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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
From to
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Commission
File Number
001-14773
PEROT SYSTEMS
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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75-2230700
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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2300 WEST PLANO PARKWAY
PLANO, TEXAS
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75075
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(Address of Principal Executive
Offices)
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(Zip Code)
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(Registrants Telephone Number)
(972) 577-0000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange
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Title of Each Class
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On Which Registered
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Class A Common Stock
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New York Stock Exchange
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Par Value $0.01 per share
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Securities registered pursuant to Section 12(g) of the
Act:
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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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þ Large
accelerated filer
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o Accelerated
filer
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o Non-accelerated
filer
(Do not check if a smaller reporting company)
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o 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
As of June 30, 2007, the aggregate market value of the
voting and non-voting common stock held by non-affiliates of the
registrant, based upon the closing sales price for the
registrants common stock as reported on the New York Stock
Exchange, was approximately $1,512,558,105 (calculated by
excluding shares owned beneficially by directors and officers).
Number of shares of registrants common stock outstanding
as of February 22, 2008: 120,319,759 shares of
Class A Common Stock and no shares of Class B Common
Stock.
DOCUMENTS INCORPORATED BY
REFERENCE
The following documents (or parts thereof) are incorporated by
reference into the following parts of this
Form 10-K:
certain information required in Part III of this
Form 10-K
is incorporated from the registrants Proxy Statement for
its 2007 Annual Meeting of Stockholders, which is expected to be
filed not later than120 days after the registrants
fiscal year ended December 31, 2007.
FORM 10-K
For the Year Ended December 31, 2007
INDEX
This 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 outlined below under the
caption Risk Factors. 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.
PART I
Overview
Perot Systems Corporation, originally incorporated in the state
of Texas in 1988 and reincorporated in the state of Delaware on
December 18, 1995, is a worldwide provider of information
technology (commonly referred to as IT) services and business
solutions to a broad range of customers. We offer our customers
integrated solutions designed around their specific business
objectives, chosen from a breadth of services, including
technology infrastructure services, applications services,
business process services, and consulting services.
With this approach, our customers benefit from integrated
service offerings that help synchronize their strategy, systems,
and infrastructure. As a result, we help our customers achieve
their business objectives, whether those objectives are to
accelerate growth, streamline operations, or enhance customer
service capabilities.
Our
Services
We provide the following categories of services to our customers
either on a standalone basis or bundled within a comprehensive
solution. Within our market-facing units and as described in
more detail below, we offer a mix of these services as part of
our solutions.
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Infrastructure services
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Applications services
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Business process services
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Consulting services
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Infrastructure
Services
Infrastructure services are typically performed under multi-year
contracts in which we assume operational responsibility for
various aspects of our customers businesses, including
data center and systems management, Web hosting and Internet
access, desktop solutions, messaging services, program
management, hardware maintenance and monitoring, network
management, including VPN services, service desk capabilities,
physical security, network security, risk management, and
virtualization (the management of leveraged computing
environments). We typically hire a significant portion of the
customers staff that supported these functions prior to
the transition of services. We then apply our expertise and
operating methodologies and utilize technology to increase the
efficiency of the operations, which usually results in increased
operational quality at a lower cost.
Applications
Services
Applications services include services such as application
development and maintenance, including the development and
maintenance of custom and packaged application software for
customers, and application systems
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migration and testing, which includes the migration of
applications from legacy environments to current technologies,
as well as performing quality assurance functions on custom
applications. We also provide other applications services such
as application assessment and evaluation, hardware and
architecture consulting, systems integration, and Web-based
services.
Business
Process Services
Business process services include services such as product
engineering, claims processing, life insurance policy
administration, call center management, payment and settlement
management, security, and services to improve the collection of
receivables. In addition, business process services include
engineering support and other technical and administrative
services that we provide to the U.S. federal government.
Consulting
Services
Consulting services include strategy consulting, enterprise
consulting, technology consulting, and research. The consulting
services provided to customers within our Industry Solutions and
Government Services segments typically consist of customized,
industry-specific business solutions provided by associates with
industry expertise. The consulting services provided within the
Consulting and Application Solutions segment primarily relate to
the implementation of prepackaged software applications.
Consulting services are typically viewed as discretionary
services by our customers, with the level of business activity
depending on many factors, including economic conditions and
specific customer needs.
Our
Contracts
Our contracts include services priced using a wide variety of
pricing mechanisms. In determining how to price our services, we
consider the delivery, credit and pricing risk of a business
relationship. For the year ended December 31, 2007:
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Approximately 37% of our revenue was from fixed-price contracts
where our customers pay us a set amount for contracted services.
For some of these fixed-price contracts, the price will be set
so that the customer realizes immediate savings in relation to
their current expense for the services we will be performing. On
contracts of this nature, our profitability generally increases
over the term of the contract as we become more efficient. The
time it takes for us to realize these efficiencies can range
from a few months to a few years, depending on the complexity of
the services.
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Approximately 28% of our revenue was from time and materials
contracts where our billings are based on measurements such as
hours, days or months and an agreed upon rate. In some cases,
the rate the customer pays for a unit of time can vary over the
term of a contract, which may result in the customer realizing
immediate savings at the beginning of a contract.
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Approximately 21% of our revenue was from cost plus contracts
where our billings are based in part on the amount of expense we
incur in providing services to a customer.
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Approximately 14% of our revenue was from
per-unit
pricing where we bill our customers based on the volumes of
units provided at the unit rate specified. In some contracts,
the per-unit
prices may vary over the term of the contract, which may result
in the customer realizing immediate savings at the beginning of
a contract.
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We also utilize other pricing mechanisms, including license fees
and risk/reward relationships where we participate in the
benefit associated with delivering a certain outcome. Revenue
from these other pricing mechanisms totaled less than 1% of our
revenue.
Depending on a customers business requirements and the
pricing structure of the contract, the amount of profit
generated from a contract can vary significantly during a
contracts term. With fixed- or unit-priced contracts, or
when an upfront payment is made to purchase assets or as a sales
incentive, an outsourcing services contract will typically
produce less profit at the beginning of the contract with
significantly more profit being generated as
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efficiencies are realized later in the term. With a cost plus
contract, the amount of profit generated tends to be relatively
consistent over the term of the contract.
Our Lines
of Business
We offer our services under three primary lines of business:
Industry Solutions, Government Services, and Consulting and
Applications Solutions. We consider these three lines of
business to be reportable segments and include financial
information and disclosures about these reportable segments in
our consolidated financial statements. You can find this
financial information in Note 15, Segment and Certain
Geographic Data, of the Notes to Consolidated Financial
Statements included herein. We routinely evaluate the historical
performance of and growth prospects for various areas of our
business, including our lines of business, delivery groups, and
service offerings. Based on a quantitative and qualitative
analysis of varying factors, we may increase or decrease the
amount of ongoing investment in each of these business areas,
make acquisitions that strengthen our market position, or
divest, exit, or downsize aspects of a business area.
Industry
Solutions
Industry Solutions, which is our largest line of business and
represented approximately 71%, 78%, and 77% of our total revenue
for 2007, 2006, and 2005, respectively, 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.
Our Industry Solutions line of business consists of four
delivery groups, three of which are market-facing
Healthcare, Commercial Solutions, and Insurance and Business
Process Solutions. The fourth group, Infrastructure Solutions,
is the delivery organization for our technology infrastructure
management services, and is responsible for defining the
technology strategies for customers within each industry group.
Healthcare
Our Healthcare group, which represented approximately 51%, 47%,
and 46% of our total revenue for 2007, 2006, and 2005,
respectively, and approximately 73%, 60%, and 60% of revenue for
the Industry Solutions line of business for 2007, 2006, and
2005, respectively, provides services primarily to providers of
healthcare, but we also serve health insurance organizations and
organizations that are a part of the healthcare supply chain:
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Providers including hospitals, physician
practices, and public sector agencies. Our hospital customers
include health systems and freestanding hospitals. Our physician
practice customers include large and community practice groups.
Within the public sector, we focus on federal government
healthcare agencies such as the Veterans Health Administration.
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Health insurance organizations including
national insurers, Blue Cross and Blue Shield plans and regional
managed care organizations; and
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Healthcare supply chain including medical
surgical suppliers and distributors and retail pharmacy.
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Our Healthcare group provides a full range of services,
including consulting, applications, infrastructure, and business
process services. Our associates deliver technology-based
solutions to meet the demanding challenges of the healthcare
industry globally to:
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Improve patient safety and quality;
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Lower the healthcare cost trend and achieve new levels of
customer satisfaction; and
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Achieve administrative transaction process efficiency.
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For hospitals, we provide information technology, revenue cycle,
and supply chain sourcing solutions, as well as operational and
clinical transformation services that drive lower costs,
increase cash and improve the delivery of care. We employ the
industrys leading clinical, technological, and process
know-how to provide our services.
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For physicians, we deploy electronic health records and operate
information technology and revenue cycle management functions.
For health insurance organizations, we enable the transformation
to consumer health models by supporting administrative process
efficiency with our technology platform and business process
services.
For healthcare supply chain, we provide technology
infrastructure support and solutions that enhance the
integration of the supply chain process among suppliers,
distributors, hospitals, and physician organizations.
For public sector healthcare, we utilize our commercial
healthcare expertise to support federal government healthcare
initiatives.
Commercial
Solutions
Our Commercial Solutions group, which represented approximately
16%, 27%, and 29% of our total revenue for 2007, 2006, and 2005,
respectively, and approximately 22%, 35%, and 37% of revenue for
the Industry Solutions line of business for 2007, 2006, and
2005, respectively, provides services to customers primarily in
three markets:
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Manufacturing including customers in
automotive and automotive components and parts, machinery and
durable goods.
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Consumer including customers in travel,
transportation, telecom, and publishing industries.
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Engineering and Construction including
customers in commercial and residential construction.
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Within Commercial Solutions, we provide a full range of services
including consulting, applications, infrastructure, and business
process services. Our infrastructure and application services
are designed to help clients reduce technology costs while
increasing operational quality. Our product engineering services
are focused on helping manufacturers to develop their products
more effectively and include research and design engineering,
program management, and manufacturing engineering. Our
industry-specific consulting services include business and
technology solutions that improve the efficiencies of critical
processes, including product design, supply chain execution,
call centers, collaborative engineering tools, and manufacturing
plant floor processes.
Insurance
and Business Process Solutions
The Insurance and Business Process Solutions group, which
represented approximately 4%, 4%, and 2% of our total revenue
for 2007, 2006, and 2005, respectively, and approximately 5%,
5%, and 3% of revenue for the Industry Solutions line of
business for 2007, 2006, and 2005, respectively, provides
industry-specific IT and general back-office business services
to the Insurance Industry and to customers in the Healthcare and
Commercial Solutions groups. These services leverage our global
delivery capabilities, which include application development and
maintenance, infrastructure services, data entry, transaction
processing, document capture and management, and customer care
services. This group uses these capabilities and leverages
proprietary intellectual property and technology platforms to
provide various business process services. Our life insurance
policy administration offering includes support for new business
processing, billing and collections, policy maintenance,
commissions processing and call center services. Additional
services include claims processing, financial and accounting
services, and revenue cycle outsourcing. These services benefit
our customers by providing lower-cost options with increased
visibility into and control over their back-office business
processes.
Infrastructure
Solutions
Our Infrastructure Solutions group is responsible for defining
the infrastructure technology strategies for our Industry
Solutions customers and also for our own internal use. This
group identifies new technology offerings and innovations that
deliver value to our customers. This group also provides the
ongoing management and maintenance of that infrastructure,
including networks, data centers, help desks, mainframes,
servers, storage, and workspace computing. It also provides
senior technology consultants to assist our customers with more
complex technology transformations. These consultants set
direction and establish solutions for innovation and efficiency
to our customer base. These solutions have included
virtualization (the management of leveraged computing
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environments), server consolidation and remote infrastructure
management. It manages, resolves and documents problems in our
customers computing environments. The group also provides
comprehensive monitoring, planning, and safeguarding of
information technology systems against intrusion by monitoring
system and network status, collecting and analyzing data
regarding system and network performance, and applying
appropriate corrective actions. All of these activities are
either performed at customer facilities or delivered through
centralized data processing centers that we maintain at various
global locations.
Government
Services
Our Government Services group, represented approximately 21%,
13%, and 14% of our total revenue for 2007, 2006, and 2005,
respectively, provides consulting, engineering support, and
technology-based business process solutions for the Department
of Defense, the Department of Homeland Security, the Department
of Education, NASA, various federal intelligence agencies, and
other governmental agencies.
Our core product portfolio includes information technology and
business process outsourcing, business process services, IT
infrastructure support, and a wide array of professional
services. These services include the direct support of
engineering, safety, quality assurance, logistics,
environmental, and program management for federal managers
across a broad spectrum of critical programs. We provide
infrastructure support to the federal government through
management consulting services, information technology and
system support, application design and development, government
financial services, business process services, and outreach,
media, and communications services.
Consulting
and Applications Solutions
Our Consulting and Applications Solutions line of business
represented approximately 8%, 9%, and 9% of our total revenue
for 2007, 2006, and 2005, respectively, net of the elimination
of inter-segment revenue. This group provides global consulting
and integration services, applications development and
management services, and applications outsourcing services to
our global client base. These services are delivered
on-site and
offshore, providing innovative industry-focused solutions. Using
our expertise to provide performance improvement, business
transformation, and technology architecture transformation, this
group delivers a wide array of services including enterprise
applications implementation and integration, the development and
maintenance of custom and packaged applications, migration of
applications from legacy environments to current technologies,
and performance of quality assurance functions and testing
services on custom applications.
Perot
Systems Associates
The markets for IT personnel and business integration
professionals are intensely competitive. A key part of our
business strategy is the hiring, training, and retaining of
highly motivated personnel with strong character and leadership
traits. We believe that employing associates with such traits
is and will continue to be an integral
factor in differentiating us from our competitors in the IT
industry. In seeking such associates, we screen candidates for
employment through a rigorous interview process. In addition to
competitive salaries, we distribute cash bonuses that are paid
promptly to reward excellent performance, and we have various
incentive compensation programs, including a year end bonus
based on our performance in relation to our business and
financial targets.
As of December 31, 2007, we employed approximately 23,100
associates. Some of our associates in Mexico, the Philippines,
and Europe are members of work councils and have worker
representatives. We believe that our relations with our
associates are good.
Our UBS
Relationship
UBS AG was our largest customer through December 31, 2006.
We earned approximately 13% and 15% of our revenue in connection
with services performed on behalf of UBS and its affiliates for
2006 and 2005, respectively. We performed most of our services
for UBS under an infrastructure outsourcing contract called the
IT Services Agreement, which ended January 1, 2007. During
2006 and 2005, the amounts of annual revenue that we earned from
UBS and its affiliates under the IT Services Agreement were
$265 million and $262 million, respectively, and the
amounts of gross profit earned were $58 million and
$53 million, respectively. We continue to provide
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applications services to UBS, which are provided outside the
scope of the infrastructure outsourcing contract that ended
January 1, 2007.
Competition
We operate in extremely competitive markets, and the technology
required to meet our customers needs changes. In each of
our lines of business we frequently compete with companies that
have greater financial resources; more technical, sales, and
marketing capacity; and larger customer bases than we do.
Because many of the factors on which we compete, as discussed
below, are outside of our control, we cannot be sure that we
will be successful in the markets in which we compete. If we
fail to compete successfully, our business, financial condition,
and results of operations will be materially and adversely
affected.
Competitors
We compete with a number of different information technology
service providers depending upon the region, country,
and/or
market we are addressing. Some of our more frequent competitors
include: Accenture Ltd., Affiliated Computer Services, Inc.,
BearingPoint, Inc., Cap Gemini Ernst & Young, Computer
Sciences Corporation, Electronic Data Systems Corporation, IBM
Global Services (a division of International Business Machines
Corporation), and Unisys Corporation. Our Industry Solutions
line of business also frequently competes with CGI Group, Inc.,
Cerner Corporation, Hewlett Packard Company, McKesson
Corporation, Siemens Business Services, Inc., smaller consulting
firms with industry expertise in areas such as healthcare or
financial services, and the consulting divisions of large
systems integrators and information technology services
providers. In addition, our Government Services line of business
frequently competes with Booz-Allen and Hamilton, CACI
International, Inc., General Dynamics, Lockheed Martin
Corporation, Northrop Grumman Corporation, Science Applications
International Corporation, and SRA International. Our Consulting
and Applications Solutions line of business also frequently
competes with Atos Origin, Cognizant Technology Solutions
Corporation, Deloitte Consulting LLP (a member of Deloitte
Touche Tomatsu), HCL Technologies, iGate Global Solutions
Limited, Infosys Technologies Limited, L&T Infotech Ltd.,
Mastek, Limited, MphasiS, Patni Computer Systems Limited,
Polaris Software Lab Limited, Sapient Corporation, Satyam
Computer Services, Tata Consultancy Services Limited, Tech
Mahindra, and Wipro Limited. We may also compete with non-IT
outsourcing providers who enter into marketing and business
alliances with our customers that provide for the consolidation
of services. As we enter new markets, we expect to encounter
additional competitors. We also frequently compete with our
customers own internal information technology capability,
which may constitute a fixed cost for our customer.
How We
Compete
We compete on the basis of a number of factors, including the
attractiveness and breadth of the business strategy and
professional services that we offer, pricing, technological
innovation, industry expertise, and quality of service. Our
Industry Solutions line of business also competes on our scale.
Our CAS segment also competes on our process methodologies and
our past successes in executing assignments. For our CAS
Segment, emerging offshore development capacity in countries
such as India and China is increasing the degree of competition
for our software development services. For our Government
segment, we frequently compete in federal and defense programs
with declining budgets, which creates pressure to lower our
prices. In addition, the market for consulting services is
affected by an oversupply of consulting talent, both
domestically and offshore, which results in downward price
pressure for our services. All of these factors may increase
pricing pressure on us.
Financial
Information About Foreign and Domestic Operations
See Note 15, Segment and Certain Geographic
Data, to the Consolidated Financial Statements included
elsewhere in this report.
Intellectual
Property
While we attempt to retain intellectual property rights arising
from customer engagements, our customers often have the
contractual right to such intellectual property. We rely on a
combination of nondisclosure and other
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contractual arrangements and trade secret, copyright, and
trademark laws to protect our proprietary rights and the
proprietary rights of third parties from whom we license
intellectual property. We enter into confidentiality agreements
with our associates and limit distribution of proprietary
information. There can be no assurance that the steps we take in
this regard will be adequate to deter misappropriation of
proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our
intellectual property rights.
We license the right to use the names Perot Systems
and Perot in our current and future businesses,
products, or services from the Perot Systems Family Corporation
and Ross Perot Jr., our Chairman. The license is a
non-exclusive, royalty-free, worldwide, non-transferable
license. We may also sublicense our rights to the Perot name to
some of our affiliates. Under the license agreement, either
party may, in its sole discretion, terminate the license at any
time, with or without cause and without penalty, by giving the
other party written notice of such termination. Upon termination
by either party, we must discontinue all use of the Perot name
within one year following notice of termination. The termination
of this license agreement could materially and adversely affect
our business, financial condition, and results of operations.
Except for the license of our name, we do not believe that any
particular copyright, trademark, or group of copyrights and
trademarks is of material importance to our business taken as a
whole.
Our
Website and Availability of SEC Reports and Corporate Governance
Documents
Our Internet address is www.perotsystems.com and the investor
relations section of our website is located at
www.perotsystems.com/investors. We make available free of
charge, on or through the investor relations section of our
website, annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and
Exchange Commission. Also, posted on our corporate
responsibility section of our website (located at
www.perotsystems.com/responsibility), and available in print
upon request of any shareholder to our Investor Relations
department, are our charters for our Audit Committee,
Compensation Committee, and Nominating and Governance Committee,
as well as our Standards & Ethical Principles and our
Corporate Governance Guidelines (which include our Director
Qualification Guidelines and Director Independence Standards).
Within the time period required by the SEC and the New York
Stock Exchange, we will post on our website any amendment to the
Standards & Ethical Principles and any waiver
applicable to our executive officers or directors.
An investment in our Class A common stock involves a
high degree of risk. You should carefully consider the following
risk factors in evaluating an investment in our common stock.
The risks described below are not the only ones that we face.
Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations. If
any of the following risks actually occurs, our business,
financial condition, or results of operations could be
materially and adversely affected. In such case, the trading
price of our Class A common stock could decline, and you
could lose all or part of your investment. You should also refer
to the other information set forth in this report, including our
Consolidated Financial Statements and the related notes.
We may
bear the risk of cost overruns relating to software development
and implementation services, and, as a result, cost overruns
could adversely affect our profitability.
We provide services related to the development of software
applications and the implementation of complex software packages
for some of our customers. The effort and cost associated with
the completion of these software development and implementation
services are difficult to estimate and, in some cases, may
significantly exceed the estimates made at the time we begin the
services. We provide these software development and
implementation services under
level-of-effort
and fixed-price contracts. The
level-of-effort
contracts are usually based on time and materials or direct
costs plus a fee. Under those arrangements, we are able to bill
our customer based on the actual cost of completing the
services, even if the ultimate cost of the services exceeds our
initial estimates. However, if the ultimate cost exceeds our
initial estimate by a significant amount, we may have difficulty
collecting the full amount that we are due under the contract,
depending upon many factors, including the reasons for the
increase in cost, our communication with the customer throughout
the project, and the customers satisfaction with the
services. As a
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result, we could incur losses with respect to these software
development and implementation services even when they are
priced on a
level-of-effort
basis. If we provide these software development or
implementation services under a fixed-price contract, we bear
all the risk that the ultimate cost of the project will exceed
the price to be charged to the customer.
Our
largest customers account for a substantial portion of our
revenue and profits, and the loss of any of these customers
could result in decreased revenue and profits.
Our 10 largest customers accounted for 42% of our revenue for
2007. Generally, we may lose a customer as a result of a merger
or acquisition, contract expiration, the selection of another
provider of information technology services, entry into
strategic business and marketing alliances with other business
partners, business failure or bankruptcy, or our performance.
Our outsourcing contracts typically require us to maintain
specified performance levels with respect to the services that
we deliver to our customer, with the result that if we fail to
perform at the specified levels, we may be required to pay or
credit the customer with amounts specified in the contract. In
the event of significant failures to deliver the services at the
specified levels, a number of these contracts provide that the
customer has the right to terminate the agreement. In addition,
some of these contracts provide the customer the right to
terminate the contract at the customers convenience. The
customers right to terminate for convenience typically
requires the customer to pay us a fee. We may not retain
long-term relationships or secure renewals of short-term
relationships with our large customers in the future.
Profitability
of our contracts may be materially, adversely affected if we do
not accurately estimate the costs of services and the timing of
the completion of projects.
The services that we provide, and projects we undertake,
pursuant to our contracts are increasingly complex. Our success
in accurately estimating the costs of services and the timing of
the completion of projects and other initiatives to be provided
pursuant to our contracts is critical to our ability to price
our contracts for long-term profitability. While these estimates
reflect our best judgment regarding preexisting costs,
efficiencies that we will be able to deliver, and resources that
will be required for implementation and performance, any
increased or unexpected costs, delays or failures to achieve
anticipated cost reductions could materially, adversely affect
the profitability of these contracts.
If
entities we acquire fail to perform in accordance with our
expectations or if their liabilities exceed our expectations,
our profits could be diminished and our financial results could
be adversely affected.
In connection with any acquisition we make, there may be
liabilities that we fail to discover or that we inadequately
assess. To the extent that the acquired entity failed to fulfill
any of its contractual obligations, we may be financially
responsible for these failures or otherwise be adversely
affected. In addition, acquired entities may not perform
according to the forecasts that we used to determine the price
paid for the acquisition. If the acquired entity fails to
achieve these forecasts, our financial condition and operating
results may be adversely affected, including the potential for
impairment of goodwill.
Development
of our software products may cost more than we initially
project, and we may encounter delays or fail to perform well in
the market, which could decrease our profits.
Our business has risks associated with the development of
software products. There is the risk that capitalized costs of
development may not be fully recovered if the market for our
products or the ability of our products to capture a portion of
the market differs materially from our estimates. In addition,
there is the risk that the cost of product development differs
materially from our estimates or a delay in product introduction
may reduce the portion of the market captured by our product.
Our
ability to perform on contracts on which we partner with third
parties may be materially and adversely affected if these third
parties fail to successfully or timely deliver their
commitments.
Our engagements often require that our products and services
incorporate or coordinate with the software or systems of other
vendors and service providers. Our ability to deliver our
commitments may depend on the delivery
8
by these vendors and service providers of their commitments. If
these third parties fail to deliver their commitments on time or
at all, our ability to perform may be adversely affected, which
could have a material adverse effect on our business, revenue,
profitability or cash flow. In addition, in some cases, we may
be responsible for the performance of other vendors or service
providers delivering software, systems or other requirements.
Our
government contracts contain early termination and reimbursement
provisions that may adversely affect our revenue and
profits.
Our Government Services line of business provides services as a
contractor and subcontractor on various projects with
U.S. government entities. Despite the fact that a number of
government projects for which we serve as a contractor or
subcontractor are planned as multi-year projects, the
U.S. government normally funds these projects on an annual
or more frequent basis. Generally, the government has the right
to change the scope of, or terminate, these projects at its
discretion or as a result of changes in laws or regulations that
might affect our ability to qualify to perform the projects. The
termination or a major reduction in the scope of a major
government project could have a material adverse effect on our
results of operations and financial condition. Approximately 99%
of the revenue from the Government Services line of business in
2007 is from contracts with the U.S. government for which
we serve as a contractor or subcontractor.
U.S. government entities audit our contract costs,
including allocated indirect costs, or conduct inquiries and
investigations of our business practices with respect to our
government contracts. If the government finds that we improperly
charged costs to a contract, the costs are not reimbursable or,
if already reimbursed, the cost must be refunded to the
government. If the government discovers improper or illegal
activities in the course of audits or investigations, the
contractor may be subject to various civil and criminal
penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, suspension of
payments, fines, and suspension or debarment from doing business
with the U.S. government. These government remedies could
have a material adverse effect on our results of operations and
financial condition.
