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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
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.)
12377 MERIT DRIVE, SUITE 1100, DALLAS, TEXAS 75251
(Address of principal executive offices) (Zip Code)
(972) 383-5600
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
As of April 30, 1998, the registrant had outstanding 38,210,018 shares of Class
A common stock.
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PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX Page
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-10
PART II: OTHER INFORMATION 11
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
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ITEM 1. FINANCIAL STATEMENTS
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
March 31, 1998 December 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 61,584 $ 35,298
Accounts receivable, net 125,237 105,230
Prepaid expenses and other 12,710 12,578
Deferred income taxes 24,906 24,962
-------- --------
Total current assets 224,437 178,068
Property, equipment and purchased software, net 41,213 50,703
Other assets 35,171 38,332
-------- --------
Total assets $300,821 $267,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations
and long-term debt $ 1,066 $ 1,367
Accounts payable 51,044 35,760
Income taxes payable 14,499 10,287
Accrued liabilities 83,149 76,040
Deferred revenue 28,006 23,258
Accrued compensation 16,987 23,449
-------- --------
Total current liabilities 194,751 170,161
Capital lease obligations and long-term debt,
less current maturities 1,637 1,532
Other long-term liabilities 2,210 2,094
-------- --------
Total liabilities 198,598 173,787
-------- --------
Stockholders' equity:
Common stock 406 406
Other stockholders' equity 101,817 92,910
-------- --------
Total stockholders' equity 102,223 93,316
-------- --------
Total liabilities and stockholders' equity $300,821 $267,103
======== ========
The accompanying notes are an integral part of these financial statements.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended March 31,
1998 1997
--------- ---------
Contract revenue $ 214,087 $ 169,071
Costs and expenses:
Direct cost of services 170,190 129,714
Selling, general and administrative expenses 32,509 30,845
--------- ---------
Operating income 11,388 8,512
Interest income 786 623
Interest expense (81) (227)
Equity in earnings/(losses) of unconsolidated affiliates, net 983 (27)
Other income/(expense) 2,653 1,990
--------- ---------
Income before taxes 15,729 10,871
Provision for income taxes 6,685 4,188
--------- ---------
Net income $ 9,044 $ 6,683
========= =========
Net income attributed to common shareholders $ 9,044 $ 6,683
Basic and diluted earnings per common share:
Basic earnings per common share $ 0.24 $ 0.17
Weighted average common shares outstanding 38,145 39,738
Diluted earnings per common share $ 0.20 $ 0.14
Weighted average common shares outstanding 44,866 48,729
The accompanying notes are an integral part of these financial statements.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three months ended March 31,
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 9,044 $ 6,683
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 8,899 6,546
Other non-cash items (3,388) (998)
Changes in current assets (12,975) 5,989
Changes in current liabilities 24,618 (5,475)
-------- --------
Net cash provided by operating activities 26,198 12,745
-------- --------
Cash flows from investing activities:
Purchase of property, equipment and software (5,037) (10,610)
Proceeds from sale of property, equipment and software 239 501
Acquisition of businesses, net of cash acquired of
$850 in 1997 -- (2,550)
Proceeds from sale of nonmarketable equity securities 5,162 --
Investment in and advances to minority interests (51) (2,033)
-------- --------
Net cash provided by (used in) investing activities 313 (14,692)
-------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations (194) (850)
Short-term borrowings -- 10,000
Proceeds from issuance of common stock -- 11
Repayment of stockholder notes receivable 97 66
Proceeds from issuance of treasury stock 453 322
Purchase of treasury stock (257) (1,382)
-------- --------
Net cash provided by financing activities 99 8,167
-------- --------
Effect of exchange rate changes on cash and cash equivalents (324) (1,636)
-------- --------
Net increase in cash and cash equivalents 26,286 4,584
Cash and cash equivalents at beginning of period 35,298 27,516
-------- --------
Cash and cash equivalents at end of period $ 61,584 $ 32,100
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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 inter-company transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles (GAAP) have
been condensed or omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1997 as filed in the Company's Form
10-K filed with the SEC on March 31, 1998. Operating results for the three month
period ended March 31, 1998, are not necessarily indicative of the results for
the year ending December 31, 1998. Dollar amounts presented are in thousands,
except as otherwise noted.
