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 June 30, 2007
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
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(IRS Employer |
| incorporation or organization)
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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 is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer and large accelerated” filer in Rule
12b-2 of the Exchange Act.
þ Large accelerated filer o Accelerated filer o Non-accelerated filer
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
July 27, 2007: 122,093,744 shares
of Class A Common Stock and 816,638 shares of Class B Common Stock.
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2007
INDEX
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
perot systems corporation and subsidiaries
condensed consolidated balance sheets
as of June 30, 2007 and december 31, 2006
(unaudited)
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June 30, 2007 |
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December 31, 2006 |
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(Dollars in millions) |
|
ASSETS |
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|
|
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Current assets: |
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|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
158 |
|
|
$ |
250 |
|
Short-term investments |
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|
— |
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|
|
133 |
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Accounts receivable, net |
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433 |
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|
338 |
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Prepaid expenses and other |
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|
84 |
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|
62 |
|
|
|
|
|
|
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Total current assets |
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675 |
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|
783 |
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Property, equipment and purchased software, net |
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239 |
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|
|
220 |
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Goodwill |
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|
633 |
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|
|
463 |
|
Deferred contract costs, net |
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|
81 |
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|
61 |
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Other non-current assets |
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105 |
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|
54 |
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Total assets |
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$ |
1,733 |
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|
$ |
1,581 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
56 |
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|
$ |
52 |
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Deferred revenue |
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|
48 |
|
|
|
42 |
|
Accrued compensation |
|
|
44 |
|
|
|
65 |
|
Income taxes payable |
|
|
6 |
|
|
|
37 |
|
Accrued and other current liabilities |
|
|
114 |
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|
|
105 |
|
|
|
|
|
|
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Total current liabilities |
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|
268 |
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|
301 |
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Long-term debt |
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|
158 |
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|
|
84 |
|
Non-current deferred revenue |
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|
85 |
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|
|
82 |
|
Other non-current liabilities |
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|
23 |
|
|
|
9 |
|
|
|
|
|
|
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Total liabilities |
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|
534 |
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|
|
476 |
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Commitments and contingencies |
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|
|
|
|
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Stockholders’ equity: |
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Common stock |
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|
1 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
566 |
|
|
|
533 |
|
Retained earnings |
|
|
629 |
|
|
|
575 |
|
Treasury stock |
|
|
(21 |
) |
|
|
(21 |
) |
Accumulated other comprehensive income |
|
|
24 |
|
|
|
17 |
|
|
|
|
|
|
|
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Total stockholders’ equity |
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|
1,199 |
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|
|
1,105 |
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|
|
|
|
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Total liabilities and stockholders’ equity |
|
$ |
1,733 |
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$ |
1,581 |
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|
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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 six months ended June 30, 2007 and 2006
(unaudited)
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Three months ended June 30, |
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Six months ended June 30, |
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2007 |
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|
2006 |
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|
2007 |
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2006 |
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(Dollars in millions, except per share data) |
|
Revenue |
|
$ |
635 |
|
|
$ |
572 |
|
|
$ |
1,225 |
|
|
$ |
1,114 |
|
Direct cost of services |
|
|
529 |
|
|
|
463 |
|
|
|
1,014 |
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
|
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Gross profit |
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106 |
|
|
|
109 |
|
|
|
211 |
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|
|
208 |
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Selling, general and administrative expenses |
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|
70 |
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|
70 |
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|
141 |
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|
|
134 |
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|
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|
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|
|
|
|
|
|
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Operating income |
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36 |
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|
39 |
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|
70 |
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|
74 |
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Interest income |
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2 |
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|
|
2 |
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4 |
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|
4 |
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Interest expense |
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(3 |
) |
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|
(1 |
) |
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(5 |
) |
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(2 |
) |
Other income (expense), net |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
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|
|
|
|
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|
|
|
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Income before taxes |
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|
36 |
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|
|
41 |
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|
70 |
|
|
|
77 |
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Provision for income taxes |
|
|
13 |
|
|
|
15 |
|
|
|
24 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
$ |
23 |
|
|
$ |
26 |
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|
$ |
46 |
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$ |
49 |
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Earnings per share of common stock: |
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Basic, Class A |
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.38 |
|
|
$ |
0.41 |
|
Basic, Class B |
|
$ |
0.19 |
|
|
$ |
0.22 |
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|
$ |
0.38 |
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|
$ |
0.41 |
|
Diluted |
|
$ |
0.18 |
|
|
$ |
0.21 |
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|
$ |
0.37 |
|
|
$ |
0.40 |
|
Diluted, Class B |
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.37 |
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|
$ |
0.40 |
|
Weighted average number of common shares
outstanding (in thousands): |
|
|
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|
|
|
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|
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Basic, Class A |
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121,567 |
|
|
|
118,572 |
|
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|
121,159 |
|
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|
118,202 |
|
Basic and diluted, Class B |
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
Diluted |
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124,943 |
|
|
|
121,949 |
|
|
|
124,558 |
|
|
|
121,766 |
|
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 SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
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Six Months Ended June 30, |
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2007 |
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2006 |
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(Dollars in millions) |
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Cash flows from operating activities: |
|
|
|
|
|
|
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Net income |
|
$ |
46 |
|
|
$ |
49 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
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Depreciation and amortization |
|
|
50 |
|
|
|
38 |
|
Impairment of assets |
|
|
2 |
|
|
|
— |
|
Stock-based compensation |
|
|
8 |
|
|
|
8 |
|
Change in deferred taxes |
|
|
(6 |
) |
|
|
7 |
|
Excess tax benefits from stock-based compensation arrangements |
|
|
(3 |
) |
|
|
(2 |
) |
Other non-cash items |
|
|
1 |
|
|
|
— |
|
Changes in assets and liabilities (net of effects from acquisitions of businesses): |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(32 |
) |
|
|
(56 |
) |
Prepaid expenses |
|
|
(13 |
) |
|
|
(11 |
) |
Deferred contract costs, net |
|
|
(29 |
) |
|
|
(15 |
) |
Accounts payable and accrued liabilities |
|
|
(12 |
) |
|
|
31 |
|
Accrued compensation |
|
|
(31 |
) |
|
|
(20 |
) |
Deferred revenue |
|
|
9 |
|
|
|
26 |
|
Income taxes |
|
|
(10 |
) |
|
|
(9 |
) |
Other current and non-current assets |
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(22 |
) |
|
|
48 |
|
|
|
|
|
|
|
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Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, equipment and software |
|
|
(48 |
) |
|
|
(36 |
) |
Acquisitions of businesses, net |
|
|
(252 |
) |
|
|
(29 |
) |
Purchases of short-term investments |
|
|
(493 |
) |
|
|
— |
|
Net proceeds from sale of short-term investments |
|
|
626 |
|
|
|
— |
|
|
|
|
|
|
|
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Net cash used in investing activities |
|
|
(167 |
) |
|
|
(65 |
) |
|
|
|
|
|
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Cash flows from financing activities: |
|
|
|
|
|
|
|
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Proceeds from issuance of long-term debt |
|
|
75 |
|
|
|
— |
|
Proceeds from issuance of common stock |
|
|
15 |
|
|
|
12 |
|
Proceeds from issuance of treasury stock |
|
|
— |
|
|
|
8 |
|
Excess tax benefits from stock-based compensation arrangements |
|
|
3 |
|
|
|
2 |
|
Purchases of treasury stock |
|
|
— |
|
|
|
(17 |
) |
Other |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
94 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(92 |
) |
|
|
(9 |
) |
Cash and cash equivalents at beginning of period |
|
|
250 |
|
|
|
260 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
158 |
|
|
$ |
251 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange Commission. The interim
condensed consolidated financial statements include the consolidated accounts of Perot Systems
Corporation and its majority-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. These
financial statements should be read in conjunction with the audited financial statements for the
year ended December 31, 2006, in our Annual Report on Form 10-K filed with the SEC on February 28,
2007. Operating results for the three and six month periods ended June 30, 2007 are not necessarily
indicative of the results for the year ending December 31, 2007.