We have a
significant business presence in India, and risks associated
with doing business there could decrease our revenue and
profits.
Our Consulting and Applications Solutions line of business is
located primarily in India. In addition to the risks regarding
fluctuations in currency exchange rates and regarding
international operations discussed below, the following risks
associated with doing business in India could decrease our
revenue and profits:
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governments could enact legislation that restricts the provision
of services from offshore locations;
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potential wage increases in India; and
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cost increases if the Government of India reduces or withholds
tax benefits and other incentives provided to us or from the
expiration of our existing tax holiday benefits in 2007 through
2009.
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If we are
unable to successfully integrate acquired entities, our profits
may be less and our operations more costly or less
efficient.
We have completed several acquisitions in recent years, and we
will continue to analyze and consider potential acquisition
candidates. Acquisitions involve significant risks, including
the following:
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companies we acquire may have a lower quality of internal
controls and reporting standards, which could cause us to incur
expenses to increase the effectiveness and quality of the
acquired companys internal controls and reporting
standards;
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we may have difficulty integrating the systems and operations of
acquired businesses, which may increase anticipated expenses
relating to integrating our business with the acquired
companys business and delay or reduce full benefits that
we anticipate from the acquisition;
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integration of an acquired business may divert our attention
from normal daily operations of the business, which may
adversely affect our management, financial condition, and
profits; and
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9
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we may not be able to retain key employees of the acquired
business, which may delay or reduce the full benefits that we
anticipate from the acquisition and increase costs anticipated
to integrate and manage the acquired company.
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Our
contracts generally contain provisions that could allow
customers to terminate the contracts and sometimes contain
provisions that enable the customer to require changes in
pricing, decreasing our revenue and profits and potentially
damaging our business reputation.
Our contracts with customers generally permit termination in the
event our performance is not consistent with service levels
specified in those contracts. The ability of our customers to
terminate contracts creates an uncertain revenue and profit
stream. If customers are not satisfied with our level of
performance, our reputation in the industry may suffer, which
may also adversely affect our ability to market our services to
other customers. Furthermore, some of our contracts contain
pricing provisions that permit a customer to request a benchmark
study by a mutually acceptable third-party benchmarker.
Generally, if the benchmarking study shows that our pricing has
a difference outside a specified range and the difference is not
due to the unique requirements of the customer, then the parties
will negotiate in good faith any appropriate adjustments to the
pricing. This may result in the reduction of our rates for the
benchmarked services and could negatively impact our results of
operations or cash flow.
Some
contracts contain fixed- and unit-price provisions or penalties
that could result in decreased profits.
Some of our contracts contain pricing provisions that require
the payment of a set fee or
per-unit fee
by the customer for our services regardless of the costs we
incur in performing these services, or provide for penalties in
the event we fail to achieve certain service levels. In such
situations, we are exposed to the risk that we will incur
significant unforeseen costs or such penalties in performing the
services under the contract.
Our
operating results may be adversely affected by fluctuations in
foreign currency exchange rates.
While we report our operating results in U.S. dollars, a
percentage of our revenues is denominated in currencies other
than the U.S. dollar. Although we hedge a portion of our
foreign currency exposures, fluctuations in foreign currency
exchange rates can have adverse effects on us.
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As we continue to leverage our global delivery model, more of
our expenses are incurred in currencies other than those in
which we bill for the related services. An increase in the value
of certain currencies, such as the Indian rupee, against the
U.S. dollar could increase costs for delivery of services
at offshore sites by increasing labor and other costs that are
denominated in local currency, and there can be no assurance
that our contractual provisions or our currency hedging
activities would offset this impact. This could result in a
decrease in the profitability of our contracts that are
utilizing delivery center resources.
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Because our consolidated financial statements are presented in
U.S. dollars, we must translate revenues, expenses and
income, as well as assets and liabilities, into
U.S. dollars at exchange rates in effect during or at the
end of each reporting period. Therefore, changes in the value of
the U.S. dollar against other currencies will affect our
revenues, operating income and the value of balance-sheet items
originally denominated in other currencies. Declines in the
value of other currencies against the U.S. dollar could
cause our consolidated earnings stated in U.S. dollars to
be lower than our consolidated earnings in local currency and
could affect our reported results when compared against other
periods. Conversely, increases in the value of other currencies
against the U.S. dollar could cause our consolidated
earnings stated in U.S. dollars to be higher than our
consolidated earnings in local currency and could affect our
reported results when compared against other periods. There is
no guarantee that our financial results will not be adversely
affected by currency exchange rate fluctuations.
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10
Our
international operations expose our assets to increased risks
and could result in business loss or in more expensive or less
efficient operations.
We have operations in many countries around the world. In
addition to the risks related to fluctuations in currency
exchange rates and the additional risk associated with doing
business in India discussed above, risks that affect these
international operations include:
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complicated licensing and work permit requirements may hinder
our ability to operate in some jurisdictions;
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our intellectual property rights may not be well protected in
some jurisdictions;
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our operations may be vulnerable to terrorist actions or harmed
by government responses;
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governments may restrict our ability to convert currencies or
repatriate cash; and
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additional expenses and risks inherent in conducting operations
in geographically distant locations, with customers speaking
different languages and having different cultural approaches to
the conduct of business.
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If
customers reduce spending that is currently above contractual
minimums, our revenue and profits could diminish.
Some of our outsourcing customers request services in excess of
the minimum level of services required by the contract. These
services are often in the form of project work and are
discretionary to our customers. Our customers ability to
continue discretionary project spending may depend on a number
of factors including, but not limited to, their financial
condition, and industry and strategic direction. Spending above
contractual minimums by customers could end with limited notice
and result in lower revenue and earnings.
If we
fail to compete successfully in the highly competitive markets
in which we operate, our business, financial condition, and
results of operations will be materially and adversely
affected.
We operate in extremely competitive markets, and the technology
required to meet our customers needs changes. In all of
our lines of business, we frequently compete with companies that
have greater financial resources; more technical, sales, and
marketing capacity; and larger customer bases than we do.
Because many of the factors on which we compete are outside of
our control, we cannot be sure that we will be successful in the
markets in which we compete. If we fail to compete successfully,
our business, financial condition, and results of operations
will be materially and adversely affected.
Increasingly
complex regulatory environments may increase our
costs.
Our customers are subject to complex and constantly changing
regulatory environments. These regulatory environments change
and in ways that cannot be predicted. For example, our financial
services customers are subject to domestic and foreign privacy
and electronic record handling rules and regulations, and our
customers in the healthcare industry have been made subject to
increasingly complex and pervasive privacy laws and regulations.
These regulations may increase our potential liabilities if our
services contribute to a failure by our customers to comply with
the regulatory regime and may increase the cost to comply as
regulatory requirements increase or change.
If we are
unable to collect our receivables, our results of operations and
cash flows could be adversely affected.
Our business depends on our ability to successfully obtain
payment from our clients of the amounts they owe us for work
performed. We evaluate the financial condition of our clients
and usually bill and collect on relatively short cycles. We
maintain allowances against receivables, but actual losses on
client balances could differ from those that we currently
anticipate and as a result we might need to adjust our
allowances. There is no guarantee that we will accurately assess
the creditworthiness of our clients. In addition, timely
collection of client balances depends on our ability to complete
our contractual commitments and bill and collect our contracted
revenues. If we are unable to meet our contractual requirements,
we might experience delays in collection of
and/or be
unable to collect our client balances, and if this occurs, our
results of operations and cash flows could be adversely affected.
11
Our
financial results are materially affected by a number of
economic and business factors.
Our financial results are materially affected by a number of
factors, including broad economic conditions, the amount and
type of technology spending that our customers undertake, 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 and growth position. Each of our three
major lines of business has distinct economic factors, business
trends, and risks that could have a material adverse effect on
our results of operations and financial condition.
Our
quarterly financial results may vary.
We expect our financial results to vary from quarter to quarter.
Such variations are likely to be caused by many factors that
are, to some extent, outside our control, including:
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the mix, timing, and completion of customer projects;
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unforeseen costs on fixed- or unit-price contracts;
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implementation and transition issues with respect to new
contracts;
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hiring, integrating, and utilizing associates;
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the timing of new contracts and changes in scope of services
performed under existing contracts;
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the resolution of outstanding tax issues from prior years;
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the issuance of common shares and options, together with
acquisition and integration costs, in connection with
acquisitions;
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currency exchange rate fluctuations; and
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costs to exit certain activities or terminate projects.
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Accordingly, we believe that
quarter-to-quarter
comparisons of financial results for preceding quarters are not
necessarily meaningful. You should not rely on the results of
one quarter as an indication of our future performance.
The use
of derivative financial instruments exposes us to credit and
market risk.
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.
Changes
in technology could adversely affect our competitiveness,
revenue, and profit.
The markets for our information technology services change
rapidly because of technological innovation, new product
introductions, changes in customer requirements, declining
prices, and evolving industry standards, among other factors.
New products and new technology often render existing
information services or technology infrastructure obsolete,
excessively costly, or otherwise unmarketable. As a result, our
success depends on our ability to timely innovate and integrate
new technologies into our service offerings. We cannot guarantee
that we will be successful at adopting and integrating new
technologies into our service offerings in a timely manner.
We could
lose rights to our company name, which may adversely affect our
ability to market our services.
We do not own the right to our company name. We have a license
agreement with Ross Perot Jr., our Chairman, and the Perot
Systems Family Corporation that allows us to use the name
Perot and Perot Systems in our
12
business on a royalty-free basis. Mr. Perot and the Perot
Systems Family Corporation may terminate this agreement at any
time and for any reason. Beginning one year following such a
termination, we would not be allowed to use the names
Perot or Perot Systems in our business.
Mr. Perots or the Perot Systems Family
Corporations termination of our license agreement could
materially and adversely affect our ability to attract and
retain customers, which could have a material adverse effect on
our business, financial condition, and results of operations.
Failure
to recruit, train, and retain technically skilled personnel
could increase costs or limit growth.
We must continue to hire and train technically skilled people in
order to perform services under our existing contracts and new
contracts into which we will enter. The people capable of
filling these positions have historically been in great demand,
and recruiting and training such personnel requires substantial
resources. We may be required to pay an increasing amount to
hire and retain a technically skilled workforce. In addition,
during periods in which demand for technically skilled resources
is great, our business may experience significant turnover.
These factors could create variations and uncertainties in our
compensation expense and efficiencies that could directly affect
our profits. If we fail to recruit, train, and retain sufficient
numbers of these technically skilled people, our business,
financial condition, and results of operations may be materially
and adversely affected.
Alleged
or actual infringement of intellectual property rights could
result in substantial additional costs.
Our suppliers, customers, competitors, and others may have or
obtain patents and other proprietary rights that cover
technology we employ. We are not, and cannot be, aware of all
patents or other intellectual property rights of which our
services may pose a risk of infringement. Others asserting
rights against us could force us to defend ourselves or our
customers against alleged infringement of intellectual property
rights. We could incur substantial costs to prosecute or defend
any intellectual property litigation, and we could be forced to
do one or more of the following:
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cease selling or using products or services that incorporate the
disputed technology;
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obtain from the holder of the infringed intellectual property
right a license to sell or use the relevant technology; or
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redesign those services or products that incorporate such
technology.
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Provisions
of our certificate of incorporation, bylaws, stockholders
rights plan, and Delaware law could deter takeover
attempts.
Our Board of Directors may issue up to 5,000,000 shares of
preferred stock and may determine the price, rights,
preferences, privileges, and restrictions, including voting and
conversion rights, of these shares of preferred stock without
any further vote or action by our stockholders. The rights of
the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance
of preferred stock may make it more difficult for a third party
to acquire a majority of our outstanding voting stock.
In addition, we have adopted a stockholder rights plan. Under
this plan, after the occurrence of specified events that may
result in a change of control, our stockholders will be able to
buy stock from us or our successor at half the then current
market price. These rights will not extend, however, to persons
participating in takeover attempts without the consent of our
Board of Directors or that our Board of Directors determines to
be adverse to the interests of the stockholders. Accordingly,
this plan could deter takeover attempts.
Some provisions of our certificate of incorporation and bylaws
and of Delaware General Corporation Law could also delay,
prevent, or make more difficult a merger, tender offer, or proxy
contest involving our company. Among other things, these
provisions:
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require a
662/3%
vote of the stockholders to amend our certificate of
incorporation or approve any merger or sale, lease, or exchange
of all or substantially all of our property and assets;
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require an 80% vote for stockholders to amend our bylaws;
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13
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require advance notice for stockholder proposals and director
nominations to be considered at a vote of a meeting of
stockholders;
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permit only our Chairman, President, or a majority of our Board
of Directors to call stockholder meetings, unless our Board of
Directors otherwise approves;
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prohibit actions by stockholders without a meeting, unless our
Board of Directors otherwise approves; and
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limit transactions between our company and persons who acquire
significant amounts of stock without approval of our Board of
Directors.
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Item 1B.
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Unresolved
Staff Comments
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None.
As of December 31, 2007, we had offices in approximately 80
locations in the United States and nine countries outside the
United States. Our office space and other facilities cover
approximately 2,900,000 square feet. We own our corporate
headquarters facility in Plano, Texas. Our Industry Solutions
line of business uses the corporate headquarters facility and
data center. The Government Services and the Consulting and
Applications Solutions lines of business do not make significant
use of the facility. Our Consulting and Applications Solutions
business is primarily located in two campus facilities in India.
We own the buildings and lease the land (under a 99 year
lease agreement) of our Delhi facility. In addition, we own both
the land and buildings of our Bangalore facility. The majority
of our remaining office space and other facilities are leased.
In addition to these properties, we also occupy office space at
customer locations throughout the world. We generally occupy
this space under the terms of the agreement with the particular
customer. We believe that our current facilities are suitable
and adequate for our business.
We have commitments related to data processing facilities,
office space, and computer equipment under non-cancelable
operating leases and fixed maintenance agreements for remaining
periods ranging from one to ten years. We have disclosed future
minimum commitments under these leases and agreements as of
December 31, 2007, in Managements Discussion
and Analysis of Financial Condition and Results of
Operations and in Note 16, Commitments and
Contingencies, to the Consolidated Financial Statements,
which are included elsewhere in this report. Upon expiration of
our leases, we do not anticipate any significant difficulty in
obtaining renewals or alternative space.
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Item 3.
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Legal
Proceedings
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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. These 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
14
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 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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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We did not submit any matters to a vote of our security holders
during the fourth quarter of the fiscal year ended
December 31, 2007.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
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Our Class A Common Stock is traded on the New York Stock
Exchange (the NYSE) under the symbol
PER. The table below shows the range of reported per
share sales prices for each quarterly period within the two most
recent fiscal years.
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High
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Low
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2006
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First Quarter
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$
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15.69
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$
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14.04
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Second Quarter
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15.90
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13.64
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Third Quarter
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14.90
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12.99
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Fourth Quarter
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17.07
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13.42
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2007
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First Quarter
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$
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18.21
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$
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15.64
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Second Quarter
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18.70
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16.13
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Third Quarter
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17.37
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14.53
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Fourth Quarter
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17.65
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12.58
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The last reported sale price of our Class A Common Stock on
the NYSE on February 22, 2008, was $14.23 per share. As of
February 22, 2008, the approximate number of record holders
of our Class A Common Stock was 2,411.
We have never paid cash dividends on shares of our Class A
Common Stock and have no current plans to pay dividends in the
future.
15
Issuer
Purchases of Equity Securities
The following table provides information relating to our
repurchase of common stock for the fourth quarter of 2007.
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Approximate
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Dollar
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Total Number
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Value of
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of Shares
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Shares that
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Average
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Purchased as
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May Yet
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Total Number
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Price
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Part of
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Be Purchased
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of Shares
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Paid per
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Publicly Announced
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Under the
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Period
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Purchased(2)
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Share
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Plans(1)
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Plans(1)
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November 1, 2007 to November 30, 2007
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2,230,756
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$
|
13.23
|
|
|
|
2,230,756
|
|
|
|
|
|
December 1, 2007 to December 31, 2007
|
|
|
1,282,600
|
|
|
$
|
13.44
|
|
|
|
1,282,600
|
|
|
$
|
28,000,000
|
|
|
|
(1)
|
The plan that existed at December 31, 2007, was replaced by
a new stock buyback program adopted on February 26, 2008,
authorizing the repurchase of up to $75 million of our
common stock. The program authorizes the repurchase of our
common stock from time to time in the open market, under a
Rule 10b5-1
plan, or through privately negotiated, block transactions, which
may include substantial blocks purchased from unaffiliated
holders.
|
|
(2)
|
Shares of Class A Common Stock.
|
Performance
Graph
The graph below compares the performance of our Class A
Common Stock since December 31, 2002.
COMPARISON
OF CUMULATIVE TOTAL RETURN AMONG PEROT SYSTEMS CORPORATION, NYSE
MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
$100 INVESTED ON DEC. 31, 2002.
16
Equity
Compensation Plan Information
The following table gives information about our Class A
Common Stock that may be issued under our equity compensation
plans as of December 31, 2007. See Note 10,
Common and Preferred Stock, and Note 11,
Stock Options and Stock-Based Compensation, to the
Consolidated Financial Statements included herein for
information regarding the material features of these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities Remaining
|
|
|
|
Number of
|
|
|
|
|
|
Available for
|
|
|
|
Securities to
|
|
|
|
|
|
Future Issuance
|
|
|
|
be Issued
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Upon Exercise
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
of Outstanding
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Options, Warrants
|
|
|
Warrants and
|
|
|
Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
11,167,449
|
(1)
|
|
$
|
15.92
|
|
|
|
50,216,997
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
5,072,589
|
|
|
$
|
12.95
|
|
|
|
29,609
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,240,038
|
|
|
$
|
15.00
|
|
|
|
50,246,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes 1,010,195 restricted stock units that have been granted
under the 2001 Long-Term Incentive Plan. |
|
(2) |
|
Includes 34,675,474 shares available to be issued under the
2001 Long-Term Incentive Plan, 15,121,523 shares available
to be issued under the 1999 Employee Stock Purchase Plan, and
420,000 shares available to directors for annual equity
compensation. |
|
(3) |
|
Shares available to be issued to directors who elect to receive
stock in lieu of their cash retainer. |
17
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data as of and for
the years ended December 31, 2007, 2006, 2005, 2004, and
2003, have been derived from our Consolidated Financial
Statements. This information should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our Consolidated
Financial Statements and the related Notes to Consolidated
Financial Statements, which are included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,612
|
|
|
$
|
2,298
|
|
|
$
|
1,998
|
|
|
$
|
1,773
|
|
|
$
|
1,461
|
|
Direct cost of services
|
|
|
2,130
|
|
|
|
1,905
|
|
|
|
1,575
|
|
|
|
1,405
|
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
482
|
|
|
|
393
|
|
|
|
423
|
|
|
|
368
|
|
|
|
267
|
|
Selling, general and administrative expenses
|
|
|
298
|
|
|
|
280
|
|
|
|
249
|
|
|
|
236
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
184
|
|
|
|
113
|
|
|
|
174
|
|
|
|
132
|
|
|
|
79
|
|
Interest income (expense), net
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
4
|
|
|
|
1
|
|
|
|
3
|
|
Equity in loss of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Other income, net
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
182
|
|
|
|
120
|
|
|
|
180
|
|
|
|
135
|
|
|
|
82
|
|
Provision for income taxes
|
|
|
67
|
|
|
|
39
|
|
|
|
69
|
|
|
|
41
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles
|
|
|
115
|
|
|
|
81
|
|
|
|
111
|
|
|
|
94
|
|
|
|
52
|
|
Cumulative effect of changes in accounting principles, net of
tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115
|
|
|
$
|
81
|
|
|
$
|
111
|
|
|
$
|
94
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|
|
$
|
0.47
|
|
Cumulative effect of changes in accounting principles, net of
tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class B:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|
|
$
|
0.47
|
|
Cumulative effect of changes in accounting principles, net of
tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
$
|
0.78
|
|
|
$
|
0.45
|
|
Cumulative effect of changes in accounting principles, net of
tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
$
|
0.78
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, Class B:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of changes in accounting
principles
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
$
|
0.78
|
|
|
$
|
0.45
|
|
Cumulative effect of changes in accounting principles, net of
tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
$
|
0.78
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A
|
|
|
121,759
|
|
|
|
118,686
|
|
|
|
115,973
|
|
|
|
111,921
|
|
|
|
106,942
|
|
Basic, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,907
|
|
|
|
3,282
|
|
|
|
3,631
|
|
Diluted
|
|
|
124,650
|
|
|
|
122,118
|
|
|
|
121,867
|
|
|
|
120,532
|
|
|
|
115,334
|
|
Diluted, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,965
|
|
|
|
4,040
|
|
|
|
5,089
|
|
Balance Sheet Data (at Period End):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
187
|
|
|
$
|
250
|
|
|
$
|
260
|
|
|
$
|
305
|
|
|
$
|
124
|
|
Total assets
|
|
|
1,900
|
|
|
|
1,581
|
|
|
|
1,371
|
|
|
|
1,226
|
|
|
|
1,011
|
|
Long-term debt
|
|
|
213
|
|
|
|
84
|
|
|
|
77
|
|
|
|
|
|
|
|
75
|
|
Stockholders equity
|
|
|
1,243
|
|
|
|
1,105
|
|
|
|
961
|
|
|
|
862
|
|
|
|
713
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
75
|
|
|
$
|
93
|
|
|
$
|
70
|
|
|
$
|
33
|
|
|
$
|
28
|
|
|
|
|
(1) |
|
The cumulative effect of changes in accounting principles, net
of tax, in 2003 was due to our adoption of Financial Accounting
Standards Board Emerging Issues Task Force Issue No.
00-21,
Revenue Arrangements with Multiple Deliverables, and
Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities. |
18
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and
related Notes to the Consolidated Financial Statements, which
are included herein.
Overview
Perot Systems Corporation, originally incorporated in the state
of Texas in 1988 and reincorporated in the state of Delaware on
December 18, 1995, is a worldwide provider of information
technology (commonly referred to as IT) services and business
solutions to a broad range of customers. We offer our customers
integrated solutions designed around their specific business
objectives, chosen from a breadth of services, including
technology infrastructure services, applications services,
business process services, and consulting services.
With this approach, our customers benefit from integrated
service offerings that help synchronize their strategy, systems,
and infrastructure. As a result, we help our customers achieve
their business objectives, whether those objectives are to
accelerate growth, streamline operations, or enhance customer
service capabilities.
Our
Services
Our customers may contract with us for any one or more of the
following categories of services:
|
|
|
|
|
Infrastructure services
|
|
|
|
Applications services
|
|
|
|
Business process services
|
|
|
|
Consulting services
|
Infrastructure
Services
Infrastructure services are typically performed under multi-year
contracts in which we assume operational responsibility for
various aspects of our customers businesses, including
data center and systems management, Web hosting and Internet
access, desktop solutions, messaging services, program
management, hardware maintenance and monitoring, network
management, including VPN services, service desk capabilities,
physical security, network security, risk management, and
virtualization (the management of leveraged computing
environments). We typically hire a significant portion of the
customers staff that supported these functions prior to
the transition of services. We then apply our expertise and
operating methodologies and utilize technology to increase the
efficiency of the operations, which usually results in increased
operational quality at a lower cost.
Applications
Services
Applications services include services such as application
development and maintenance, including the development and
maintenance of custom and packaged application software for
customers, and application systems migration and testing, which
includes the migration of applications from legacy environments
to current technologies, as well as performing quality assurance
functions on custom applications. We also provide other
applications services such as application assessment and
evaluation, hardware and architecture consulting, systems
integration, and Web-based services.
Business
Process Services
Business process services include services such as product
engineering, claims processing, life insurance policy
administration, call center management, payment and settlement
management, security, and services to improve the collection of
receivables. In addition, business process services include
engineering support and other technical and administrative
services that we provide to the U.S. federal government.
19
Consulting
Services
Consulting services include strategy consulting, enterprise
consulting, technology consulting, and research. The consulting
services provided to customers within our Industry Solutions and
Government Services segments typically consist of customized,
industry-specific business solutions provided by associates with
industry expertise. The consulting services provided within the
Consulting and Application Solutions segment primarily relate to
the implementation of prepackaged software applications.
Consulting services are typically viewed as discretionary
services by our customers, with the level of business activity
depending on many factors, including economic conditions and
specific customer needs.
Our
Contracts
Our contracts include services priced using a wide variety of
pricing mechanisms. In determining how to price our services, we
consider the delivery, credit and pricing risk of a services
agreement. For the year ended December 31, 2007:
|
|
|
|
|
Approximately 37% of our revenue was from fixed-price contracts
where our customers pay us a set amount for contracted services.
For some of these fixed-price contracts, the price will be set
so that the customer realizes immediate savings in relation to
their current expense for the services we will be performing. On
contracts of this nature, our profitability generally increases
over the term of the contract as we become more efficient. The
time that it takes for us to realize these efficiencies can
range from a few months to a few years, depending on the
complexity of the services.
|
|
|
|
Approximately 28% of our revenue was from time and materials
contracts where our billings are based on measurements such as
hours, days or months and an agreed upon rate. In some cases,
the rate the customer pays for a unit of time can vary over the
term of a contract, which may result in the customer realizing
immediate savings at the beginning of a contract.
|
|
|
|
Approximately 21% of our revenue was from cost plus contracts
where our billings are based in part on the amount of expense we
incur in providing services to a customer.
|
|
|
|
Approximately 14% of our revenue was from
per-unit
pricing where we bill our customers based on the volumes of
units provided at the unit rate specified. In some contracts,
the per-unit
prices may vary over the term of the contract, which may result
in the customer realizing immediate savings at the beginning of
a contract.
|
We also utilize other pricing mechanisms, including license fees
and risk/reward relationships where we participate in the
benefit associated with delivering a certain outcome. Revenue
from these other pricing mechanisms totaled less than 1% of our
revenue.
