,106 7,304
Equity in earnings (loss) of unconsolidated affiliates ... (505) 1,751 3,810 6,413
Other income (expense), net .............................. (762) (158) 51,838 (541)
--------------- --------------- --------------- ---------------
Income before taxes ...................................... 20,018 33,553 104,681 88,711
Provision for income taxes ............................... 7,907 13,421 41,349 35,484
--------------- --------------- --------------- ---------------
Net income .......................................... $ 12,111 $ 20,132 $ 63,332 $ 53,227
=============== =============== =============== ===============
Basic and diluted earnings per common share:
Basic earnings per common share ..................... $ 0.12 $ 0.22 $ 0.66 $ 0.61
Weighted average common shares outstanding .......... 97,260 89,832 95,687 87,042
Diluted earnings per common share ................... $ 0.11 $ 0.18 $ 0.56 $ 0.47
Weighted average diluted common shares
outstanding .................................... 110,364 113,093 114,032 112,762
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine months ended September 30,
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net income .............................................................. $ 63,332 $ 53,227
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................ 20,261 21,060
Gain on sale of marketable equity securities ......................... (17,503) --
Gain on sale of unconsolidated affiliate ............................. (38,851) --
Other non-cash items ................................................. (2,705) (6,334)
Change in assets and liabilities:
Accounts receivable ............................................... (17,659) (56,068)
Accounts payable and accrued liabilities .......................... (16,734) 9,354
Accrued compensation .............................................. (35,697) (6,083)
Deferred revenue .................................................. (10,332) 3,329
Income taxes payable .............................................. 17,435 23,963
Other current and non-current assets .............................. (9,555) (10,494)
Other current and non-current liabilities ......................... (336) 3,023
--------------- ---------------
Net cash provided by (used in) operating activities ........... (48,344) 34,977
--------------- ---------------
Cash flows from investing activities:
Purchases of property, equipment and purchased software ................. (21,216) (14,683)
Acquisition of business, net of cash acquired of $8,881 ................. (41,119) --
Proceeds from sale of unconsolidated affiliate .......................... 55,486 --
Purchases and sales of marketable equity securities ..................... 26,543 (17,000)
Investment in unconsolidated affiliate .................................. (15,000) --
Other ................................................................... (2,502) 871
--------------- ---------------
Net cash provided by (used in) investing activities ........... 2,192 (30,812)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock .................................. 5,281 111,725
Other ................................................................... (391) 5,865
--------------- ---------------
Net cash provided by financing activities ..................... 4,890 117,590
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents ................. (5,225) (3,447)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ......................... (46,487) 118,308
Cash and cash equivalents at beginning of period ............................. 294,645 144,907
--------------- ---------------
Cash and cash equivalents at end of period ................................... $ 248,158 $ 263,215
=============== ===============
The accompanying notes are an integral part of these financial statements
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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, 1999 as included in the Company's
Annual Report on Form 10-K filed with the SEC on March 3, 2000. Operating
results for the three and nine month periods ended September 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 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 September 30, 2000, the fair market value of the remaining shares of this
investment in TenFold is $2,219, and an unrealized loss of $3,832 (net of tax of
$2,449) 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.
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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 $76,806, 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 nine months
ended September 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 nine months ended September 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 Nine months
Ended September 30, Ended September 30,
------------------- ---------------------------
1999 2000 1999
------------ ------------ ------------
Revenue $ 321,241 $ 819,198 $ 908,569
Income before taxes 35,813 106,654 89,350
Net income 21,488 64,526 53,610
Basic earnings per common share 0.23 0.67 0.60
Diluted earnings per common share 0.19 0.56 0.47
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. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
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.
In July 2000, the Company entered into a joint venture with PNC Bank, N.A.
whereby the Company owns 50% of BillingZone, L.L.C., which provides
business-to-business electronic bill presentment and payment services. During
the third quarter of 2000, the Company made cash contributions to the joint
venture totaling $15,000. For the three and nine months ended September 30,
2000, the Company recorded $2,807 in losses, which are included in "Equity in
earnings (loss) of unconsolidated affiliates" on the condensed consolidated
statements of income.