Financial instruments
The carrying amounts reflected in our condensed consolidated balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable, and short-term and
long-term debt approximate their respective fair value. Fair values are based primarily on current
prices for those or similar instruments.
We use derivative financial instruments for the purpose of managing specific exposures as part of
our risk management program and hold all derivatives for purposes other than trading. To date, our
use of such instruments has been limited to foreign currency forward contracts and an interest rate
swap on borrowings under our credit facility entered into on February 15, 2007. This interest rate
swap effectively converts $75 million of our borrowings under our credit facility from a
variable-rate instrument into a fixed-rate instrument with an interest rate of 5.64%. We do not
currently utilize hedge accounting with regard to these derivatives and record all gains and losses
associated with such derivatives in the earnings of the appropriate period. In accordance with
Statement of Financial Accounting Standards (FAS) No 133, “Accounting for Derivative Instruments
and Hedging Activities,” we record the net fair value of the derivatives in accounts receivable,
net, and accrued and other current liabilities, on the condensed consolidated balance sheets.
Significant accounting standards to be adopted
FASB Statement No. 157
In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standard (FAS) No. 157, “Fair Value Measurements,” which provides guidance for using fair value to
measure assets and liabilities. FAS 157 will apply whenever another standard requires or permits
assets or liabilities to be measured at fair value. The standard does not expand the use of fair
value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. Our adoption of FAS 157 is not expected to have a material
impact on our consolidated financial statements.
FASB Statement No. 159
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115,” which expands the use of
fair value accounting but does not affect existing standards which require assets and liabilities
to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure
accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees, issued debt and other eligible financial instruments.
FAS 159 is effective for years beginning after November 15, 2007. Our adoption of FAS 159 is not
expected to have a material impact on our consolidated financial statements.
NOTE 2. ACQUISITIONS
On February 28, 2006, we acquired
substantially all of the assets of eServ, LLC, a provider of
product engineering outsourcing services. During the second quarter of 2007, we determined that
eServ, LLC, met their financial
targets for 2006 and we paid $4 million of additional consideration in cash, which was recorded as
goodwill on the consolidated balance sheets. The goodwill was assigned to the Industry Solutions
segment and is deductible for tax purposes.
4
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On January 30, 2007, we acquired all of the outstanding shares of QSS Group, Inc. (QSS), an
information technology services company providing services to the U.S. federal government. As a
result of the acquisition, we have gained several significant government-wide contracts and
expanded both the scope of services and the areas we serve within the Department of Homeland
Security and the Department of Defense. The initial purchase price for QSS was $248 million (net of
$1 million of cash acquired), $30 million of which is being held in an escrow account for up to
approximately 18 months for potential purchase price adjustments. The purchase price was partially
funded by $75 million borrowed against our existing credit facility. The results of operations of
QSS and the fair value of assets acquired and liabilities assumed are included in our condensed
consolidated financial statements beginning on the acquisition date. The allocation of the QSS
purchase consideration to goodwill, has not been concluded due to a potential contractual purchase
price adjustment relating to working capital targets. The fair value of the acquired intangible
assets totaled $50 million, resulting in the estimated excess purchase price over net assets
acquired of $172 million, which was recorded as goodwill on the condensed consolidated balance
sheets, was assigned to the Government Services segment and is deductible for tax purposes.
The following table summarizes the adjusted fair values of the QSS assets acquired and the
liabilities assumed at the date of acquisition, which was January 30, 2007 (in millions):
| |
|
|
|
|
Current assets |
|
$ |
61 |
|
Property, equipment and purchased software, net |
|
|
1 |
|
Goodwill |
|
|
172 |
|
Indentifiable intangible assets |
|
|
50 |
|
|
|
|
|
|
|
|
284 |
|
|
|
|
|
Current liabilities |
|
|
(35 |
) |
|
|
|
|
Total consideration paid as of June 30, 2007 |
|
$ |
249 |
|
|
|
|
|
The following table reflects pro forma combined results of operations as if the acquisition had
taken place at the beginning of the calendar year for each of the periods presented and includes an
estimate of interest expense on the amount borrowed against our credit facility and an estimate of
amortization expense for identifiable intangible assets that were acquired (in millions):
| |
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|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Six months ended |
| |
|
June 30, |
|
June 30, |
| |
|
2006 |
|
2007 |
|
2006 |
Revenue |
|
$ |
641 |
|
|
$ |
1,250 |
|
|
$ |
1,256 |
|
Income before taxes |
|
|
43 |
|
|
|
71 |
|
|
|
81 |
|
Net income |
|
|
27 |
|
|
|
47 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, Class A |
|
|
0.23 |
|
|
|
0.38 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, Class B |
|
|
0.23 |
|
|
|
0.38 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
|
0.22 |
|
|
|
0.38 |
|
|
|
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, Class B |
|
|
0.22 |
|
|
|
0.38 |
|
|
|
0.42 |
|
In our opinion, the unaudited pro forma combined results of operations are not indicative of the
actual results that would have occurred had the acquisition been consummated at the beginning of
2007 or 2006, nor are they indicative of future operations of the combined companies under our
ownership and management.