Depending on a customers business requirements and the
pricing structure of the contract, the amount of profit
generated from a contract can vary significantly during a
contracts term. With fixed- or unit-priced contracts, or
when an upfront payment is made to purchase assets or as a sales
incentive, an outsourcing services contract will typically
produce less profit at the beginning of the contract with
significantly more profit being generated as efficiencies are
realized later in the term. With a cost plus contract, the
amount of profit generated tends to be relatively consistent
over the term of the contract.
Our Lines
of Business
We offer our services under three primary lines of business:
Industry Solutions, Government Services, and Consulting and
Applications Solutions. We consider these three lines of
business to be reportable segments and include financial
information and disclosures about these reportable segments in
our consolidated financial statements. You can find this
financial information in Note 15, Segment and Certain
Geographic Data, of the Notes to Consolidated Financial
Statements included herein. We routinely evaluate the historical
performance of and growth prospects for various areas of our
business, including our lines of business, delivery groups, and
service offerings. Based on a quantitative and qualitative
analysis of varying factors, we may increase or decrease the
20
amount of ongoing investment in each of these business areas,
make acquisitions that strengthen our market position, or
divest, exit, or downsize aspects of a business area.
Results
of Operations
Overview
of Our Financial Results for 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.
Certain of these performance indicators are extracted from
consolidated financial information and are not required by
generally accepted accounting principles (GAAP) and are
considered non-GAAP financial measures as defined by
SEC rules. Specifically, we refer to free cash flow. As required
by SEC rules, we provide a reconciliation of each non-GAAP
financial measure and an explanation why we believe that the
presentation of the non-GAAP financial measure provides useful
information to investors. Non-GAAP financial measures should be
considered in addition to, but not as a substitute for or
superior to, other measures of financial performance prepared in
accordance with GAAP.
Termination
of a Services Agreement
In the fourth quarter of 2007, we received notice from a client
that it would end the current services agreement. As a result,
we realized contract termination-related revenue and gross
profit of approximately $59 million and $46 million,
respectively, including a contractually-obligated termination
fee of $26 million and recognition of revenue and costs
that were previously deferred of $33 million and
$13 million, respectively. Prior to this termination, this
client was one of our ten largest clients.
Effect of
the End of Our Infrastructure Outsourcing Contract with
UBS
UBS AG was our largest customer through December 31, 2006.
Our infrastructure outsourcing agreement with UBS ended on
January 1, 2007. During 2006, our UBS relationship
generated $308 million, or 13.4%, of our revenue, which
included $265 million of revenue and $58 million of
gross profit from our infrastructure outsourcing contract with
UBS that ended on January 1, 2007. We continue to provide
applications services to UBS, which are provided outside the
scope of the infrastructure outsourcing contract that ended on
January 1, 2007.
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 2007 grew by 13.7% as compared
to 2006. As discussed in more detail below, this revenue growth
came primarily from the following:
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|
|
|
|
Revenue from companies acquired in the first and third quarter
of 2007 and revenue from a company acquired in the first quarter
of 2006 for which we did not recognize a full year of revenue in
2006.
|
|
|
|
An increase in revenue from the expansion of base services and
discretionary technology investments by our existing long-term
customers.
|
21
|
|
|
|
|
Revenue from new contracts signed during 2007 and from new
contracts signed in 2006 for which we did not recognize a full
year of revenue in 2006.
|
|
|
|
Contract termination-related revenue in the fourth quarter of
2007. See Termination of a Services Agreement above.
|
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 2007 increased 39.4% to
$0.92 per share from $0.66 per share for 2006. This increase
came primarily from:
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|
|
|
|
Additional gross profit on a Healthcare customer of
$48 million, or approximately $0.24 per diluted share, of
which $46 million is related to the termination of a
services agreement, as discussed above in Termination of a
Services Agreement.
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|
|
|
During the third quarter of 2006, we modified an existing
contract that included both construction services and
non-construction services. The construction services related to
a software development and implementation project, which was
modified to eliminate the fixed-price development and
implementation deliverables in the original contract. Following
the contract modification in September 2006, we impaired
$44 million of the deferred costs, or approximately $0.22
per diluted share, and recorded this charge to direct cost of
services in the consolidated income statements.
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|
|
|
A reduction in incentive compensation of $27 million, or
approximately $0.14 per diluted share, which partially reduced
the impact on earnings of the expiration of the outsourcing
agreement with UBS. We do not expect this reduced level of
incentive compensation to continue in future periods.
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|
|
|
Additional operating income of approximately $13 million,
or approximately $0.07 per diluted share, due to the acquisition
of QSS Group, Inc. (QSS), in the first quarter of 2007.
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|
|
During the years ended December 31, 2007 and 2006, we
incurred losses of $22 million and $31 million,
respectively, on an infrastructure services contract with a
Commercial Solutions customer. The decrease in losses in 2007
from this contract resulted in an increase in gross profit of
$9 million, or approximately $0.05 per diluted share.
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|
|
|
During the third quarter of 2006, we recorded expense of
$6 million, or approximately $0.03 per diluted share,
related to cost reduction activities. The expense is
attributable to the consolidation and elimination of facilities
and products, the combination of units, and severance expense.
|
These improvements to our earnings were partially offset by:
|
|
|
|
|
Gross profits from our infrastructure outsourcing contract with
UBS decreased by $58 million in 2007 as compared to 2006 as
a result of the end of the UBS infrastructure outsourcing
contract on January 1, 2007. The loss from this contract
resulted in a decrease in earnings of approximately $0.30 per
diluted share.
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|
|
|
In the fourth quarter of 2007, we recorded expense of
$18 million, or approximately $0.09 per diluted share,
related to cost reduction activities implemented in the fourth
quarter of 2007.
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|
|
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An increase in our effective tax rate for the year ended
December 31, 2007, to 36.8% as compared to an effective tax
rate for the year ended December 31, 2006, of 32.5%,
resulted in a decrease of approximately $.06 per diluted share
on full year 2007 net income, which includes $.02 related to the
$62 million increase in income before taxes from 2006 to
2007.
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|
|
|
A change in our net interest income and expense to
$3 million of net interest expense for the year ended
December 31, 2007, from $5 million net interest income
for the year ended December 31, 2006, resulted in a
decrease in earnings of $8 million, or approximately $0.04
per diluted share.
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22
Free Cash
Flow
We calculate free cash flow as net cash provided by operating
activities less purchases of property, equipment and purchased
software, as stated in our 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 for the year ended
December 31, 2007, was $43 million as compared to
$120 million for the year ended December 31, 2006.
Free cash flow, which is a non-GAAP measure, can be reconciled
to Net cash provided by operating activities as
follows (in millions):
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
$
|
118
|
|
|
$
|
213
|
|
Purchases of property, equipment and software
|
|
|
(75
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
43
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
See Liquidity and Capital Resources below for
additional discussion of net cash provided by operations (under
Operating Activities) and additional discussion of
our purchases of property, equipment and software (under
Investing 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 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 the twelve-month period ended
December 31, 2007, the amount of TCV signed was
$1.8 billion, as compared to $2.7 billion for the
twelve-month period ended December 31, 2006. Included in
the $2.7 billion of TCV signed for the twelve-month period
ending December 31, 2006, was $1.2 billion relating to
the signing of the services agreement that was terminated in
October 2007, as discussed in more detail above under
Termination of a Services Agreement.
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.
23
Comparison
of 2007 to 2006
Revenue
Revenue for 2007 increased from 2006 across all segments. Below
is a summary of our revenue for 2007 as compared to 2006 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
Industry Solutions
|
|
$
|
1,840
|
|
|
$
|
1,803
|
|
|
$
|
37
|
|
|
|
2.1
|
%
|
Government Services
|
|
|
554
|
|
|
|
291
|
|
|
|
263
|
|
|
|
90.4
|
%
|
Consulting and Applications Solutions
|
|
|
310
|
|
|
|
255
|
|
|
|
55
|
|
|
|
21.6
|
%
|
Elimination of intersegment revenue
|
|
|
(92
|
)
|
|
|
(51
|
)
|
|
|
(41
|
)
|
|
|
80.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,612
|
|
|
$
|
2,298
|
|
|
$
|
314
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
Solutions
The net increase in revenue from the Industry Solutions segment
for 2007 as compared to 2006 was primarily attributable to:
|
|
|
|
|
$113 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.
|
|
|
|
$84 million net increase from a Healthcare client, which
includes $59 million of revenue recognized due to the
contract termination, (see Termination of a Services
Agreement above) and $25 million increase in revenue
primarily related to software implementation.
|
|
|
|
$64 million increase from new contracts signed during 2007
and from new contracts signed in 2006 for which we did not
recognize a full year of revenue in 2006. This increase was
composed of $35 million, $26 million, and
$3 million from new contracts signed in the Commercial
Solutions, Healthcare, and Insurance and Business Process
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.
|
|
|
|
$28 million increase from revenue related to an acquisition
within our Healthcare group during the third quarter of 2007.
|
|
|
|
$13 million increase from revenue related to an acquisition
within our Commercial Solutions group in the first quarter of
2006. The acquired company is a provider of product engineering
outsourcing services.
|
Offsetting these increases was a $265 million decrease in
revenue from the expiration of our infrastructure outsourcing
contract with UBS on January 1, 2007.
Government
Services
The $263 million, or 90.4%, net increase in revenue from
the Government Services segment for 2007 as compared 2006 was
primarily attributable to the $260 million in revenue from
the acquisition of 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.
24
Consulting
and Applications Solutions
The $55 million, or 21.6% increase in revenue from the
Consulting and Applications Solutions segment was due to a
$41 million increase in intersegment revenues, primarily
attributable to consulting, systems integration, and
applications maintenance, and a $14 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.
Domestic
Revenue
Domestic revenue grew by 21.1% in 2007 to $2,294 million
from $1,894 million in 2006. The increase was primarily the
result of revenue growth within our Industry Solutions segment
and our Government Services segment. Domestic revenue growth for
our Industry Solutions segment came primarily from the
healthcare industry, where we experienced strong growth from
existing accounts and short-term project work, and from
acquisitions within our Healthcare and Commercial Solutions
groups. Offsetting these increases was a decrease in revenue
from the expiration of our infrastructure outsourcing contract
with UBS on January 1, 2007.
Non-domestic
Revenue
Non-domestic revenue, consisting primarily of European and Asian
operations, decreased by 21.3% in 2007 to $318 million from
$404 million in 2006. Asian operations generated revenue of
$119 million in 2007 as compared to $140 million in
2006. This decrease was primarily due to the end of the UBS
infrastructure outsourcing contract. The largest components of
our European operations are in the United Kingdom and Germany.
In the United Kingdom, revenue for 2007 decreased to
$110 million from $179 million primarily due to the
end of the UBS infrastructure outsourcing contract partially
offset by increases in revenue from existing accounts and
short-term project work. Revenue in Germany increased to
$37 million for 2007 from $32 million for 2006.
Revenue in Switzerland, which was primarily from the UBS
infrastructure outsourcing contract in 2006, decreased to
$2 million for 2007 from $33 million for 2006. The UBS
infrastructure outsourcing contract ended January 1, 2007.
Gross
Margin
Gross margin, which is calculated as gross profit divided by
revenue, for 2007, was 18.5% of revenue, as compared to the
gross margin for 2006 of 17.1%. This
year-to-year
increase in gross margin was primarily due to the following:
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|
|
|
|
During the third quarter of 2006, we modified an existing
contract that included both construction services and
non-construction services. The construction services related to
a software development and implementation project, which was
modified to eliminate the fixed-price development and
implementation deliverables in the original contract. Following
the contract modification in September 2006, we impaired
$44 million of the deferred costs and recorded this charge
to direct cost of services in the consolidated income statements.
|
|
|
|
$48 million increase in gross profit related to a client of
which $46 million is related to the termination of the
services agreement, discussed above in Termination of a
Services Agreement.
|
|
|
|
$15 million reduction to employee-related expenses,
consisting of incentive compensation.
|
These improvements to our gross margin were partially offset by:
|
|
|
|
|
$58 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.
|
|
|
|
Reduced gross margin for Government Services 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. Additionally, lower margins were
realized within our Government Services group as a result of
contract scope reductions on existing contracts related to
federal government budget pressure.
|
25
|
|
|
|
|
Reductions to gross margin within Industry Solutions as a result
of a renegotiated contract that will not reach full levels of
profitability until after 2007 and profit pressures from new
contracts signed in the last two years.
|
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for 2007 increased
6.4% to $298 million from $280 million in 2006. The
increase resulted primarily from $23 million in SG&A
related to our acquisitions in the first and third quarter of
2007 and $18 million recorded in the fourth quarter of 2007
associated with cost reduction activities. These increases were
partially offset by a $12 million decrease in associate
incentive compensation in 2007. We do not expect this reduced
level of incentive compensation to continue in future periods.
Additionally, 2006 included $5 million of expense related
to cost reduction activities and an asset impairment.
As a percentage of revenue, SG&A for 2007 was 11.4% of
revenue, which was slightly lower than SG&A for 2006 of
12.2% of revenue. The decrease in SG&A as a percentage of
revenue was primarily due to the lower SG&A rate on a
business acquired in 2007, the decrease in incentive
compensation in 2007 mentioned above, the impact of the
$59 million of revenue recognized in the fourth quarter of
2007 as a result of the termination of a services agreement, as
discussed above in Termination of a Services
Agreement, and the $5 million of expense related to
cost reduction activities and an asset impairment recorded in
2006. Partially offsetting these decreases is $18 million
of expense recorded in the fourth quarter of 2007 related to
cost reduction activities.
Other
Income Statement Items
Interest income for 2007 decreased by $2 million as
compared to 2006 due primarily to lower average balances of cash
and cash equivalents and short-term investments during 2007 as
compared to 2006. Interest expense for 2007 increased by
$6 million as compared to 2006 due primarily to higher debt.
Our effective income tax rate for the year ended
December 31, 2007, was 36.8% as compared to 32.5% for the
year ended December 31, 2006. The increase in the effective
tax rate is primarily due to additional taxes from the
expiration of one of our tax holidays in India and higher state
income taxes, primarily as a result of the Texas margin tax, and
is partially offset by a $2 million tax benefit from the
reduction of a valuation allowance against our deferred tax
assets in Europe. Income tax expense for 2006 included a greater
benefit related to tax-exempt investment income. The increase in
effective tax rate from December 31, 2006 to
December 31, 2007 is further explained in Note 14,
Income Taxes.
Comparison
of 2006 to 2005
Revenue
Revenue for 2006 increased from 2005 across all segments. Below
is a summary of our revenue for 2006 as compared to 2005 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Industry Solutions
|
|
$
|
1,803
|
|
|
$
|
1,534
|
|
|
$
|
269
|
|
|
|
17.5
|
%
|
Government Services
|
|
|
291
|
|
|
|
272
|
|
|
|
19
|
|
|
|
7.0
|
%
|
Consulting and Applications Solutions
|
|
|
255
|
|
|
|
236
|
|
|
|
19
|
|
|
|
8.1
|
%
|
Elimination of intersegment revenue
|
|
|
(51
|
)
|
|
|
(44
|
)
|
|
|
(7
|
)
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,298
|
|
|
$
|
1,998
|
|
|
$
|
300
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Industry
Solutions
The net increase in revenue from the Industry Solutions segment
for 2006 as compared to 2005 was primarily attributable to:
|
|
|
|
|
$115 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.
|
|
|
|
$85 million increase from new contracts signed during 2006
and from new contracts signed in 2005, for which we did not
recognize a full year of revenue in 2005. This increase consists
primarily of $68 million and $15 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.
|
|
|
|
$37 million increase from revenue related to an acquisition
within our Commercial Solutions group in the first quarter of
2006. The acquired company is a provider of product engineering
outsourcing services.
|
|
|
|
$32 million increase from revenue related to an acquisition
within our Insurance and Business Process Solutions group during
the third quarter of 2005, for which we did not recognize a full
year of revenue in 2005. The acquired company is a provider of
policy administration and business process services to the life
insurance and annuity industry.
|
Government
Services
The $19 million, or 7.0%, net increase in revenue from the
Government Services segment for 2006 as compared 2005 was
primarily attributable to new services provided to the
Departments of Education and Energy, revenue from a safety,
environmental and engineering services company that we acquired
in the third quarter of 2005, for which we did not recognize a
full year of revenue in 2005, and project work associated with
our support of the Department of Defense. 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 $19 million, or 8.1% increase in revenue from the
Consulting and Applications Solutions segment was due to a
$7 million increase in intersegment revenues, primarily
attributable to consulting, systems integration, and
applications maintenance, and a $12 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.
UBS
Revenue from UBS, our largest customer through December 31,
2006, was $308 million for 2006, or 13.4% of our total
revenue. This revenue was reported within the Industry Solutions
and Consulting and Applications Solutions lines of business and
is summarized in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
UBS revenue in Industry Solutions
|
|
$
|
265
|
|
|
$
|
262
|
|
|
|
1.1
|
%
|
UBS revenue in Consulting and Applications Solutions
|
|
|
43
|
|
|
|
37
|
|
|
|
16.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from UBS
|
|
$
|
308
|
|
|
$
|
299
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
As discussed above under Effect of the End of Our
Outsourcing Contract with UBS, substantially all of the
UBS revenue that is reported within the Industry Solutions line
of business was earned under the outsourcing agreement with UBS
that ended on January 1, 2007.
Domestic
Revenue
Domestic revenue grew by 15.4% in 2006 to $1,894 million
from $1,641 million in 2005. This increase was primarily
the result of revenue growth within the Industry Solutions
segment. Domestic revenue growth for our Industry Solutions
segment came primarily from the healthcare industry, where we
experienced a strong demand, and from the acquisitions within
our Commercial Solutions group.
Non-domestic
Revenue
Non-domestic revenue, consisting primarily of European and Asian
operations, increased by 13.2% in 2006 to $404 million from
$357 million in 2005. Asian operations generated revenue of
$140 million in 2006 as compared to $125 million in
2005, and this increase was primarily from the Consulting and
Applications Solutions operations in India and revenue from the
UBS infrastructure outsourcing contract. The largest components
of our European operations are in the United Kingdom and
Switzerland. In the United Kingdom, revenue for 2006 increased
to $179 million from $168 million primarily due to
increases in revenue from our Consulting and Applications
Solutions segment as well as an increase in revenue from the UBS
infrastructure outsourcing contract. Revenue in Switzerland,
which was primarily from the UBS infrastructure outsourcing
contract, increased to $33 million for 2006 from
$31 million for 2005. The UBS infrastructure outsourcing
contract ended January 1, 2007.
Gross
Margin
Gross margin, which is calculated as gross profit divided by
revenue, for 2006, was 17.1% of revenue, as compared to the
gross margin for 2005 of 21.2%. This
year-to-year
decrease in gross margin was primarily due to the following:
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During the third quarter of 2006, we modified an existing
contract that included both construction services and
non-construction services. The construction services related to
a software development and implementation project, which was
modified to eliminate the fixed-price development and
implementation deliverables in the original contract. Following
the contract modification in September 2006, we impaired
$44 million of the deferred costs and recorded this charge
to direct cost of services in the consolidated income statements.
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$19 million decrease in gross profit from an infrastructure
services contract with a Commercial Solutions customer. This
decrease was due to a loss of $31 million on this contract
that we incurred in 2006 as compared to a loss of
$12 million in 2005.
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In the second quarter of 2005, we settled a dispute with a
former customer. As a result, we received a $7 million
payment and reduced our liabilities by $3 million, both of
which were recorded as a reduction to direct cost of services.
The dispute related to a contract we exited in 2003.
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An increase in the amount of total associate incentive
compensation, net of the amounts reimbursable by our customers,
recorded in direct cost of services. In 2006, we recorded
$29 million of net expense for associate incentive
compensation, of which $10 million was recorded in the
fourth quarter of 2006. In 2005, we recorded $26 million of
net expense for associate incentive compensation, of which
$4 million was recorded in the fourth quarter of 2005.
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During 2006, we recorded $6 million of additional stock
compensation expense in direct cost of services as compared to
the prior year period as a result of our adoption of FAS 123R.
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Partially offsetting these decreases was an increase in
profitability related to a customer contract modified in
September 2006.
28
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for 2006 increased
12.4% to $280 million from $249 million in 2005. As a
percentage of revenue, SG&A for 2006 was 12.2% of revenue,
which was slightly lower than SG&A for 2005 of 12.5% of
revenue. The increase in SG&A expenses is primarily due to
$12 million of acquisition-related SG&A,
$8 million of additional stock compensation expense that
was recorded as a result of our adoption of FAS 123R, and
$5 million of expense related to cost reduction activities
and an asset impairment.
Provision
for Income Taxes
Our effective income tax rate for the year ended
December 31, 2006, was 32.5% as compared to 38.3% for the
year ended December 31, 2005. The tax rate for 2006 was
lower than the tax rate for 2005 due to an increased impact from
our foreign operations, including the impact of tax holidays, an
increase in tax-exempt interest income, and a net reduction of
deferred tax asset valuation allowances. In addition, the
effective tax rate for 2005 included income tax expense due to
the repatriation of foreign earnings pursuant to the American
Jobs Creation Act of 2004 (the Act) and a net increase in
deferred tax asset valuation allowances. The Act created a
temporary incentive through December 31, 2005, for
U.S. companies to repatriate income earned abroad by
providing an 85% dividends received deduction on qualifying
foreign dividends. The decrease in the effective tax rate from
December 31, 2005, to December 31, 2006, is further
explained in Note 14, Income Taxes.
Liquidity
and Capital Resources
At December 31, 2007, we have cash and cash equivalents of
$187 million and short-term investments of
$23 million. We believe our existing cash and cash
equivalents, short-term investments, expected cash flows from
operating activities, and the $68 million currently
available under the restated and amended revolving credit
facility, which is discussed below, will provide us sufficient
funds to meet our operating needs for the foreseeable future.
During 2007, cash and cash equivalents decreased
$63 million as compared to decreases of $10 million
and $45 million for 2006 and 2005, respectively. During
2007, short-term investments decreased $110 million,
primarily due to our acquisition of QSS.
Operating
Activities
Net cash provided by operating activities was $118 million
in 2007 as compared to $213 million in 2006 and
$150 million in 2005. The primary reasons for the changes
in cash provided by operating activities for these three years
are as follows:
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Net income was $115 million, $81 million, and
$111 million in 2007, 2006, and 2005, respectively. Net
income in 2006 includes non-cash asset impairments of
$46 million. In addition, depreciation and amortization
expense, which are also non-cash expenses, were
$104 million, $79 million, and $59 million in
2007, 2006, and 2005, respectively. The increase in depreciation
expense in 2007 as compared to 2006 and 2005 was due primarily
to amortization of intangibles related to acquired businesses,
amortization of deferred contract costs, and depreciation and
amortization expense on property, equipment, and purchased
software. The increased depreciation and amortization expense
from property, equipment, and purchased software is associated
primarily with acquisitions, data center migration, and our
recent data center expansion. The increased amortization of
deferred contract costs is primarily associated with transition
services and new contract signings.
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During 2007, 2006 and 2005, cash used due to changes in accounts
receivable was $63 million, $49 million and
$47 million, respectively. We typically collect our
accounts receivable within
59-65 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.
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During 2007, 2006, and 2005, cash provided by changes in
accounts payable and accrued liabilities was $4 million,
$33 million, and $3 million, respectively. This change
is primarily due to the timing of vendor payments.
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During 2007, there was a decrease in deferred revenue received
from clients as compared to 2006, due primarily to increased
deferred revenue received in 2006 from a client whose services
agreement terminated in October 2007 (see Termination of a
Services Agreement). Deferred revenue received in 2005 was
comparable to deferred revenue received in 2007.
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During 2007, we increased our spending on deferred contract
costs as we entered into new contracts that require significant
start-up
costs in order to perform our contractual obligations.
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During 2007, we paid $10 million related to cost reduction
activities as compared to $2 million in 2006.
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Incentive compensation paid to associates in 2007, 2006, and
2005 (including payments of annual bonuses relating to the prior
years bonus plan) were $58 million, $72 million,
and $70 million, respectively. Included in the bonus
amounts that were paid in 2007, 2006, and 2005 were
approximately $7 million, $24 million, and
$24 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 managements discretion.
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During 2007, 2006, and 2005, we made net cash payments for
income taxes of $52 million, $50 million, and
$31 million, respectively.
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Investing
Activities
Net cash used in investing activities was $298 million for
2007 as compared to $255 million for 2006 and
$168 million for 2005. These changes in cash used in
investing activities were primarily attributable to the
following:
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During 2007, we purchased $75 million of property,
equipment and purchased software as compared to $93 million
during 2006 and $70 million during 2005. The increase in
2006 was primarily related to our business expansion needs for
data center and office facilities.
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During 2007, we paid $338 million for acquisitions of
businesses, including $248 million, net of cash acquired
for the acquisition of QSS, $86 million, net of cash
acquired for the acquisition of JJ Wild Holdings, Inc. and JJ
Wild, Inc., and $4 million of additional consideration for
the acquisition of eServ LLC, a provider of product engineering
outsourcing services.
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During 2006, we paid $29 million for acquisitions of
businesses, including $21 million for the acquisition of
eServ, and $8 million as additional consideration related
to the acquisition of Technical Management, Inc. and its
subsidiaries, including Transaction Applications Group, Inc.
(TAG).
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During 2005, we paid $98 million for acquisitions,
including $60 million (net of cash received) for the
acquisition of TAG, $17 million as additional consideration
related to the acquisition of Soza & Company, Ltd.,
$7 million, (net of cash acquired) for the acquisition of
PrSM Corporation, $7 million as additional consideration
related to the acquisition of ADI Technology Corporation, and
$7 million related to the acquisition of one other company.
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During 2007, we liquidated short-term investments of
$110 million, net, as compared to net purchases of
$133 million in 2006.
