e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
or
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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 1-14773
PEROT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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| DELAWARE
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75-2230700 |
| (State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.) |
2300 WEST PLANO PARKWAY
PLANO, TEXAS
75075
(Address of principal executive offices)
(Zip Code)
(972) 577-0000
(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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the
Exchange Act. (Check one):
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| Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of registrant’s common stock outstanding as of November 2, 2009: 124,097,330
shares of Class A Common Stock.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
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FINANCIAL STATEMENTS (UNAUDITED) |
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(UNAUDITED)
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September 30, 2009 |
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December 31, 2008 |
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(Dollars in millions) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
380 |
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$ |
234 |
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Short-term investments |
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53 |
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36 |
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Accounts receivable, net |
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397 |
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443 |
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Prepaid expenses and other |
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111 |
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93 |
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Total current assets |
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941 |
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806 |
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Property, equipment, and purchased software, net |
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227 |
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221 |
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Goodwill |
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734 |
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730 |
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Deferred contract costs, net |
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122 |
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112 |
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Identifiable intangible assets, net |
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42 |
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54 |
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Other non-current assets |
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46 |
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55 |
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Total assets |
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$ |
2,112 |
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$ |
1,978 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
57 |
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$ |
54 |
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Deferred revenue |
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63 |
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60 |
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Accrued compensation |
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84 |
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98 |
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Income taxes payable |
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— |
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11 |
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Accrued and other current liabilities |
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113 |
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138 |
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Total current liabilities |
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317 |
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361 |
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Long-term debt |
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178 |
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181 |
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Non-current deferred revenue |
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70 |
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80 |
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Other non-current liabilities |
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62 |
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51 |
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Total liabilities |
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627 |
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673 |
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Commitments and contingencies (Notes 1 and 12) |
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Stockholders’ equity: |
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Common stock |
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1 |
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1 |
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Additional paid-in capital |
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617 |
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587 |
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Retained earnings |
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907 |
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815 |
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Treasury stock |
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(26 |
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(73 |
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Accumulated other comprehensive income |
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(14 |
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(25 |
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Total stockholders’ equity |
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1,485 |
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1,305 |
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Total liabilities and stockholders’ equity |
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$ |
2,112 |
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$ |
1,978 |
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The accompanying notes are an integral part of these financial statements.
1
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(Dollars in millions, except per share data) |
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Revenue |
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$ |
629 |
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$ |
711 |
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$ |
1,878 |
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$ |
2,096 |
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Direct cost of services |
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507 |
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587 |
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1,513 |
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1,734 |
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Gross profit |
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122 |
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124 |
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365 |
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362 |
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Selling, general and administrative expenses |
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79 |
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76 |
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235 |
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223 |
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Operating income |
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43 |
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48 |
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130 |
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139 |
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Interest income |
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1 |
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2 |
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3 |
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5 |
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Interest expense |
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(1 |
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(2 |
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(4 |
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(7 |
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Other income, net |
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— |
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— |
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2 |
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3 |
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Income before taxes |
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43 |
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48 |
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131 |
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140 |
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Provision for income taxes |
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10 |
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18 |
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39 |
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52 |
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Net income |
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$ |
33 |
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$ |
30 |
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$ |
92 |
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$ |
88 |
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Earnings per share of common stock: |
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Basic |
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$ |
0.28 |
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$ |
0.25 |
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$ |
0.77 |
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$ |
0.74 |
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Diluted |
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$ |
0.27 |
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$ |
0.25 |
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$ |
0.76 |
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$ |
0.73 |
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Weighted average number of common shares outstanding (in thousands): |
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Basic |
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121,189 |
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120,151 |
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120,279 |
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119,750 |
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Diluted |
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123,862 |
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122,576 |
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122,007 |
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121,712 |
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The accompanying notes are an integral part of these financial statements.
2
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
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Nine Months Ended September 30, |
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2009 |
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2008 |
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(Dollars in millions) |
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Cash flows from operating activities: |
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Net income |
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$ |
92 |
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$ |
88 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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84 |
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85 |
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Impairment of assets |
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4 |
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3 |
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Stock-based compensation |
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13 |
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13 |
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Change in deferred taxes |
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20 |
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(1 |
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Excess tax benefits from stock-based compensation arrangements |
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2 |
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— |
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Other non-cash items |
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2 |
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— |
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Changes in assets and liabilities (net of effects from acquisitions of businesses): |
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Accounts receivable, net |
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48 |
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(18 |
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Prepaid expenses |
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(10 |
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(15 |
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Deferred contract costs, net |
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(34 |
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(43 |
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Accounts payable and accrued liabilities |
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(23 |
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(15 |
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Accrued compensation |
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(17 |
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31 |
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Deferred revenue |
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(6 |
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19 |
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Income taxes |
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(19 |
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(3 |
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Other current and non-current assets |
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8 |
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(7 |
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Other current and non-current liabilities |
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(3 |
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1 |
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Net cash provided by operating activities |
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161 |
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138 |
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Cash flows from investing activities: |
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Purchases of property, equipment and purchased software |
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(53 |
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(38 |
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Acquisitions of businesses, net |
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(4 |
) |
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(18 |
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Purchases of short-term investments |
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(79 |
) |
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(40 |
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Net proceeds from sale of short-term investments |
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62 |
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63 |
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Other |
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1 |
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1 |
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Net cash used in investing activities |
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(73 |
) |
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(32 |
) |
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Cash flows from financing activities: |
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Repayments of debt |
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(2 |
) |
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(34 |
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Proceeds from issuance of common stock |
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6 |
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8 |
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Proceeds from issuance of treasury stock |
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54 |
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16 |
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Excess tax benefits from stock-based compensation arrangements |
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(2 |
) |
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— |
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Purchases of treasury stock |
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— |
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(24 |
) |
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Net cash provided by (used in) financing activities |
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56 |
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(34 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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2 |
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(13 |
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Net increase in cash and cash equivalents |
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146 |
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59 |
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Cash and cash equivalents at beginning of period |
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234 |
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187 |
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Cash and cash equivalents at end of period |
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$ |
380 |
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$ |
246 |
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The accompanying notes are an integral part of these financial statements.
3
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 wholly-owned subsidiaries with all significant intercompany
transactions eliminated. In our opinion, 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 have been condensed or omitted pursuant to such SEC rules and
regulations. We have evaluated subsequent events for recognition or disclosure through November 6,
2009, which was the date we filed this Form 10-Q with the SEC. These financial statements should be
read in conjunction with the audited financial statements for the year ended December 31, 2008, in
our Annual Report on Form 10-K filed with the SEC on February 25, 2009. Operating results for the
three and nine month period ended September 30, 2009, are not necessarily indicative of the results
for the year ending December 31, 2009.
Recent Developments — Merger
As previously disclosed on a Form 8-K filed with the SEC on September 21, 2009, Perot Systems
Corporation (the Company) entered into an Agreement and Plan of Merger (the Merger Agreement),
dated as of September 20, 2009, by and among the Company, Dell Inc., a Delaware corporation (Dell),
and DII — Holdings Inc., a Delaware corporation and an indirect, wholly-owned subsidiary of Dell
(the Purchaser).
Pursuant to the Merger Agreement and as previously disclosed on a Form 8-K filed with the SEC on
November 3, 2009, Dell completed its acquisition of all of the outstanding shares of the Company’s
Class A common stock, par value $0.01 per share (the Shares), on November 3, 2009. The acquisition
was completed through the merger of the Purchaser with and into the Company in accordance with
applicable provisions of Delaware law that authorize the completion of the merger as a “short form”
merger without a vote or meeting of the Company’s stockholders. See Note 13, “Subsequent Events,”
for additional discussion of the merger.
Adoption of significant accounting standards
In April 2009, the Financial Accounting Standard Board issued a clarification of previous guidance
for interim disclosures about fair value of financial instruments, that requires an entity to
provide disclosures about fair value of financial instruments in interim financial information.
This statement is to be applied prospectively and is effective for interim and annual periods
ending after June 15, 2009. We adopted this statement in the quarter ended June 30, 2009. There
was no impact on the condensed consolidated financial statements as it relates only to additional
disclosures.
In May 2009, the FASB issued a standard that sets forth: 1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements; 2) the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements; and 3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This Statement is effective for interim
and annual periods ending after June 15, 2009. We adopted this Statement in the quarter ended June
30, 2009. This Statement did not impact our financial position or results of operations.
In June 2009, the FASB issued a statement that provides for a single Accounting Codification and
modifies the hierarchy of Generally Accepted Accounting Procedures to consist of two levels of
GAAP: authoritative and nonauthoritative. This statement is effective for all interim and annual
periods ending after September 15, 2009. As a result of this statement, the references to
authoritative GAAP in our footnotes have changed to reflect this new codification.