5
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. GOODWILL
The changes in the carrying amount of goodwill for the six months ended June 30, 2007, by reporting
segment are as follows:
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Consulting |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
| |
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Industry |
|
|
Government |
|
|
Applications |
|
|
|
|
| |
|
Solutions |
|
|
Services |
|
|
Solutions |
|
|
Total |
|
| |
|
(in millions) |
|
Balance as of December 31, 2006 |
|
$ |
255 |
|
|
$ |
128 |
|
|
$ |
80 |
|
|
$ |
463 |
|
Goodwill resulting from QSS acquisition |
|
|
— |
|
|
|
172 |
|
|
|
— |
|
|
|
172 |
|
Other |
|
|
4 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2007 |
|
$ |
259 |
|
|
$ |
300 |
|
|
$ |
74 |
|
|
$ |
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4. 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 June 30, 2007 |
|
| |
|
Gross |
|
|
|
|
|
|
Net |
|
| |
|
Carrying |
|
|
Accumulated |
|
|
Book |
|
| |
|
Value |
|
|
Amortization |
|
|
Value |
|
| |
|
(in millions) |
|
Service mark |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
— |
|
Customer-based assets |
|
|
80 |
|
|
|
(21 |
) |
|
|
59 |
|
Other intangible assets |
|
|
3 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
84 |
|
|
$ |
(23 |
) |
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for identifiable intangible assets was $8 million and $4 million for the
six months ended June 30, 2007 and 2006, respectively. Amortization expense is estimated at $16
million, $15 million, $14 million, $13 million, $10 million and $1 million for the years ended
December 31, 2007 through 2012, respectively. Identifiable intangible assets are amortized on a
straight-line basis over their estimated useful lives, ranging from 2 to 6 years. The weighted
average estimated useful life is approximately five years.
NOTE 5. COMPREHENSIVE INCOME
Total comprehensive income, net of tax, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Six months |
|
| |
|
ended June 30, |
|
|
ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(in millions) |
|
|
|
|
|
Net income |
|
$ |
23 |
|
|
$ |
26 |
|
|
$ |
46 |
|
|
$ |
49 |
|
Foreign currency translation adjustments |
|
|
6 |
|
|
|
1 |
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
29 |
|
|
$ |
27 |
|
|
$ |
53 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6. CREDIT FACILITY
In January 2007, we borrowed an additional $75 million against our credit facility in connection
with our acquisition of QSS. Interest on this borrowing is at a variable rate based on 3 month
LIBOR and was 5.86% at June 30, 2007. On February 15, 2007, we entered into an interest rate swap
agreement to effectively convert this borrowing into a fixed-rate instrument with an interest rate
of 5.64%. The interest rate at June 30, 2007 for our borrowing of $77 million made in March 2005
was 5.82%.
6
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. STOCKHOLDERS’ EQUITY
At June 30, 2007, there were 121,957,000 shares of our Class A Stock outstanding and 817,000 shares
of our Class B Common Stock outstanding. At December 31, 2006, there were 120,229,000 shares of our
Class A Stock outstanding and 817,000 shares of our Class B Common Stock outstanding.
NOTE 8. STOCK OPTIONS AND STOCK-BASED COMPENSATION
Stock-based compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment,” which requires employee stock options and rights to purchase shares under stock
participation plans to be accounted for under the fair value method. Prior to the adoption of FAS
123R and as permitted by FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Transition
and Disclosure,” we elected to follow APB 25 and related interpretations in accounting for our
employee stock options and implemented the disclosure-only provisions of FAS 123 and FAS 148. Under
APB 25, stock compensation expense was recorded when the exercise price of employee stock options
was less than the fair value of the underlying stock on the date of grant. We continue to account
for options issued prior to our initial public offering under APB 25 as required by FAS 123R.
For the three and six months ended June 30, 2007, stock option compensation expense and costs
associated with our employee stock purchase plan (ESPP) recorded in direct cost of services and
selling, general and administrative expenses, as well as the decrease in diluted earnings per
common share, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(in millions, except per share data) |
|
Direct cost of services |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Selling, general and administrative expenses |
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense from stock
options and ESPP |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
7 |
|
Stock compensation expense from stock
options and ESPP, net of tax |
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, Class A |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
Basic earnings per common share, Class B |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
Diluted earnings per common share, Class B |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
Stock compensation expense related to restricted stock units was $888,000 ($560,000 net of tax),
and $1,704,000 ($1,074,000 net of tax) for the three and six months ended June 30, 2007, and
$588,000 ($371,000 net of tax), and $1,098,000 ($692,000 net of tax) for the three and six months
ended June 30, 2006.
At June 30, 2007, there was $38 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 2.1 years.
7
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Activity in our stock-based compensation plans
Activity in stock options for Class A Common Stock was as follows (options in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six months ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding at January 1 |
|
|
18,169 |
|
|
|
14.42 |
|
|
|
25,342 |
|
|
|
14.81 |
|
Granted |
|
|
53 |
|
|
|
18.65 |
|
|
|
83 |
|
|
|
15.00 |
|
Exercised |
|
|
(1,367 |
) |
|
|
7.99 |
|
|
|
(1,885 |
) |
|
|
8.55 |
|
Forfeited |
|
|
(989 |
) |
|
|
16.92 |
|
|
|
(4,409 |
) |
|
|
21.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30 |
|
|
15,866 |
|
|
|
14.83 |
|
|
|
19,131 |
|
|
|
14.00 |
|
Exercisable at June 30 |
|
|
9,071 |
|
|
|
15.63 |
|
|
|
10,198 |
|
|
|
15.04 |
|
For outstanding and exercisable shares for the six months ended June 30, 2007, the weighted
average remaining contractual term (in years) is 4.23 and 3.88, respectively. For outstanding and
exercisable shares for the six months ended June 30, 2007, the aggregate intrinsic value is $56
million and $33 million, respectively.
NOTE 9. INCOME TAXES
Our effective tax rate for the six months ended June 30, 2007 was 34.3% as compared to 36.4% for
the first six months ended 2006. Income tax expense for the six months of 2007 included a $2
million tax benefit from the reduction of a valuation allowance against our deferred tax assets in
Europe and a $1 million benefit to our deferred tax assets resulting from a change in Texas margin
tax law in the second quarter of 2007, partially offset by the effect of increased taxes from the
expiration of one of our tax holidays in India and increased state income taxes as a result of the
Texas margin tax and the acquisition of QSS, which operates in several high-tax states. Income tax
expense for the first six months of 2006 included tax expense of $1 million relating to the
resolution of several tax issues raised in an audit by the Internal Revenue Service (IRS),
including the impact from similar tax issues in open tax years.