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Financing
Activities
Net cash provided by financing activities was $109 million
for 2007, compared to net cash provided by financing activities
of $27 million in 2006 and net cash used in financing
activities of $22 million in 2005. During 2007, we borrowed
$130 million against our credit facility in connection with
our acquisitions of QSS and JJ Wild. During 2007, we purchased
$47 million of treasury stock as compared to
$18 million and $42 million during 2006 and 2005,
respectively. In addition, during 2007, we received lower
proceeds from the issuance of common stock as compared to 2006.
We routinely maintain cash balances in certain European and
Asian currencies to fund operations in those regions. During
2007, foreign exchange rate fluctuations had a net positive
impact on our non-domestic cash
30
balances of $8 million, as the U.S. dollar weakened
against the Indian rupee, Euro, Swiss franc, and other
currencies. During 2006, foreign exchange rate fluctuations had
a net positive impact on our non-domestic cash balances of
$5 million, as the U.S. dollar weakened against the
British Pound, Euro, Indian rupee, and other currencies. We
manage foreign exchange exposures that are likely to
significantly impact net income or working capital. At
December 31, 2007, we had derivative financial instruments
to purchase and sell various currencies in the amount of
$171 million, which expire at various times before the end
of 2010.
Contractual
Obligations and Contingent Commitments
The following table sets forth our significant contractual
obligations at December 31, 2007, and the effect such
obligations are expected to have on our liquidity and cash flows
for the periods indicated (in millions):
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2009-
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2011-
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2008
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2010
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2012
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Thereafter
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Total
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Operating leases
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$
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56
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$
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62
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$
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27
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$
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29
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$
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174
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Capital leases
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4
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1
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5
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Long-term debt
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2
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5
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207
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214
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Estimated interest expense on long-term debt
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10
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19
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6
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35
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Total
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$
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72
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$
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87
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$
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240
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$
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29
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$
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428
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We discuss these contractual obligations in Note 9,
Debt, and Note 16, Commitments and
Contingencies to the Consolidated Financial Statements,
which are included herein. Minimum lease payments related to
facilities abandoned as part of our prior years realigned
operating structures are included in the operating lease amounts
above.
As discussed in Note 5, Acquisitions, to the
Consolidated Financial Statements, we may be required to make an
additional $4 million payment to the sellers of eServ in
2008, depending on eServs achievement of certain financial
targets.
Reserves
for Uncertain Tax Positions
As discussed in Note 14, Income Taxes of the
Notes to the 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
December 31, 2007, we had gross reserves for uncertain tax
positions totaling $17 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.
Credit
Facility
We currently have a credit facility with a syndicate of banks
that allows us to borrow up to $275 million that expires in
August 2011. Borrowings under the credit facility will be either
through loans or letter of credit obligations. The credit
facility is guaranteed by certain of our domestic subsidiaries.
In addition, we have pledged a portion of the stock of several
of our non-domestic subsidiaries as security on the facility.
Interest on borrowings varies with usage and begins at an
alternate base rate, as defined in the credit facility
agreement, or the LIBOR rate plus an applicable spread based
upon our debt/EBITDA ratio applicable on such date. We are also
required to pay a facility fee based upon the unused credit
commitment and certain other fees related to letter of credit
issuance. The credit facility requires certain financial
covenants, including a debt/EBITDA ratio and a minimum interest
coverage ratio, each as defined in the credit facility
agreement. In March 2005, we borrowed $77 million against
the credit facility. Interest on this borrowing is at a variable
rate based on 1 month LIBOR and was 5.32% at
December 31, 2007.
In January 2007, we borrowed an additional $75 million in
connection with our acquisition of QSS Group, Inc. Interest on
this borrowing is at a variable rate based on 3 month LIBOR
and was 5.48% at December 31, 2007. We entered into an
interest rate swap agreement to effectively convert this
borrowing into a fixed-rate instrument with an interest rate of
5.28%.
31
In August 2007, we borrowed an additional $55 million in
connection with our acquisition of JJ Wild. Interest on this
borrowing is at a variable rate based on 3 month LIBOR and
was 5.58% at December 31, 2007. On August 31, 2007, we
entered into an interest rate swap agreement to effectively
convert this borrowing into a fixed-rate instrument with an
interest rate of 5.33%.
We have $68 million currently available under the restated
and amended revolving credit facility.
Critical
Accounting Policies
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements contain information that is important to
managements discussion and analysis. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities.
Critical accounting policies are those that reflect significant
judgments and uncertainties and may result in materially
different results under different assumptions and conditions. We
believe that our critical accounting policies are limited to
those described below. For a detailed discussion on the
application of these and other accounting policies, see
Note 1, Nature of Operations and Summary of
Significant Accounting Policies, to the Consolidated
Financial Statements.
Revenue
recognition
We provide services to our customers under contracts that
contain various pricing mechanisms and other terms. The fees
under these arrangements are generally based on the level of
effort incurred in delivering the services, including cost plus
and time and materials fee arrangements, on a contracted fixed
price for contracted services, or on a contracted
per-unit
price for each unit of service delivered. These services include
infrastructure services, applications services, business process
services, and consulting services.
Within these four categories of services, our contracts include
non-construction service deliverables, including infrastructure
services and business process services, and construction service
deliverables, such as application development and implementation
services.
Accounting
for Revenue in Single-Deliverable Arrangements
Revenue for non-construction service deliverables is recognized
as the services are delivered in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue
Recognition, which provides that revenue should be
recognized when persuasive evidence of an arrangement exists,
the fee is fixed or determinable, and collectibility is
reasonably assured. Under our policy, persuasive evidence of an
arrangement exists when a final understanding between us and our
customer exists as to the specific nature and terms of the
services that we are going to provide, as documented in the form
of a signed agreement between us and the customer.
Revenue for non-construction services priced under fixed-fee
arrangements is recognized on a straight-line basis over the
longer of the term of the contract or the expected service
period, regardless of the amounts that can be billed in each
period, unless evidence suggests that the revenue is earned or
our obligations are fulfilled in a different pattern. If we are
to provide a similar level of non-construction services each
period during the term of a contract, we would recognize the
revenue on a straight-line basis since our obligations are being
fulfilled in a straight-line pattern. If our obligations are
being fulfilled in a pattern that is not consistent over the
term of a contract, then we would recognize revenue consistent
with the proportion of our obligations fulfilled in each period.
In determining the proportion of our obligations fulfilled in
each period, we consider the nature of the deliverables we are
providing to the customer and whether the volumes of those
deliverables are easily measured, such as when we provide a
contractual number of full time equivalent associate resources.
If the amount of our obligations fulfilled in each period is not
easily distinguished by reference to the volumes of services
provided, then we would recognize revenue on a straight-line
basis.
Revenue for construction services that do not include a license
to one of our software products is recognized in accordance with
the provisions of AICPA Statement of Position
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. In general,
SOP 81-1
requires the use of the
32
percentage-of-completion
method to recognize revenue and profit as our work progresses,
and we primarily use hours incurred to date to measure our
progress toward completion. This method relies on estimates of
total expected hours to complete the construction service, which
are compared to hours incurred to date, to arrive at an estimate
of how much revenue and profit has been earned to date. Although
we primarily measure our progress toward completion using hours
incurred to date, we may measure our progress toward completion
using costs incurred to date if the construction services
involve a significant amount of non-labor costs. Because these
estimates may require significant judgment, depending on the
complexity and length of the construction services, the amount
of revenue and profits that have been recognized to date are
subject to revisions. If we do not accurately estimate the
amount of hours or costs required or the scope of work to be
performed, or do not complete our projects within the planned
periods of time, or do not satisfy our obligations under the
contracts, then revenue and profits may be significantly and
negatively affected or losses may need to be recognized.
Revisions to revenue and profit estimates are reflected in
income in the period in which the facts that give rise to the
revision become known.
Revenue for the sale of a license from our software products or
the sale of services relating to a software license is
recognized in accordance with the provisions of AICPA Statement
of Position
No. 97-2,
Software Revenue Recognition. In general,
SOP 97-2
addresses the separation and the timing of revenue recognition
for software and software-related services, such as
implementation and maintenance services.
SOP 97-2
also requires the application of the
percentage-of-completion
method as described in
SOP 81-1
for those software arrangements that require significant
production, modification, or customization of the software. As a
result, the accounting for revenue related to software
arrangements includes many of the estimates and significant
judgments discussed above.
Revenue for services priced under time and materials contracts
and unit-priced contracts is recognized as the services are
provided at the contractual unit price.
Accounting
for Revenue in Multiple-Deliverable Arrangements
For those arrangements that include multiple deliverables, we
first determine whether each service, or deliverable, meets the
separation criteria of Financial Accounting Standards Board
Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. In
general, a deliverable (or a group of deliverables) meets the
separation criteria if the deliverable has standalone value to
the customer and if there is objective and reliable evidence of
the fair value of the remaining deliverables in the arrangement.
Each deliverable that meets the separation criteria is
considered a separate unit of accounting. We
allocate the total arrangement consideration to each unit of
accounting based on the relative fair value of each unit of
accounting. The amount of arrangement consideration that is
allocated to a delivered unit of accounting is limited to the
amount that is not contingent upon the delivery of another unit
of accounting.
After the arrangement consideration has been allocated to each
unit of accounting, we apply the appropriate revenue recognition
method for each unit of accounting as described previously based
on the nature of the arrangement and the services included in
each unit of accounting. All deliverables that do not meet the
separation criteria of
EITF 00-21
are combined into one unit of accounting, and the most
appropriate revenue recognition method is applied.
In arrangements for both non-construction and construction
services, we may bill the customer prior to performing services,
which would require us to record deferred revenue. In other
arrangements, we may perform services prior to billing the
customer, which could require us to record unbilled receivables
or to defer the costs associated with either the
non-construction or construction services, depending on the
terms of the arrangement and the application of the revenue
separation criteria of
EITF 00-21.
In certain arrangements we may pay consideration to the customer
at the beginning of a contract as an incentive, which is most
commonly in the form of cash. This consideration is recorded in
other non-current assets on the consolidated balance sheets and
is amortized as a reduction to revenue over the term of the
related contract.
As a result of our adoption of
EITF 00-21
in 2003, we recognized revenue of approximately $7 million,
$5 million, and $3 million during the years ended
December 31, 2007, 2006, and 2005, respectively, that was
recognized prior to 2003 under our accounting for revenue prior
to the adoption of
EITF 00-21
and was also included in the cumulative effect of a change in
accounting principle, which we recorded in the first quarter of
2003.
33
Contract
costs
Costs to deliver services are expensed as incurred, with the
exception of setup costs and the cost of certain construction
and non-construction services for which the related revenue must
be deferred under
EITF 00-21
or other accounting literature. We defer and subsequently
amortize certain setup costs related to activities that enable
us to provide the contracted services to customers. Deferred
contract setup costs may include costs incurred during the setup
phase of a customer arrangement relating to data center
migration, implementation of certain operational processes,
employee transition, and relocation of key personnel. We
amortize deferred contract setup costs on a straight-line basis
over the lesser of their estimated useful lives or the term of
the related contract. Useful lives range from three years up to
a maximum of the term of the related customer contract.
For a construction service in a single-deliverable arrangement,
if the total estimated costs to complete the construction
service exceed the total amount that can be billed under the
terms of the arrangement, then a loss would generally be
recorded in the period in which the loss first becomes probable.
For a construction service in a multiple-deliverable
arrangement, if the total estimated costs to complete the
construction service exceed the amount of revenue that is
allocated to the separate construction service unit of
accounting (based on the relative fair value allocation, limited
to the amount that is not contingent), then the actual costs
incurred to complete the construction service in excess of the
allocated fair value would be deferred, up to the amount of the
relative fair value, and amortized over the remaining term of
the contract. A loss would generally be recorded on a
construction service in a multiple-deliverable arrangement if
the total costs to complete the service exceed the relative fair
value of the service.
Deferred contract costs are evaluated for realizability whenever
events or changes in circumstances indicate that the carrying
amount may not be realizable. Our evaluation is based on the
amount of non-refundable deferred revenue that is related to the
deferred contract costs and our projection of the remaining
gross profits from the related customer contract. To the extent
that the carrying amount of the deferred contract costs is
greater than the amount of non-refundable deferred revenue and
the remaining net gross profits from the customer contract, a
charge is recorded to reduce the carrying amount to equal the
amount of non-refundable deferred revenue and remaining gross
profits.
Year-end
bonus plan
One of our compensation methods is to pay to certain associates
a year-end bonus, which is based on associate and team
performance, our financial results, and managements
discretion. The amount of bonus expense that we record each
quarter is based on several factors, including our financial
performance for that quarter, our latest expectations for full
year results, and managements estimate of the amount of
bonus to be paid at the end of the year. As a result, the amount
of bonus expense that we record in each quarter can vary
significantly.
Contingencies
We account for claims and contingencies in accordance with
Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies. FAS 5 requires
that we record an estimated loss from a claim or loss
contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset
has been impaired or a liability has been incurred at the date
of the financial statements and the amount of the loss can be
reasonably estimated. If we determine that it is reasonably
possible but not probable that an asset has been impaired or a
liability has been incurred or the amount of a probable loss
cannot be reasonably estimated, then we may disclose the amount
or range of estimated loss if the amount or range of estimated
loss is material. Accounting for claims and contingencies
requires us to use our judgment. We consult with legal counsel
on those issues related to litigation and seek input from other
experts and advisors with respect to matters in the ordinary
course of business.
Goodwill
and other intangibles
We allocate the cost of acquired businesses to the assets
acquired and liabilities assumed based on estimated fair values
at the date of acquisition, and any cost of the acquired
companies not allocated to assets acquired or liabilities
assumed is recorded as goodwill. Goodwill is not amortized, but
instead is evaluated at least annually for
34
impairment. Other intangible assets are amortized on a
straight-line basis over their estimated useful lives, which
range from twelve months to seven years.
The determination of the fair value of goodwill and other
intangibles requires us to make estimates and assumptions about
future business trends and growth at the date of acquisition. If
an event occurs that would cause us to revise our estimates and
assumptions used in analyzing the value of our goodwill or other
intangibles, such revision could result in an impairment charge
that could have a material impact on our financial condition and
results of operations.
Goodwill is tested for impairment annually in the third quarter
or whenever an event occurs or circumstances change that may
reduce the fair value of the reporting unit below its book
value. The impairment test is conducted for each reporting unit
in which goodwill is recorded by comparing the fair value of the
reporting unit to its carrying value. Fair value is determined
primarily by computing the future discounted cash flows expected
to be generated by the reporting unit. If the carrying value
exceeds the fair value, goodwill may be impaired. If this
occurs, the fair value of the reporting unit is then allocated
to its assets and liabilities in a manner similar to a purchase
price allocation in order to determine the implied fair value of
the goodwill of the reporting unit. If the implied fair value is
less than the carrying amount of the goodwill of the reporting
unit, we would recognize an impairment loss to write down the
goodwill to fair value.
Income
taxes
We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred income taxes
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be realized. On a quarterly basis, we evaluate the need for
and adequacy of valuation allowances based on the expected
realizability of our deferred tax assets and adjust the amount
of such allowances, if necessary. The factors used to assess the
likelihood of realization include our latest forecast of future
taxable income and available tax planning strategies that could
be implemented to realize the net deferred tax assets. Income
tax expense consists of our current and deferred provisions for
U.S. and foreign income taxes.
We do not provide for U.S. income tax on the undistributed
earnings of our
non-U.S. subsidiaries.
Except for amounts repatriated in 2005 pursuant to the American
Jobs Creation Act of 2004 (the Act), we intend to either
permanently invest our
non-U.S. earnings
or remit such earnings in a tax-free manner. The Act created a
temporary incentive through December 31, 2005, for
U.S. companies to repatriate income earned abroad by
providing an 85 percent dividends received deduction for
qualifying foreign dividends.
The cumulative amount of undistributed earnings (as calculated
for income tax purposes) of our
non-U.S. subsidiaries
was approximately $232 million at December 31, 2007,
and $182 million at December 31, 2006. Such earnings
include pre-acquisition earnings of
non-U.S. entities
acquired through stock purchases and are intended to be invested
outside of the U.S. indefinitely. The ultimate tax
liability related to repatriation of our undistributed earnings
is dependent upon future tax planning opportunities and is not
estimable at the present time.
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 adoption of FIN 48, we
recognize accrued interest and penalties related to unrecognized
tax benefits as a component of income tax expense. The effect of
the adoption of FIN 48 is detailed in Note 14
Income Taxes.
Determining the consolidated provision for income taxes involves
judgments, estimates, and the application of complex tax
regulations. As a global company, we are required to provide for
income taxes in each of the jurisdictions where we operate,
including estimated liabilities for uncertain tax positions. We
are subject to income tax audits by federal, state, and foreign
tax authorities and we are currently under audit by the Internal
Revenue
35
Service and the Indian and United Kingdom taxing authorities. We
fully cooperate with all audits, but we defend our positions
vigorously. Although we believe that we have provided adequate
liabilities for uncertain tax positions, the actual liability
resulting from examinations by tax authorities could differ
substantially from the recorded income tax liabilities and could
result in additional income tax expense. Changes to our recorded
income tax liabilities resulting from the resolution of tax
matters are reflected in income tax expense in the period of
resolution. Other factors may cause us to revise our estimates
of income tax liabilities including the expiration of statutes
of limitations, changes in tax regulations, and tax rulings.
Changes in estimates of income tax liabilities are reflected in
our income tax provision in the period in which the factors
resulting in our change in estimate become known to us. As a
result, our effective tax rate may fluctuate on a quarterly
basis.
Financial
instruments
The carrying amounts reflected in our 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 values. Fair
values are based primarily on current prices for those or
similar instruments.
Derivative
Financial Instruments
As part of our risk management strategy, we enter into
derivative financial instruments to mitigate certain financial
risks related to foreign currencies and interest rates. We have
a risk management policy outlining 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 hedge our exposure to
floating rates on certain portions of our debt, and forward
contracts and zero cost collars that hedge our exposure to
fluctuations in foreign currency exchange rates.
In the third quarter of 2007, we began designating certain
derivative financial instruments as cash flow hedges in
accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and
reporting standards for derivative financial instruments and for
hedging activities. As such, the changes in the fair value of
our derivative financial instruments are recorded in the
consolidated balance sheet and are reclassified to the same
consolidated income statement category as the hedged item in the
period in which the hedged transactions occur.
Our policy requires us to document all relationships between
hedging instruments and hedged items, as well as our risk
management objective and strategy for entering into economic
hedges. We also assess, at the inception of the hedge and on an
ongoing basis, whether the derivatives that are used in hedging
transactions have been highly effective in offsetting changes in
the cash flows of hedged items and whether those derivatives may
be expected to remain highly effective in future periods. In
accordance with FAS 133, the derivatives change in
fair value will be deferred in other comprehensive income until
the period in which the hedged transaction occurs. If the change
in fair value creates any ineffectiveness, which represents the
amount by which the changes in the fair value of the derivative
does not offset the change in the cash flow of the forecasted
transaction, the ineffective portion of the change in fair value
is recorded in earnings.
We will discontinue hedge accounting prospectively when
(1) we determine that the derivative financial instrument
is no longer effective in offsetting changes in the fair value
or cash flows of the underlying exposure being hedged;
(2) the derivative financial instrument matures, or is
sold, terminated or exercised; or (3) we determine that
designating the derivative financial instrument as a hedge is no
longer appropriate. When hedge accounting is discontinued, and
the derivative financial instrument remains outstanding, the
deferred gains or losses on the cash flow hedge will remain in
other comprehensive income until the forecasted transaction
occurs. Any further changes in the fair value of the derivative
financial instrument will be recognized in current period
earnings.
For derivative financial instruments that do not qualify for
hedge accounting or for which we have not elected to apply hedge
accounting, the changes in fair values are recognized in other
income, net.
36
Short-term
investments
Our short-term investments consist of Variable Rate Demand Notes
(VRDN). Our VRDN investments are tax-exempt instruments of high
credit quality. The primary objectives of VRDN investments are
preservation of invested funds, liquidity sufficient to meet
cash flow requirements, and yield. VRDN securities have variable
interest rates that reset at regular intervals of one, seven,
28, or 35 days. Although VRDN securities are issued and
rated as long-term securities, they are priced and traded as
short-term instruments. We classify these short-term investments
as available for sale in accordance with FAS 115,
Accounting for Certain Instruments in Debt and Equity
Securities. The cost of our VRDNs approximates fair value.
Concentrations
of credit risk
Financial instruments, which potentially subject us to
concentrations of credit risk, consist of cash equivalents,
short-term investments, and accounts receivable. Our cash
equivalents consist primarily of short-term money market
deposits, which are deposited with reputable financial
institutions. Our short-term investments consist of VRDNs, which
are tax-exempt instruments of high credit quality. We believe
the risk of loss associated with both our cash equivalents and
short-term investments to be remote. We have accounts receivable
from customers engaged in various industries including banking,
insurance, healthcare, manufacturing, telecommunications, travel
and energy, as well as government customers in defense and other
governmental agencies, and our accounts receivable are not
concentrated in any specific geographic region. These specific
industries may be affected by economic factors, which may impact
accounts receivable. Generally, we do not require collateral
from our customers. We do not believe that any single customer,
industry or geographic area represents significant credit risk.
No customer accounted for 10% or more of our total accounts
receivable (including accounts receivable recorded in both
accounts receivable, net, and long-term accrued revenue) at
December 31, 2007 or at December 31, 2006.
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. For a further discussion of the impact of
FAS 123R on the results of our financial statements, see
Note 11, Stock Options and Stock-Based
Compensation.
To account for the tax effects of stock based compensation,
FAS 123R requires a calculation to establish the beginning
pool of excess tax benefits, or the additional paid-in capital
(APIC) pool, available to absorb any tax deficiencies recognized
after the adoption of FAS 123R. Tax deficiencies arise when
the actual tax benefit from the tax deduction for share-based
compensation at the statutory tax rate is less than the related
deferred tax asset recognized in the financial statements. We
have elected the alternative transition method for calculating
the APIC pool as described in FAS 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards.
Significant
accounting standards to be adopted
FASB
Statement No 141R
In December 2007, the FASB issued FAS No. 141R
Business Combinations, which establishes principles
and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. FAS 141R also provides guidance
for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
FAS 141R is effective for fiscal years beginning after
December 15, 2008. Early
37
adoption is not permitted. We are currently evaluating the
impact this statement will have on our results of operations and
financial position.
FASB
Statement No. 157
In September 2006, the Financial Accounting Standards Board
issued Financial Accounting Standard 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. Delayed
application is permitted for all nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at
fair value in an entitys financial statements on a
recurring basis (at least annually) in financial statements
issued for fiscal years beginning after November 15, 2008.
We are currently evaluating the impact this statement will have
on our results of operations and financial position.
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. We are currently evaluating the impact
this statement will have on our results of operations and
financial position.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
In the ordinary course of business, we enter into certain
contracts denominated in foreign currency. Potential foreign
currency exposures arising from these contracts are analyzed
during the contract bidding process. We generally manage these
transactions by ensuring that costs to service these contracts
are incurred in the same currency in which revenue is received.
By matching revenue and costs to the same currency, we have been
able to substantially mitigate foreign currency risk to
earnings. We use derivative financial instruments to manage
exposures arising from these transactions when necessary. We do
not foresee changing our foreign currency exposure management
strategy.
During 2007, 12.2%, or $318 million, of our revenue was
generated outside of the United States. Using sensitivity
analysis, a hypothetical 10% increase or decrease in the value
of the U.S. dollar against all currencies would change
total revenue by 1.2%, or $32 million. In our opinion, a
substantial portion of this fluctuation would be offset by
expenses incurred in local currency.
Using sensitivity analysis, a hypothetical increase of 10% in
the interest rate related to our borrowing of $77 million
under our credit facility would increase our net expense by
approximately $400,000 for the year ended December 31, 2007.
38
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to Consolidated Financial Statements and Financial
Statement Schedules
Consolidated
Financial Statements
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|
Page
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|
|
F-1
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|
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F-2
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F-3
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|
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F-4
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F-5
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F-6
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F-7 F-41
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|
Financial Statement Schedule II, Valuation and
Qualifying Accounts, is submitted as Exhibit 99.1 to
this Annual Report on
Form 10-K.
Schedules other than that listed above have been omitted since
they are either not required, are not applicable, or the
required information is shown in the financial statements or
related notes.
39
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal
control over financial reporting as of December 31, 2007.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with
authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on
our financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that our degree of compliance with the policies or procedures
may deteriorate.
Our management performed an assessment of the effectiveness of
our internal control over financial reporting as of
December 31, 2007, based upon criteria in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, our management determined that
our internal control over financial reporting was effective as
of December 31, 2007, based on the criteria in Internal
Control Integrated Framework issued by COSO.