4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In October 2009, the FASB ratified a consensus that establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each deliverable will
be based on vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. This consensus will also
require additional disclosures in the notes to the financial statements related to our
multiple-deliverable revenue arrangements and will be effective prospectively for arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, however,
early adoption is allowed. We are currently evaluating the impact of this pronouncement on our
condensed consolidated financial statements.
In October 2009, the FASB ratified a consensus related to software revenue recognition. Under this
consensus, tangible products that have software components that are essential to the functionality
of the tangible product will no longer be within the scope of the software revenue recognition
guidance. This update will be effective prospectively for arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, however, early adoption is allowed.
We are currently evaluating the impact of this pronouncement on our condensed consolidated
financial statements.
2. Fair Value Measurements
Fair value is defined as the price that would be paid upon sale of an asset or upon transfer of a
liability in an orderly transaction between market participants at the measurement date and in the
principal or most advantageous market for that asset or liability. Fair value is calculated based
on assumptions that market participants would use in pricing the asset or liability, not on
assumptions specific to us. In addition, the fair value of assets and liabilities includes
consideration of non-performance risk, including credit risk.
Financial assets and financial liabilities measured at fair value on a recurring basis
To increase consistency and comparability in fair value measurements and related disclosures,
inputs to valuation techniques used to measure fair value are prioritized into a hierarchy of three
broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The following is a brief description of those three levels:
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Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
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Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active. |
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• |
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Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
Assessing the significance of a particular input to the fair value measurement in its entirety
requires judgment, considering factors specific to the asset or liability.
The following table summarizes the basis used to measure certain financial assets and financial
liabilities at fair value on a recurring basis in the balance sheet:
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Basis of Fair Value Measurements |
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Quoted Prices |
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In Active |
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Significant |
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Markets for |
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Other |
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Significant |
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Balance at |
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Identical |
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Observable |
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Unobservable |
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September 30, |
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Items |
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Inputs |
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Inputs |
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2009 |
|
(Level 1) |
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(Level 2) |
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(Level 3) |
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(in millions) |
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Cash equivalents — money market funds |
|
$ |
227 |
|
|
$ |
227 |
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|
$ |
— |
|
|
$ |
— |
|
Cash equivalents — commercial paper |
|
$ |
25 |
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|
$ |
25 |
|
|
$ |
— |
|
|
$ |
— |
|
Short-term investments |
|
$ |
53 |
|
|
$ |
53 |
|
|
$ |
— |
|
|
$ |
— |
|
Foreign currency derivative financial |
|
|
|
|
|
|
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|
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|
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Forward contracts |
|
$ |
(10 |
) |
|
$ |
— |
|
|
$ |
(10 |
) |
|
$ |
— |
|
Options |
|
$ |
(2 |
) |
|
$ |
— |
|
|
$ |
(2 |
) |
|
$ |
— |
|
5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair value of credit facility
The estimated fair value of our amounts outstanding under our credit facility as of September 30,
2009 was $170 million. We estimated the fair value of the credit facility by discounting future
cash flows using interest rate spreads currently available for a credit facility with similar terms
and maturity to our existing outstanding borrowings. The outstanding borrowings were recorded in
our condensed consolidated balance sheets at the carrying value of $177 million.
3. Derivative Financial Instruments
As part of our risk management strategy, we may enter into derivative financial instruments to
mitigate certain financial risks related to foreign currencies and interest rates. We have a risk
management policy defining the conditions under which we can enter into derivative financial
instrument transactions. To date, our use of derivative financial instruments has been limited to
interest rate swaps that hedged our exposure to floating rates on certain portions of our debt and
forward contracts and options that hedged a portion of our exposure to fluctuations in foreign
currency exchange rates.
We designate and account for certain foreign currency derivative financial instruments as cash flow
hedges. We hedge the variability of a portion of our anticipated foreign currency cash flows using
forward contracts and zero cost collars. These derivative financial instruments are designated as
cash flow hedges of forecasted revenues related to our operations in India. The remaining foreign
currency derivative financial instruments are being marked to market, with changes in fair value
being reported in other income, net, in the condensed consolidated income statements. As of
September 30, 2009, the notional amount of foreign currency derivative financial instruments
outstanding totaled approximately $210 million, of which approximately $162 million relates to
derivative financial instruments for which we elected hedge accounting. These derivative financial
instruments expire at various dates over the next 33 months. At September 30, 2009, the estimated
net amount of loss that is expected to be reclassified into earnings within the next twelve months
is $9 million ($8 million, net of tax). As of September 30, 2009, the unrealized loss on our
foreign currency hedges, reflected in accumulated other comprehensive loss, was approximately $11
million ($9 million, net of tax).
Our two interest rate swaps matured in August 2009, both of which were designated as cash flow
hedges.
By using derivative financial instruments, we are exposed to credit and market risk. If a
counterparty fails to fulfill its performance obligations under a derivative contract, our credit
risk will equal the fair-value gain in a derivative financial instrument. Generally, when the fair
value of a derivative financial instrument is positive, this indicates that the counterparty owes
us, thus creating a repayment risk for us. When the fair value of a derivative financial instrument
is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the
credit (or repayment) risk in derivative financial instruments by entering into transactions with
high-quality counterparties that are reviewed periodically by our Treasurer.
6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair values of our derivative financial instruments are reflected in the condensed consolidated
balance sheets as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of September 30, |
|
| |
|
2009 |
|
|
2008 |
|
| |
|
(in millions) |
|
Derivative financial instruments designated as hedging instruments |
|
|
|
|
|
|
|
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
Accrued and other current liabilities |
|
$ |
— |
|
|
$ |
(2 |
) |
Forward contracts: |
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
1 |
|
|
|
— |
|
Accrued and other current liabilities |
|
|
(7 |
) |
|
|
(4 |
) |
Other non-current liabilities |
|
|
(3 |
) |
|
|
(9 |
) |
Option contracts: |
|
|
|
|
|
|
|
|
Accrued and other current liabilities |
|
|
(2 |
) |
|
|
(5 |
) |
Other non-current liabilities |
|
|
— |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Total derivative financial instruments designated as hedging instruments |
|
$ |
(11 |
) |
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial instruments not designated as hedging instruments |
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total derivative financial instruments |
|
$ |
(12 |
) |
|
$ |
(21 |
) |
|
|
|
|
|
|
|
The following tables summarize activities related to our derivative financial instruments that are
classified as cash flow hedges:
The (gain) or loss in fair value recognized in accumulated other comprehensive loss, net of tax
(effective portion):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
6 |
|
Forward contracts |
|
|
|
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
13 |
|
Option contracts |
|
|
|
|
|
|
— |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (gain) loss
in accumulated
other comprehensive
loss |
|
|
|
|
|
$ |
(1 |
) |
|
$ |
9 |
|
|
$ |
(2 |
) |
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The (gain) or loss in fair value reclassified from accumulated other comprehensive loss into
earnings, net of tax (effective portion):
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Three months ended September 30, |
|
|
Nine
months ended September 30, |
|
| |
|
Income Statement |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Interest rate swaps |
|
Interest expense |
|
$ |
1 |
|
|
$ |
7 |
|
|
$ |
2 |
|
|
$ |
6 |
|
Forward contracts |
|
Revenue |
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Option contracts |
|
Revenue |
|
|
1 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (gain) loss
reclassified to
earnings |
|
|
|
|
|
$ |
2 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in fair value resulting from ineffectiveness is insignificant for the three and nine
months ended September 30, 2009 and 2008.
For the three months ended September 30, 2009 and 2008, we recognized a $2 million loss and a $1
million gain, respectively, on our forward contracts that are not designated as hedging
instruments. For the nine months ended September 30, 2009 and 2008, we recognized a $1 million loss
and an insignificant loss, respectively, on our forward contracts that are not designated as
hedging instruments.
7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2009, by
reportable segment are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Industry |
|
|
Government |
|
|
|
|
| |
|
Solutions |
|
|
Services |
|
|
Total |
|
| |
|
|
|
|
|
(in millions) |
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
431 |
|
|
$ |
299 |
|
|
$ |
730 |
|
Net additional goodwill resulting from Tellurian acquisition |
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
435 |
|
|
$ |
299 |
|
|
$ |
734 |
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2009, we completed our valuation of the intangible assets related to
the acquisition of Tellurian Networks, Inc. As a result, $1 million of goodwill was reclassed to
amortizable intangible assets. During the third quarter of 2009, based on Tellurian’s financial
performance and operating strategies, we accelerated the payment of additional consideration of $5
million in cash, which was recorded as goodwill on the consolidated balance sheet.