While we are subject to examination by the tax authorities in each of the jurisdictions where we
operate, our principal tax jurisdictions are the United States, India, and the United Kingdom. We
are currently under examination by the IRS for tax years 2003 and 2004. We received a closing
agreement from the IRS in March 2007, which effectively closed all tax years prior to 2003 from
further examination. We are also under examination in India for the fiscal years ended March 31,
2002 through March 31, 2005 and are under examination in the United Kingdom for calendar year 2005.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which clarifies the
accounting for and disclosure of uncertainty in tax positions. Additionally, FIN 48 provides
guidance on the recognition, measurement, derecognition, classification and disclosure of tax
positions and on the accounting for related interest and penalties. As a result of the
implementation of FIN 48, we recognized an $18 million decrease in the reserves for uncertain tax
positions, which was recognized as an $8 million increase to retained earnings, a $5 million
decrease to goodwill to adjust unrecognized benefits recorded in the cost of acquired companies and
a $5 million increase to additional paid in capital to adjust uncertain positions recorded as a
component of shareholders’ equity. Following our adoption of FIN 48, the gross balance of
reserves for uncertain tax positions was $15 million at January 1, 2007, which excludes $3 million of
offsetting tax benefits, primarily from international tax treaties, which provide for relief from
double taxation. The net unrecognized tax benefits of $12 million includes $10 million that, if
recognized, would benefit our effective income tax rate and $2 million that, if recognized, would
reduce goodwill.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of
income tax expense. Accrued interest and penalties related to unrecognized tax benefits were
approximately $2 million as of both January 1, 2007 and June 30, 2007. We do not anticipate a
significant change to the total amount of unrecognized tax benefits within the next 12 months.
8
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10. SEGMENT DATA
We offer our services under three primary lines of business: Industry Solutions, Government
Services, and Consulting and Applications Solutions. Industry Solutions, our largest line of
business, provides services to our customers primarily under long-term contracts in strategic
relationships. These services include technology and business process services, as well as industry
domain-based, short-term project and consulting services. The Government Services segment provides
infrastructure support, application design and development, consulting, engineering, and
technology-based business process solutions for the Department of Defense, the Department of
Homeland Security, various federal intelligence agencies, and other governmental agencies.
Consulting and Applications Solutions provides software-related services, including the
implementation of prepackaged software applications, application development and maintenance, and
application systems migration and testing primarily under short-term contracts related to specific
projects. “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 $21 million and
$12 million for the three months ended June 30, 2007 and 2006, respectively, and $40 million and
$23 million for the six months ended June 30, 2007 and 2006 related to the provision of services by
the Consulting and Applications Solutions segment to the Industry Solutions segment and Government
Services Segments.
The reportable segments follow the same accounting policies that we use for our consolidated
financial statements. Segment performance is evaluated based on income before taxes, exclusive of
income and expenses that are included in the “Other” category. Substantially all corporate and
centrally incurred costs are allocated to the segments based principally on expenses, employees,
square footage, or usage.
The following is a summary of certain financial information by reportable segment for the three and
six months ended June 30, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Consulting and |
|
|
|
|
| |
|
Industry |
|
Government |
|
Applications |
|
|
|
|
| |
|
Solutions |
|
Services |
|
Solutions |
|
Other |
|
Total |
| |
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
For the three months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
436 |
|
|
$ |
145 |
|
|
$ |
75 |
|
|
$ |
(21 |
) |
|
$ |
635 |
|
Income before taxes |
|
|
22 |
|
|
|
6 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
36 |
|
For the three months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
449 |
|
|
$ |
72 |
|
|
$ |
63 |
|
|
$ |
(12 |
) |
|
$ |
572 |
|
Income before taxes |
|
|
26 |
|
|
|
6 |
|
|
|
8 |
|
|
|
1 |
|
|
|
41 |
|
For the six months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
860 |
|
|
$ |
259 |
|
|
$ |
146 |
|
|
$ |
(40 |
) |
|
$ |
1,225 |
|
Income before taxes |
|
|
41 |
|
|
|
11 |
|
|
|
19 |
|
|
|
(1 |
) |
|
|
70 |
|
For the six months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
867 |
|
|
$ |
148 |
|
|
$ |
122 |
|
|
$ |
(23 |
) |
|
$ |
1,114 |
|
Income before taxes |
|
|
49 |
|
|
|
10 |
|
|
|
16 |
|
|
|
2 |
|
|
|
77 |
|
9
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 under the two-class method.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(in thousands, except per share data) |
|
Basic Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class A common shares (1) |
|
$ |
22,575 |
|
|
$ |
25,672 |
|
|
$ |
45,826 |
|
|
$ |
48,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class A |
|
|
121,567 |
|
|
|
118,572 |
|
|
|
121,159 |
|
|
|
118,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, Class A |
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.38 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class B common shares (1) |
|
$ |
152 |
|
|
$ |
177 |
|
|
$ |
309 |
|
|
$ |
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class B |
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share, Class B |
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.38 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (2) |
|
$ |
22,727 |
|
|
$ |
25,849 |
|
|
$ |
46,135 |
|
|
$ |
48,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
122,384 |
|
|
|
119,388 |
|
|
|
121,975 |
|
|
|
119,017 |
|
Incremental shares assuming dilution |
|
|
2,559 |
|
|
|
2,561 |
|
|
|
2,583 |
|
|
|
2,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding (3) |
|
|
124,943 |
|
|
|
121,949 |
|
|
|
124,558 |
|
|
|
121,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.37 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class B common shares(4) |
|
$ |
148 |
|
|
$ |
172 |
|
|
$ |
301 |
|
|
$ |
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class B |
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, Class B |
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.37 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Net income is allocated to Class A and Class B common shares based on the weighted
average common shares attributable to each class of stock. |
| |
| (2) |
|
For purposes of the diluted net income per share computation for common stock, shares
of Class B common stock are assumed to be converted; therefore, 100% of net income is
allocated to common stock. |
| |
| (3) |
|
Class B shares are assumed to be converted in the weighted average diluted common
shares outstanding. |
| |
| (4) |
|
Net income is allocated to class B common shares based on the weighted average diluted
common shares attributable to each class of stock. |
For the three and six months ended June 30, 2007, outstanding options to purchase 3,486,000
and 3,515,000 shares, respectively, of our common stock were not included in the computation of
diluted earnings per common share because including them would be anti-dilutive. For the three and
six months ended June 30, 2006, outstanding options to purchase 6,404,000 and 6,349,000 shares,
respectively, of our common stock were not included in the computation of diluted earnings per
common share because including them would be anti-dilutive. We determined whether an option was
dilutive or anti-dilutive by comparing the average market price of our common shares for that
period to the aggregate assumed proceeds from each stock option, measured as the sum of the assumed
cash proceeds from and excess tax benefits that would be recorded upon the exercise of each stock
option and the average unearned compensation cost on each stock option.
