##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from       to
 Commission File Number 0-22495
 PEROT SYSTEMS CORPORATION
  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    75-2230700
(IRS Employer
Identification No.)
 
 
 þ o
 þ o




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PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Income Statements for the three and six months ended June 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 4: CONTROLS AND PROCEDURES
    
    
    26PART II: OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGS
    
    
    27ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    28ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    29ITEM 6: EXHIBITS
    
    
    29SIGNATURES
    
    
    30Rule 13a-14 Certifiction of President and CEORule 13a-14 Certification of Vice-President and CFOSection 1350 Certification of President and CEOSection 1350 Certification of Vice-President and CFO




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June 30, 2005
    
    December 31, 2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    264,344
    
    
    $
    304,786Accounts receivable, net
    
    
    262,419
    
    
    
    233,875Prepaid expenses and other
    
    
    67,643
    
    
    
    51,920Total current assets
    
    
    594,406
    
    
    
    590,581Property, equipment and purchased software, net
    
    
    157,328
    
    
    
    144,425Goodwill
    
    
    385,312
    
    
    
    359,033Deferred contract costs, net
    
    
    70,777
    
    
    
    48,459Other non-current assets
    
    
    67,683
    
    
    
    81,113Total assets
    
    $
    1,275,506
    
    
    $
    1,223,611LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    75,498Accounts payable
    
    
    40,533
    
    
    
    34,114Accrued liabilities
    
    
    77,471
    
    
    
    98,298Accrued compensation
    
    
    50,003
    
    
    
    65,706Income taxes payable
    
    
    44,094
    
    
    
    34,306Deferred revenue and other current liabilities
    
    
    25,976
    
    
    
    22,626Total current liabilities
    
    
    238,077
    
    
    
    330,548Long-term debt
    
    
    76,505
    
    
    
    Non-current deferred revenue and other non-current liabilities
    
    
    46,996
    
    
    
    31,029Total liabilities
    
    
    361,578
    
    
    
    361,577Commitments and contingenciesStockholders equity:Common stock
    
    
    1,190
    
    
    
    1,173Additional paid-in capital
    
    
    486,457
    
    
    
    478,266Retained earnings
    
    
    441,990
    
    
    
    382,962Treasury stock
    
    
    (20,639
    )
    
    
    Other stockholders equity
    
    
    (7,932
    )
    
    
    (9,673
    )Accumulated other comprehensive income
    
    
    12,862
    
    
    
    9,306Total stockholders equity
    
    
    913,928
    
    
    
    862,034Total liabilities and stockholders equity
    
    $
    1,275,506
    
    
    $
    1,223,611
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 
 
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    $
    488,232
    
    
    $
    433,794
    
    
    $
    961,503
    
    
    $
    853,598Direct cost of services
    
    
    378,744
    
    
    
    345,153
    
    
    
    748,253
    
    
    
    680,529Gross profit
    
    
    109,488
    
    
    
    88,641
    
    
    
    213,250
    
    
    
    173,069Selling, general and administrative expenses
    
    
    59,702
    
    
    
    54,565
    
    
    
    119,826
    
    
    
    108,014Operating income
    
    
    49,786
    
    
    
    34,076
    
    
    
    93,424
    
    
    
    65,055Interest income
    
    
    1,596
    
    
    
    352
    
    
    
    3,839
    
    
    
    736Interest expense
    
    
    (760
    )
    
    
    (512
    )
    
    
    (1,605
    )
    
    
    (975
    )Other income (expense), net
    
    
    279
    
    
    
    712
    
    
    
    (13
    )
    
    
    (296
    )Income before taxes
    
    
    50,901
    
    
    
    34,628
    
    
    
    95,645
    
    
    
    64,520Provision for income taxes
    
    
    18,315
    
    
    
    12,723
    
    
    
    36,617
    
    
    
    23,872Net income
    
    $
    32,586
    
    
    $
    21,905
    
    
    $
    59,028
    
    
    $
    40,648Basic and diluted earnings per common share:Basic earnings per common share
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.36Weighted average common shares outstanding
    
    
    117,622
    
    
    
    114,659
    
    
    
    117,663
    
    
    
    114,302Diluted earnings per common share
    
    $
    0.27
    
    
    $
    0.18
    
    
    $
    0.48
    
    
    $
    0.34Weighted average diluted common shares outstanding
    
    
    121,453
    
    
    
    119,610
    
    
    
    121,928
    
    
    
    119,553
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 
 
 Six months ended June 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    59,028
    
    
    $
    40,648Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    27,986
    
    
    
    26,937Change in deferred taxes
    
    
    3,164
    
    
    