The effectiveness of our internal control over financial
reporting as of December 31, 2007, has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
Dated: February 27, 2008
|
|
|
Peter A. Altabef
|
|
John E. Harper
|
President and Chief Executive Officer
|
|
Vice President and Chief Financial Officer
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Perot Systems
Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Perot Systems Corporation and its
subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control Over Financial Reporting appearing under
Item 8. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007 and the manner in which it
accounts for stock-based compensation in 2006.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Dallas, Texas
February 27, 2008
F-2
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
as of December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions except par values and shares in
thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
187
|
|
|
$
|
250
|
|
Short-term investments
|
|
|
23
|
|
|
|
133
|
|
Accounts receivable, net
|
|
|
477
|
|
|
|
338
|
|
Prepaid expenses and other
|
|
|
38
|
|
|
|
37
|
|
Deferred income taxes
|
|
|
32
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
757
|
|
|
|
783
|
|
Property, equipment and purchased software, net
|
|
|
235
|
|
|
|
220
|
|
Goodwill
|
|
|
713
|
|
|
|
463
|
|
Deferred contract costs, net
|
|
|
82
|
|
|
|
61
|
|
Other non-current assets
|
|
|
113
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,900
|
|
|
$
|
1,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
69
|
|
|
$
|
52
|
|
Deferred revenue
|
|
|
55
|
|
|
|
42
|
|
Accrued compensation
|
|
|
54
|
|
|
|
65
|
|
Income taxes payable
|
|
|
18
|
|
|
|
37
|
|
Accrued and other current liabilities
|
|
|
134
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
330
|
|
|
|
301
|
|
Long-term debt
|
|
|
213
|
|
|
|
84
|
|
Non-current deferred revenue
|
|
|
70
|
|
|
|
82
|
|
Other non-current liabilities
|
|
|
44
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
657
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock; par value $.01; authorized 5,000 shares;
none issued
|
|
|
|
|
|
|
|
|
Class A Common Stock; par value $.01; authorized
300,000 shares; issued 123,958 and 120,316 shares,
respectively
|
|
|
1
|
|
|
|
1
|
|
Class B Convertible Common Stock; par value $.01;
authorized 24,000 shares; issued 0 and 2,275 shares,
respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
565
|
|
|
|
533
|
|
Retained earnings
|
|
|
698
|
|
|
|
575
|
|
Treasury stock
|
|
|
(49
|
)
|
|
|
(21
|
)
|
Accumulated other comprehensive income
|
|
|
28
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,243
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,900
|
|
|
$
|
1,581
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
for the
years ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Revenue
|
|
$
|
2,612
|
|
|
$
|
2,298
|
|
|
$
|
1,998
|
|
Direct cost of services
|
|
|
2,130
|
|
|
|
1,905
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
482
|
|
|
|
393
|
|
|
|
423
|
|
Selling, general and administrative expenses
|
|
|
298
|
|
|
|
280
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
184
|
|
|
|
113
|
|
|
|
174
|
|
Interest income
|
|
|
8
|
|
|
|
10
|
|
|
|
8
|
|
Interest expense
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Other income, net
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
182
|
|
|
|
120
|
|
|
|
180
|
|
Provision for income taxes
|
|
|
67
|
|
|
|
39
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115
|
|
|
$
|
81
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
Basic, Class B
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
Diluted
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
Diluted, Class B
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
Weighted average number of common shares outstanding (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A
|
|
|
121,759
|
|
|
|
118,686
|
|
|
|
115,973
|
|
Basic, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,907
|
|
Diluted
|
|
|
124,650
|
|
|
|
122,118
|
|
|
|
121,867
|
|
Diluted, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,965
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
for the
years ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Issued
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Income
|
|
|
Equity
|
|
|
|
(Dollars in millions and shares in thousands)
|
|
|
Balance at January 1, 2005
|
|
|
117,273
|
|
|
$
|
1
|
|
|
$
|
478
|
|
|
$
|
383
|
|
|
$
|
|
|
|
$
|
(10
|
)
|
|
$
|
10
|
|
|
$
|
862
|
|
Issuance of Class A shares under incentive plans
(689 shares, including 27 shares from treasury)
|
|
|
662
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Class A shares repurchased (1,710 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
Class B shares repurchased (1,458 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Exercise of stock options for Class A shares
(2,306 shares, including 483 from treasury)
|
|
|
1,823
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Exercise of stock options for Class B shares
|
|
|
700
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Tax benefit from stock options exercised and restricted stock
units vested
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Deferred compensation, net, and other
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
3
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
120,458
|
|
|
$
|
1
|
|
|
$
|
502
|
|
|
$
|
494
|
|
|
$
|
(35
|
)
|
|
$
|
(11
|
)
|
|
$
|
10
|
|
|
$
|
961
|
|
Issuance of Class A shares under incentive plans
(1,013 shares, including 373 shares from treasury)
|
|
|
640
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Class A shares repurchased (1,288 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
Exercise of stock options for Class A shares
(3,463 shares, including 2,028 from treasury)
|
|
|
1,435
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Exercise of stock options for Class B shares
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred compensation, net
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Tax benefit from stock options exercised and restricted stock
units vested
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
122,591
|
|
|
$
|
1
|
|
|
$
|
533
|
|
|
$
|
575
|
|
|
$
|
(21
|
)
|
|
$
|
|
|
|
$
|
17
|
|
|
$
|
1,105
|
|
Issuance of Class A shares under incentive plans
|
|
|
906
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Class A shares repurchased (3,517 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
Class B shares retired (1,458 shares)
|
|
|
(1,458
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options for Class A shares
(1,929 shares, including 10 from treasury)
|
|
|
1,919
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Tax benefit from stock options exercised and restricted stock
units vested
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
123,958
|
|
|
$
|
1
|
|
|
$
|
565
|
|
|
$
|
698
|
|
|
$
|
(49
|
)
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
for the years ended December 31, 2007, 2006, and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115
|
|
|
$
|
81
|
|
|
$
|
111
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
104
|
|
|
|
79
|
|
|
|
59
|
|
Impairment of assets
|
|
|
2
|
|
|
|
46
|
|
|
|
4
|
|
Stock-based compensation
|
|
|
16
|
|
|
|
17
|
|
|
|
3
|
|
Change in deferred taxes
|
|
|
(1
|
)
|
|
|
(17
|
)
|
|
|
10
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
|
|
Other non-cash items
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
|
|
Changes in assets and liabilities (net of effects from
acquisitions of businesses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(63
|
)
|
|
|
(49
|
)
|
|
|
(47
|
)
|
Prepaid expenses
|
|
|
|
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Deferred contract costs
|
|
|
(41
|
)
|
|
|
(30
|
)
|
|
|
(45
|
)
|
Accounts payable and accrued liabilities
|
|
|
4
|
|
|
|
33
|
|
|
|
3
|
|
Accrued compensation
|
|
|
(22
|
)
|
|
|
2
|
|
|
|
(14
|
)
|
Current and non-current deferred revenue
|
|
|
(5
|
)
|
|
|
50
|
|
|
|
27
|
|
Income taxes
|
|
|
13
|
|
|
|
5
|
|
|
|
28
|
|
Other current and non-current assets
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
12
|
|
Other current and non-current liabilities
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
3
|
|
|
|
132
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
118
|
|
|
|
213
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(75
|
)
|
|
|
(93
|
)
|
|
|
(70
|
)
|
Proceeds from sale of property, equipment and software
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired of $6, $0, and
$6, respectively
|
|
|
(338
|
)
|
|
|
(29
|
)
|
|
|
(98
|
)
|
Purchases of short-term investments
|
|
|
(753
|
)
|
|
|
(689
|
)
|
|
|
|
|
Proceeds from sale of short-term investments
|
|
|
863
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(298
|
)
|
|
|
(255
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(2
|
)
|
|
|
|
|
|
|
(79
|
)
|
Proceeds from issuance of long-term debt
|
|
|
130
|
|
|
|
|
|
|
|
77
|
|
Proceeds from issuance of common and treasury stock
|
|
|
25
|
|
|
|
37
|
|
|
|
24
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(47
|
)
|
|
|
(18
|
)
|
|
|
(42
|
)
|
Other
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
109
|
|
|
|
27
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
8
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents
|
|
|
(63
|
)
|
|
|
(10
|
)
|
|
|
(45
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
250
|
|
|
|
260
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
187
|
|
|
$
|
250
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
|
|
1.
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Perot Systems Corporation, a Delaware corporation, is a
worldwide provider of information technology (commonly referred
to as IT) services and business solutions to a broad range of
customers. We offer our customers integrated solutions designed
around their specific business objectives, and these services
include infrastructure services, applications services, business
process services, and consulting services. Our significant
accounting policies are described below.
Principles
of consolidation
Our consolidated financial statements include the accounts of
Perot Systems Corporation and all domestic and foreign
subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires that we make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting
period. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, allowance for
doubtful accounts, realizability of deferred contract costs,
impairment testing of goodwill, long-lived assets, and
intangible assets, accrued liabilities, income taxes, and loss
contingencies associated with litigation and disputes.
Our estimates are based on historical experience and various
other assumptions, including assumptions about counterparty
financial condition and future business volumes above
contractual minimums, which we believe are reasonable under the
circumstances and that form the basis for our judgments about
the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates.
Cash
equivalents
All highly liquid investments with original maturities of three
months or less that are purchased and sold generally as part of
our cash management activities are considered to be cash
equivalents.
Revenue
recognition
We provide services to our customers under contracts that
contain various pricing mechanisms and other terms. The fees
under these arrangements are generally based on the level of
effort incurred in delivering the services, including cost plus
and time and materials fee arrangements, on a contracted fixed
price for contracted services, or on a contracted
per-unit
price for each unit of service delivered. These services
generally fall into one of the following categories:
|
|
|
|
|
Infrastructure services include data center
and systems management, Web hosting and Internet access, desktop
solutions, messaging services, program management, hardware
maintenance and monitoring, network management, including VPN
services, service desk capabilities, physical security, network
security, risk management, and virtualization (the management of
leveraged computing environments). We typically hire a
significant portion of the customers staff that supported
these functions prior to the transition of services. We then
apply our expertise and operating methodologies and utilize
technology to increase the efficiency of the operations, which
usually results in increased operational quality at a lower
cost. The term of our outsourcing contracts generally ranges
between five and ten years.
|
|
|
|
Applications services include services such
as application development and maintenance, including the
development and maintenance of custom and packaged application
software for customers, and application systems migration and
testing, which includes the migration of applications from
legacy environments to
|
F-7
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
current technologies, as well as performing quality assurance
functions on custom applications. We also provide other
applications services such as application assessment and
evaluation, hardware and architecture consulting, systems
integration, and Web-based services. The term of our
applications services contracts varies based on the complexity
of the services provided and the customers needs.
|
|
|
|
|
|
Business process services include services
such as product engineering, claims processing, life insurance
policy administration, call center management, payment and
settlement management, security, and services to improve the
collection of receivables. In addition, business process
services include engineering support and other technical and
administrative services that we provide to the U.S. federal
government. The term of our business process services contracts
generally ranges from
month-to-month
to five years.
|
|
|
|
Consulting services include services such as
strategy consulting, enterprise consulting, technology
consulting, and research. The consulting services provided to
customers within our Industry Solutions and Government Services
segments typically consist of customized, industry-specific
business solutions provided by associates with industry
expertise. The consulting services provided within the
Consulting and Application Solutions segment includes the
implementation of prepackaged software applications. Consulting
services are typically viewed as discretionary services by our
customers, with the level of business activity depending on many
factors, including economic conditions and specific customer
needs. The term of our consulting contracts varies based on the
complexity of the services provided and the customers
needs.
|
Within these four categories of services, our contracts include
non-construction service deliverables, including infrastructure
services and business process services, and construction service
deliverables, such as application development and implementation
services.
Accounting
for Revenue in Single-Deliverable Arrangements
Revenue for non-construction service deliverables is recognized
as the services are delivered in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue
Recognition, which provides that revenue should be
recognized when persuasive evidence of an arrangement exists,
the fee is fixed or determinable, and collectibility is
reasonably assured. Under our policy, persuasive evidence of an
arrangement exists when a final understanding between us and our
customer exists as to the specific nature and terms of the
services that we are going to provide, as documented in the form
of a signed agreement between us and the customer.
Revenue for non-construction services priced under fixed-fee
arrangements is recognized on a straight-line basis over the
longer of the term of the contract or the expected service
period, regardless of the amounts that can be billed in each
period, unless evidence suggests that the revenue is earned or
our obligations are fulfilled in a different pattern. If we are
to provide a similar level of non-construction services each
period during the term of a contract, we would recognize the
revenue on a straight-line basis since our obligations are being
fulfilled in a straight-line pattern. If our obligations are
being fulfilled in a pattern that is not consistent over the
term of a contract, then we would recognize revenue consistent
with the proportion of our obligations fulfilled in each period.
In determining the proportion of our obligations fulfilled in
each period, we consider the nature of the deliverables we are
providing to the customer and whether the volumes of those
deliverables are easily measured, such as when we provide a
contractual number of full time equivalent associate resources.
If the amount of our obligations fulfilled in each period is not
easily distinguished by reference to the volumes of services
provided, then we would recognize revenue on a straight-line
basis.
Revenue for construction services that do not include a license
to one of our software products is recognized in accordance with
the provisions of AICPA Statement of Position
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. In general,
SOP 81-1
requires the use of the
percentage-of-completion
method to recognize revenue and profit as our work progresses,
and we primarily use hours incurred to date to measure our
progress toward completion. This method relies on estimates of
total expected hours to complete the construction service, which
are compared to hours incurred to date, to arrive at an
F-8
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimate of how much revenue and profit has been earned to date.
Although we primarily measure our progress toward completion
using hours incurred to date, we may measure our progress toward
completion using costs incurred to date if the construction
services involve a significant amount of non-labor costs.
Because these estimates may require significant judgment,
depending on the complexity and length of the construction
services, the amount of revenue and profits that have been
recognized to date are subject to revisions. If we do not
accurately estimate the amount of hours or costs required or the
scope of work to be performed, or do not complete our projects
within the planned periods of time, or do not satisfy our
obligations under the contracts, then revenue and profits may be
significantly and negatively affected or losses may need to be
recognized. Revisions to revenue and profit estimates are
reflected in income in the period in which the facts that give
rise to the revision become known.
Revenue for the sale of a license from our software products or
the sale of services relating to a software license is
recognized in accordance with the provisions of AICPA Statement
of Position
No. 97-2,
Software Revenue Recognition. In general,
SOP 97-2
addresses the separation and the timing of revenue recognition
for software and software-related services, such as
implementation and maintenance services.
SOP 97-2
also requires the application of the
percentage-of-completion
method as described in
SOP 81-1
for those software arrangements that require significant
production, modification, or customization of the software. As a
result, the accounting for revenue related to software
arrangements includes many of the estimates and significant
judgments discussed above.
Revenue for services priced under time and materials contracts
and unit-priced contracts is recognized as the services are
provided at the contractual unit price.
Accounting
for Revenue in Multiple-Deliverable Arrangements
For those arrangements that include multiple deliverables, we
first determine whether each service, or deliverable, meets the
separation criteria of Financial Accounting Standards Board
Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. In
general, a deliverable (or a group of deliverables) meets the
separation criteria if the deliverable has standalone value to
the customer and if there is objective and reliable evidence of
the fair value of the remaining deliverables in the arrangement.
Each deliverable that meets the separation criteria is
considered a separate unit of accounting. We
allocate the total arrangement consideration to each unit of
accounting based on the relative fair value of each unit of
accounting. The amount of arrangement consideration that is
allocated to a delivered unit of accounting is limited to the
amount that is not contingent upon the delivery of another unit
of accounting.
After the arrangement consideration has been allocated to each
unit of accounting, we apply the appropriate revenue recognition
method for each unit of accounting as described previously based
on the nature of the arrangement and the services included in
each unit of accounting. All deliverables that do not meet the
separation criteria of
EITF 00-21
are combined into one unit of accounting, and the most
appropriate revenue recognition method is applied.
In arrangements for both non-construction and construction
services, we may bill the customer prior to performing services,
which would require us to record deferred revenue. In other
arrangements, we may perform services prior to billing the
customer, which could require us to record unbilled receivables
or to defer the costs associated with either the
non-construction or construction services, depending on the
terms of the arrangement and the application of the revenue
separation criteria of
EITF 00-21.
In certain arrangements we may pay consideration to the customer
at the beginning of a contract as an incentive, which is most
commonly in the form of cash. This consideration is recorded in
other non-current assets on the consolidated balance sheets and
is amortized as a reduction to revenue over the term of the
related contract.
As a result of our adoption of
EITF 00-21
in 2003, we recognized revenue of approximately $7 million,
$5 million, and $3 million during the years ended
December 31, 2007, 2006, and 2005, respectively, that were
recognized prior to 2003 under our accounting for revenue prior
to the adoption of
EITF 00-21
and were also included in the cumulative effect of a change in
accounting principle, which we recorded in the first quarter of
2003.
F-9
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contract
costs
Costs to deliver services are expensed as incurred, with the
exception of setup costs and the cost of certain construction
and non-construction services for which the related revenue must
be deferred under
EITF 00-21
or other accounting literature. We defer and subsequently
amortize certain setup costs related to activities that enable
us to provide the contracted services to customers. Deferred
contract setup costs may include costs incurred during the setup
phase of a customer arrangement relating to data center
migration, implementation of certain operational processes,
employee transition, and relocation of key personnel. We
amortize deferred contract setup costs on a straight-line basis
over the lesser of their estimated useful lives or the term of
the related contract. Useful lives range from three years up to
a maximum of the term of the related customer contract.
For a construction service in a single-deliverable arrangement,
if the total estimated costs to complete the construction
service exceed the total amount that can be billed under the
terms of the arrangement, then a loss would generally be
recorded in the period in which the loss first becomes probable.
For a construction service in a multiple-deliverable
arrangement, if the total estimated costs to complete the
construction service exceed the amount of revenue that is
allocated to the separate construction service unit of
accounting (based on the relative fair value allocation, limited
to the amount that is not contingent), then the actual costs
incurred to complete the construction service in excess of the
allocated fair value would be deferred, up to the amount of the
relative fair value, and amortized over the remaining term of
the contract. A loss would generally be recorded on a
construction service in a multiple-deliverable arrangement if
the total costs to complete the service exceed the relative fair
value of the service.
Deferred contract costs are evaluated for realizability whenever
events or changes in circumstances indicate that the carrying
amount may not be realizable. Our evaluation is based on the
amount of non-refundable deferred revenue that is related to the
deferred contract costs and our projection of the remaining
gross profits from the related customer contract. To the extent
that the carrying amount of the deferred contract costs is
greater than the amount of non-refundable deferred revenue and
the remaining net gross profits from the customer contract, a
charge is recorded to reduce the carrying amount to equal the
amount of non-refundable deferred revenue and remaining gross
profits.
Year-end
bonus plan
One of our compensation methods is to pay to certain associates
a year-end bonus, which is based on associate and team
performance, our financial results, and managements
discretion. The amount of bonus expense that we record each
quarter is based on several factors, including our financial
performance for that quarter, our latest expectations for full
year results, and managements estimate of the amount of
bonus to be paid at the end of the year. As a result, the amount
of bonus expense that we record in each quarter can vary
significantly.
Contingencies
We account for claims and contingencies in accordance with
Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies. FAS 5 requires
that we record an estimated loss from a claim or loss
contingency when information available prior to issuance of our
financial statements indicates that it is probable that an asset
has been impaired or a liability has been incurred at the date
of the financial statements and the amount of the loss can be
reasonably estimated. If we determine that it is reasonably
possible but not probable that an asset has been impaired or a
liability has been incurred or the amount of a probable loss
cannot be reasonably estimated, then we may disclose the amount
or range of estimated loss if the amount or range of estimated
loss is material. Accounting for claims and contingencies
requires us to use our judgment. We consult with legal counsel
on those issues related to litigation and seek input from other
experts and advisors with respect to matters in the ordinary
course of business.
F-10
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research
and development costs
Research and development costs are included in SG&A, are
charged to expense as incurred, and were $2 million,
$3 million, and $2 million in the years ended
December 31, 2007, 2006, and 2005, respectively.
Property,
equipment and purchased software
Buildings are stated at cost and are depreciated on a
straight-line basis using estimated useful lives of 20 to
30 years. Computer equipment and furniture are stated at
cost and are depreciated on a straight-line basis using
estimated useful lives of two to seven years. Leasehold
improvements are amortized over the shorter of the lease term,
the estimated useful life of the improvement, or seven years.
Purchased software that is utilized either internally or in
providing services is capitalized at cost and amortized on a
straight-line basis over the lesser of its useful life or the
term of the related contract.
Upon sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the
accounts, and any gain or loss is reflected in the consolidated
income statements. Expenditures for repairs and maintenance are
expensed as incurred.
Capitalized
software development costs
We capitalize internal software development costs for software
we sell to our customers in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed. This statement specifies that costs incurred
internally in creating a computer software product shall be
charged to expense when incurred as research and development
until technological feasibility has been established for the
product. Technological feasibility is established upon
completion of all planning, designing, and testing activities
that are necessary to establish that the product can be produced
to meet its design specifications including functions, features
and technical performance requirements. We cease capitalization
and begin amortization of internally developed software when the
product is made available for general release to customers, and
thereafter, any maintenance and customer support is charged to
expense as incurred. Capitalized software costs are amortized on
a straight-line basis over the estimated useful life of the
software of three to five years, but amortization may be
accelerated to ensure that the software costs are amortized in a
manner consistent with the anticipated timing of product
revenue. We continually evaluate the recoverability of
capitalized software development costs, which are reported at
the lower of unamortized cost or net realizable value.
We also capitalize internal software development costs for
software we use internally in accordance with AICPA Statement of
Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement specifies that
computer software development costs for computer software
intended for internal use occur in three stages: (1) the
preliminary project stage, where costs are expensed as incurred,
(2) the application development stage, where costs are
capitalized, and (3) the post-implementation or operation
stage, where costs are expensed as incurred. We cease
capitalization of developed software for internal use when the
software is ready for its intended use and placed in service. We
amortize such capitalized costs on a
product-by-product
basis using a straight-line basis over the estimated useful life
of three to five years.
Goodwill
and other intangibles
We allocate the cost of acquired businesses to the assets
acquired and liabilities assumed based on estimated fair values
at the date of acquisition, and any cost of the acquired
companies not allocated to assets acquired or liabilities
assumed is recorded as goodwill. Goodwill is not amortized, but
instead is evaluated at least annually for impairment. Other
intangible assets are amortized on a straight-line basis over
their estimated useful lives, which range from twelve months to
seven years.
The determination of the fair value of goodwill and other
intangibles requires us to make estimates and assumptions about
future business trends and growth at the date of acquisition. If
an event occurs that would cause
F-11
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
us to revise our estimates and assumptions used in analyzing the
value of our goodwill or other intangibles, such revision could
result in an impairment charge that could have a material impact
on our financial condition and results of operations.
Goodwill is tested for impairment annually in the third quarter
or whenever an event occurs or circumstances change that may
reduce the fair value of the reporting unit below its book
value. The impairment test is conducted for each reporting unit
in which goodwill is recorded by comparing the fair value of the
reporting unit to its carrying value. Fair value is determined
primarily by computing the future discounted cash flows expected
to be generated by the reporting unit. If the carrying value
exceeds the fair value, goodwill may be impaired. If this
occurs, the fair value of the reporting unit is then allocated
to its assets and liabilities in a manner similar to a purchase
price allocation in order to determine the implied fair value of
the goodwill of the reporting unit. If the implied fair value is
less than the carrying amount of the goodwill of the reporting
unit, we would recognize an impairment loss to write down the
goodwill to fair value.
Impairment
of long-lived assets
Long-lived assets and intangible assets with definite lives are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. Our review is based on our projection of
the undiscounted future operating cash flows of the underlying
assets. To the extent such projections indicate that future
undiscounted cash flows are not sufficient to recover the
carrying amounts of related assets, a charge is recorded to
reduce the carrying amount to the projected future discounted
cash flows.
Income
taxes
We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred income taxes
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected
to be realized. On a quarterly basis, we evaluate the need for
and adequacy of valuation allowances based on the expected
realizability of our deferred tax assets and adjust the amount
of such allowances, if necessary. The factors used to assess the
likelihood of realization include our latest forecast of future
taxable income and available tax planning strategies that could
be implemented to realize the net deferred tax assets. Income
tax expense consists of our current and deferred provisions for
U.S. and foreign income taxes.
We do not provide for U.S. income tax on the undistributed
earnings of our
non-U.S. subsidiaries.
Except for amounts repatriated in 2005 pursuant to the American
Jobs Creation Act of 2004 (the Act), we intend to either
permanently invest our
non-U.S. earnings
or remit such earnings in a tax-free manner. The Act created a
temporary incentive through December 31, 2005, for
U.S. companies to repatriate income earned abroad by
providing an 85 percent dividends received deduction for
qualifying foreign dividends.
The cumulative amount of undistributed earnings (as calculated
for income tax purposes) of our
non-U.S. subsidiaries
was approximately $232 million at December 31, 2007,
and $182 million at December 31, 2006. Such earnings
include pre-acquisition earnings of
non-U.S. entities
acquired through stock purchases and are intended to be invested
outside of the U.S. indefinitely. The ultimate tax
liability related to repatriation of our undistributed earnings
is dependent upon future tax planning opportunities and is not
estimable at the present time.
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 adoption of FIN 48, we
recognize accrued interest and penalties related to
F-12
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrecognized tax benefits as a component of income tax expense.
The effect of the adoption of FIN 48 is detailed in
Note 14 Income Taxes.
Determining the consolidated provision for income taxes involves
judgments, estimates, and the application of complex tax
regulations. As a global company, we are required to provide for
income taxes in each of the jurisdictions where we operate,
including estimated liabilities for uncertain tax positions. We
are subject to income tax audits by federal, state, and foreign
tax authorities and we are currently under audit by the Internal
Revenue Service and the Indian and United Kingdom taxing
authorities. We fully cooperate with all audits, but we defend
our positions vigorously. Although we believe that we have
provided adequate liabilities for uncertain tax positions, the
actual liability resulting from examinations by tax authorities
could differ substantially from the recorded income tax
liabilities and could result in additional income tax expense.
Changes to our recorded income tax liabilities resulting from
the resolution of tax matters are reflected in income tax
expense in the period of resolution. Other factors may cause us
to revise our estimates of income tax liabilities including the
expiration of statutes of limitations, changes in tax
regulations, and tax rulings. Changes in estimates of income tax
liabilities are reflected in our income tax provision in the
period in which the factors resulting in our change in estimate
become known to us. As a result, our effective tax rate may
fluctuate on a quarterly basis.
Financial
instruments
The carrying amounts reflected in our 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 values. Fair
values are based primarily on current prices for those or
similar instruments.
Derivative
Financial Instruments
As part of our risk management strategy, we enter into
derivative financial instruments to mitigate certain financial
risks related to foreign currencies and interest rates. We have
a risk management policy outlining 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 hedge our exposure to
floating rates on certain portions of our debt, and forward
contracts and zero cost collars that hedge our exposure to
fluctuations in foreign currency exchange rates.