10
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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. Theses cases focus on alleged
improper practices of investment banks. Our case has been consolidated for pretrial purposes with
approximately 300 similar cases in the IPO Allocation Securities Litigation. We had accepted a
settlement proposal presented to all issuer defendants under which plaintiffs would dismiss and
release all claims against all issuer defendants, in exchange for an assurance by the insurance
companies collectively responsible for insuring the issuers in all of the IPO cases that the
plaintiffs will achieve a minimum recovery of $1 billion (including amounts recovered from the
underwriters).
In December 2006, the Second Circuit Court of Appeals vacated the class certifications in the IPO
class action test cases, finding the predominance of common questions over individual questions
that is required for class certification cannot be met by those plaintiffs. The Second Circuit has
denied plaintiffs’ petition for rehearing. The plaintiffs are seeking certification of a narrower
class at the trial court level. At the request of the issuer defendants, the trial court has
terminated the settlement approval process.
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.
11
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, 2006. 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
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, 2006.
Lines of Business
We offer our services under three primary lines of business: Industry Solutions, Government
Services, and Consulting and Applications Solutions. Industry Solutions, our largest line of
business, provides services to our customers primarily under long-term contracts in strategic
relationships. These services include technology and business process services, as well as industry
domain-based, short-term project and consulting services. The Government Services segment provides
infrastructure support, application design and development, consulting, engineering, and
technology-based business process solutions for the Department of Defense, the Department of
Homeland Security, various federal intelligence agencies, and other governmental agencies.
Consulting and Applications Solutions provides software-related services, including the
implementation of prepackaged software applications, application development and maintenance, and
application systems migration and testing primarily under short-term contracts related to specific
projects.
Overview of Our Financial Results for the Second Quarter of 2007
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 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.
12
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue Growth
Revenue growth is a measure of the growth we generate through sales of services to new customers,
retention of existing contracts, acquisitions, and discretionary services from existing customers.
Revenue for the second quarter of 2007 grew by 11.0% as compared to the second quarter of 2006. As
discussed in more detail below, this revenue growth came primarily from the following:
| • |
|
Revenue from a company acquired during the first quarter of 2007. |
| |
| • |
|
An increase in revenue from the expansion of base services and discretionary technology investments by our existing
long-term customers. |
| |
| • |
|
Revenue from new contracts signed during the twelve-month period following the second quarter of 2006. |
Partially offsetting these increases in revenue was the loss of revenue from our infrastructure
outsourcing contract with UBS that ended on January 1, 2007.
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 for the second quarter of
2007 decreased 14.3% to $0.18 per share from $0.21 per share for the second quarter of 2006 and
include the following underlying changes:
| • |
|
Gross profits from our infrastructure outsourcing contract with UBS
decreased by $14 million in the second quarter of 2007 as compared to
the second quarter of 2006 as a result of the end of the UBS contract.
The loss from this infrastructure outsourcing contract resulted in a
decrease in earnings of approximately $.07 per diluted share. |
| |
| • |
|
The remaining $.04 of growth per diluted share, came primarily from
our Industry Solutions line of business as the result of actions to
strengthen profitability, including account profit improvements and a
reduction to employee expenses, primarily incentive compensation.
Partially offsetting this benefit were decreased gross margins in our
Industry Solutions and Government Services lines of business. |
Free Cash Flow
We calculate free cash flow on a trailing twelve month 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 use
a twelve-month period to measure our success in this area because of the significant variations
that typically occur on a quarterly basis due to the timing of certain cash payments. Free cash
flow for the twelve months ended June 30, 2007, was $38 million as compared to $93 million for the
twelve months ended June 30, 2006. Free cash flow, which is a non-GAAP measure, can be reconciled
to “Net cash provided by operating activities” as follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Twelve Months |
|
| |
|
Ended |
|
| |
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
Net cash provided by operating activities |
|
$ |
143 |
|
|
$ |
166 |
|
Purchases of property, equipment and software |
|
|
(105 |
) |
|
|
(73 |
) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
38 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
As discussed below under “Liquidity and Capital Resources,” the increase in purchases of property,
equipment and software was primarily related to our business expansion needs for data center and
office facilities.
13
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and includes contracts with new
customers and contracts for new 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 the signing of 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 each of the
twelve-month periods ending June 30, 2007 and June 30, 2006, the amount of TCV signed was $1.8
billion.
Additional Measurements
Each of our three primary lines of business has 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 June 30, 2007 and 2006
Revenue
Revenue for the second quarter of 2007 increased from revenue for the second quarter of 2006 due to
increases in revenue from the Government Services and Consulting and Applications Solutions
segments, partially offset by a decrease in the Industry Solutions segment. Below is a summary of
our revenue for the second quarter of 2007 as compared to the second quarter of 2006 (amounts in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Industry Solutions |
|
$ |
436 |
|
|
$ |
449 |
|
|
$ |
(13 |
) |
|
|
(2.9 |
)% |
Government Services |
|
|
145 |
|
|
|
72 |
|
|
|
73 |
|
|
|
101.4 |
% |
Consulting and Applications Solutions |
|
|
75 |
|
|
|
63 |
|
|
|
12 |
|
|
|
19.0 |
% |
Elimination of intersegment revenue |
|
|
(21 |
) |
|
|
(12 |
) |
|
|
(9 |
) |
|
|
75.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
635 |
|
|
$ |
572 |
|
|
$ |
63 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Solutions
The net decrease in revenue from the Industry Solutions segment for second quarter of 2007 as
compared to the second quarter of 2006 was primarily due to the $68 million decrease in revenue
from the expiration of our infrastructure outsourcing contract with UBS on January 1, 2007.
Partially offsetting this decrease were increases in revenue primarily attributable to:
| • |
|
$41 million net increase from existing accounts and short-term project
work. This net increase resulted from expanding our base services to
existing long-term customers and from providing additional
discretionary services to these customers. 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. This increase was
primarily related to contracts in the healthcare industry. |
| |
| • |
|
$14 million increase from new contracts signed during the twelve-month
period following the second quarter of 2006 and from new contracts
signed in the second quarter of 2006 for which we did not recognize a
full quarter of revenue in the second quarter of 2006. This increase
was composed of $6 million and $8 million from new contracts signed in
the Healthcare and Commercial Solutions groups, respectively. 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. |
14
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net increases in revenue from contracts in the healthcare industry are largely due to changes in
the healthcare industry, which has required increased system investment by our customers and new
customers. Because of the complexities associated with system changes, combined with our customers’
desire to focus on core functions, the healthcare outsourcing market has experienced increased
levels of business. The strength in healthcare revenue comes primarily from two factors:
| • |
|
Our solutions for the healthcare market were developed over several
years and are highly customized to the specific business needs of the
market. We identified certain aspects of the healthcare market as core
to our long-term service offerings several years ago when the market
for technology and business process services was immature. As a
result, we have an established presence and brand, which we have
strengthened primarily through internal investments in software and
solutions. |
| |
| • |
|
The healthcare industry continues to be in a state of change as health
systems globally look to transform their clinical and administrative
back-office operations, payer organizations work to develop new
consumer-based health models, and the rate of medical cost inflation
continues to be high. Clinical transformation revolutionizes the way
in which the healthcare community uses information technology to
automate the clinical process resulting in improvements in both
healthcare quality and efficiency. |
Government Services
The $73 million, or 101.4%, net increase in revenue from the Government Services segment for the
second quarter of 2007 as compared to the second quarter of 2006 was primarily attributable to the
$69 million in revenue from the acquisition of QSS Group, Inc. (QSS), an information technology
services company providing services to the U.S. federal government. Our business with the federal
government will fluctuate due to annual federal funding limits and the specific needs of the
federal agencies we serve.