5. Identifiable Intangible Assets
Identifiable intangible assets are recorded in other non-current assets in the condensed
consolidated balance sheets and are composed of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of September 30, 2009 |
|
| |
|
Gross |
|
|
|
|
|
|
Net |
|
| |
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
| |
|
Value |
|
|
Amortization |
|
|
Value |
|
| |
|
|
|
|
|
(in millions) |
|
|
|
|
|
Customer-based assets |
|
|
83 |
|
|
|
(42 |
) |
|
|
41 |
|
Other intangible assets |
|
|
3 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86 |
|
|
$ |
(44 |
) |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for identifiable intangible assets was $14 million for each of the nine
months ended September 30, 2009 and September 30, 2008. Amortization expense is estimated at $18
million, $16 million, $13 million, $4 million, and $2 million for the years ending December 31,
2009 through 2013, respectively. Identifiable intangible assets are amortized over their estimated
useful lives, ranging from one to ten years.
6. Comprehensive Income
Total comprehensive income, net of tax, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Nine months |
|
| |
|
ended September 30, |
|
|
ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(in millions) |
|
|
|
|
|
Net income |
|
$ |
33 |
|
|
$ |
30 |
|
|
$ |
92 |
|
|
$ |
88 |
|
Change in fair value of derivative financial instruments |
|
|
1 |
|
|
|
(9 |
) |
|
|
2 |
|
|
|
(25 |
) |
Reclassification of derivative financial instruments into earnings |
|
|
2 |
|
|
|
8 |
|
|
|
7 |
|
|
|
7 |
|
Foreign currency translation adjustments |
|
|
(4 |
) |
|
|
(15 |
) |
|
|
2 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
32 |
|
|
$ |
14 |
|
|
$ |
103 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Stockholders’ Equity
At September 30, 2009, there were 123,368,000 shares of our Class A Common Stock outstanding. At
December 31, 2008, there were 119,429,000 shares of our Class A Common Stock outstanding.
8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Stock Options and Stock-Based Compensation
Stock-based compensation
For the three and nine months ended September 30, 2009 and 2008, stock-based compensation expense
recorded in direct cost of services and selling, general and administrative expenses, was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
(in millions) |
|
|
(in millions) |
|
Direct cost of services |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Selling, general and administrative expenses |
|
|
4 |
|
|
|
3 |
|
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
|
5 |
|
|
|
4 |
|
|
|
13 |
|
|
|
13 |
|
Total stock-based compensation expense, net of tax |
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
8 |
|
At September 30, 2009, there was $39 million of total unrecognized compensation cost, net of
expected forfeitures, related to non-vested options and restricted stock units, which is expected
to be recognized over a weighted-average period of 1.9 years.
We utilize the Black-Scholes option pricing model to calculate our stock-based employee
compensation expense, and the assumptions used were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended |
| |
|
September 30, |
| |
|
2009 |
|
2008 |
Weighted average risk free interest rates |
|
|
1.86 |
% |
|
|
2.80 |
% |
Weighted average life (in years) |
|
|
4.4 |
|
|
|
4.7 |
|
Volatility |
|
|
34 |
% |
|
|
27 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Weighted average grant-date fair value per share of options granted |
|
$ |
3.64 |
|
|
$ |
4.09 |
|
Activity in our stock-based compensation plans
Activity in stock options and stock-settled stock appreciation rights (SSARs) for Class A Common
Stock was as follows (options and SSARs in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended September 30, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
| |
|
Options/ |
|
Exercise |
|
Options/ |
|
Exercise |
| |
|
SSARs |
|
Price |
|
SSARs |
|
Price |
Outstanding at January 1 |
|
|
15,420 |
|
|
|
15.25 |
|
|
|
16,240 |
|
|
|
15.00 |
|
Granted (1) |
|
|
946 |
|
|
|
11.79 |
|
|
|
1,683 |
|
|
|
14.34 |
|
Exercised |
|
|
(3,312 |
) |
|
|
16.28 |
|
|
|
(1,427 |
) |
|
|
11.10 |
|
Forfeited |
|
|
(1,032 |
) |
|
|
15.56 |
|
|
|
(953 |
) |
|
|
15.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30 |
|
|
12,022 |
|
|
|
14.66 |
|
|
|
15,543 |
|
|
|
15.23 |
|
Exercisable at September 30 |
|
|
6,821 |
|
|
|
15.18 |
|
|
|
9,176 |
|
|
|
15.73 |
|
|
|
|
| (1) |
|
All awards granted for the nine months ended September 30, 2009, were SSARs. |
For outstanding and exercisable options and SSARs at September 30, 2009, the weighted average
remaining contractual term (in years) is 3.47 and 2.43, respectively. For outstanding and
exercisable options and SSARs at September 30, 2009, the aggregate intrinsic value is $181 million
and $99 million, respectively.
9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Activity in restricted stock units for Class A Common Stock was as follows (restricted stock units
in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended September 30, |
| |
|
2009 |
|
2008 |
| |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
|
|
|
|
|
Grant-Date |
| |
|
Awards |
|
Fair Value |
|
Awards |
|
Fair Value |
Outstanding at January 1 |
|
|
1,030 |
|
|
|
14.68 |
|
|
|
1,010 |
|
|
|
14.90 |
|
Granted |
|
|
1,096 |
|
|
|
11.80 |
|
|
|
441 |
|
|
|
14.28 |
|
Vested |
|
|
(150 |
) |
|
|
13.44 |
|
|
|
(71 |
) |
|
|
16.94 |
|
Forfeited |
|
|
(90 |
) |
|
|
14.08 |
|
|
|
(151 |
) |
|
|
14.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30 |
|
|
1,886 |
|
|
|
13.11 |
|
|
|
1,229 |
|
|
|
14.66 |
|
9. Income Taxes
Our effective tax rate for the nine months ended September 30, 2009 was 29.8% as compared to 37.1%
for the nine months ended September 30, 2008. Income tax expense for the nine months ended
September 30, 2009 was lower primarily due to a $6 million tax benefit attributable to the
resolution of certain tax issues with the Internal Revenue Service related to our consolidated
federal income tax returns for the tax years 2003 through 2007, and a $2 million tax benefit
related to the resolution of uncertain tax positions attributable to the closing of tax years in
certain foreign jurisdictions.
In August 2009, we reached an agreement with the Internal Revenue Service to settle all tax issues
related to our consolidated federal income tax returns for the tax years 2005 through 2007. In
connection with this settlement, we expect to owe additional taxes of approximately $1 million,
plus interest.
The gross balance of reserves for uncertain tax positions was $2 million at September 30, 2009,
which excludes $7 million of offsetting tax benefits, primarily from international tax treaties
that provide for relief from double taxation. The net deferred tax asset of $5 million, if
recognized, would be a detriment to our effective income tax rate. The change to the total amount
of unrecognized tax benefits in the third quarter of 2009 reflects the settlement of tax issues
with the Internal Revenue Service related to our consolidated federal income tax returns for the
tax years 2005 through 2007, as well as the closing of tax years in certain foreign jurisdictions.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of
income tax expense. Interest and penalties recorded as a component of income tax expense were
insignificant for the three months ended September 30, 2009 and September 30, 2008. Accrued
interest and penalties, net of tax benefit, related to unrecognized tax benefits were approximately
$2 million as of September 30, 2009 and $5 million as of December 31, 2008.