In the third quarter of 2007, we began designating certain
derivative financial instruments as cash flow hedges in
accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and
reporting standards for derivative financial instruments and for
hedging activities. As such, the changes in the fair value of
our derivative financial instruments are recorded in the
consolidated balance sheet and are reclassified to the same
consolidated income statement category as the hedged item in the
period in which the hedged transactions occur.
Our policy requires us to document all relationships between
hedging instruments and hedged items, as well as our risk
management objective and strategy for entering into economic
hedges. We also assess, at the inception of the hedge and on an
ongoing basis, whether the derivative financial instruments that
are used in hedging transactions have been highly effective in
offsetting changes in the cash flows of hedged items and whether
those derivative financial instruments may be expected to remain
highly effective in future periods. In accordance with
FAS 133, the derivative financial instruments change
in fair value will be deferred in other comprehensive income
until the period in which the hedged transaction occurs. If the
change in fair value creates any ineffectiveness, which
represents the amount by which the changes in the fair value of
the derivative financial instruments does not offset the change
in the cash flow of the forecasted transaction, the ineffective
portion of the change in fair value is recorded in earnings.
We will discontinue hedge accounting prospectively when
(1) we determine that the derivative financial instrument
is no longer effective in offsetting changes in the fair value
or cash flows of the underlying exposure
F-13
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
being hedged; (2) the derivative financial instrument
matures, or is sold, terminated or exercised; or (3) we
determine that designating the derivative financial instrument
as a hedge is no longer appropriate. When hedge accounting is
discontinued, and the derivative financial instrument remains
outstanding, the deferred gains or losses on the cash flow hedge
will remain in other comprehensive income until the forecasted
transaction occurs. Any further changes in the fair value of the
derivative financial instrument will be recognized in current
period earnings.
For derivative financial instruments that do not qualify for
hedge accounting or for which we have not elected to apply hedge
accounting, the changes in fair values are recognized in other
income, net.
Short-term
investments
Our short-term investments consist of Variable Rate Demand Notes
(VRDN). Our VRDN investments are tax-exempt instruments of high
credit quality. The primary objectives of VRDN investments are
preservation of invested funds, liquidity sufficient to meet
cash flow requirements, and yield. VRDN securities have variable
interest rates that reset at regular intervals of one, seven,
28, or 35 days. Although VRDN securities are issued and
rated as long-term securities, they are priced and traded as
short-term instruments. We classify these short-term investments
as available for sale in accordance with FAS 115,
Accounting for Certain Instruments in Debt and Equity
Securities. The cost of our VRDNs approximates fair value.
Concentrations
of credit risk
Financial instruments, which potentially subject us to
concentrations of credit risk, consist of cash equivalents,
short-term investments, and accounts receivable. Our cash
equivalents consist primarily of short-term money market
deposits, which are deposited with reputable financial
institutions. Our short-term investments consist of VRDNs, which
are tax-exempt instruments of high credit quality. We believe
the risk of loss associated with both our cash equivalents and
short-term investments to be remote. We have accounts receivable
from customers engaged in various industries including banking,
insurance, healthcare, manufacturing, telecommunications, travel
and energy, as well as government customers in defense and other
governmental agencies, and our accounts receivable are not
concentrated in any specific geographic region. These specific
industries may be affected by economic factors, which may impact
accounts receivable. Generally, we do not require collateral
from our customers. We do not believe that any single customer,
industry or geographic area represents significant credit risk.
No customer accounted for 10% or more of our total accounts
receivable (including accounts receivable recorded in both
accounts receivable, net, and long-term accrued revenue) at
December 31, 2007 or at December 31, 2006.
Foreign
operations
The consolidated balance sheets include foreign assets and
liabilities of $215 million and $67 million,
respectively, as of December 31, 2007, and
$204 million and $90 million, respectively, as of
December 31, 2006.
Assets and liabilities of subsidiaries located outside the
United States are translated into U.S. dollars at current
exchange rates as of the respective balance sheet date, and
revenue and expenses are translated at average exchange rates
during each reporting period. Translation gains and losses are
recorded as a component of accumulated other comprehensive
income on the consolidated balance sheets.
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
F-14
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. For a further discussion
of the impact of FAS 123R on the results of our financial
statements, see Note 11, Stock Options and
Stock-Based Compensation.
To account for the tax effects of stock based compensation,
FAS 123R requires a calculation to establish the beginning
pool of excess tax benefits, or the additional paid-in capital
(APIC) pool, available to absorb any tax deficiencies recognized
after the adoption of FAS 123R. Tax deficiencies arise when
the actual tax benefit from the tax deduction for share-based
compensation at the statutory tax rate is less than the related
deferred tax asset recognized in the financial statements. We
have elected the alternative transition method for calculating
the APIC pool as described in FAS 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards.
Significant
accounting standards to be adopted
FASB
Statement No 141R
In December 2007, the FASB issued FAS No. 141R
Business Combinations, which establishes principles
and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. FAS 141R also provides guidance
for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
FAS 141R is effective for fiscal years beginning after
December 15, 2008. Early adoption is not permitted. We are
currently evaluating the impact this statement will have on our
results of operations and financial position.
FASB
Statement No. 157
In September 2006, the Financial Accounting Standards Board
issued Financial Accounting Standard 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. Delayed
application is permitted for all nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at
fair value in an entitys financial statements on a
recurring basis (at least annually) in financial statements
issued for fiscal years beginning after November 15, 2008.
We are currently evaluating the impact this statement will have
on our results of operations and financial position.
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. We are currently evaluating the impact
this statement will have on our results of operations and
financial position.
|
|
2.
|
Derivative
Financial Instruments
|
We have elected hedge accounting under FAS 133 for certain
foreign currency derivative financial instruments and designated
them as cash flow hedges. We hedge the variability of a portion
of our anticipated foreign currency
F-15
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 consolidated
income statements. As of December 31, 2007, the notional
amount of foreign currency derivative financial instruments
outstanding totaled $171 million, of which
$133 million relates to derivative financial instruments
for which we elected hedge accounting. These derivative
financial instruments expire at various dates over the next
twenty-five months. At December 31, 2007, the estimated net
amount of existing gains that is expected to be reclassified
into earnings within the next twelve months is $2 million.
As of December 31, 2007, the unrealized gain on our foreign
currency hedges, reflected in accumulated other comprehensive
income, was approximately $4 million ($3 million, net
of tax).
On August 31, 2007, we entered into two interest rate
swaps, for which we elected hedge accounting under FAS 133
and designated them as cash flow hedges. The first interest rate
swap effectively converted $75 million of our borrowings
under our credit facility from a variable-rate instrument into a
fixed-rate instrument with an interest rate of 5.28%. The second
interest rate swap effectively converted an additional
$55 million of our borrowings under our credit facility
from a variable-rate instrument into a fixed-rate instrument
with an interest rate of 5.33%. As of December 31, 2007,
the unrealized loss on our interest rate swaps, reflected in
accumulated other comprehensive income, was approximately
$2 million ($2 million, net of tax).
Accounts receivable, net, consisted of the following as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Amounts billed
|
|
$
|
310
|
|
|
$
|
214
|
|
Amounts to be invoiced
|
|
|
161
|
|
|
|
106
|
|
Recoverable costs and profits
|
|
|
7
|
|
|
|
13
|
|
Other
|
|
|
12
|
|
|
|
13
|
|
Allowance for doubtful accounts
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
477
|
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
With regard to amounts billed, allowances for doubtful accounts
are provided based primarily on specific identification where
less than full recovery of accounts receivable is expected.
Amounts to be invoiced represent revenue contractually earned
for services performed that are invoiced to the customer
primarily in the following month. Recoverable costs and profits
represent amounts recognized as revenue that have not yet been
billed in accordance with the contract terms but are anticipated
to be billed within one year. Other accounts receivable
primarily represents amounts to be reimbursed by customers for
the purchase of third party products and services that are not
recorded as revenue or direct cost of services.
F-16
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property,
Equipment and Purchased Software
|
Property, equipment and purchased software, net, consisted of
the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Land and buildings
|
|
$
|
179
|
|
|
$
|
157
|
|
Computer equipment
|
|
|
117
|
|
|
|
97
|
|
Furniture and equipment
|
|
|
81
|
|
|
|
72
|
|
Leasehold improvements
|
|
|
24
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
347
|
|
Less accumulated depreciation and amortization
|
|
|
(191
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Purchased software
|
|
|
85
|
|
|
|
74
|
|
Less accumulated amortization
|
|
|
(60
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total property, equipment and purchased software, net
|
|
$
|
235
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we had $7 million of computer
equipment under capital lease with $2 million of
accumulated amortization. Depreciation and amortization expense
for property, equipment and purchased software was
$67 million, $55 million, and $41 million for the
years ended December 31, 2007, 2006, and 2005, respectively.
JJ
Wild, Inc.
On August 31, 2007, we acquired all of the outstanding
shares of JJ Wild Holdings, Inc., and its subsidiary, JJ Wild,
Inc. (collectively, JJ Wild), an information technology services
company providing services to the hospital market and also the
preferred provider of integrated healthcare delivery solutions
for organizations using the MEDITECH Healthcare Information
System. The acquisition of JJ Wild adds to the capabilities of
Perot Systems MEDITECH Solution Center and enables the company
to expand and enhance its MEDITECH service offerings. The
initial purchase price for JJ Wild was $86 million (net of
$5 million of cash acquired), $9 million of which is
being held in an escrow account for up to 18 months for
potential purchase price adjustments. The purchase price was
partially funded by $55 million borrowed under our existing
credit facility. The results of operations of JJ Wild and the
fair value of assets acquired and liabilities assumed are
included in our consolidated financial statements beginning on
the acquisition date. The allocation of the JJ Wild purchase
consideration to the assets and liabilities acquired, including
goodwill, has not been concluded due to the pending completion
of the intangible assets appraisal and a potential contractual
purchase price adjustments relating to working capital targets.
The estimated purchase price in excess of the net assets
acquired equaled $79 million and was recorded as goodwill
on the consolidated balance sheets, was assigned to the Industry
Solutions segment and is not deductible for tax purposes.
F-17
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the adjusted fair values of the
JJ Wild assets acquired and the liabilities assumed at the date
of acquisition, which was August 31, 2007 (in millions):
|
|
|
|
|
Current assets
|
|
$
|
23
|
|
Property, equipment and purchased software, net
|
|
|
1
|
|
Goodwill
|
|
|
79
|
|
Identifiable intangible assets
|
|
|
11
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
Current liabilities
|
|
|
(23
|
)
|
|
|
|
|
|
Total consideration paid as of December 31, 2007
|
|
$
|
91
|
|
|
|
|
|
|
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 for
amortization expense for identifiable intangible assets that
were acquired:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
2,670
|
|
|
$
|
2,375
|
|
Income before taxes
|
|
|
179
|
|
|
|
108
|
|
Net income
|
|
|
113
|
|
|
|
73
|
|
Basic earnings per common share, Class A
|
|
|
0.92
|
|
|
|
0.61
|
|
Basic earnings per common share, Class B
|
|
|
0.92
|
|
|
|
0.61
|
|
Diluted earnings per common share
|
|
|
0.91
|
|
|
|
0.60
|
|
Diluted earnings per common share, Class B
|
|
|
0.91
|
|
|
|
0.60
|
|
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.
QSS
Group, Inc.
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 eighteen
months for potential purchase price adjustments. The purchase
price was partially funded by $75 million borrowed under
our existing credit facility. The results of operations of QSS
and the fair value of assets acquired and liabilities assumed
are included in our consolidated financial statements beginning
on the acquisition date. The allocation of the QSS purchase
consideration to the assets and liabilities acquired, including
goodwill, has not been concluded due to a potential contractual
purchase price adjustment relating to working capital targets.
The estimated purchase price in excess of the net assets
acquired equaled $172 million and was recorded as goodwill
on the consolidated balance sheets, was assigned to the
Government Services segment and is deductible for tax purposes.
F-18
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
Identifiable intangible assets
|
|
|
50
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
Current liabilities and non-current liabilities
|
|
|
(35
|
)
|
|
|
|
|
|
Total consideration paid as of December 31, 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 for
amortization expense for identifiable intangible assets that
were acquired:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Revenue
|
|
$
|
2,637
|
|
|
$
|
2,564
|
|
Income before taxes
|
|
|
182
|
|
|
|
123
|
|
Net income
|
|
|
115
|
|
|
|
82
|
|
Basic earnings per common share, Class A
|
|
|
0.94
|
|
|
|
0.69
|
|
Basic earnings per common share, Class B
|
|
|
0.94
|
|
|
|
0.69
|
|
Diluted earnings per common share
|
|
|
0.92
|
|
|
|
0.68
|
|
Diluted earnings per common share, Class B
|
|
|
0.92
|
|
|
|
0.68
|
|
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.
eServ
LLC
On February 28, 2006, we acquired substantially all of the
assets of eServ LLC (eServ), a provider of product engineering
outsourcing services. As a result of the acquisition, we
broadened our suite of BPO services for the automotive,
manufacturing and industrial services markets. The initial
purchase price for eServ was $21 million, of which
$3 million is being held in escrow for potential purchase
price adjustments. The purchase agreement contains provisions
that included an additional payment of up to $4 million in
cash in 2008, which is contingent on eServ achieving certain
financial targets for 2007. During 2007, we determined that
eServ met their financial target for 2006, and we paid
$4 million of additional cash consideration. The results of
operations of eServ and the estimated fair value of assets
acquired and liabilities assumed are included in our
consolidated financial statements beginning on the acquisition
date. The estimated purchase price in excess of the net assets
acquired equaled $16 million and was recorded as goodwill
on the consolidated balance sheets, was assigned to the Industry
Solutions segment, and is deductible for tax purposes. Any
additional future payments will be recorded as additional
goodwill in the Industry Solutions segment.
F-19
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the adjusted fair values of the
eServ assets acquired and liabilities assumed at the date of
acquisition, which was February 28, 2006 (in millions):
|
|
|
|
|
Current assets
|
|
$
|
4
|
|
Property, equipment and purchased software, net
|
|
|
2
|
|
Goodwill
|
|
|
16
|
|
Identifiable intangible assets
|
|
|
5
|
|
Other non-current assets
|
|
|
1
|
|
|
|
|
|
|
|
|
|
28
|
|
Current liabilities
|
|
|
(3
|
)
|
|
|
|
|
|
Total consideration paid as of December 31, 2007
|
|
$
|
25
|
|
|
|
|
|
|
This business is not considered to be material to our
consolidated results of operations, financial position, and cash
flows.
Other
acquisition activity
Technical
Management, Inc.
In August 2005, we acquired all of the outstanding shares of
Technical Management, Inc. and its subsidiaries, including
Transaction Applications Group, Inc. (TAG), a provider of policy
administration and business process services to the life
insurance and annuity industry. During 2006, we determined that
TAG met contractual financial targets for 2005 and we paid
$8 million of additional consideration in cash which was
recorded as goodwill on the consolidated balance sheets, was
assigned to the Industry Solutions segment, and is not
deductible for tax purposes.
PrSM
Corporation
In July 2005, we acquired all of the outstanding shares of PrSM
Corporation (PrSM) for $7 million in cash. PrSM is a
safety, environmental and engineering services company that
provides services to various government agencies, including the
U.S. Department of Energy, the U.S. Department of
Defense and NASA. The allocation of the PrSM purchase
consideration to the assets and liabilities acquired resulted in
goodwill of $7 million, which was assigned to the
Government Services segment and is not deductible for tax
purposes.
Perot
Systems TSI B.V.
In March 1996, we entered into a joint venture with HCL
Technologies whereby we each owned 50% of HCL Perot Systems B.V.
(HPS), an information technology services company based in
India. In December 2003, we acquired HCL Technologies
shares in HPS, and changed the name of HPS to Perot Systems TSI
B.V.
For each of the years ended December 31, 2007, 2006, and
2005, we revised our pre-acquisition income tax liabilities,
which resulted in a decrease in goodwill of $5 million,
$1 million, and $1 million, respectively. These
adjustments to goodwill were assigned to the Consulting and
Applications Solutions segment, and are not deductible for tax
purposes.
Soza &
Company, Ltd.
In February 2003, we acquired all of the outstanding shares of
Soza & Company, Ltd. (Soza), a professional services
company that provides information technology, management
consulting, financial services and environmental services
primarily to public sector customers. During 2005, we determined
that Soza met contractual financial targets for 2004 and we paid
additional consideration of $17 million in cash, which was
recorded as
F-20
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goodwill on the consolidated balance sheets, was assigned to the
Government Services segment, and is not deductible for tax
purposes.
ADI
Technology Corporation
In July 2002, we acquired all of the outstanding shares of ADI
Technology Corporation (ADI), a professional services company
that provides technical, information, and management disciplines
to the Department of Defense and other governmental agencies.
During 2005, we determined that ADI met the financial target for
2004, and we paid $7 million of additional consideration in
cash, which was recorded as goodwill on the consolidated balance
sheets, was assigned to the Government Services segment, and is
not deductible for tax purposes.
Other
acquisitions
Additionally, during the year ended December 31, 2005, we
paid additional consideration for other acquired businesses that
met financial targets that individually and in the aggregate
were not material to our consolidated results of operations,
financial position or cash flows in the year acquired.
As of December 31, 2007, we have made all payments related
to our acquisitions, except for a potential $4 million
payment to the sellers of eServ, as described above.
The changes in the carrying amount of goodwill for the years
ended December 31, 2007 and 2006, by reportable segment are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Industry
|
|
|
Government
|
|
|
Applications
|
|
|
|
|
|
|
Solutions
|
|
|
Services
|
|
|
Solutions
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance as of January 1, 2006
|
|
$
|
250
|
|
|
$
|
128
|
|
|
$
|
66
|
|
|
$
|
444
|
|
Goodwill resulting from eServ acquisition
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Additional goodwill resulting from TAG acquisition
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Reclassification of goodwill due to change in reporting units
|
|
|
(15
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
255
|
|
|
|
128
|
|
|
|
80
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill resulting from the QSS acquisition
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
172
|
|
Goodwill resulting from the JJWild acquisition
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Other
|
|
|
4
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
338
|
|
|
$
|
300
|
|
|
$
|
75
|
|
|
$
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2006, we combined the Consulting
Solutions group, which was previously included in our Commercial
Solutions group in the Industry Solutions line of business, with
the Applications Solutions line of business. As a result of this
change, we allocated the goodwill from the Consulting Solutions
group to both the Commercial Solutions group and the Consulting
and Applications Solutions line of business based on the
relative fair values of the Commercial Solutions group and the
Consulting Solutions group.
F-21
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Deferred
Contract Costs, Net, and Other Non-Current Assets
|
Deferred
contract costs, net
The balance of deferred contract costs, net, at
December 31, 2007 and 2006, relate primarily to deferred
contract setup costs, which are amortized on a straight-line
basis over the lesser of their estimated useful lives or the
term of the related contract. Amortization expense for deferred
contract setup costs was $16 million, $11 million, and
$5 million for the years ended December 31, 2007,
2006, and 2005, respectively.
During the third quarter of 2006, we modified an existing
contract that included both construction services and
non-construction services. The construction services related to
a software development and implementation project, which was
modified to eliminate the fixed-price development and
implementation deliverables in the original contract. Following
the contract modification in September 2006, we impaired
$44 million of the deferred contract costs.
Other
non-current assets
Other non-current assets consist of the following as of December
31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Non-current prepaid assets
|
|
$
|
9
|
|
|
$
|
9
|
|
Sales incentives, net
|
|
|
6
|
|
|
|
8
|
|
Identifiable intangible assets, net
|
|
|
62
|
|
|
|
19
|
|
Non-current deferred tax assets
|
|
|
10
|
|
|
|
7
|
|
Non-current tax receivable
|
|
|
13
|
|
|
|
|
|
Other non-current assets
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
Sales
incentives
In certain arrangements we may pay consideration to the customer
at the beginning of a contract as a sales incentive, which is
most commonly in the form of cash. This consideration is
recorded in other non-current assets on the consolidated balance
sheets and is amortized as a reduction to revenue over the term
of the related contract. Amortization for sales incentives was
$2 million, $3 million, and $3 million for each
of the years ended December 31, 2007, 2006, and 2005.
Identifiable
intangible assets
Identifiable intangible assets are recorded in other non-current
assets in the consolidated balance sheets and are composed of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
As of December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Book
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Book
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in millions)
|
|
|
Service mark
|
|
$
|
4
|
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
Customer-based assets
|
|
|
87
|
|
|
|
(28
|
)
|
|
|
59
|
|
|
|
38
|
|
|
|
(22
|
)
|
|
|
16
|
|
Other intangible assets
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
7
|
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94
|
|
|
$
|
(32
|
)
|
|
$
|
62
|
|
|
$
|
50
|
|
|
$
|
(31
|
)
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total amortization expense for identifiable intangible assets
was $18 million, $8 million and $6 million, for
the years ended December 31, 2007, 2006, and 2005,
respectively. Amortization expense is estimated at
$18 million, $16 million, $14 million,
$11 million and $2 million for the years ended
December 31, 2008 through 2012, respectively. Identifiable
intangible assets are amortized on a straight-line basis over
their estimated useful lives, ranging from one to seven years.
The weighted average useful life is approximately five years.
|
|
8.
|
Accrued
and Other Current Liabilities
|
Accrued and other current liabilities consist of the following
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Accrued operating expenses
|
|
$
|
81
|
|
|
$
|
72
|
|
Accrued subcontractor costs
|
|
|
30
|
|
|
|
20
|
|
Taxes other than income
|
|
|
4
|
|
|
|
5
|
|
Other
|
|
|
19
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
134
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
Accrued operating expenses include liabilities recorded for both
corporate and contract-related needs, including accrued
liabilities for employee benefit plan costs and other general
expenditures. Also included in accrued operating expenses at
December 31, 2007, is $8 million of accrued severance
from our $18 million cost reduction activity. We expect
this liability to be substantially settled by June 30, 2008.
Credit
facility
We currently have a credit facility with a syndicate of banks
that allows us to borrow up to $275 million that expires in
August 2011. Borrowings under the credit facility will be either
through loans or letter of credit obligations. The credit
facility is guaranteed by certain of our domestic subsidiaries.
In addition, we have pledged a portion of the stock of several
of our non-domestic subsidiaries as security on the facility.
Interest on borrowings varies with usage and begins at an
alternate base rate, as defined in the credit facility
agreement, or the LIBOR rate plus an applicable spread based
upon our debt/EBITDA ratio applicable on such date. We are also
required to pay a facility fee based upon the unused credit
commitment and certain other fees related to letter of credit
issuance. The credit facility requires certain financial
covenants, including a debt/EBITDA ratio and a minimum interest
coverage ratio, each as defined in the credit facility
agreement. In March 2005, we borrowed $77 million against
the credit facility. Interest on this borrowing is at a variable
rate based on 1 month LIBOR and was 5.32% at
December 31, 2007.
In January 2007, we borrowed an additional $75 million in
connection with our acquisition of QSS. Interest on this
borrowing is at a variable rate based on 3 month LIBOR and
was 5.48% at December 31, 2007. We entered into an interest
rate swap agreement to effectively convert this borrowing into a
fixed-rate instrument with an interest rate of 5.28%.
In August 2007, we borrowed an additional $55 million in
connection with our acquisition of JJ Wild. Interest on this
borrowing is at a variable rate based on 3 month LIBOR and
was 5.58% at December 31, 2007. On August 31, 2007, we
entered into an interest rate swap agreement to effectively
convert this borrowing into a fixed-rate instrument with an
interest rate of 5.33%
We have $68 million currently available under the restated
and amended revolving credit facility.
F-23
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Common
and Preferred Stock
|
Class B
Convertible Common Stock
The Class B shares were authorized in conjunction with the
provisions of the original service agreements with Swiss Bank
Corporation, one of the predecessors of UBS AG, which were
signed in January 1996. Class B shares are non-voting and
convertible into Class A shares, but otherwise are
equivalent to the Class A shares.
Under the terms and conditions of the UBS agreements, each
Class B share shall be converted, at the option of the
holder, on a
share-for-share
basis, into a fully paid and non-assessable Class A share
upon sale of the share to a third-party purchaser under one of
the following circumstances: 1) in a widely dispersed
offering of the Class A shares; 2) to a purchaser of
Class A shares who prior to the sale holds a majority of
our stock; 3) to a purchaser who after the sale holds less
than 2% of our stock; 4) in a transaction that complies
with Rule 144 under the Securities Act of 1933, as amended;
or 5) any sale approved by the Federal Reserve Board of the
United States.
During 1997, we concluded a renegotiation of the terms of our
strategic alliance with UBS. Under these terms and conditions,
we sold to UBS 100,000 shares of our Class B stock at
a purchase price of $3.65 per share. These shares vested ratably
over the ten year term of the agreement and were fully vested as
of January 1, 2007.
Under the terms and conditions of the same 1997 agreement, we
sold UBS options to purchase 7,234,000 shares of our
Class B Common Stock at a non-refundable cash purchase
price of $1.125 per option. UBS had exercised all of these
options in accordance with this plan by January 2006, resulting
in a total of 7,334,000 Class B shares issued. As of
December 31, 2006, 5,059,000 shares had been converted
to Class A shares, 817,000 shares were outstanding,
and 1,458,000 shares had been repurchased from UBS for
$19 million and were held as treasury shares. As of
December 31, 2007, the 817,000 outstanding shares had been
converted to Class A shares and the 1,458,000 treasury
shares were retired, resulting in no issued or outstanding
Class B shares.