Page 5
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMPREHENSIVE INCOME
The Company's total comprehensive income, net of tax, was as follows:
Three months Nine months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income $ 12,111 $ 20,132 $ 63,332 $ 53,227
Foreign currency translation adjustments (2,061) 2,021 (5,453) (998)
Unrealized gain (loss) on marketable equity
securities, net of tax of $(2,447), $(2,152),
$(11,341), and $3,895, respectively (3,828) (3,098) (17,738) 5,605
------------ ------------ ------------ ------------
Total comprehensive income $ 6,222 $ 19,055 $ 40,141 $ 57,834
============ ============ ============ ============
NOTE 6. STOCKHOLDERS' EQUITY
The components of other stockholders' equity were as follows:
September 30, 2000 December 31, 1999
------------------ -----------------
Retained earnings .................... $ 218,341 $ 155,009
Deferred compensation ................ (2,486) (2,822)
Other ................................ (38) (1,010)
------------ ------------
Total other stockholders' equity ..... $ 215,817 $ 151,177
============ ============
Additional paid-in-capital increased by $74,278 during the nine months ended
September 30, 2000. The major components of the increase include $49,980 from
the issuance of Class A common shares in the acquisition of SCI, $12,629
relating to tax benefits resulting from the exercise of options to purchase
shares of the Company's Class A Common Stock, $6,018 from the issuance of Class
A common shares through the Employee Stock Purchase Plan, and $5,168 from the
exercise of options to purchase shares of the Company's Class A Common Stock.
At September 30, 2000, there were 95,813,201 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 2,848,537 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
("Sykes") as part of a five year strategic alliance agreement to provide each
party a variety of business solutions and services. In August 2000, this
agreement was amended and the Company received $20,000 in cash from Sykes.
Page 6
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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 three months ended September 30,
2000 1999
------------- ---------------
BASIC EARNINGS PER COMMON SHARE
Net income ............................................... $ 12,111 $ 20,132
============ ============
Weighted average common shares outstanding ............... 97,260 89,832
============ ============
Basic earnings per common share .......................... $ 0.12 $ 0.22
============ ============
DILUTED EARNINGS PER COMMON SHARE
Net income ............................................... $ 12,111 $ 20,132
============ ============
Weighted average common shares outstanding ............... 97,260 89,832
Incremental shares assuming dilution ..................... 13,104 23,261
------------ ------------
Weighted average diluted common shares outstanding ....... 110,364 113,093
============ ============
Diluted earnings per common share ........................ $ 0.11 $ 0.18
============ ============
For the nine months ended September 30,
2000 1999
------------ --------------
BASIC EARNINGS PER COMMON SHARE
Net income ............................................... $ 63,332 $ 53,227
============ ============
Weighted average common shares outstanding ............... 95,687 87,042
============ ============
Basic earnings per common share .......................... $ 0.66 $ 0.61
============ ============
DILUTED EARNINGS PER COMMON SHARE
Net income ............................................... $ 63,332 $ 53,227
============ ============
Weighted average common shares outstanding ............... 95,687 87,042
Incremental shares assuming dilution ..................... 18,345 25,720
------------ ------------
Weighted average diluted common shares outstanding ....... 114,032 112,762
============ ============
Diluted earnings per common share ........................ $ 0.56 $ 0.47
============ ============
For the three and nine months ended September 30, 2000 options to purchase
approximately 31,775 and 17,253 shares, respectively, of the Company's common
stock were excluded from the calculation of diluted earnings per common share
because the impact was antidilutive.
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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 position, 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 operation or cash flow.
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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 September 30, 2000 and 1999
Total revenue decreased in the three months ended September 30, 2000 by
9.4% to $276.1 million from $304.8 million in the three months ended September
30, 1999. This decrease was attributable to a $31.9 million decrease from the
termination of the East Midlands Electricity (IT) Limited (together with its
parent company East Midlands Electricity plc, "EME") contract, of which $10.6
million related to a one-time termination fee recorded in the third quarter of
1999; a $20.7 million decrease from the UBS AG ("UBS") contract; a $14.6 million
decrease from the ANC Rental Corporation ("ANC Rental") contract; and a net
decrease from other existing clients and short-term projects. These decreases
were offset by a $33.6 million increase from new sales signed subsequent to
September 30, 1999 and a $12.1 million increase from Solutions Consulting, Inc.