10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Segment Data
The following is a summary of certain financial information by reportable segment for the three and
nine months ended September 30, 2009 and 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Industry |
|
Government |
|
|
|
|
| |
|
Solutions |
|
Services |
|
Other(1) |
|
Total |
| |
|
(in millions) |
For the three months ended September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
470 |
|
|
$ |
160 |
|
|
$ |
(1 |
) |
|
$ |
629 |
|
Income before taxes |
|
|
35 |
|
|
|
8 |
|
|
|
— |
|
|
|
43 |
|
For the three months ended September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
544 |
|
|
$ |
168 |
|
|
$ |
(1 |
) |
|
$ |
711 |
|
Income before taxes |
|
|
39 |
|
|
|
9 |
|
|
|
— |
|
|
|
48 |
|
For the nine months ended September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,412 |
|
|
$ |
470 |
|
|
$ |
(4 |
) |
|
$ |
1,878 |
|
Income before taxes |
|
|
114 |
|
|
|
23 |
|
|
|
(6 |
) |
|
|
131 |
|
For the nine months ended September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,608 |
|
|
$ |
490 |
|
|
$ |
(2 |
) |
|
$ |
2,096 |
|
Income before taxes |
|
|
123 |
|
|
|
17 |
|
|
|
— |
|
|
|
140 |
|
|
|
|
| (1) |
|
“Other” includes our remaining operating areas and corporate activities, income and expenses
that are not related to the operations of the other reportable segments, and the elimination
of intersegment revenue and direct costs of services of approximately $1 million for the three
months ended September 30, 2009 and 2008, respectively, and $4 million and $2 million for the
nine months ended September 30, 2009 and 2008, respectively, related to the provision of
services by the Industry Solutions segment to the Government Services segment. In addition, $6
million of cost reduction activities are included in this segment in the nine months ended
September 30, 2009. |
11. Earnings Per Share
The following is a reconciliation of the numerators and the denominators of the basic and diluted
earnings per common share computations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months |
|
|
For the Nine Months |
|
| |
|
Ended September 30, |
|
|
Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
| |
|
(in thousands, except per |
|
|
(in thousands, except per |
|
| |
|
share data) |
|
|
share data) |
|
Basic Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,470 |
|
|
$ |
30,341 |
|
|
$ |
92,662 |
|
|
$ |
88,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
121,189 |
|
|
|
120,151 |
|
|
|
120,279 |
|
|
|
119,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
$ |
0.77 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,470 |
|
|
$ |
30,341 |
|
|
$ |
92,662 |
|
|
$ |
88,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
121,189 |
|
|
|
120,151 |
|
|
|
120,279 |
|
|
|
119,750 |
|
Incremental shares assuming dilution |
|
|
2,673 |
|
|
|
2,425 |
|
|
|
1,728 |
|
|
|
1,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
123,862 |
|
|
|
122,576 |
|
|
|
122,007 |
|
|
|
121,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.27 |
|
|
$ |
0.25 |
|
|
$ |
0.76 |
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock awards that were outstanding but were not included in the computation of diluted earnings per
share because their effect was antidilutive were 2,819,000 and 7,214,000 shares for the three
months ended September 30, 2009 and 2008, respectively, and 8,746,000 and 8,415,000 shares for the
nine months ended September 30, 2009 and 2008, respectively. We determined whether a stock award
was dilutive or antidilutive by determining the shares issuable upon exercising or vesting, net of
shares assumed to be purchased out of proceeds at the average market price for the periods
presented.
11
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. Commitments and Contingencies
Litigation
We are, from time to time, involved in various litigation matters. We do not believe that the
outcome of the litigation matters in which we are currently a party, either individually or taken
as a whole, will have a material adverse effect on our consolidated financial condition, results of
operations or cash flows. However, we cannot predict with certainty any eventual loss or range of
possible loss related to such matters.
We currently purchase and intend to continue to purchase the types and amounts of insurance
coverage customary for the industry and geographies in which we operate. We have evaluated our
risk and consider the coverage we carry to be adequate both in type and amount for the business we
conduct.
IPO Allocation Securities Litigation
In July and August 2001, we, as well as some of our current and former officers and directors and
the investment banks that underwrote our initial public offering, were named as defendants in two
purported class action lawsuits seeking unspecified damages for alleged violations of the
Securities Exchange Act of 1934 and the Securities Act of 1933. Plaintiffs alleged that the
Company should have disclosed that the investment banks managing its public offering allocated IPO
shares of the Company to their customers in return for undisclosed commissions and promises to
purchase additional shares of the Company in aftermarket trading. The Company’s case was one of
approximately 300 similar cases, which are collectively known as the IPO Allocation Securities
Litigation. On June 9, 2009, the trial court issued an order granting preliminary approval of the
settlement of the IPO Allocation Securities Litigation. The trial court held a hearing to consider
the final approval of the proposed settlement in September 2009 and, on October 6, 2009, issued an
order approving the settlement. Several groups of objectors have indicated their intent to appeal
once judgments are entered. Under the settlement, the Company’s insurers (along with the insurers
of the other issuers in the IPO Allocation Securities Litigation) would fund the issuers’ portion
of the settlement, and the Company would not make any payment in connection with the settlement.
Dell Acquisition Securities Litigation
On October 5, 2009, a lawsuit related to the offer by DII-Holdings Inc., a Delaware corporation and
an indirect, wholly-owned subsidiary of Dell Inc., a Delaware corporation (Dell), to purchase all
of the issued and outstanding shares of the Company’s Class A Common Stock for $30.00 per share,
upon the terms and subject to the conditions set forth in the Offer to Purchase dated October 2,
2009 (the Offer and Merger) was filed in the District Court of the State of Texas, County of
Dallas, The Booth Family Trust v. Perot Systems Corporation, et al. (Cause No. 09-13538). The
action is brought by The Booth Family Trust, which claims to be a stockholder of the Company, on
its own behalf and on behalf of all other similarly situated, and seeks certification as a class
action on behalf of all the Company’s stockholders, except the defendants and their affiliates.
The lawsuit names the Company, each of the Company’s directors and Dell as defendants. The lawsuit
alleges, among other things, that the Company’s directors breached their fiduciary duties by (i)
failing to maximize shareholder value; (ii) securing benefits for certain officers and directors of
the Company in the Merger at the expense of the Company’s public shareholders; (iii) discouraging
and/or inhibiting alternative offers to purchase control of the corporation or its assets; and (iv)
failing to provide to the Company’s shareholders material information so that they can make an
informed decision as to whether to tender their shares. The lawsuit alleges that, as a result of
the foregoing, the Offer and the Merger are the result of an unfair process resulting in an unfair
price of $30.00 per share. In addition, the lawsuit alleges that the Company and Dell aided and
abetted such alleged breaches of fiduciary duties by the Company’s directors. Based on these
allegations, the lawsuit seeks, among other relief, injunctive relief enjoining the defendants from
consummating the Offer and the Merger. It also purports to seek recovery of the costs of the
action, including reasonable attorney’s fees. On October 29, 2009, an order was entered denying
the plaintiff’s application for a temporary injunction.
On October 7, 2009, a lawsuit related to the Offer and Merger was filed in Collin County, Texas in
the 296th Judicial District Court, Delores Lawrie v. Peter Altabef, et al. (Cause No.
296-03947-2009). The action is brought by Delores Lawrie, who claims to be a stockholder of the
Company, on her own behalf and on behalf of all other similarly situated and seeks certification as
a class action on behalf of all the Company’s stockholders, except the defendants and their
affiliates. The lawsuit names the Company, each of the Company’s directors, the Purchaser and Dell
as defendants. The lawsuit alleges, among other things, that the Company’s directors breached
their fiduciary duties by failing to maximize shareholder value and by making alleged materially
inadequate disclosures and material disclosure omissions. In addition, the lawsuit alleges that
the Company and Dell aided and abetted such alleged breaches of
12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
fiduciary duties by the Company’s
directors. Based on these allegations, the lawsuit seeks, among other relief, injunctive relief
enjoining the Offer and the Merger. It also purports to seek recovery of the costs of the action,
including reasonable attorney’s fees.
Other
In addition to the matters described above, we have been, and from time to time are, named as a
defendant in various legal proceedings in the normal course of business, including arbitrations,
class actions and other litigation involving commercial and employment disputes. Certain of these
proceedings include claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. We are contesting liability and/or the amount of damages, in
each pending matter.
13. Subsequent Events
Pursuant to the previously announced Agreement and Plan of Merger, dated as of September 20, 2009
(the Merger Agreement), by and among the Company, Dell Inc., a Delaware corporation (Dell), and DII
— Holdings, Inc., a Delaware corporation and an indirect, wholly-owned subsidiary of Dell (the
Purchaser), and as previously disclosed on a Form 8-K filed with the SEC on November 3, 2009, Dell
completed its acquisition of all of the outstanding shares of the Company’s Class A common stock,
par value $0.01 per share (the Shares) on November 3, 2009.
Dell’s acquisition of the Shares was structured as a two-step transaction, consisting of a tender
offer by the Purchaser for the Shares at a price of $30.00 per Share (the Offer Price) without
interest thereon and less any applicable withholding or stock transfer taxes, upon the terms and
subject to the conditions set forth in the Offer to Purchase, dated October 2, 2009, and in the
related Letter of Transmittal, each, as amended and supplemented from time to time, filed by Dell
and the Purchaser with the SEC on October 2, 2009 (the Offer), followed by the merger of the
Purchaser with and into the Company, with the Company surviving as an indirect, wholly-owned
subsidiary of Dell (the Merger).
The Offer expired at 12:00 midnight, New York City time, on Monday, November 2, 2009. On November
3, 2009, the Purchaser accepted for payment all validly tendered and not properly withdrawn Shares
(including certain Shares tendered to the depositary pursuant to the Offer’s guaranteed delivery
procedure) and promptly made payment for such Shares in accordance with the terms and conditions of
the Offer and applicable law.