Treasury
stock
Treasury stock transactions are accounted for under the cost
method. Activity for Class A and Class B Treasury
Stock was as follows (shares in thousands and costs in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
|
Class B Common Stock
|
|
|
|
Shares
|
|
|
Cost
|
|
|
Shares
|
|
|
Cost
|
|
|
Balance at January 1, 2006
|
|
|
1,200
|
|
|
$
|
16
|
|
|
|
1,458
|
|
|
$
|
19
|
|
Purchased
|
|
|
1,288
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
Issued for employee incentive plans
|
|
|
(2,401
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
87
|
|
|
|
2
|
|
|
|
1,458
|
|
|
|
19
|
|
Purchased
|
|
|
3,517
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Issued for employee incentive plans
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retired
|
|
|
|
|
|
|
|
|
|
|
(1,458
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,594
|
|
|
$
|
49
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
In July 1998, our Board of Directors approved an amendment to
our Certificate of Incorporation that authorized 5 million
shares of Preferred Stock, the rights, designations, and
preferences of which may be designated from time to time by the
Board of Directors. On January 5, 1999, our Board of
Directors authorized two series of Preferred Stock in connection
with the adoption of a Shareholder Rights Plan:
200,000 shares of Series A Junior Participating
Preferred Stock, par value $.01 per share (the Series A
Preferred Stock), and 10,000 shares of Series B
F-24
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Junior Participating Preferred Stock, par value $.01 per share
(the Series B Preferred Stock and, together with the
Series A Preferred Stock, the Preferred Stock).
Stockholder
rights plan
As mentioned above, we have entered into a Stockholder Rights
Plan, pursuant to which one Class A Right entitles the
registered holder to purchase a unit consisting of one
one-thousandth of a share of Series A Preferred Stock from
us, at a purchase price of $55.00 per share, subject to
adjustment. These Rights have certain anti-takeover effects and
will cause substantial dilution to a person or group that
attempts to acquire us in certain circumstances. Accordingly,
the existence of these Rights may deter certain acquirers from
making takeover proposals or tender offers.
Employee
stock purchase plan
Eligible associates participate in an employee stock purchase
plan (the ESPP), which provides for the issuance of a maximum of
20,000,000 shares of Class A Common Stock and is divided
into separate U.S. and Non-U.S plans in order to ensure
that United States employees continue to receive tax benefits
under Section 421 and 423 of the United States Internal
Revenue Code. Eligible employee may have up to 10% of their
earnings withheld to be used to purchase shares of our common
stock on specified dates determined by the Board of Directors.
The price of the common stock purchased under the ESPP will be
equal to 85% of the fair value of the stock on the exercise date
for the offering period.
|
|
11.
|
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 adopted FAS 123R using the modified prospective method.
Under this transition method, stock compensation expense for
2006 included the cost for all share-based payments granted
prior to, but not yet vested, as of January 1, 2006, as
well as those share-based payments granted subsequent to
December 31, 2005. This compensation cost was based on the
grant-date fair values determined in accordance with
FAS 123 and FAS 123R, which we estimate using the
Black-Scholes option pricing model and recognize ratably, less
estimated forfeitures, over the vesting period, in direct cost
of services or in selling, general and administrative expenses.
In addition, upon adoption of FAS 123R we began recording
the related deferred income tax benefits associated with stock
compensation expense and began reflecting the excess tax
benefits of stock-based compensation awards in cash flows from
financing activities. Results for prior periods have not been
restated.
F-25
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
Direct cost of services
|
|
$
|
3
|
|
|
$
|
6
|
|
Selling, general and administrative expenses
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense from stock options and ESPP
|
|
|
12
|
|
|
|
14
|
|
Stock compensation expense from stock options and ESPP, net of
tax
|
|
|
8
|
|
|
|
10
|
|
Basic earnings per common share, Class A
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Basic earnings per common share, Class B
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Diluted earnings per common share
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Diluted earnings per common share, Class B
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
Stock compensation expense related to restricted stock units was
$4 million ($2 million net of tax), $3 million
($2 million net of tax), and $3 million
($2 million net of tax) for the years ended
December 31, 2007, 2006, and 2005, respectively.
At December 31, 2007, there was $41 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.
The following table illustrates the effect on net income and
earnings per common share as if we had elected to adopt the
expense recognition provisions of FAS 123 for the years
ended December 31, 2005:
|
|
|
|
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Net income
|
|
|
|
|
As reported
|
|
$
|
111
|
|
Add: stock-based compensation expense included in reported net
income, net of related tax effects
|
|
|
2
|
|
Less: total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related
tax effects
|
|
|
(27
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
86
|
|
Earnings per share of common stock
|
|
|
|
|
As Reported:
|
|
|
|
|
Basic earnings per common share, Class A
|
|
$
|
0.94
|
|
Basic earnings per common share, Class B
|
|
$
|
0.94
|
|
Diluted earnings per common share
|
|
$
|
0.91
|
|
Diluted earnings per common share, Class B
|
|
$
|
0.91
|
|
Pro forma:
|
|
|
|
|
Basic earnings per common share, Class A
|
|
$
|
0.73
|
|
Basic earnings per common share, Class B
|
|
$
|
0.73
|
|
Diluted earnings per common share
|
|
$
|
0.72
|
|
Diluted earnings per common share, Class B
|
|
$
|
0.72
|
|
F-26
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We utilize the Black-Scholes option pricing model to calculate
our actual and pro forma stock-based employee compensation
expense and the assumptions used for each period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted average risk free interest rates
|
|
|
4.9
|
%
|
|
|
4.7
|
%
|
|
|
4.4
|
%
|
Weighted average life (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
4.6
|
|
Volatility
|
|
|
23
|
%
|
|
|
31
|
%
|
|
|
43
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average grant-date fair value per share of options
granted at fair market value
|
|
$
|
4.68
|
|
|
$
|
5.32
|
|
|
$
|
6.05
|
|
Weighted average grant-date fair value per share of options
granted above fair market value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.14
|
|
Prior to January 1, 2006, with the exception of grants with
cliff vesting and acceleration features, the expected life of
each grant was generally estimated to be a period equal to one
half of the vesting period, plus one year. The expected life for
cliff vesting grants was generally equal to the vesting period,
and the expected life for grants with acceleration features was
estimated to be equal to the midpoint of the vesting period. For
those stock options granted subsequent to December 31,
2005, we estimated the expected life of each grant as the
weighted average expected life of each tranche of the granted
option, which was determined based on the sum of each
tranches vesting period plus one-half of the period from
the vesting date of each tranche to its expiration. For the
years subsequent to December 31, 2005, expected volatility
of our stock price was based on implied volatilities from traded
options on our common stock and on historical volatility over
the expected term of the granted option. For the year ended
December 31, 2005, expected volatility of our stock price
was based on only historical volatility over the expected term
of the granted option. The estimated fair value is not intended
to predict actual future events or the value ultimately realized
by employees who receive equity awards.
To reduce future stock option compensation expense that we would
otherwise recognize in our consolidated income statements with
the adoption of FAS 123R, Share-Based Payments,
and to further advance our corporate compensation objectives, in
November 2005 we extended an offer to eligible employees to
exchange certain unvested stock options to purchase Class A
common stock for fully vested replacement stock options to
purchase 90% of the original number of shares of our
Class A common stock. The stock options that were eligible
to be exchanged were only those options to purchase shares of
our Class A common stock at $25.00 per share that were
scheduled to vest in March 2010. Of the 2,861,000 stock options
eligible for exchange, employees representing approximately 72%
of the eligible options accepted the offer, and we granted
1,859,000 fully vested replacement stock options to those
employees. Also to reduce future stock option compensation
expense, we accelerated the vesting for the remaining 795,000
stock options, but the underlying shares resulting from the
future exercise of these stock options may not be sold prior to
the original vesting date in March 2010. As a result of the
offer and the acceleration of the remaining 795,000 stock
options, our 2005 pro forma net income and diluted earnings per
common share above were reduced by $12 million and $0.10,
respectively.
Description
of stock-based compensation plans
Below are descriptions of our active stock-based compensation
plans, as well as our 1996 Non-Employee Director Stock
Option/Restricted Stock Plan and our 1991 Stock Option Plan,
under which a significant number of stock options remain
outstanding.
2001
Long-Term Incentive Plan
In 2001, we adopted the 2001 Long-Term Incentive Plan under
which employees, directors, or consultants may be granted stock
options, stock appreciation rights, and restricted stock or may
be issued cash awards, or a combination thereof. Under the 2001
Plan, stock option awards may be granted in the form of
incentive stock
F-27
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options or non-statutory stock options. The exercise price of
any incentive stock option issued is the fair market value on
the date of grant, and the term of which may be no longer than
ten years from the date of grant. The exercise price of a
non-statutory stock option may be no less than 85% of the fair
value on the date of grant, except under certain conditions
specified in the 2001 Plan, and the term of a non-statutory
stock option may be no longer than eleven years from the date of
grant. The vesting period for all options is determined upon
grant date, and the options usually vest over a three- to
ten-year period, and in some cases can be accelerated through
attainment of performance criteria. The options are exercisable
from the vesting date, and unexercised vested options are
canceled following the expiration of a certain period after the
employees termination date.
2006
Non-Employee Director Equity Compensation Plan
In 2006, we adopted the 2006 Non-Employee Director Equity
Compensation Plan. This plan provides for the issuance of up to
500,000 Class A common shares to non-employee Board members
at a designated amount on June 1 of every year. Shares
under the plan would be immediately vested upon the grant date
and would have no restrictions. The non-employee Board members
may elect to defer receipt of a future stock award to the date
his or her service terminates.
1996
Non-Employee Director Stock Option/Restricted Stock
Plan
In 1996, we adopted the 1996 Non-Employee Director Stock
Option/Restricted Stock Plan. No new shares or options will be
granted under this plan as the plan was terminated in 2006;
however, provisions of this plan will remain in effect for all
currently outstanding options granted under this plan. This plan
provided for the issuance of up to 800,000 Class A common
shares or options to Board members who are not our employees.
Shares or options issued under the plan are subject to one- to
five-year vesting, with options expiring after an eleven-year
term. The purchase price for shares issued and exercise price
for options issued is the fair value of the shares at the date
of issuance. Other restrictions were established upon issuance.
The options are exercisable from the vesting date, and
unexercised vested options are canceled following the expiration
of a certain period after the Board members termination
date.
1991
Stock Option Plan
In 1991, we adopted the 1991 Stock Option Plan, which was
amended in 1993 and 1998. No additional stock options will be
granted under this plan as the plan was terminated in 2001;
however, provisions of this plan will remain in effect for all
outstanding options that were granted under this plan. Pursuant
to the 1991 Plan, options to purchase Class A common shares
could be granted to eligible employees. Prior to the date of our
initial public offering, such options were generally granted at
a price not less than 100% of the fair value of our Class A
common shares, as determined by the Board of Directors and based
upon an independent third-party valuation. Subsequent to our
initial public offering date, the exercise price for options
issued was the fair market value of the shares on the date of
grant. The stock options vest over a three- to ten-year period
based on the provisions of each grant, and in some cases can be
accelerated through the attainment of performance criteria. The
options are usually exercisable from the vesting date, and
unexercised vested options are canceled following the expiration
of a certain period after the employees termination date.
F-28
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity
in our stock-based compensation plans
Activity in stock options for Class A Common Stock was as
follows (options in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at January 1
|
|
|
18,169
|
|
|
|
14.42
|
|
|
|
25,342
|
|
|
|
14.81
|
|
|
|
29,904
|
|
|
|
14.68
|
|
Granted
|
|
|
1,636
|
|
|
|
15.38
|
|
|
|
1,543
|
|
|
|
14.89
|
|
|
|
3,755
|
|
|
|
19.26
|
|
Exercised
|
|
|
(1,929
|
)
|
|
|
8.39
|
|
|
|
(3,451
|
)
|
|
|
8.54
|
|
|
|
(2,306
|
)
|
|
|
6.08
|
|
Forfeited
|
|
|
(1,636
|
)
|
|
|
16.91
|
|
|
|
(5,265
|
)
|
|
|
20.33
|
|
|
|
(6,011
|
)
|
|
|
20.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
16,240
|
|
|
|
15.00
|
|
|
|
18,169
|
|
|
|
14.42
|
|
|
|
25,342
|
|
|
|
14.81
|
|
Exercisable at December 31
|
|
|
10,240
|
|
|
|
15.37
|
|
|
|
10,731
|
|
|
|
14.97
|
|
|
|
15,702
|
|
|
|
16.14
|
|
For outstanding and exercisable options at December 31,
2007, the weighted average remaining contractual term (in years)
is 4.03 and 3.54 respectively. For outstanding and exercisable
options at December 31, 2007, the aggregate intrinsic value
is $17 million and $14 million, respectively.
The following table summarizes information about options for
Class A Common Stock outstanding at December 31, 2007
(options in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Range of Prices
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
|
Options
|
|
|
Price
|
|
|
$ 1.88 - $ 5.00
|
|
|
262
|
|
|
$
|
3.10
|
|
|
|
.94
|
|
|
|
241
|
|
|
$
|
3.08
|
|
$ 5.01 - $10.00
|
|
|
1,947
|
|
|
|
9.69
|
|
|
|
4.29
|
|
|
|
1,943
|
|
|
|
9.69
|
|
$10.01 - $15.00
|
|
|
7,595
|
|
|
|
13.00
|
|
|
|
3.80
|
|
|
|
3,831
|
|
|
|
12.62
|
|
$15.01 - $20.00
|
|
|
3,374
|
|
|
|
15.80
|
|
|
|
5.19
|
|
|
|
1,328
|
|
|
|
16.30
|
|
$20.01 - $25.00
|
|
|
3,062
|
|
|
|
23.46
|
|
|
|
3.42
|
|
|
|
2,897
|
|
|
|
23.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,240
|
|
|
|
15.00
|
|
|
|
4.03
|
|
|
|
10,240
|
|
|
|
15.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have 50,246,606 shares reserved for issuance under our
equity compensation plans.
The following table summarizes information about the aggregate
intrinsic value and income tax benefits from the exercise of our
Class A stock options and the vesting of restricted stock
units during the years ended December 31, 2007, 2006, and
2005, as well as the amount of cash received from our
stock-based compensation arrangements for the same periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in millions)
|
|
Aggregate intrinsic value of Class A stock options
exercised and restricted stock units vested
|
|
$
|
20
|
|
|
$
|
25
|
|
|
$
|
20
|
|
Income tax benefits from the exercise of Class A stock
options and restricted stock units vested
|
|
|
7
|
|
|
|
9
|
|
|
|
5
|
|
Cash received from our stock-based compensation arrangements
|
|
|
25
|
|
|
|
37
|
|
|
|
21
|
|
Of the total income tax benefit of $7 million,
$9 million, and $5 million for the years ended
December 31, 2007, 2006, and 2005, respectively,
$4 million and $7 million, for 2007 and 2006, was
reflected as excess tax benefits from stock-based compensation
arrangements in net cash provided by financing activities in our
F-29
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated statements of cash flow for the same period. There
was no excess tax benefit for the year ended December 31,
2005. In addition, upon adoption of FAS 123R, we
reclassified the deferred compensation balance at
December 31, 2005, of $11 million, which related
primarily to the unearned compensation expense on restricted
stock units, to additional paid-in capital.
The number of outstanding nonvested restricted stock units was
1,010,000, 957,000, and 807,000 for the years ended
December 31, 2007, 2006, and 2005, respectively, with a
weighted-average grant-date fair value per share of $14.90,
$14.60, and $14.42, respectively. The number of restricted stock
units that vested or forfeited during the years ended
December 31, 2007 and 2006 was insignificant.
Total comprehensive income, net of tax, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Net income
|
|
$
|
115
|
|
|
$
|
81
|
|
|
$
|
111
|
|
Foreign currency translation adjustments
|
|
|
10
|
|
|
|
7
|
|
|
|
|
|
Net unrealized gain on foreign exchange forward contracts and
interest rate swaps
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
126
|
|
|
$
|
88
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The related net change associated with hedging transactions for
our derivative financial instruments designated as hedges under
FAS 133 for the year ended December 31, 2007, was as
follows:
|
|
|
|
|
|
|
(in millions)
|
|
|
Accumulated gain at December 31, 2006
|
|
$
|
|
|
Net unrealized gain on hedging transactions
|
|
|
1
|
|
Reclassifications into earnings
|
|
|
|
|
|
|
|
|
|
Total accumulated gain at December 31, 2007
|
|
$
|
1
|
|
|
|
|
|
|
|
|
13.
|
Customer
Contract Terminations
|
In the fourth quarter of 2007, we received notice from a client
that it would end the current services agreements. As a result,
we realized contract termination-related revenue and gross
profit of approximately $59 million and $46 million,
respectively, consisting of a contractually-obligated
termination fee of $26 million and recognition of revenue
and costs that were previously deferred of $33 million and
$13 million, respectively.
In 2001, we entered into a long-term fixed-price IT outsourcing
contract with a customer that included various non-construction
services and a construction service, which was an application
development project. In 2003, we recorded losses on this
contract totaling approximately $37 million, and we exited
the contract. We completed the services necessary to transition
certain functions back to the customer during the fourth quarter
of 2003. In 2004, we filed a claim in arbitration to recover
amounts we believed were due under this contract, and the other
party filed counterclaims. In the second quarter of 2005, we
settled this dispute, which resulted in a payment to us of
approximately $7 million and a reduction of liabilities of
approximately $3 million, both of which were recorded as a
reduction to direct cost of services in 2005.
F-30
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income before taxes for the years ended December 31 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Domestic
|
|
$
|
141
|
|
|
$
|
77
|
|
|
$
|
137
|
|
Foreign
|
|
|
41
|
|
|
|
43
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
182
|
|
|
$
|
120
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes charged to operations was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
53
|
|
|
$
|
44
|
|
|
$
|
42
|
|
State and local
|
|
|
8
|
|
|
|
4
|
|
|
|
5
|
|
Foreign
|
|
|
7
|
|
|
|
7
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
68
|
|
|
|
55
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
10
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Foreign
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(1
|
)
|
|
|
(16
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
67
|
|
|
$
|
39
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax benefits recorded directly to additional
paid-in-capital
from stock options exercised and restricted stock units vested
were $5 million, $20 million, and $3 million in
2007, 2006, and 2005, respectively.
We have foreign net operating loss carryforwards of
$47 million to offset future foreign taxable income that do
not expire. We have U.S. federal net operating loss
carryforwards of $11 million that may be used to offset
future taxable income and will begin to expire in 2018. We have
state net operating losses that expire over the next
20 years. We also have state income tax credits of
$4 million that may be used to offset future Nebraska
income tax liability and will begin to expire in 2016.
F-31
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Accrued liabilities
|
|
$
|
63
|
|
|
$
|
45
|
|
Accrued revenue
|
|
|
4
|
|
|
|
22
|
|
Loss carryforwards
|
|
|
17
|
|
|
|
15
|
|
Property and equipment
|
|
|
10
|
|
|
|
9
|
|
Stock-based compensation
|
|
|
7
|
|
|
|
4
|
|
Tax credits
|
|
|
4
|
|
|
|
4
|
|
Bad debt reserve
|
|
|
4
|
|
|
|
2
|
|
Other
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
115
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Deferred costs
|
|
|
(35
|
)
|
|
|
(25
|
)
|
Intangible assets
|
|
|
(28
|
)
|
|
|
(20
|
)
|
Investments in subsidiaries
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(75
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
26
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
Based upon our estimates of future taxable income and a review
of available tax planning strategies, we believe it is more
likely than not that $26 million of net deferred tax assets
will be realized, resulting in a valuation allowance at
December 31, 2007, of $14 million relating primarily
to certain foreign jurisdictions. The valuation allowance
decreased by $1 million during 2007, including
$2 million recorded as a component of income tax expense,
offset by an increase of $1 million due to foreign currency
translation adjustments on our foreign valuation allowances.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory
federal income tax rate to income before taxes, as a result of
the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Statutory U.S. tax rate
|
|
$
|
64
|
|
|
$
|
42
|
|
|
$
|
63
|
|
State and local taxes, net of federal benefit
|
|
|
6
|
|
|
|
2
|
|
|
|
4
|
|
Nondeductible items
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
U.S. rates in excess of foreign rates and other
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
41
|
|
|
|
64
|
|
Valuation allowance
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
Tax on repatriation of foreign earnings pursuant to the Act
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
67
|
|
|
$
|
39
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense for 2005 included $3 million of income
tax expense on $42 million of foreign earnings repatriated
pursuant to the Act. We do not provide for U.S. income tax
on the undistributed earnings of our
non-U.S. subsidiaries.
Except for the aforementioned amounts repatriated pursuant to
the Act, we intend to either permanently invest our
non-U.S. earnings
or remit such earnings in a tax-free manner. The cumulative
amount of
F-32
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
undistributed earnings (as calculated for income tax purposes)
of our
non-U.S. subsidiaries
was approximately $232 million at December 31, 2007,
and $182 million at December 31, 2006. Such earnings
include pre-acquisition earnings of
non-U.S. entities
acquired through stock purchases and are intended to be invested
outside of the U.S. indefinitely. The ultimate tax
liability related to repatriation of our undistributed earnings
is dependent upon future tax planning opportunities and is not
estimable at the present time.
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. The Internal Revenue Service has completed its
examination of our U.S. Federal income tax returns for the
tax years ended December 31, 2003, and December 31,
2004, and we are currently appealing various issues. While the
resolution of any issues under audit may result in income tax
liabilities that are significantly different than the recorded
liabilities, management believes the ultimate resolution of
these matters will not have a material effect on the
Companys consolidated financial position or results of
operation. In addition, the IRS has informed us of their intent
to audit the Company for the tax years ended December 31,
2005 and 2006. We have previously received a closing agreement
from the IRS, 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, 2006, and are under examination in the United
Kingdom for calendar year 2005.
Certain of our subsidiaries in India, Singapore, Malaysia, and
the Philippines have qualified for tax holidays and incentives.
The 2007 tax benefit relating to these tax holidays and
incentives was approximately $7 million (approximately
$0.05 per diluted share). Our India tax holidays were granted to
Software Technology Parks and were scheduled to expire beginning
March 2006 through March 2009. Our Singapore tax incentives were
granted to encourage business development and expansion over a
five-year period, which expires in September 2008. Our Malaysian
subsidiary was granted Pioneer status, which qualified the
company for a five-year tax holiday that expired in July 2007.
Our Philippine subsidiary has been designated as an Ecozone IT
Enterprise by the Philippine Economic Zone Authority, granting
the company a four-year tax holiday expiring in August 2010.
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. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
15
|
|
Additions based on tax positions related to the current year
|
|
|
1
|
|
Additions based on tax positions related to prior years
|
|
|
1
|
|
Settlements
|
|
|
0
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
17
|
|
|
|
|
|
|
The gross balance of reserves for uncertain tax positions of
$17 million excluded $4 million of offsetting tax
benefits, primarily from international tax treaties, which
provide for relief from double taxation. The net unrecognized
tax benefits of $13 million includes $11 million that,
if recognized, would benefit our effective income tax rate and
$2 million that, if recognized, would reduce goodwill.
F-33
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2007. We do not
anticipate a significant change to the total amount of
unrecognized tax benefits within the next twelve months.
|
|
15.
|
Segment
and Certain Geographic Data
|
We offer our services under three primary lines of business:
Industry Solutions, Government Services, and Consulting and
Applications Solutions. We consider these three lines of
business to be reportable segments and include financial
information and disclosures about these reportable segments in
our consolidated financial statements. Operating segments that
have similar economic and other characteristics have been
aggregated to form our reportable segments. We routinely
evaluate the historical performance of and growth prospects for
various areas of our business, including our lines of business,
delivery groups, and service offerings. Based on a quantitative
and qualitative analysis of varying factors, we may increase or
decrease the amount of ongoing investment in each of these
business areas, make acquisitions that strengthen our market
position, or divest, exit, or downsize aspects of a business
area. During the past several years, we have used acquisitions
to strengthen our service offerings for applications development
and maintenance and business process 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 and
business process services, as well as industry domain-based,
short-term project and consulting services. The Government
Services segment provides consulting, engineering support, and
technology-based business process solutions for the Department
of Defense, the Department of Homeland Security, the Department
of Education, NASA, various federal intelligence agencies, and
other governmental agencies. In the first quarter of 2006, we
combined the Consulting Solutions group, which was previously
included in our Commercial Solutions group in the Industry
Solutions line of business, with the Applications Solutions line
of business. This combined line of business, Consulting and
Applications Solutions, provides global consulting and
integration services, applications development and management
services, and applications outsourcing services to our global
client base. These services are delivered
on-site and
offshore, providing innovative industry-focused solutions.
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 cost of services
of approximately $92 million, $51 million, and
$44 million for the years ended December 31, 2007,
2006, and 2005, respectively, related to the provision of
services by the Consulting and Applications Solutions segment to
the Industry Solutions segment. The assets reported in
Other consist primarily of cash and cash
equivalents, short-term investments, and our corporate
headquarters facility.
The reportable segments follow the same accounting policies that
we use for our consolidated financial statements as described in
the summary of significant accounting policies. 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.
F-34
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of certain financial information by
reportable segment as of and for the years ended
December 31, 2007, 2006, and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and
|
|
|
|
|
|
|
Industry
|
|
Government
|
|
Applications
|
|
|
|
|
|
|
Solutions
|
|
Services
|
|
Solutions
|
|
Other
|
|
Total
|
|
|
(in millions)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,840
|
|
|
$
|
554
|
|
|
$
|
310
|
|
|
$
|
(92
|
)
|
|
$
|
2,612
|
|
Depreciation and amortization
|
|
|
73
|
|
|
|
15
|
|
|
|
6
|
|
|
|
10
|
|
|
|
104
|
|
Income before taxes
|
|
|
135
|
|
|
|
26
|
|
|
|
42
|
|
|
|
(21
|
)
|
|
|
182
|
|
Total assets
|
|
|
877
|
|
|
|
518
|
|
|
|
212
|
|
|
|
293
|
|
|
|
1,900
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,803
|
|
|
$
|
291
|
|
|
$
|
255
|
|
|
$
|
(51
|
)
|
|
$
|
2,298
|
|
Depreciation and amortization
|
|
|
58
|
|
|
|
5
|
|
|
|
7
|
|
|
|
9
|
|
|
|
79
|
|
Income before taxes
|
|
|
65
|
|
|
|
19
|
|
|
|
35
|
|
|
|
1
|
|
|
|
120
|
|
Total assets
|
|
|
687
|
|
|
|
211
|
|
|
|
189
|
|
|
|
494
|
|
|
|
1,581
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,534
|
|
|
$
|
272
|
|
|
$
|
236
|
|
|
$
|
(44
|
)
|
|
$
|
1,998
|
|
Depreciation and amortization
|
|
|
39
|
|
|
|
5
|
|
|
|
7
|
|
|
|
8
|
|
|
|
59
|
|
Income before taxes
|
|
|
125
|
|
|
|
16
|
|
|
|
39
|
|
|
|
|
|
|
|
180
|
|
Total assets
|
|
|
632
|
|
|
|
215
|
|
|
|
221
|
|
|
|
303
|
|
|
|
1,371
|
|
Financial information for 2005 has been adjusted to reflect the
combination in 2006 of the Consulting Solutions group with the
Applications Solutions line of business.