Consulting and Applications Solutions
The $12 million, or 19.0% increase in revenue from the Consulting and Applications Solutions
segment was due to a $9 million increase in intersegment
revenues primarily attributable to consulting, systems integration, and applications maintenance and a $3 million increase in
direct-to-market revenues, primarily attributable to an increase in the demand for application
development and maintenance services from existing customers in the financial services industry. Intersegment revenue relates to the provision of services by
the Consulting and Applications Solutions segment to the other segments.
Gross Margin
Gross margin, which is calculated as gross profit divided by revenue, for the second quarter of
2007 was 16.7% of revenue, which is lower than the gross margin for the second quarter of 2006 of
19.1%. This year-to-year decrease in gross margin is primarily due to the following:
| • |
|
The decreased gross margin for Industry Solutions primarily stems from early stage contracts related to our entry into new markets,
a renegotiated contract where we assumed responsibility for expanded
operations, and a reduction in profits recognized on a contract,
resulting primarily from uncertainties related to possible changes by
the client to the system implementation schedule as a result of a change in control of the client. |
| |
| • |
|
A reduced gross profit margin for Government Services is primarily
attributable to the acquisition of QSS. The gross margins associated
with the acquisition are typically lower than those we realize within
our consolidated margins because of the cost plus nature of their
work. |
| |
| • |
|
A $14 million decrease in gross profit from the expiration of our
infrastructure outsourcing contract with UBS that is reported within
the Industry Solutions line of business. |
These factors were partially offset by a reduction to employee-related expenses, consisting
primarily of incentive compensation.
15
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 2007 and 2006 was $70
million. Increased SG&A expenses due to the acquisition of QSS were offset by decreased expenses
related to our cost containment efforts, including a reduction to incentive compensation. As a
percentage of revenue, SG&A for the second quarter of 2007 was 11.0% of revenue, which is lower
than SG&A for the second quarter of 2006 of 12.2% of revenue.
Other Income Statement Items
Interest expense for the second quarter of 2007 increased by $2 million as compared to the second
quarter of 2006 due primarily to increased long-term debt connected with an acquisition of QSS.
Our effective tax rate for the second quarter of 2007 was 36.1% as compared to 36.6% for the second
quarter of 2006. Income tax expense for the second quarter of 2007 included a $1 million benefit to
our deferred tax assets resulting primarily from a change in Texas margin tax law, partially offset
by the effect of increased taxes from the expiration of one of our tax holidays in India and
increased state income taxes, primarily as a result of the Texas margin tax and the acquisition of
QSS, which operates in several high-tax states.
Comparison of the Six Months Ended June 30, 2007 and 2006
Revenue
Revenue for the six months ended June 30, 2007, increased from revenue for the six months ended
June 30, 2006, due to increases in revenue from the Government Services and Consulting and
Applications Solutions segments partially offset by a decrease in revenue from the Industry
Solutions segment. Below is a summary of our revenue for the six months ended June 30, 2007, as
compared to the six months ended June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Industry Solutions |
|
$ |
860 |
|
|
$ |
867 |
|
|
$ |
(7 |
) |
|
|
(0.8 |
)% |
Government Services |
|
|
259 |
|
|
|
148 |
|
|
|
111 |
|
|
|
75.0 |
% |
Consulting and Applications Solutions |
|
|
146 |
|
|
|
122 |
|
|
|
24 |
|
|
|
19.7 |
% |
Elimination of intersegment revenue |
|
|
(40 |
) |
|
|
(23 |
) |
|
|
(17 |
) |
|
|
73.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,225 |
|
|
$ |
1,114 |
|
|
$ |
111 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Solutions
The net decrease in revenue from the Industry Solutions segment for the first six months of 2007 as
compared to the first six months of 2006 was primarily attributable to the $132 million decrease in
revenue from the expiration of our infrastructure outsourcing contract with UBS on January 1, 2007.
Partially offsetting this loss were increases in revenue primarily attributable to:
| • |
|
$88 million net increase from existing accounts and short-term project
work. This net increase resulted from expanding our base services to
existing long-term customers and from providing additional
discretionary services to these customers. 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. This increase was
primarily related to contracts in the healthcare industry. |
| |
| • |
|
$25 million increase from new contracts signed during the twelve-month
period following the second quarter of 2006 and from new contracts
signed in the second quarter of 2006 for which we did not recognize a
full six months of revenue during the six months ended June 30, 2006.
This increase was composed of $11 million and $14 million from new
contracts signed in the Healthcare and Commercial Solutions groups,
respectively. 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
Commercial Solutions group during the first quarter of 2006 for which
we did not recognize a full six months of revenue during the six
months ended June 30, 2006. The acquired company is a provider of
product engineering outsourcing services. |
16
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Government Services
The $111 million, or 75.0%, net increase in revenue from the Government Services segment for the
first six months of 2007 as compared to the first six months of 2006 was primarily attributable to
the $111 million in revenue from the acquisition of QSS. Our business with the federal government
will fluctuate due to annual federal funding limits and the specific needs of the federal agencies
we serve.
Consulting and Applications Solutions
The $24 million, or 19.7% increase in revenue from the Consulting and Applications Solutions
segment was due to a $17 million increase in intersegment
revenues primarily attributable to consulting, systems integration,
and applications maintenance and a $7 million increase in
direct-to-market revenues, primarily attributable to an increase in the demand for application
development and maintenance services from existing customers in the
financial services industry. Intersegment revenue relates to the provision of services by
the Consulting and Applications Solutions segment to the other segments.