Following the Purchaser’s acceptance for payment of all validly tendered and not withdrawn Shares
on November 3, 2009, pursuant to the terms of the Merger Agreement, the Purchaser merged with and
into the Company in accordance with the provisions of Delaware law that authorize the completion of
the Merger without a vote or meeting of the Company’s stockholders. In the Merger, each Share not
purchased in the Offer (other than shares held in treasury or reserved for issuance by the Company
and Shares held by Dell or the Purchaser or direct or indirect subsidiaries of Dell or the Company,
all of which were cancelled and extinguished, and Shares held by stockholders who validly exercise
their appraisal rights under Delaware law) was converted into the right to receive the Offer Price
without interest thereon and less applicable withholding or stock transfer taxes. Following the
Merger, the Company became a wholly-owned subsidiary of Dell.
Additionally, on November 3, 2009, the Company paid off, in cash, its outstanding borrowings under
the Company’s credit facility, upon which the credit facility was terminated.
We have an arrangement with Goldman Sachs to assist us in the merger and we made a payment to them
of $15 million on November 3, 2009.
On November 4, 2009, the New York Stock Exchange (NYSE) filed with the SEC a notification on Form
25 of removal from listing of the Company’s Class A common stock on the NYSE. The NYSE delisting
of the Class A common stock will become effective ten days after the filing.
13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. These statements relate to future events
or our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “could,” “forecasts,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” “see,” “target,” “projects,”
“position,” or “continue” or the negative of such terms and other comparable terminology. These
statements reflect our current expectations, estimates, and projections. These statements are not
guarantees of future performance and involve risks, uncertainties, and assumptions that are
difficult to predict. Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including the risks described in our Annual Report on Form
10-K for the year ended December 31, 2008, which have not materially changed. These risk factors
describe reasons why our actual results may differ materially from any forward-looking statement.
We disclaim any intention or obligation to update any forward-looking statement.
|
|
|
| Item 2: |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Recent Developments — Merger
Pursuant to the previously announced Agreement and Plan of Merger, dated as of September 20, 2009
(the Merger Agreement), by and among the Company, Dell Inc., a Delaware corporation (Dell), and DII
- Holdings, Inc., a Delaware corporation and an indirect, wholly-owned subsidiary of Dell (the
Purchaser), and as previously disclosed on a Form 8-K filed with the SEC on November 3, 2009, Dell
completed its acquisition of all of the outstanding shares of the Company’s Class A common stock,
par value $0.01 per share (the Shares) on November 3, 2009.
Dell’s acquisition of the Shares was structured as a two-step transaction, consisting of a tender
offer by the Purchaser for the Shares at a price of $30.00 per Share (the Offer Price) without
interest thereon and less any applicable withholding or stock transfer taxes, upon the terms and
subject to the conditions set forth in the Offer to Purchase, dated October 2, 2009, and in the
related Letter of Transmittal, each, as amended and supplemented from time to time, filed by Dell
and the Purchaser with the SEC on October 2, 2009 (the Offer), followed by the merger of the
Purchaser with and into the Company, with the Company surviving as an indirect, wholly-owned
subsidiary of Dell (the Merger).
The Offer expired at 12:00 midnight, New York City time, on Monday, November 2, 2009. On November
3, 2009, the Purchaser accepted for payment all validly tendered and not properly withdrawn Shares
(including certain Shares tendered to the depositary pursuant to the Offer’s guaranteed delivery
procedure) and promptly made payment for such Shares in accordance with the terms and conditions of
the Offer and applicable law.
Following the Purchaser’s acceptance for payment of all validly tendered and not withdrawn Shares
on November 3, 2009, pursuant to the terms of the Merger Agreement, the Purchaser merged with and
into the Company in accordance with the provisions of Delaware law that authorize the completion of
the Merger without a vote or meeting of the Company’s stockholders. In the Merger, each Share not
purchased in the Offer (other than shares held in treasury or reserved for issuance by the Company
and Shares held by Dell or the Purchaser or direct or indirect subsidiaries of Dell or the Company,
all of which were cancelled and extinguished, and Shares held by stockholders who validly exercise
their appraisal rights under Delaware law) was converted into the right to receive the Offer Price
without interest thereon and less applicable withholding or stock transfer taxes. Following the
Merger, the Company became a wholly-owned subsidiary of Dell.
On November 4, 2009, the New York Stock Exchange (NYSE) filed with the SEC a notification on Form
25 of removal from listing of the Company’s Class A common stock on the NYSE. The NYSE delisting
of the Class A common stock will become effective ten days after the filing.
14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our interim condensed
consolidated financial statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q and with our consolidated financial statements and the information under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are
included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Lines of Business
We offer our services under two primary lines of business: Industry Solutions and Government
Services. Industry Solutions, our largest line of business, provides services to our customers
primarily under long-term contracts in strategic relationships. These services include technology,
applications, and business process services, as well as industry domain-based, short-term project
and consulting services. Industry Solutions also provides software-related services, including the
implementation of prepackaged software applications, application development and maintenance, and
application systems migration and testing under short-term contracts related to specific projects.
The Government Services segment provides information technology infrastructure and application
services, consulting, engineering support, and technology-based business process solutions for the
Department of Defense, the Department of Homeland Security, various civilian agencies including the
Department of Education and NASA, various federal intelligence agencies, and other governmental
agencies. Based on a quantitative and qualitative analysis of varying factors, we may increase or
decrease the amount of ongoing investment in both of these business areas, make acquisitions that
strengthen our market position, or divest, exit, or downsize aspects of a business area.
Overview of Our Financial Results for the Third Quarter of 2009
Our financial results are affected by a number of factors, including broad economic conditions, the
amount and type of technology spending by our customers, and the business strategies and financial
condition of our customers and the industries we serve, which could result in increases or
decreases in the amount of services that we provide to our customers and the pricing of such
services. Our ability to identify and effectively respond to these factors is important to our
future financial growth.
We continue to monitor current macroeconomic and credit market conditions and levels of business
confidence and their potential effect on our clients and on us. The current general economic
downturn has adversely affected the levels of business activities in the industries and geographies
where we operate, and has reduced demand and pressured pricing for our services, especially with
respect to discretionary project services. In a severe or prolonged economic downturn, more of our
clients could become unable to meet their financial obligations to us under the terms of our
existing services agreements, could decide to downsize, or could defer or cancel contracts, all of
which could have a material adverse effect on our results of operations or financial condition.
We evaluate our consolidated performance on the basis of several performance indicators. The four
key performance indicators we use are revenue growth, earnings growth, free cash flow, and the
value of contracts signed. We compare these key performance indicators to both annual target
amounts established by management and to our performance for prior periods. We establish the
targets for these key performance indicators primarily on an annual basis, but we may revise them
during the year. We assess our performance using these key indicators on a quarterly and annual
basis.
Revenue Growth
Revenue growth is a measure of the growth we generate from sales of services to new customers,
expansion and extension of existing contracts, acquisitions, and sales of discretionary services to
existing customers. Revenue for the third quarter of 2009 decreased by 11.5% compared to the third
quarter of 2008. As discussed in more detail below, this decrease in revenue came primarily from:
| • |
|
Reductions from existing accounts largely resulting from reductions in scope of services and
completing task orders in the normal course of business in excess of new project starts, and a
reduction of discretionary project services. The discretionary services that we provide, which
include short-term project work, can vary from period-to-period depending on many factors,
including specific customer and industry needs and economic conditions. |
| • |
|
A reduction of pass-through revenue as a result of transitioning the contract management
function back to a client. |
| • |
|
An unfavorable impact from foreign currency movements. |
15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The decrease was partially offset by:
| • |
|
Revenue from new contracts signed during the twelve-month period following the third quarter
of 2008. |
| • |
|
Increase from revenue related to an acquisition in the fourth quarter of 2008. |
Earnings Growth
We measure earnings growth using diluted earnings per share, which is a measure of our
effectiveness in delivering profitable growth. Diluted earnings per share increased to $0.27 per
share for the third quarter of 2009 from $0.25 per share for the third quarter of 2008. The
improvement in earnings relates primarily to reduced income tax expense, which was lower primarily
due to a $4 million tax benefit attributable to the resolution of certain tax issues with the
Internal Revenue Service related to our consolidated federal income tax returns for the tax years
2005 through 2007, and a $2 million tax benefit related to the closing of tax years in certain
foreign jurisdictions. Earnings also increased due to improved profitability on existing accounts,
primarily resulting from the effects of cost reduction activities and increased utilization. These
improvements to earnings were partially offset by reductions in discretionary short-term project
work and by an increase in selling, general and administrative costs.