Certain of the 1997 amounts in the accompanying financial statements have been
reclassified to conform to the current presentation.
NOTE 2. IMPLEMENTATION OF NEW ACCOUNTING STANDARD
The Company implemented Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" during the first quarter of 1998. The Company's
total comprehensive income was as follows:
Three months ended March 31,
1998 1997
------- -------
Net income $ 9,044 $ 6,683
Foreign currency translation adjustments (996) (162)
------- -------
Total comprehensive income $ 8,048 $ 6,521
NOTE 3. ACQUISITIONS
There were no acquisitions during the three months ended March 31, 1998.
During the first quarter of 1997, the Company completed three business
acquisitions accounted for under the purchase method of accounting.
Collectively, total consideration included $3,400 in cash, $1,180 in the form of
190,000 shares of the Company's Class A Common Stock, and $1,500 in the form of
550,000 options to purchase the Company's Class A Common Stock. On the basis of
a pro forma consolidation of the results of operations as if the acquisitions
had taken place on January 1, 1997 and January 1, 1998 the impact on revenue,
net income and earnings per share would not have been material.
During the three months ended March 31, 1997, the Company invested an additional
$1,033 in an existing unconsolidated limited partnership venture capital fund
and purchased an interest in another unconsolidated entity for $1,000.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. BORROWINGS
There were no borrowings outstanding under the Company's $40,000 line of credit
at March 31, 1998 and December 31, 1997.
NOTE 5. STOCKHOLDERS' EQUITY
Significant changes in stockholders' equity included the issuance of 401,123
shares and the repurchase of 583,439 shares of the Company's Class A Common
Stock which caused a net increase of $833 in treasury stock. A portion of the
Stock repurchased from Employees during the first quarter of 1998 had been
financed by Employee Stock Loans. The decline of $895 in Stockholders' notes
receivable was due primarily to the offsetting of notes held against Stock
repurchased.
At March 31, 1998 there were 38,045,391 shares of the Company's Class A Common
Stock outstanding, 50,000 shares of the Company's Class B Convertible Common
Stock and 2,479,985 shares held in treasury. At December 31, 1997, there were
38,227,707 shares of the Company's Class A Common Stock outstanding, 50,000
shares of the Company's Class B Convertible Common Stock and 2,298,612 shares
held in treasury.
NOTE 6. OTHER
In April 1998, the Company paid a fee of $536 to terminate a contract-related
interest rate swap agreement.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 1998 and 1997
Contract revenue increased in the first quarter of 1998 by 27% to
$214.1 million from $169.1 million in 1997, due to $19.2 million in revenue from
two significant contracts entered into the third quarter of 1997, $9.9 million
in revenue from business acquired in the first quarter of 1997, and a $15.9
million increase in revenue from other new and existing business.
Domestic contract revenue grew by 26% in the first quarter of 1998 to
$139.5 million from $111.1 million in the first quarter of 1997, and decreased
slightly as a percentage of total contract revenue to 65% from 66% over the same
period.
Non-domestic contract revenue, comprised of European and Asian
operations, grew by 29% in the first quarter of 1998 to $74.6 million from $58.0
million in the first quarter of 1997, and increased as a percentage of total
contract revenue to 35% from 34%.
Direct cost of services increased in the first quarter of 1998 by 31%
to $170.2 from $129.7 million in the first quarter of 1997, due primarily to
continued growth in the Company's business. Selling, general and administrative
expenses ("SG&A") increased slightly in the first quarter of 1998 by 5% to $32.5
million from $30.8 million in the first quarter of 1997.
Equity in earnings of unconsolidated affiliates, net, increased in the
first quarter of 1998 to $1.0 million due to improved financial results from the
Company's Equity Investments. Other income/(expense) increased in the
first quarter of 1998 to $2.7 million from $2.0 million in the first quarter of
1997 primarily due to the $3.0 million gain on the sale of the Company's
limited partnership interests in a venture capital fund which was offset in
part by the $1.2 million decrease in foreign exchange gains and the $1.0
million decrease in gains on asset sales.
As a result of the factors noted above, operating income increased in
the first quarter of 1998 to $11.4 million from $8.5 million in the first
quarter of 1997, and operating margin increased to 5.3% from 5.0%. Net income
increased 34% in the first quarter of 1998 to $9.0 million from $6.7 million in
the first quarter of 1997 and net income margin increased to 4.2% from 4.0%.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, cash and cash equivalents increased
74% from $35.3 million to $61.6 million from year end 1997 primarily from
operating activities.