Gross Margin
Gross margin, which is calculated as gross profit divided by revenue, for the six months ended June
30, 2007, was 17.2%, which is lower than the gross margin for the six months ended June 30, 2006,
of 18.7%. This year-to-year decrease in gross margin is primarily due to the following:
| • |
|
In the first quarter of 2007, we acquired QSS within our Government
Services group. The gross margins associated with the acquisition are
typically lower than those we realize within our consolidated margins
because of the cost plus nature of their work. |
| |
| • |
|
A $28 million decrease in gross profit from the expiration of our
infrastructure outsourcing contract with UBS that is reported within
the Industry Solutions line of business. |
Partially offsetting these decreases was a reduction to employee-related expenses, consisting
primarily of incentive compensation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30, 2007, increased 5.2%
to $141 million from $134 million for the six months ended June 30, 2006. The increase in SG&A
expenses is primarily due to the acquisition of QSS in the first quarter of 2007. SG&A for the
first six months of 2007 was 11.5% of revenue, which is slightly lower than SG&A for the first six
months of 2006 of 12.0% of revenue.
Other Income Statement Items
Interest expense for the six months ended June 30, 2007 increased by $3 million as compared to the
six months ended June 30, 2006 due primarily to increased long-term debt connected with an
acquisition of QSS.
Our effective tax rate for the six months ended June 30, 2007 was 34.3% as compared to 36.4% for
the first six months ended 2006. Income tax expense for the six months of 2007 included a $2
million tax benefit from the reduction of a valuation allowance against our deferred tax assets in
Europe and a $1 million benefit to our deferred tax assets resulting from a change in Texas margin
tax law in the second quarter of 2007, partially offset by the effect of increased taxes from the
expiration of one of our tax holidays in India and increased state income taxes, primarily as a
result of the Texas margin tax and the acquisition of QSS, which operates in several high-tax
states. Income tax expense for the first six months of 2006 included tax expense of $1 million
relating to the resolution of several tax issues raised in an audit by the Internal Revenue Service
(IRS), including the impact from similar tax issues in open tax years.
17
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At June 30, 2007, we have cash and cash equivalents of $158 million. We believe our existing cash
and cash equivalents, expected cash flows from operating activities, and the $123 million that is
available under our restated and amended credit facility, will provide us sufficient funds to meet
our operating needs for the foreseeable future. During the six months ended June 30, 2007, cash and
cash equivalents decreased 36.8% to $158 million from
$250 million at December 31, 2006 and short-term investments of
$133 million, net, at December 31, 2006 were liquidated, primarily due to our acquisition of QSS.
Operating Activities
Net cash used in operating activities was $22 million for the six months ended June 30, 2007, as
compared to net cash provided by operating activities of $48 million for the six months ended June
30, 2006. The primary reasons for the changes in cash provided by operating activities are as
follows:
| • |
|
Cash used by changes in accounts payable and accrued liabilities was
$12 million for the six months ended June 30, 2007, as compared to
cash provided of $31 million for the same period of the prior year.
This decrease is primarily due to the timing of vendor payments. |
| |
| • |
|
During the six months ended June 30, 2007, there was a decrease of $17
million in net deferred revenue received from clients as compared to
the same period in 2006. |
| |
| • |
|
During the six months ended June 30, 2007, we increased our spending
by $14 million on deferred contract costs as compared to the same
period in 2006 due to new contract signings in 2007 that had
significant transitional activity for which costs are deferred until
services are operational. |
| |
| • |
|
During the six months ended June 30, 2007, we made net cash payments
for income taxes of $40 million as compared to $30 million in the six
months ended June 30, 2006. |
| |
| • |
|
Bonuses paid to associates under our bonus plans in the first six
months of 2007 and 2006 (including payments of annual bonus amounts
relating to the previous year’s bonus plan) were approximately $47
million and $58 million, respectively. Included in these bonus amounts
paid in 2007 and 2006 were approximately $6 million and $23 million,
respectively, of bonus payments that are reimbursable by our
customers. The amount of bonuses that we pay each year is based on
several factors, including our financial performance and management’s
discretion. |
| |
| • |
|
These factors were partially offset by a $24 million change in the use
of cash from our accounts receivable balances as compared to the six
months ended June 30, 2006. We typically collect our accounts receivable
within 55-65 days, and therefore 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. |
Investing Activities
Net cash used in investing activities was $167 million for the six months ended June 30, 2007, as
compared to net cash used in investing activities of $65 million for the same period in 2006. This
change was primarily attributable to the following:
| • |
|
During the six months ended June 30, 2007, we paid $252 million for
acquisitions of businesses, including $248 million, net of cash
acquired, for the acquisition of QSS, and $4 million of additional
consideration for the acquisition of eServ LLC, a provider of high-end
product engineering outsourcing services. |
| |
| • |
|
During the six months ended June 30, 2007, we purchased $48 million of
property, equipment and purchased software as compared to $36 million
during the six months ended June 30, 2006. This increase was primarily
related to our business expansion needs for data center and office
facilities. |
| |
| • |
|
During the six months ended June 30, 2007, we liquidated short-term
investments of $133 million, net, primarily due to our acquisition of
QSS. |
18
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| • |
|
During the six months ended June 30, 2006, we paid $29 million for
acquisitions of businesses, including $21 million for the acquisition
of eServ and $8 million of additional consideration for the
acquisition of Technical Management, Inc., a provider of policy
administration and business process services to the life insurance and
annuity industry. |
Financing Activities
Net cash provided by financing activities was $94 million for the six months ended June 30, 2007,
as compared to net cash provided by financing activities of $6 million for the six months ended
June 30, 2006. This increase is primarily due to the additional $75 million borrowed against our
restated and amended credit facility in connection with our acquisition of QSS in 2007 and the $17
million paid to repurchase shares of our Class A Common Stock in 2006. Partially offsetting these
increases in net cash provided by financing activities was a decrease in the amount of cash
received upon exercise of employee stock options.
We routinely maintain cash balances in certain European and Asian currencies to fund operations in
those regions. During the six months ended June 30, 2007, foreign exchange rate fluctuations had a
net positive impact on our non-domestic cash balances by $3 million, as the U.S. dollar weakened
against the Indian Rupee, Euro, British Pound, and other currencies. We manage foreign exchange
exposures that are likely to significantly impact net income or working capital. At June 30, 2007,
we had numerous forward contracts to purchase and sell various currencies in the amount of $51
million, which expire at various times before the end of 2008.
Contractual Obligations
We have contractual obligations for operating leases, long-term debt, and interest on long-term
debt that were summarized in a table of Contractual Obligations in our Annual Report on Form 10-K
for the year ended December 31, 2006. Since December 31, 2006, there have been no material changes
to the contractual obligations of the Company, outside of the ordinary course of business, except
for our liability for unrecognized tax benefits. As discussed in Note 9, “Income Taxes” of the
Notes to the Condensed Consolidated Financial Statements, we adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109” as of January 1, 2007. At
June 30, 2007, we had gross reserves for uncertain tax positions
totaling $16 million, all of which is expected to be paid
after one year. We are unable to make a reasonably reliable estimate
as to when a cash settlement with a taxing authority will occur.