Free Cash Flow
We calculate free cash flow on a year to date basis as net cash provided by operating activities
less purchases of property, equipment and purchased software, as stated in our condensed
consolidated statements of cash flows. We use free cash flow as a measure of our ability to
generate cash for both our short-term and long-term operating and business expansion needs. We
believe this measure provides important supplemental information to investors and allows them to
assess our ability to meet our working capital requirements and business expansion needs. Free cash
flow was a source of cash of $108 million for the nine months ended September 30, 2009 and $100
million for the same period in 2008. Free cash flow, which is a non-GAAP measure, can be reconciled
to “Net cash provided by operating activities” as follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
Net cash provided by operating activities |
|
$ |
161 |
|
|
$ |
138 |
|
Purchases of property, equipment and software |
|
|
(53 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
108 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
See “Liquidity and Capital Resources” below for additional discussion of net cash provided by
operating activities (under “Operating Activities”).
TCV of Contracts Signed
The amount of “Total Contract Value” (commonly referred to as TCV) that we sell during a
twelve-month period is a measure of our success in capturing new business in the various
outsourcing and consulting markets in which we provide services. TCV includes contracts with new
customers and new and previously uncommitted services with existing customers. We measure TCV as
our estimate of the total expected revenue from contracts that are expected to generate revenue in
excess of a defined amount during a contract term that exceeds a defined length of time.
Various factors may impact the timing of signing contracts with customers, including the complexity
of the contract, competitive pressures, and customer demands. As a result, we generally measure our
success in this area over a twelve-month period because of the significant variations that
typically occur in the amount of TCV signed during each quarterly period. During the twelve-month
period ending September 30, 2009, the amount of TCV signed was $1.0 billion, as compared to $1.4
billion for the twelve-month period ending September 30, 2008.
16
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Additional Measurements
Both of our primary lines of business have distinct economic factors, business trends, and risks
that could affect our results of operations. As a result, in addition to the four metrics discussed
above that we use to measure our consolidated financial performance; we use similar metrics for
each of these lines of business and for certain industry groups and operating units within these
lines of business.
Comparison of the Three Months Ended September 30, 2009 and 2008
Revenue
Revenue for the third quarter of 2009 decreased from revenue for the third quarter of 2008 across
both segments. Below is a summary of our revenue for the third quarter of 2009 as compared to the
third quarter of 2008 (amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Industry Solutions |
|
$ |
470 |
|
|
$ |
544 |
|
|
$ |
(74 |
) |
|
|
(13.6 |
)% |
Government Services |
|
|
160 |
|
|
|
168 |
|
|
|
(8 |
) |
|
|
(4.8 |
)% |
Elimination of intersegment revenue |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
629 |
|
|
$ |
711 |
|
|
$ |
(82 |
) |
|
|
(11.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Solutions
The net decrease in revenue from the Industry Solutions segment for the third quarter of 2009 as
compared to the third quarter of 2008 was primarily attributable to:
| • |
|
$92 million net decrease from existing accounts largely resulting from completing task orders
in the normal course of business in excess of new project starts, a reduction of discretionary
project services, and a renegotiated contract with less pass-through revenue as a result of
transitioning a contract management function back to the client. The discretionary services
that we provide, which include short-term project work, can vary from period-to-period
depending on many factors, including specific customer and industry needs and economic
conditions. |
| • |
|
An unfavorable impact from foreign currency movements of $4 million. |
This decrease was partially offset by these increases:
| • |
|
$18 million increase from new contracts signed primarily in the Healthcare group during the
twelve-month period following the third quarter of 2008. The services that we are providing to
these new customers are primarily the same services that we provide to the majority of our
other long-term outsourcing customers. |
| • |
|
$4 million increase from revenue related to an acquisition within our Healthcare group during
the fourth quarter of 2008. |
Government Services
The decrease of $8 million, or 4.8%, for Government Services for the third quarter of 2009 as
compared to the third quarter of 2008 was primarily attributable to reductions in scope of services
and task orders. These decreases were partially offset by revenue contributions from new business.
Our business with the federal government will fluctuate due to annual federal funding limits and
the specific needs of the federal agencies we serve.
17
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gross Margin
Gross margin, which is calculated as gross profit divided by revenue, for the third quarter of
2009, was 19.4% of revenue, which is higher than the gross margin for the third quarter of 2008 of
17.4%. This year-to-year increase in gross margin was primarily due to the following:
| • |
|
Increased contract profitability on existing accounts in Industry Solutions resulting from
contract efficiencies on fixed-priced outsourcing contracts, volume increases on unit-priced
contracts, and cost containment activities. |
| • |
|
Increased gross margin in Industry Solutions due to a reduction of pass-through revenue and
expenses, as a result of transitioning a contract management function back to a customer. |
These improvements were partially offset by an increase in early stage new contract sales that
typically reach their full level of profitability over time.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of 2009 increased 3.9% to $79
million from $76 million for the third quarter of 2008. As a percentage of revenue, SG&A for the
third quarter of 2009 was 12.6% of revenue as compared to SG&A for the third quarter of 2008 of
10.7% of revenue. The increase is primarily attributable to sales force and marketing expansion and
costs related to our merger with Dell.
Other Income Statement Items
Our effective tax rate for the third quarter of 2009 was 23.3% as compared to 37.5% for the third
quarter of 2008. Income tax expense for the third quarter of 2009 was lower primarily due to a $4
million tax benefit attributable to the resolution of certain tax issues with the Internal Revenue
Service related to our consolidated federal income tax returns for the tax years 2005 through 2007,
and a $2 million tax benefit related to the closing of tax years in certain foreign jurisdictions.
In connection with the settlement with the Internal Revenue Service, we expect to owe additional
taxes of approximately $1 million, plus interest.
Comparison of the Nine Months Ended September 30, 2009 and 2008
Revenue
Revenue for the nine months ended September 30, 2009 decreased from revenue for the nine months
ended September 30, 2008 in both segments. Below is a summary of our revenue for the nine months
ended September 30, 2009 as compared to the nine months ended September 30, 2008 (amounts in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Industry Solutions |
|
$ |
1,412 |
|
|
$ |
1,608 |
|
|
$ |
(196 |
) |
|
|
(12.2 |
)% |
Government Services |
|
|
470 |
|
|
|
490 |
|
|
|
(20 |
) |
|
|
(4.1 |
)% |
Elimination of intersegment revenue |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,878 |
|
|
$ |
2,096 |
|
|
$ |
(218 |
) |
|
|
(10.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Solutions
The net decrease in revenue from the Industry Solutions segment for the nine months ended September
30, 2009 as compared to the nine months ended September 30, 2008 was primarily attributable to:
| • |
|
$213 million net decrease from existing accounts largely resulting from completing task
orders in the normal course of business in excess of new project starts, a reduction of
discretionary project services, and a renegotiated contract with less pass-through revenue as
a result of transitioning a contract management function back to the client. The discretionary
services that we provide, which include short-term project work, can vary from
period-to-period depending on many factors, including specific customer and industry needs and
economic conditions. |
18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| • |
|
An unfavorable impact from foreign currency movements of $27 million. |
This decrease was partially offset by these increases:
| • |
|
$32 million increase from new contracts signed primarily in the Healthcare group during the
twelve-month period following the third quarter of 2008. The services that we are providing to
these new customers are primarily the same services that we provide to the majority of our
other long-term outsourcing customers. |
| • |
|
$12 million increase from revenue related to an acquisition within our Healthcare group
during the fourth quarter of 2008. |
Government Services
The decrease in revenue of $20 million for Government Services for the nine months ended September
30, 2009, as compared to the nine months ended September 30, 2008, was primarily attributable to
reductions in pass-through revenue and reductions in scope of services and task orders. Our
business with the federal government will fluctuate due to annual federal funding limits and the
specific needs of the federal agencies we serve.
Gross Margin
Gross margin, which is calculated as gross profit divided by revenue, for the nine months ended
September 30, 2009, was 19.4% of revenue, which is higher than the gross margin for the nine months
ended September 30, 2008 of 17.3%. This year-to-year increase in gross margin was primarily due to
the following:
| • |
|
Increased contract profitability on existing accounts in Industry Solutions resulting from
contract efficiencies on fixed-priced contracts, volume increases on unit-priced contracts,
and cost containment activities. |
| • |
|
Increased gross margin in Industry Solutions due to a reduction of pass-through revenue and
expenses, as a result of transitioning a contract management function back to a customer. |
| • |
|
Increased gross profit for Government Services related to a contract that was in transition
during the first and second quarter of 2008. |
These improvements were partially offset by a reduction in project work caused by project
completions and cancellations in excess of new project starts and increased expenses related to
transitioning and globalizing certain functions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2009 increased
5.4% to $235 million from $223 million for the nine months ended September 30, 2008. As a
percentage of revenue, SG&A for nine months ended September 30, 2009 was 12.5% of revenue as
compared to SG&A for the nine months ended September 30, 2008 of 10.6% of revenue. The increase is
primarily attributable to $6 million of expenses related to cost reduction activities implemented
in the first quarter of 2009 and increased expenses in the second and third quarters of 2009
related to sales force and marketing expansion.