Cash flow from operating activities increased to $26.2 million from
$12.7 million for the periods ended March 31, 1998 and 1997, respectively. The
increase in cash flow from operating activities was due primarily to general
business growth, and increased control over accounts receivable collections.
There was a $30.0 million increase in current liabilities such as accounts
payable, deferred revenue and accrued compensation offset in part by a $19.0
million increase in current assets consisting primarily of increased accounts
receivable.
Net cash provided by investing activities was $0.3 million for the
first quarter of 1998, compared to net cash used in investing activities of
$14.7 million for the first quarter of 1997. Cash expenditures for property and
equipment during the first quarter of 1998 decreased to approximately $5.0
million compared to approximately $10.6 million in the prior year period,
reflecting increased emphasis on cost control. In the first quarter 1998,
proceeds from the sale of nonmarketable equity securities was $5.2 million due
to the sale of the Company's limited partnership interests in a venture capital
fund.
For the first quarter of 1998, net cash provided by financing
activities was approximately $0.1 million, compared to $8.2 million for the
first quarter of 1997. This decrease was due primarily to a $10.0 million
borrowing on the Company's line of credit at March 31, 1997 compared to no
borrowing at March 31, 1998. Additionally, the Company used $1.4 million in
cash to repurchase shares of the Company's Class A Common Stock during the first
quarter of 1997 compared to $0.3 million during the first quarter of 1998.
As of March 31, 1998, the Company has $40.0 million in available
borrowing under a line of credit with a financial institution. At March 31,
1998, there were no outstanding borrowings on this line. No other sources of
outside financing were obtained during the first quarter of 1998.
The Company anticipates that cash flows from operating activities will
provide sufficient funds to meet its needs during 1998. The Company's existing
line of credit expires July 31, 1998. Although there is no assurance that the
Company can extend its existing line of credit or negotiate a new line of
credit, the Company anticipates that it will not have significant difficulty
extending its existing line of credit or negotiating a new line of credit if the
Company chooses to do so. As new contracts are commenced or existing contracts
expanded, there will be increasing requirements for cash resources to fund
current operations. Significant growth in the Company's business in 1998 and
beyond could result in the need for private or public offerings of debt or
equity instruments of the Company to provide the funds necessary to support its
growth.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The American Institute of Certified Public Accountants (the "AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and requires costs incurred in the application
development stage (whether internal or external) to be capitalized. This SOP is
applicable to all financial statements for fiscal years beginning after December
15, 1998, and should be applied to internal-use computer software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of this SOP. Costs incurred prior to initial
application of this SOP, whether or not capitalized, should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs were incurred. The adoption of this SOP is not expected to have a
material impact on the annual financial position or operating results of the
Company.
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems could be unable to accurately process certain
date-based information. The Company believes it has identified all significant
internal applications that will require modification to ensure Year 2000
Compliance and does not believe compliance with the Year 2000 requirements will
have a material adverse effect on the Company's business or results of
operations. The Company is performing an assessment of its obligations to make
any of its clients' systems Year 2000 compliant, including an estimate of the
cost and revenues to be incurred in fulfilling such obligations, and monitors
this assessment on an ongoing basis. Based on such assessment, the Company does
not believe that its client obligations with respect to the Year 2000 issue will
have a material adverse impact on the financial position and results of
operations of the Company.
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PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is, from time to time, involved in various litigation
matters arising in the ordinary course of its business. The Company believes
that the resolution of currently pending legal proceedings, either individually
or taken as a whole, will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
a) EXHIBITS.
Exhibit No. Document
----------- --------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the three months ended
March 31, 1998.
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PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEROT SYSTEMS CORPORATION
(Registrant)
Date: May 15, 1998 By /s/ TERRY ASHWILL
---------------------
Terry Ashwill
Vice President and Chief
Financial Officer
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PEROT SYSTEMS CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
EXHIBIT INDEX
Exhibit No. Description
- ------------ ---------------------------------------------------------
11 Computation of Earnings per Common Share.
27 Financial Data Schedule as of March 31, 1998
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