Significant Accounting Standards to be Adopted
FASB Statement No. 157
In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standard (FAS) No. 157, “Fair Value Measurements,” which provides guidance for using fair value to
measure assets and liabilities. FAS 157 will apply whenever another standard requires or permits
assets or liabilities to be measured at fair value. The standard does not expand the use of fair
value to any new circumstances. FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. Our adoption of FAS 157 is not expected to have a material
impact on our consolidated financial statements.
FASB Statement No. 159
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115,” which expands the use of
fair value accounting but does not affect existing standards which require assets and liabilities
to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure
accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees, issued debt and other eligible financial instruments.
FAS 159 is effective for years beginning after November 15, 2007. Our adoption of FAS 159 is not
expected to have a material impact on our consolidated financial statements.
19
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2007
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our market risk associated with foreign currencies as of December 31, 2006, 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.
On February 15, 2007, we entered into an interest rate swap agreement that effectively converts $75
million of the $152 million of borrowings under our credit facility from a variable-rate instrument
to a fixed-rate instrument with an interest rate of 5.64% in order to manage our interest rate
risk. Using sensitivity analysis, a hypothetical increase of 10% in the interest rate would
increase our net expense by approximately $400,000 for the year ended December 31, 2007.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that these disclosure 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. Theses cases focus on alleged
improper practices of investment banks. Our case has been consolidated for pretrial purposes with
approximately 300 similar cases in the IPO Allocation Securities Litigation. We had accepted a
settlement proposal presented to all issuer defendants under which plaintiffs would dismiss and
release all claims against all issuer defendants, in exchange for an assurance by the insurance
companies collectively responsible for insuring the issuers in all of the IPO cases that the
plaintiffs will achieve a minimum recovery of $1 billion (including amounts recovered from the
underwriters).
In December 2006, the Second Circuit Court of Appeals vacated the class certifications in the IPO
class action test cases, finding the predominance of common questions over individual questions
that is required for class certification cannot be met by those plaintiffs. The Second Circuit has
denied plaintiffs’ petition for rehearing. The plaintiffs are seeking certification of a narrower
class at the trial court level. At the request of the issuer defendants, the trial court has
terminated the settlement approval process.
20
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2007
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.
ITEM 1A: RISK FACTORS
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, 2006, as filed with the
U.S. Securities and Exchange Commission and available at www.sec.gov, for additional information
regarding risk factors.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders of the Company on May 3, 2007. The purpose of
the meeting was to elect eleven nominees to serve as directors of the Company, approve the Amended
and Restated 2001 Long-Term Incentive Plan, and ratify the appointment of PricewaterhouseCoopers
LLP as the Company’s independent registered public accounting firm for the fiscal year ending
December 31, 2007. The number of shares voted with respect to each nominee was as follows:
| |
|
|
|
|
|
|
|
|
| Nominee |
|
For |
|
Withheld |
Ross Perot |
|
|
96,434,493 |
|
|
|
3,954,338 |
|
Ross Perot, Jr |
|
|
95,139,512 |
|
|
|
5,249,319 |
|
Peter A. Altabef |
|
|
97,022,557 |
|
|
|
3,366,274 |
|
Steven Blasnik |
|
|
95,354,782 |
|
|
|
5,034,049 |
|
John S.T. Gallagher |
|
|
98,723,218 |
|
|
|
1,665,613 |
|
Carl Hahn |
|
|
97,916,740 |
|
|
|
2,472,091 |
|
DeSoto Jordan |
|
|
74,078,836 |
|
|
|
26,309,995 |
|
Thomas Meurer |
|
|
97,418,876 |
|
|
|
2,969,955 |
|
Cecil H. (C. H.) Moore, Jr |
|
|
98,728,424 |
|
|
|
1,660,407 |
|
Anthony J. Principi |
|
|
98,702,326 |
|
|
|
1,686,505 |
|
Anuroop (Tony) Singh |
|
|
98,698,389 |
|
|
|
1,690,442 |
|
All of the nominees were elected to the Board of Directors. At the time of the shareholders
meeting, these directors constituted the entire Board of Directors of the Company. The approval of
the Amended and Restated 2001 Long-Term Incentive Plan was approved by the shareholders. The vote
was 94,194,873 for, 6,071,904 against, and 122,053 abstaining. The appointment of
PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2007 was ratified by the shareholders. The vote was 99,421,307
for, 943,743 against, and 23,780 abstaining.
21
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2007
ITEM 6: EXHIBITS
Exhibits required by Item 601 of Regulation S-K
| |
|
|
| EXHIBIT |
|
|
| NUMBER |
|
DESCRIPTION OF EXHIBIT |
3.1
|
|
Third Amended and Restated Certificate of Incorporation of Perot Systems Corporation (the “Company”)
(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
|
|
Fourth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 of the Company’s Current Report
on Form 8-K filed September, 24, 2004.) |
|
|
|
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.) |
|
|
|
4.2
|
|
Rights Agreement dated January 28, 1999 between the Company and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1, Registration No. 333-60755.) |
|
|
|
4.3
|
|
Form of Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock
(included as Exhibit A-1 to the Rights Agreement) (Incorporated by reference to Exhibit 4.3 of the Company’s
Registration Statement on Form S-1, Registration No. 333-60755.) |
|
|
|
4.4
|
|
Form of Certificate of Designation, Preferences, and Rights of Series B Junior Participating Preferred Stock
(included as Exhibit A-2 to the Rights Agreement) (Incorporated by reference to Exhibit 4.4 of the Company’s
Registration Statement on Form S-1, Registration No. 333-60755.) |
|
|
|
31.1*
|
|
Rule 13a-14 Certification dated July 31, 2007, by Peter A. Altabef, President and Chief Executive Officer. |
|
|
|
31.2*
|
|
Rule 13a-14 Certification dated July 31, 2007, by Russell Freeman, Vice President and Chief Financial Officer. |
|
|
|
32.1**
|
|
Section 1350 Certification dated July 31, 2007, by Peter A. Altabef, President and Chief Executive Officer. |
|
|
|
32.2**
|
|
Section 1350 Certification dated July 31, 2007, by Russell Freeman, Vice President and Chief Financial Officer. |
|
|
|
| * |
|
Filed herewith. |
| |
| ** |
|
Furnished herewith. |
22
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2007
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: July 31, 2007
|
|
By /s/ ROBERT J. KELLY
Robert J. Kelly
|
|
|
|
|
Corporate Controller and Principal |
|
|
|
|
Accounting Officer |
|
|
23