Other Income Statement Items
Our effective tax rate for the nine months ended September 30, 2009 was 29.8% as compared to 37.1%
for the nine months ended 2008. Income tax expense for the nine months ended September 30, 2009 was
lower primarily due to a $6 million tax benefit attributable to the resolution of certain tax
issues with the Internal Revenue Service related to our consolidated federal income tax returns for
the tax years 2003 through 2007, and a $2 million tax benefit related to the closing of tax years
in certain foreign jurisdictions.
19
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At September 30, 2009, we have cash and cash equivalents of $380 million, of which $131 million was
held by our foreign subsidiaries. We also had short-term investments of $53 million at September
30, 2009, which were held in the U.S. While we are aware of no restrictions on access to our cash
balances in any foreign jurisdiction, it is our intent to permanently reinvest our foreign earnings
or to remit such earnings to the U.S. in a tax-free manner, and we do not provide for U.S. income
tax on the undistributed earnings of our foreign subsidiaries.
In addition, as of September 30, 2009, we had a credit facility that allowed us to borrow up to
$275 million. As of September 30, 2009, we had borrowings of $177 million under the credit facility
and $98 million available. The credit facility required certain financial covenants of which we
were in compliance as of September 30, 2009. On November 3, 2009, we paid off, in cash, our
outstanding borrowings under our credit facility, upon which the credit facility was terminated.
Operating Activities
Net cash provided by operating activities was $161 million and $138 million for the nine months
ended September 30, 2009 and for the nine months ended September 30, 2008, respectively. This
increase was primarily attributable to the following:
| • |
|
Cash provided by changes in accounts receivable was $48 million for the nine months ended
September 30, 2009, as compared to $18 million cash used in accounts receivable for the same
period of the prior year. Our accounts receivable balance at the end of each period can change
based on the amount of revenue for that period and the timing of collection from our
customers, which may vary significantly from period to period. |
| • |
|
During the nine months ended September 30, 2009, we made net cash payments for income taxes
of $26 million as compared to $57 million in the nine months ended September 30, 2008. |
These increases to net cash provided by operating activities were partially offset by the
following:
| • |
|
Cash used due to changes in accrued compensation was $17 million in the nine months ending
September 30, 2009, as compared to $31 million cash provided by changes in accrued
compensation for the same period of 2008. The changes in accrued compensation in the nine
months ended September 30, 2009 were driven by the compensation accrued as of December 31,
2008 that was paid during the nine months ended September 30, 2009, partially offset by our
2009 compensation accrual that will be paid in 2010. Bonuses paid to associates under our
bonus plans in the first nine months of 2009 and 2008 (including payments of annual bonuses
relating to the previous year’s bonus plan) were $62 million and $28 million, respectively. |
| • |
|
During the nine months ended September 30, 2009, there was a decrease of $6 million in net
deferred revenue received from customers as compared to an increase of $19 million for the
same period in 2008. The decrease in 2009 is primarily attributable to payments received in
2008 related to transition services on long-term outsourcing contracts. |
| • |
|
Cash used by changes in accounts payable and accrued liabilities was $23 million for the nine
months ended September 30, 2009, as compared to cash used of $15 million for the same period
of the prior year. This decrease is primarily due to the timing of vendor payments. |
Investing Activities
Net cash used in investing activities was $73 million for the nine months ended September 30, 2009,
as compared to net cash used in investing activities of $32 million for the same period in 2008.
During the nine months ended September 30, 2009, we purchased $53 million of property, equipment
and software, as compared to $38 million for the nine months ended September 30, 2008. During the
nine months ended September 30, 2009, we made net purchases of short-term investments of $17
million. During the nine months ended September 30, 2008, we liquidated short-term investments of
$23 million, net, and used $18 million in the acquisitions of businesses.
20
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financing Activities
Net cash provided by financing activities was $56 million for the nine months ended September 30,
2009, as compared to net cash used in financing activities of $34 million for the nine months ended
September 30, 2008. This increase is primarily attributable to $54 million of proceeds from the
issuance of treasury stock for the nine months ending September 30, 2009, as compared to $16
million for the same period in 2008. Also, in 2008 we made a $34 million payment against our
credit facility and a $24 million purchase of treasury stock.
We routinely maintain cash balances in certain European and Asian currencies to fund operations in
those regions. During the nine months ended September 30, 2009, foreign exchange rate fluctuations
had a net positive impact on our non-domestic cash balances of $2 million, as the U.S. dollar
weakened against the British Pound, Indian Rupee and other currencies. We manage exchange exposures
that are likely to significantly impact net income or working capital. At September 30, 2009, we
had derivative financial instruments to purchase and sell various currencies in the notional amount
of $210 million, which expire at various times before the end of 2012.
Adoption of Significant Accounting Standards
See Note 1, “General,” in the notes to condensed consolidated financial statements for a discussion
of recent accounting pronouncements.
21
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
|
|
|
| Item 3: |
|
Quantitative and Qualitative Disclosures About Market Risk |
For a discussion of our market risk associated with foreign currencies as of December 31, 2008, see
“Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on
Form 10-K for the fiscal year then ended. There have been no material changes in these market
risks.
|
|
|
| Item 4: |
|
Controls and Procedures |
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in SEC Rule
13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of the period
covered by this report, such controls and procedures were effective.
There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, internal control over
financial reporting.
PART II: OTHER INFORMATION
|
|
|
| Item 1: |
|
Legal Proceedings |
We are, from time to time, involved in various litigation matters. We do not believe that the
outcome of the litigation matters in which we are currently a party, either individually or taken
as a whole, will have a material adverse effect on our consolidated financial condition, results of
operations or cash flows. However, we cannot predict with certainty any eventual loss or range of
possible loss related to such matters.
We currently purchase and intend to continue to purchase the types and amounts of insurance
coverage customary for the industry and geographies in which we operate. We have evaluated our
risk and consider the coverage we carry to be adequate both in type and amount for the business we
conduct.
IPO Allocation Securities Litigation
In July and August 2001, we, as well as some of our current and former officers and directors and
the investment banks that underwrote our initial public offering, were named as defendants in two
purported class action lawsuits seeking unspecified damages for alleged violations of the
Securities Exchange Act of 1934 and the Securities Act of 1933. Plaintiffs alleged that the
Company should have disclosed that the investment banks managing its public offering allocated IPO
shares of the Company to their customers in return for undisclosed commissions and promises to
purchase additional shares of the Company in aftermarket trading. The Company’s case was one of
approximately 300 similar cases, which are collectively known as the IPO Allocation Securities
Litigation. On June 9, 2009, the trial court issued an order granting preliminary approval of the
settlement of the IPO Allocation Securities Litigation. The trial court held a hearing to consider
the final approval of the proposed settlement in September 2009 and, on October 6, 2009, issued an
order approving the settlement. Several groups of objectors have indicated their intent to appeal
once judgments are entered. Under the settlement, the Company’s insurers (along with the insurers
of the other issuers in the IPO Allocation Securities Litigation) would fund the issuers’ portion
of the settlement, and the Company would not make any payment in connection with the settlement.