("SCI") which was acquired in the first quarter of 2000. During the three months
ended September 30, 2000, revenue from UBS totaled $61.5 million as compared to
$82.2 million in the third quarter of 1999. This period over period decrease
from UBS is primarily 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.
The ANC Rental decline stems from the Company's successful completion of the
development of the Odyssey reservation system and the transition of this
contract into the operating phase.
Domestic revenue grew by 3.7% in the third quarter of 2000 to $198.3
million from $191.3 million in the second quarter of 1999, and increased as a
percentage of total revenue to 71.8% from 62.8% over the same period.
Non-domestic revenue, consisting of European and Asian operations,
decreased by 31.5% in the third quarter of 2000 to $77.8 million from $113.5
million in the third quarter of 1999, and decreased as a percentage of total
revenue to 28.2% from 37.2%. The largest components of European operations were
in the United Kingdom and Switzerland. In the United Kingdom revenue decreased
47.8% to $39.1 million in the third quarter of 2000 from $74.9 million in the
third quarter of 1999, due primarily to the termination of the EME contract,
which may result in continued declines in period over period comparisons for the
remainder of 2000. In Switzerland, revenue decreased 38.1% to $10.0 million in
the third quarter of 2000 from $16.2 million in the third quarter of 1999, due
to a revenue decrease in the UBS contract. Asian operations represented $5.1
million, or 1.9%, and $5.0 million, or 1.6%, of total revenue for the three
months ended September 30, 2000 and 1999, respectively.
Direct cost of services decreased in the third quarter of 2000 by 7.2%
to $214.7 million from $231.2 million over the same period of 1999. Gross margin
as a percentage of total revenue decreased to 22.2% from 24.2% for the third
quarter of 2000 compared to the third quarter of 1999. This decrease was
attributable to the termination of the EME contract, including a contract
termination gain of $8.0 million recorded in the third quarter of 1999; a net
$2.5 million charge recorded in the current quarter related to the performance
of certain contracts; 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 $4.7 million and a
decrease of $9.2 million in certain personnel related expenses.
Selling, general and administrative expenses ("SG&A") increased in the
third quarter of 2000 by 0.5% to $44.6 million from $44.4 million over the same
period of 1999, and increased as a percentage of total revenue to 16.2% from
14.6%. While period over period total SG&A was relatively flat, the increase in
SG&A as a percentage of total revenue was due primarily to the decrease in
revenue period over period.
Page 9
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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 third quarter of 2000 to $16.8 million from $29.2 million in the third
quarter of 1999. Operating income as a percentage of total revenue decreased to
6.1% from 9.6%.
Net income decreased 39.8% in the third quarter of 2000 to $12.1
million from $20.1 million in the third quarter of 1999, and net income as a
percentage of total revenue decreased to 4.4% from 6.6%.
Comparison of the nine months ended September 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 nine months ended September
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 nine months ended September 30, 2000 by
4.9% to $819.2 million from $861.4 million in the nine months ended September
30, 1999. This decrease was attributable to a $81.2 million decrease from the
termination of the EME contract, a $58.6 million decrease from the UBS contract,
and a $28.4 million decrease from ANC Rental. These decreases were partially
offset by a $77.9 million increase from new sales signed subsequent to September
30, 1999, $35.3 million from SCI, and a net increase in revenue from existing
clients.
Domestic revenue grew by 7.9% in the nine months ended September 30,
2000 to $597.8 million from $554.2 million in the nine months ended September
30, 1999, and increased as a percentage of total revenue to 73.0% from 64.3%
over the same period of the prior year.
Non-domestic revenue, consisting of European and Asian operations,
declined by 27.9% in the nine months ended September 30, 2000 to $221.4 million
from $307.2 million in the same period of 1999, and decreased as a percentage of
total revenue to 27.0% from 35.7%. The largest components of European operations
were the United Kingdom and Switzerland. In the United Kingdom revenue decreased
44.4% to $110.1 million in the nine month period of 2000 from $198.1 million in
the same period of 1999 due primarily to the termination of the EME contract. In
Switzerland, revenue decreased 30.0% to $32.8 million in the nine month period
of 2000 from $46.8 million in the nine month period of 1999, due to a revenue
decrease in the UBS contract. Asian operations represented $15.1 million, or
1.9%, and $14.8 million, or 1.7%, of total revenue for the nine months ended
September 30, 2000 and 1999, respectively.