As discussed above in Note 13, Customer Contract
Terminations, during the fourth quarter of 2007, we
recorded $59 million of revenue related to a termination
fee, which resulted in an additional $48 million dollars in
additional gross margin in the Industry Solutions segment.
During the fourth quarter of 2007, we recorded $18 million
of expense in selling, general and administrative costs
associated with cost reduction activities. This charge is
included in the Other segment.
During the third quarter of 2006, we recorded $44 million
of expense in direct cost of services associated with the
impairment of deferred software development and implementation
costs related to the modification of the existing contract. This
charge is included in the Industry Solutions segment.
F-35
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized below is the financial information for each
geographic area. All Other includes financial
information from other foreign countries in which we provide
services, including the following countries: Australia, Canada,
China, France, Germany, Ireland, Italy, Japan, Malaysia, Mexico,
the Netherlands, the Philippines, Romania, Singapore,
Switzerland, and United Arab Emirates. Revenue for each country
is based primarily on where the services are performed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,294
|
|
|
$
|
1,894
|
|
|
$
|
1,641
|
|
Long-lived assets at December 31
|
|
|
196
|
|
|
|
183
|
|
|
|
145
|
|
United Kingdom:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
110
|
|
|
|
179
|
|
|
|
168
|
|
Long-lived assets at December 31
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
India:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
86
|
|
|
|
75
|
|
|
|
62
|
|
Long-lived assets at December 31
|
|
|
35
|
|
|
|
33
|
|
|
|
34
|
|
All Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
122
|
|
|
|
150
|
|
|
|
127
|
|
Long-lived assets at December 31
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,612
|
|
|
|
2,298
|
|
|
|
1,998
|
|
Long-lived assets at December 31
|
|
|
235
|
|
|
|
220
|
|
|
|
180
|
|
For the years ended December 31, 2006 and 2005 revenue from
one customer, UBS, comprised approximately 13% and 15% of total
revenue, respectively. Our outsourcing agreement with UBS, which
represented approximately 12% and 13% of our consolidated
revenue for the years ended December 31, 2006 and
December 31, 2005, respectively, ended on January 1,
2007. We continue to provide applications services to UBS, which
are provided outside the scope of the infrastructure outsourcing
contract.
|
|
16.
|
Commitments
and Contingencies
|
Operating
leases and maintenance agreements
We have commitments related to data processing facilities,
office space and computer equipment under non-cancelable
operating leases and fixed maintenance agreements for remaining
periods ranging from one to ten years. Future minimum
commitments under these agreements as of December 31, 2007,
are as follows:
|
|
|
|
|
|
|
Lease and
|
|
Year ended December 31:
|
|
Maintenance Commitments
|
|
|
|
(in millions)
|
|
|
2008
|
|
$
|
56
|
|
2009
|
|
|
39
|
|
2010
|
|
|
23
|
|
2011
|
|
|
16
|
|
2012
|
|
|
11
|
|
Thereafter
|
|
|
29
|
|
|
|
|
|
|
Total
|
|
$
|
174
|
|
|
|
|
|
|
F-36
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum payments have not been reduced by minimum sublease
rental income of $6 million due in the future under
non-cancelable subleases. We are obligated under certain
operating leases for our pro rata share of the lessors
operating expenses. Rent expense was $72 million,
$57 million, and $44 million for the years ended
December 31, 2007, 2006, and 2005, respectively.
Additionally, as of December 31, 2007 and 2006, we
maintained a provision balance of $2 million and
$3 million, respectively, relating to unused lease space.
Federal
government contracts
Despite the fact that a number of government projects for which
we serve as a contractor or subcontractor are planned as
multi-year projects, the U.S. government normally funds
these projects on an annual or more frequent basis. Generally,
the government has the right to change the scope of, or
terminate, these projects at its discretion or as a result of
changes in laws or regulations that might affect our ability to
qualify to perform the projects. The termination or a reduction
in the scope of a major government project could have a material
adverse effect on our results of operations and financial
condition.
Our federal government contract costs and fees are subject to
audit by the Defense Contract Audit Agency (DCAA) and other
federal agencies. These audits may result in adjustments to
contract costs and fees reimbursed by our federal customers. The
DCAA has completed audits of our contracts through fiscal year
2004.
Contract-related
contingencies
We have certain contingent liabilities that arise in the
ordinary course of providing services to our customers. These
contingencies are generally the result of contracts that require
us to comply with certain level of effort or performance
measurements, certain cost-savings guarantees, or the delivery
of certain services by a specified deadline.
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. These 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 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.
F-37
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Guarantees
and indemnifications
We have applied the disclosure provisions of FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others, to our agreements that contain
guarantee or indemnification clauses. FIN 45 requires us to
disclose certain types of guarantee and indemnification
arrangements, even if the likelihood of our being required to
perform under these arrangements is remote. The following is a
description of arrangements in which we are a guarantor, as
defined by FIN 45.
We are a party to a variety of agreements under which we may be
obligated to indemnify another party. Typically, these
obligations arise in the context of contracts under which we
agree to hold the other party harmless against losses arising
from certain matters, which may include death or bodily injury,
loss of or damage to tangible personal property, improper
disclosures of confidential information, infringement or
misappropriation of copyrights, patent rights, trade secrets or
other intellectual property rights, breaches of third party
contract rights, and violations of certain laws applicable to
our services, products, or operations. The indemnity obligation
in these arrangements is customarily conditioned on the other
party making an adverse claim pursuant to the procedures
specified in the particular contract, which procedures typically
allow us to challenge the other partys claims. The term of
these indemnification provisions typically survives in
perpetuity after the applicable contract terminates. It is not
possible to predict the maximum potential amount of future
payments under these or similar agreements, due to the
conditional nature of our obligations and the unique facts and
circumstances involved in each particular agreement. However, we
have purchased and expect to continue to purchase a variety of
liability insurance policies, which are expected, in most cases,
to offset a portion of our financial exposure to claims covered
by such policies (other than claims relating to the infringement
or misappropriation of copyrights, patent rights, trade secrets
or other intellectual property). In addition, we have not
historically incurred significant costs to defend lawsuits or
settle claims related to these indemnification provisions. As a
result, we believe the likelihood of a material liability under
these arrangements is remote. Accordingly, we have no
significant liabilities recorded for these agreements as of
December 31, 2007.
We include warranty provisions in substantially all of our
customer contracts in the ordinary course of business. These
provisions generally provide that our services will be performed
in an appropriate and legal manner and that our products and
other deliverables will conform in all material respects to
specifications agreed between our customer and us. Our
obligations under these agreements may be limited in terms of
time or amount or both. In addition, we have purchased and
expect to continue to purchase errors and omissions insurance
policies, which are expected, in most cases, to limit our
financial exposure to claims covered by such policies. Because
our obligations are conditional in nature and depend on the
unique facts and circumstances involved in each particular
matter, we record liabilities for these arrangements only on a
case by case basis when management determines that it is
probable that a liability has been incurred. As of
December 31, 2007, we have no significant liability
recorded for warranty claims.
|
|
17.
|
Retirement
Plan and Other Employee Trusts
|
Our eligible associates participate in the Perot Systems 401(k)
Retirement Plan, a qualified defined contribution retirement
plan. The plan year is the calendar year. The plan allows
eligible employees to contribute between 1% and the IRS limit of
their annual compensation, including overtime pay, incentive
compensation and
F-38
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commissions. We match 100% of employees contributions, up
to a maximum of 4% of the employees compensation, and
provide for immediate vesting of all company matching
contributions. Employees are not allowed to invest funds in our
Class A Common Stock; however, the plan does allow for our
matching contributions to be paid in the form of Class A
Common Stock, and employees are not restricted in selling any
such stock. Our contributions, which were all made in cash, were
$31 million, $26 million, and $23 million for the
years ended December 31, 2007, 2006, and 2005, respectively.
|
|
18.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Cash paid for interest
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net
|
|
$
|
52
|
|
|
$
|
50
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt assumed in acquisition of a business
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
Related
Party Transactions
|
We are providing information technology and energy management
services for Hillwood Enterprise L.P., which is controlled and
partially owned by Ross Perot, Jr. This contract was
scheduled to expire on January 31, 2007. However, an
extension signed in January 2007 will keep this contract in
effect until January 31, 2017. Following this period, the
contract will automatically extend for consecutive one-year
renewal terms. This contract includes provisions under which we
may be penalized if our actual performance does not meet the
levels of service specified in the contract, and such provisions
are consistent with those included in other customer contracts.
For the years ended December 31, 2007, 2006, and 2005, we
recorded revenue of $1,910,000, $2,086,000 and $1,624,000 and
direct cost of services of $1,543,000, $1,656,000 and $1,229,000
respectively. As of December 31, 2007 and 2006, accounts
receivables of Perot Systems with Hillwood Enterprise, L.P. were
$311,000 and $438,000, respectively.
During 2002, we subleased to Perot Services Company, LLC, which
is controlled and owned by Ross Perot, approximately
23,000 square feet of office space at our Plano, Texas,
facility. Rent over the term of the lease was approximately
$422,000 per year. The initial lease term was
21/2 years
with one optional
2-year
renewal period, and the renewal period was exercised in
accordance with the terms of the sublease. In 2007, a new lease
agreement was signed through 2015 for the same amount of square
footage. Rent over the term of the lease is approximately
$446,000 per year. The rates were determined by an independent
firm to be consistent with the market for comparable space.
We have a corporate AAirpass program with American Airlines,
Inc. under which we prepay for mileage that our associates use
for business travel. Historically, the use of prepaid miles has
resulted in lower travel costs than refundable tickets for most
travel itineraries. Employees of Hillwood Development Company
LLC, Perot Services Company, LLC, and their affiliated
corporations, as well as members of the Perot family, also use
this AAirpass program. These parties reimburse us for the
prepaid miles that they use. During 2007, these parties used
approximately $752,000 in prepaid miles under our AAirpass
program. We benefit from this arrangement because we have a
commitment to American Airlines to purchase a minimum number of
miles under the AAirpass program, and the miles used by these
related parties are counted toward fulfilling that commitment.
One of our wholly-owned Indian subsidiaries engages in certain
transactions with the family of Anurag Jain, a Vice President of
Perot Systems who became one of our executive officers on
July 10, 2007. Prior to the time Mr. Jain became an
executive officer, we entered into leases in 2003 and 2004 for
certain properties in Chennai,
F-39
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
India with, and began purchasing electric power in May 2007
from, members of Mr. Jains family and a partnership
owned and controlled by Mr. Jain and his family members. On
July 16, 2007, we extended and modified the terms of
certain of the leases that were expiring. In addition, on
November 29, 2007, our subsidiary entered into an addendum
to one of its property leases to add an additional part of the
building to the lease. During 2007, we paid affiliates of
Mr. Jain approximately $630,000 in lease payments and
approximately $200,000 for electric power.
|
|
20.
|
Earnings
Per Common Share
|
The following is a reconciliation of the numerators and the
denominators of the basic and diluted earnings per share of
common stock computations under the two class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class A common shares(1)
|
|
$
|
114,509
|
|
|
$
|
79,984
|
|
|
$
|
109,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class A
|
|
|
121,759
|
|
|
|
118,686
|
|
|
|
115,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class B common shares(1)
|
|
$
|
532
|
|
|
$
|
550
|
|
|
$
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(2)
|
|
$
|
115,041
|
|
|
$
|
80,534
|
|
|
$
|
111,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
122,325
|
|
|
|
119,503
|
|
|
|
117,880
|
|
Incremental shares assuming dilution
|
|
|
2,325
|
|
|
|
2,615
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding(3)
|
|
|
124,650
|
|
|
|
122,118
|
|
|
|
121,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to Class B common shares(4)
|
|
$
|
522
|
|
|
$
|
538
|
|
|
$
|
1,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, Class B
|
|
|
566
|
|
|
|
817
|
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, Class B
|
|
$
|
0.92
|
|
|
$
|
0.66
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net income is allocated to Class A and Class B common
shares based on 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 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 years ended December 31, 2007, 2006, and 2005,
outstanding options to purchase 3,484,000, 7,314,000 and
11,903,000 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
years ended December 31, 2007 and 2006, 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
F-40
PEROT
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the assumed cash proceeds and excess tax benefits that would be
recorded upon the exercise of each stock option and the average
unearned compensation cost for each stock option. For the year
ended December 31, 2005, we determined whether an option
was dilutive or anti-dilutive based on the exercise prices for
each option as compared to the average market price of our
common shares for that period.
|
|
21.
|
Supplemental
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(in millions)
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
$
|
590
|
|
|
$
|
635
|
|
|
$
|
655
|
|
|
$
|
732
|
|
Direct cost of services
|
|
|
485
|
|
|
|
529
|
|
|
|
542
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit(1)
|
|
|
105
|
|
|
|
106
|
|
|
|
113
|
|
|
|
158
|
|
Net income(2)
|
|
|
23
|
|
|
|
23
|
|
|
|
25
|
|
|
|
44
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A(3)
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
$
|
0.36
|
|
Basic, Class B(3)
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
$
|
0.36
|
|
Diluted(3)
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.35
|
|
Diluted, Class B(3)
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.35
|
|
Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
542
|
|
|
$
|
572
|
|
|
$
|
583
|
|
|
$
|
601
|
|
Direct cost of services(4)
|
|
|
443
|
|
|
|
463
|
|
|
|
514
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
99
|
|
|
|
109
|
|
|
|
69
|
|
|
|
116
|
|
Net income
|
|
|
23
|
|
|
|
26
|
|
|
|
|
|
|
|
32
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, Class A(3)
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
|
|
|
$
|
0.26
|
|
Basic, Class B(3)
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
|
|
|
$
|
0.26
|
|
Diluted(3)
|
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
|
|
|
$
|
0.26
|
|
Diluted, Class B(3)
|
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
|
|
|
$
|
0.26
|
|
|
|
|
(1) |
|
In the fourth quarter of 2007, we received notice from a
customer that it would end the current services agreement. In
relation to this, we realized contract termination-related
revenue and gross profit of approximately $59 million and
$46 million, respectively, consisting of a
contractually-obligated termination fee of $26 million and
recognition of revenue and costs that were previously deferred
of $33 million and $13 million, respectively. |
|
(2) |
|
In the fourth quarter of 2007, we incurred severance expense of
$18 million in selling, general, and administrative
expenses associated with cost reduction activities we
implemented. |
|
(3) |
|
Due to changes in the weighted average common shares outstanding
per quarter and the impact of rounding earnings per share to the
nearest penny each quarter, the sum of basic and diluted
earnings per common share per quarter may not equal the basic
and diluted earnings per common share for the applicable year. |
|
(4) |
|
In the third quarter of 2006, we recorded $44 million of
expense in direct cost of services associated with the
impairment of deferred software development and implementation
costs relating to the modification of an existing contract. |
F-41
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of disclosure controls and procedures
The term disclosure controls and procedures (defined
in SEC
Rule 13a-15(e))
refers to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within required time periods. Our management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this annual report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2007, such controls and procedures
were effective. See Managements Report on Internal
Control Over Financial Reporting on
page F-1.
Changes
in internal controls
The term internal control over financial reporting
(defined in SEC
Rule 13a-15(f))
refers to the process of a company that is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. Our management, with the participation of
the Chief Executive Officer and Chief Financial Officer, have
evaluated any changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter,
and they have concluded that there were no changes to our
internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
All information required by Item 10 is incorporated by
reference to our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 7, 2008, which we
expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2007.
|
|
Item 11.
|
Executive
Compensation
|
All information required by Item 11 is incorporated by
reference to our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 7, 2008, which we
expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2007.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
All information required by Item 12 is incorporated by
reference to our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 7, 2008, which we
expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2007.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
All information required by Item 13 is incorporated by
reference to our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 7, 2008, which we
expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2007.
40
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
All information required by Item 14 is incorporated by
reference to our definitive proxy statement for our Annual
Meeting of Stockholders to be held on May 7, 2008, which we
expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2007.
41
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(1) and (2) Financial Statements and Financial
Statement Schedule
The consolidated financial statements of Perot Systems
Corporation and its subsidiaries and the required financial
statement schedule are incorporated by reference in
Part II, Item 8 of this report.
(3) Exhibits
|
|
|
|
|
Exhibit
|
|
Description of
|
Number
|
|
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 Companys 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 Companys 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
Companys 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 Companys 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 Companys Registration Statement on
Form S-1,
Registration
No. 333-60755.)
|
|
10
|
.1
|
|
Restricted Stock Plan, as amended through March 22, 2006
(Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on
Form 8-K
filed March 28, 2006.)
|
|
10
|
.2
|
|
Form of Restricted Stock Agreement (Restricted Stock Plan)
(Incorporated by reference to Exhibit 10.4 of the
Companys Form 10, dated April 30, 1997.)
|
|
10
|
.3
|
|
1996 Non-Employee Director Stock Option/Restricted Stock
Incentive Plan (Incorporated by reference to
Exhibit 10.5 of the Companys Form 10, dated
April 30, 1997.)
|
|
10
|
.4
|
|
Form of Restricted Stock Agreement (1996 Non-Employee Director
Stock Option/Restricted Stock Incentive Plan) (Incorporated
by reference to Exhibit 10.6 of the Companys
Form 10, dated April 30, 1997.)
|
|
10
|
.5
|
|
Form of Stock Option Agreement (1996 Non-Employee Director Stock
Option/Restricted Stock Incentive Plan) (Incorporated by
reference to Exhibit 10.7 of the Companys
Form 10, dated April 30, 1997.)
|
|
10
|
.6
|
|
1999 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.32 of the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1999.)
|
|
10
|
.7
|
|
Amended and Restated 1991 Stock Option Plan, as amended through
March 22, 2006 (Incorporated by reference to
Exhibit 10.7 of the Companys Current Report on
Form 8-K
filed March 28, 2006.)
|
|
10
|
.8
|
|
Form of Stock Option Agreement (Amended and Restated 1991 Stock
Option Plan) (Incorporated by reference to Exhibit 10.34
of the Companys Registration Statement on
Form S-1,
Registration
No. 333-60755.)
|
|
10
|
.9
|
|
Amended and Restated 2001 Long-Term Incentive Plan dated
effective January 1, 2007. (Incorporated by reference to
Exhibit 10.42 of the Companys Current Report on
Form 8-K
filed May 8, 2007.)
|
|
10
|
.10
|
|
Form of Nonstatutory Stock Option Agreement (2001 Long Term
Incentive Plan) (Incorporated by reference to
Exhibit 10.13 of Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2002.)
|
|
10
|
.11
|
|
Form of Unit Certificate Restricted Stock Unit
Agreement (2001 Long Term Incentive Plan) (Incorporated by
reference to Exhibit 10.11 of the Companys Quarterly
Report on
Form 10-Q
filed October 31, 2006.)
|
42
|
|
|
|
|
Exhibit
|
|
Description of
|
Number
|
|
Exhibit
|
|
|
10
|
.12
|
|
Amended and Restated 2006 Non-Employee Director Equity
Compensation Plan adopted September 28, 2006
(Incorporated by reference to Exhibit 10.41 of the
Companys Current Report on
Form 8-K
filed October 4, 2006.)
|
|
10
|
.13
|
|
Summary of arrangement for non-equity compensation of
non-employee directors (Incorporated by reference to
Exhibit 10.38 of the Companys Current Report on
Form 8-K
filed December 20, 2005.)
|
|
10
|
.14
|
|
Form of
Change-in-Control
Severance Agreement (Incorporated by reference to
Exhibit 10.40 of the Companys Quarterly Report on
Form 10-Q
filed August 1, 2006.)
|
|
10
|
.15
|
|
Associate Agreement dated July 8, 1996 between the Company
and James Champy (Incorporated by reference to
Exhibit 10.20 of the Companys Form 10, dated
April 30, 1997.)
|
|
10
|
.16
|
|
Restricted Stock Agreement dated July 8, 1996 between the
Company and James Champy (Incorporated by reference to
Exhibit 10.21 of the Companys Form 10, dated
April 30, 1997.)
|
|
10
|
.17
|
|
Letter Agreement dated July 8, 1996 between James Champy
and the Company (Incorporated by reference to
Exhibit 10.22 of the Companys Form 10, dated
April 30, 1997.)
|
|
10
|
.18
|
|
Employment Agreement dated March 14, 2003, between the
Company and Jeff Renzi (Incorporated by reference to
Exhibit 10.29 of the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2003.)
|
|
10
|
.19*
|
|
Second Amended and Restated License Agreement dated as of
October 6, 2005, between Perot Systems Family Corporation
and Ross Perot, Jr. and the Company.
|
|
10
|
.20
|
|
Amended and Restated Credit Agreement dated as of March 3,
2005 by and among the Company, JPMorgan Chase Bank, N.A.,
KeyBank National Association, SunTrust Bank, Wells Fargo Bank,
N.A., Wachovia Bank, N.A., Comerica Bank, Southwest Bank of
Texas, N.A., Bank of Texas, N.A., The Bank of Tokyo-Mitsubishi,
Ltd., Bank Hapoalim B.M., and Mizuho Corporate Bank, Ltd.
(Incorporated by reference to Exhibit 10.38 of the
Companys Current Report on
Form 8-K
filed March 4, 2005.)
|
|
10
|
.21
|
|
Amended and Restated Stock Option Agreement dated
December 27, 2006, between the Company and Ross Perot, Jr.
(Incorporated by reference to Exhibit 10.39 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006.)
|
|
10
|
.22
|
|
Information Technology Services Agreement dated as of
January 1, 2007, by and between the Company and Hillwood
Enterprises, L.P., a Texas limited partnership. (Incorporated
by reference to Exhibit 10.41 of the Companys Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006.)
|
|
10
|
.23*
|
|
Commercial Lease effective October 1, 2007, between PSC
Management Limited Partnership and Perot Services Company, LLC.
|
|
10
|
.24
|
|
First Amendment to Amended and Restated Credit Agreement dated
August 28, 2006 by and among Perot Systems Corporation, as
Borrower, the Lenders party thereto, and JPMorgan Chase Bank,
N.A., as Administrative Agent (Incorporated by reference to
Exhibit 10.42 of the Companys Current Report on
Form 8-K
filed August 31, 2006.)
|
|
10
|
.25
|
|
Stock Purchase Agreement dated December 18, 2006 by and
among Perot Systems Government Services, Inc., a wholly owned
subsidiary of the Company, QSS Group, Inc., a Maryland
corporation (QSS), and the stockholders of QSS.
(Incorporated by reference to Exhibit 10.40 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006.)
|
|
10
|
.26
|
|
Agreement and Plan of Merger dated August 10, 2007, by and
among the Company, Eagle Delaware Corp., a Delaware corporation,
J. J. Wild Holdings, Inc., a Massachusetts corporation, J. J.
Wild, Inc., a Massachusetts corporation, and Certain
Stockholders of J. J. Wild Holdings, Inc. (Incorporated by
reference to Exhibit 10.43 of the Companys Quarterly
Report on
Form 10-Q
filed on October 31, 2007.)
|
|
21
|
.1*
|
|
Subsidiaries of the Company.
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP dated February 27,
2008.
|
|
31
|
.1*
|
|
Rule 13a-14
Certification dated February 27, 2008, by Peter A. Altabef,
President and Chief Executive Officer.
|
|
31
|
.2*
|
|
Rule 13a-14
Certification dated February 27, 2008, by John E. Harper,
Vice President and Chief Financial Officer.
|
43
|
|
|
|
|
Exhibit
|
|
Description of
|
Number
|
|
Exhibit
|
|
|
32
|
.1**
|
|
Section 1350 Certification dated February 27, 2008, by
Peter A. Altabef, President and Chief Executive Officer.
|
|
32
|
.2**
|
|
Section 1350 Certification dated February 27, 2008, by
John E. Harper, Vice President and Chief Financial Officer.
|
|
99
|
.1*
|
|
Schedule II Valuation and Qualifying Accounts.
|
|
|
*
|
Filed herewith.
|
|
**
|
Furnished herewith.
|
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Peter A. Altabef
President and Chief Executive Officer
Dated: February 27, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Peter
A. Altabef
Peter
A. Altabef
|
|
Director, President, and Chief Executive Officer (Principal
Executive Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ John
E. Harper
John
E. Harper
|
|
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Robert
J. Kelly
Robert
J. Kelly
|
|
Corporate Controller (Principal Accounting Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Ross
Perot
Ross
Perot
|
|
Chairman Emeritus
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Ross
Perot, Jr.
Ross
Perot, Jr.
|
|
Chairman
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Steve
Blasnik
Steve
Blasnik
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ John
S.T. Gallagher
John
S.T. Gallagher
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Carl
Hahn
Carl
Hahn
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ DeSoto
Jordan
DeSoto
Jordan
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Thomas
Meurer
Thomas
Meurer
|
|
Director
|
|
February 27, 2008
|
45
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Cecil
H. Moore, Jr.
Cecil
H. Moore, Jr.
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Anthony
Principi
Anthony
Principi
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Anuroop
Singh
Anuroop
Singh
|
|
Director
|
|
February 27, 2008
|
46