Dell Acquisition Securities Litigation
On October 5, 2009, a lawsuit related to the offer by DII-Holdings Inc., a Delaware corporation and
an indirect, wholly-owned subsidiary of Dell Inc., a Delaware corporation (Dell), to purchase all
of the issued and outstanding shares of the Company’s Class A Common Stock for $30.00 per share,
upon the terms and subject to the conditions set forth in the Offer to Purchase dated October 2,
2009 (the Offer and Merger) was filed in the District Court of the State of Texas, County of
Dallas, The Booth Family Trust v. Perot
Systems Corporation, et al. (Cause No. 09-13538). The action is brought by The Booth Family
Trust, which claims to be a
22
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
stockholder of the Company, on its own behalf and on behalf of all
other similarly situated, and seeks certification as a class action on behalf of all the Company’s
stockholders, except the defendants and their affiliates. The lawsuit names the Company, each of
the Company’s directors and Dell as defendants. The lawsuit alleges, among other things, that the
Company’s directors breached their fiduciary duties by (i) failing to maximize shareholder value;
(ii) securing benefits for certain officers and directors of the Company in the Merger at the
expense of the Company’s public shareholders; (iii) discouraging and/or inhibiting alternative
offers to purchase control of the corporation or its assets; and (iv) failing to provide to the
Company’s shareholders material information so that they can make an informed decision as to
whether to tender their shares. The lawsuit alleges that, as a result of the foregoing, the Offer
and the Merger are the result of an unfair process resulting in an unfair price of $30.00 per
share. In addition, the lawsuit alleges that the Company and Dell aided and abetted such alleged
breaches of fiduciary duties by the Company’s directors. Based on these allegations, the lawsuit
seeks, among other relief, injunctive relief enjoining the defendants from consummating the Offer
and the Merger. It also purports to seek recovery of the costs of the action, including reasonable
attorney’s fees. On October 29, 2009, an order was entered denying the plaintiff’s application for
a temporary injunction.
On October 7, 2009, a lawsuit related to the Offer and Merger was filed in Collin County, Texas in
the 296th Judicial District Court, Delores Lawrie v. Peter Altabef, et al. (Cause No.
296-03947-2009). The action is brought by Delores Lawrie, who claims to be a stockholder of the
Company, on her own behalf and on behalf of all other similarly situated and seeks certification as
a class action on behalf of all the Company’s stockholders, except the defendants and their
affiliates. The lawsuit names the Company, each of the Company’s directors, the Purchaser and Dell
as defendants. The lawsuit alleges, among other things, that the Company’s directors breached
their fiduciary duties by failing to maximize shareholder value and by making alleged materially
inadequate disclosures and material disclosure omissions. In addition, the lawsuit alleges that
the Company and Dell aided and abetted such alleged breaches of fiduciary duties by the Company’s
directors. Based on these allegations, the lawsuit seeks, among other relief, injunctive relief
enjoining the Offer and the Merger. It also purports to seek recovery of the costs of the action,
including reasonable attorney’s fees.
Other
In addition to the matters described above, we have been, and from time to time are, named as a
defendant in various legal proceedings in the normal course of business, including arbitrations,
class actions and other litigation involving commercial and employment disputes. Certain of these
proceedings include claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. We are contesting liability and/or the amount of damages, in
each pending matter.
In evaluating all forward-looking statements, you should specifically consider various factors that
may cause actual results to vary from those contained in the forward-looking statements. Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the
U.S. Securities and Exchange Commission and available at www.sec.gov, for additional information
regarding risk factors.
23
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
Exhibits required by Item 601 of Regulation S-K
| |
|
|
| EXHIBIT |
|
|
| NUMBER |
|
DESCRIPTION OF EXHIBIT |
|
|
|
2.1
|
|
Agreement and Plan of Merger dated September 20, 2009 by and among the Company, Dell Inc. (“Dell”) and DII -
Holdings Inc. (“DII”). (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K
filed September 21, 2009.) |
|
|
|
2.2
|
|
First Amendment dated September 30, 2009, to the Agreement and Plan of Merger dated September 20, 2009, by and
among the Company, Dell and DII. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on
Form 8-K filed October 1, 2009.) |
|
|
|
2.3
|
|
Form of Tender and Voting Agreement dated September 20, 2009, by and among the Company, Dell, DII and each of
the following executive officers and directors of the Company: Peter A. Altabef, Steven Blasnik, John S.T.
Gallagher, Carl Hahn, DeSoto Jordan, Caroline S. Matthews, Thomas Meurer, Cecil H. Moore, Jr., Anthony J.
Principi, Anuroop Singh, John E. Harper, Russell Freeman, Thomas D. Williams, John Lyon, Scott Barnes, Eugene L.
Carrick, Steve Curts, Anurag Jain, Chuck Lyles and Jeff Renzi. (Incorporated by reference to Exhibit 2.2 of the
Company’s Current Report on Form 8-K filed September 21, 2009.) |
|
|
|
2.4
|
|
Form of Tender and Voting Agreement dated September 20, 2009, by and among the Company, Dell, DII and each of
the following stockholders of the Company: H. Ross Perot, HWGA, Ltd., The Perot Foundation, Petrus Financial
Services Ltd., Perot Family Trust, Perot Investment Trust I, Perot Investment Trust II, Perot Investment Trust
III, Perot Investment Trust IV and Perot Investment Trust V. (Incorporated by reference to Exhibit 2.3 of the
Company’s Current Report on Form 8-K filed September 21, 2009.) |
|
|
|
2.5
|
|
Amended and Restated Tender and Voting Agreement dated September 30, 2009, among the Company, Dell, DII and the
Perot Family Trust. (Incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed
October 1, 2009.) |
|
|
|
3.1
|
|
Third Amended and Restated Certificate of Incorporation of Perot Systems Corporation (Incorporated by reference
to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002.) |
|
|
|
3.2
|
|
Fifth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on
Form 8-K filed December 17, 2008). |
|
|
|
4.1
|
|
Specimen of Class A Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company’s
Registration Statement on Form S-1, Registration No. 333-60755.) |
|
|
|
10.36
|
|
Plan Amendment to the Perot Systems Corporation Amended and Restated 1999 Employee Stock Purchase Plan/US,
effective as of September 30, 2009. (Incorporated by reference to Exhibit (e)(17) to the Solicitation /Recommendation
Statement on Schedule 14D-9 filed October 2, 2009.) |
|
|
|
10.37
|
|
Plan Amendment to the Company’s Amended and Restated 1999 Employee Stock Purchase Plan/Non-US, effective as of
September 30, 2009. (Incorporated by reference to Exhibit (e)(19) to the Solicitation / Recommendation
Statement on Schedule 14D-9 filed October 2, 2009.) |
|
|
|
10.38
|
|
Perot Systems Corporation 2001 Long-Term Incentive Plan — Sub-Plan of Perot Systems TSI (India) Limited
(formerly called HCL Perot Systems Limited). (Incorporated by reference to Exhibit (e)(14) to the Solicitation
/ Recommendation Statement on Schedule 14D-9 filed October 2, 2009.) |
|
|
|
10.39
|
|
Plan Amendment to the Perot Systems Corporation 2001 Long-Term Incentive Plan — Sub-Plan of Perot Systems TSI
(India) Limited (formerly called HCL Perot Systems Limited). (Incorporated by reference to Exhibit (e)(15) to
the Solicitation / Recommendation Statement on Schedule 14D-9 filed October 2, 2009.) |
24
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
| |
|
|
| EXHIBIT |
|
|
| NUMBER |
|
DESCRIPTION OF EXHIBIT |
|
|
|
10.40
|
|
Plan Amendment, effective as of September 30, 2009, to the Perot Systems Corporation 2001 Long-Term Incentive
Plan Amended and Restated. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form
8-K filed October 1, 2009.) |
|
|
|
10.41
|
|
Third Amended and Restated License Agreement dated September 20, 2009, between Perot Systems Family Corporation,
H. Ross Perot, Ross Perot, Jr. and the Company. (Incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K filed September 21, 2009.) |
|
|
|
10.70
|
|
Non-Competition Agreement dated September 20, 2009, between Ross Perot, Dell, DII and the Company. (Incorporated
by reference to Exhibit (e)(43) to the Solicitation / Recommendation Statement on Schedule 14D-9 filed October
2, 2009.) |
|
|
|
10.71
|
|
Non-Competition Agreement dated September 20, 2009, between Ross Perot, Jr., Dell, DII and the Company.
(Incorporated by reference to Exhibit (e)(44) to the Solicitation / Recommendation Statement on Schedule 14D-9
filed October 2, 2009.) |
|
|
|
31.1*
|
|
Rule 13a-14 Certification dated November 6, 2009, by Peter A. Altabef, President and Chief Executive Officer. |
|
|
|
31.2*
|
|
Rule 13a-14 Certification dated November 6, 2009, by John E. Harper, Vice President and Chief Financial Officer. |
|
|
|
32.1**
|
|
Section 1350 Certification dated November 6, 2009, by Peter A. Altabef, President and Chief Executive Officer. |
|
|
|
32.2**
|
|
Section 1350 Certification dated November 6, 2009, by John E. Harper, Vice President and Chief Financial Officer. |
|
|
|
| * |
|
Filed herewith. |
| |
| ** |
|
Furnished herewith. |
25
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2009
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 6, 2009 |
By |
/s/ ROBERT J. KELLY
|
|
| |
|
Robert J. Kelly |
|
| |
|
Corporate Controller and Principal
Accounting Officer |
|
26