Direct cost of services decreased in the first nine months of 2000 by
4.9% to $628.3 million from $660.5 million over the same period of 1999. Gross
margin represented 23.3% of total revenue for each of the nine month periods.
Gross margin for the nine months of 2000 benefited from decreases in certain
personnel related expenses of $22.5 million and from the inclusion of SCI in the
amount of $14.0 million. These benefits were offset by decreases in gross margin
due to the termination of EME and decreases in profitability of short-term
projects.
SG&A increased in the first nine months ended September 30, 2000 by
6.0% to $132.9 million from $125.4 million in the same period of 1999, and
increased as a percentage of total revenue to 16.2% from 14.6%. The nine months
ended September 30, 1999 included $8.5 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 $4.4 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 nine months ended September 30, 2000 to $35.9 million from $75.5 million in
the nine months ended September 30, 1999.
Operating income as a percentage of total revenue decreased to 4.4%
from 8.8%. 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 nine months ended
September 30, 2000 to $51.8 million from a loss of $0.5 million in the nine
months ended September 30, 1999 primarily due to non-recurring activities.
Non-recurring items during the first nine 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 19.0% in the nine months ended September 30, 2000
to $63.3 million from $53.2 million in the nine months ended September 30, 1999,
and net income as a percentage of total revenue increased to 7.7% from 6.2%.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, cash and cash
equivalents decreased 15.8% to $248.2 million from $294.6 million at December
31, 1999.
Net cash used in operating activities was $48.3 million for the nine
months ended September 30, 2000 compared to net cash provided by operating
activities of $35.0 million for the nine months ended September 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 September 30, 2000 as
compared to September 30, 1999. Further change was due to a decrease in accounts
payable and accrued liabilities. These decreases were partially offset by an
increase in accounts receivable.
Net cash provided by investing activities was $2.2 million for the nine
months ended September 30, 2000 compared to net cash used in investing
activities of $30.8 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, a $15.0 million investment in a 50% owned
joint venture with PNC Bank, N.A. and a $6.5 million increase in purchases of
property, equipment and purchased software. Included in the first nine months of
1999 was the purchase of 1,000,000 shares in the initial public offering of
TenFold for $17.0 million.
For the nine months ended September 30, 2000, net cash provided by
financing activities was approximately $4.9 million compared to $117.6 million
for the nine months ended September 30, 1999. The nine months ended September
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 nine months
ended September 30, 2000, foreign exchange rate fluctuations adversely impacted
the Company's non-domestic cash balances by $5.2 million, as British pounds,
Swiss francs, and Euros all weakened against the U.S. dollar. The Company's
foreign exchange policy does not call for hedging foreign exchange exposures
that are not likely to impact net income or working capital.
Page 11
14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
In October of 2000, the Company entered into an agreement with ANC
Rental that extended the term of the original services contract through 2007 and
reduced the Company's royalty obligations to ANC Rental, which are payable in
connection with any future licensing to third parties of the intellectual
property for the Odyssey reservation system. As part of the agreement, the
Company paid ANC Rental $25.0 million.
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. On October 31, 2000 the Company announced the initiation
of a stock repurchase plan. Under the plan the Board of Directors has approved
the repurchase of shares of the Company's common stock with a value of up to
$50.0 million.
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.
Page 12
15
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2000
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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, 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 the
entire $108.1 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, $22.1 million in compensation was paid as a
direct result of an acquisition, and $15.0 million was utilized as an investment
in an unconsolidated entity.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security
holders during the period covered by this report.
ITEM 5: OTHER INFORMATION
None
Page 13
16
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended September 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
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the three months ended
September 30, 2000.
Page 14
17
PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended September 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: November 3, 2000 By /s/ RUSSELL FREEMAN
------------------------------------------
Russell Freeman
Vice President and Chief Financial Officer
(principal financial officer and
chief accounting officer)
Page 15
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.0 Financial Data Schedule
Page 16