    (7,615
    )Other non-cash items
    
    
    1,797
    
    
    
    (1,248
    )Changes in assets and liabilities (net of effects from acquisitions
of businesses):Accounts receivable, net
    
    
    (34,288
    )
    
    
    (32,496
    )Prepaid expenses
    
    
    (16,568
    )
    
    
    (11,376
    )Deferred contract costs, net
    
    
    (24,183
    )
    
    
    (18,437
    )Accounts payable and accrued liabilities
    
    
    (1,214
    )
    
    
    963Accrued compensation
    
    
    (17,696
    )
    
    
    7,128Deferred revenue
    
    
    19,597
    
    
    
    5,076Income taxes
    
    
    7,658
    
    
    
    14,444Other current and non-current assets
    
    
    5,976
    
    
    
    (4,578
    )Other current and non-current liabilities
    
    
    1,184
    
    
    
    (823
    )Net cash provided by operating activities
    
    
    32,441
    
    
    
    18,623Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (33,437
    )
    
    
    (14,510
    )Acquisitions of businesses
    
    
    (26,128
    )
    
    
    (8,611
    )Net proceeds from the sale of short-term investments
    
    
    
    
    
    
    37,725Other
    
    
    52
    
    
    
    (6
    )Net cash (used in) provided by investing activities
    
    
    (59,513
    )
    
    
    14,598Cash flows from financing activities:Repayment of debt
    
    
    (75,498
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    76,505
    
    
    
    Proceeds from issuance of common stock
    
    
    10,322
    
    
    
    10,364Purchase of treasury stock
    
    
    (20,639
    )
    
    
    Other
    
    
    (766
    )
    
    
    (44
    )Net cash (used in) provided by financing activities
    
    
    (10,076
    )
    
    
    10,320Effect of exchange rate changes on cash and cash equivalents
    
    
    (3,294
    )
    
    
    (393
    )Net (decrease) increase in cash and cash equivalents
    
    
    (40,442
    )
    
    
    43,148Cash and cash equivalents at beginning of period
    
    
    304,786
    
    
    
    123,770Cash and cash equivalents at end of period
    
    $
    264,344
    
    
    $
    166,918
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
  
    Stock-Based Compensation
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net incomeAs reported
    
    $
    32,586
    
    
    $
    21,905
    
    
    $
    59,028
    
    
    $
    40,648Add: stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    345
    
    
    
    115
    
    
    
    798
    
    
    
    260Less: total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (4,274
    )
    
    
    (6,711
    )
    
    
    (7,715
    )
    
    
    (10,436
    )Pro forma
    
    $
    28,657
    
    
    $
    15,309
    
    
    $
    52,111
    
    
    $
    30,472Basic earnings per common shareAs reported
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.36Pro forma
    
    $
    0.24
    
    
    $
    0.13
    
    
    $
    0.44
    
    
    $
    0.27Diluted earnings per common shareAs reported
    
    $
    0.27
    
    
    $
    0.18
    
    
    $
    0.48
    
    
    $
    0.34Pro forma
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.43
    
    
    $
    0.26
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Weighted average risk free interest rates
    
    
    3.77
    %
    
    
    2.80
    %
    
    
    3.82
    %
    
    
    2.30
    %Weighted average life (in years)
    
    
    5.0
    
    
    
    3.3
    
    
    
    5.2
    
    
    
    3.6Volatility
    
    
    43
    %
    
    
    48
    %
    
    
    43
    %
    
    
    50
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value per
share of options granted
    
    $
    5.81
    
    
    $
    5.09
    
    
    $
    6.12
    
    
    $
    5.29
 Significant Accounting Standards to be Adopted
 Statement of Financial Accounting Standards No. 123R
  Statement of Financial Accounting Standards No. 154
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
    Industry
    
    Government
    
    TechnologySolutions
    
    Services
    
    Services
    
    TotalBalance as of December 31, 2004
    
    $
    195,041
    
    
    $
    97,292
    
    
    $
    66,700
    
    
    $
    359,033Additional goodwill for ADI acquisition
    
    
    
    
    
    
    6,878
    
    
    
    
    
    
    
    6,878Additional goodwill for Soza acquisition
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    17,000Other
    
    
    2,250
    
    
    
    
    
    
    
    151
    
    
    
    2,401Balance as of June 30, 2005
    
    $
    197,291
    
    
    $
    121,170
    
    
    $
    66,851
    
    
    $
    385,312
   Deferred Contract Costs, Net
   Page 6




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
 Identifiable Intangible Assets
  Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    BookValue
    
    Amortization
    
    ValueService marks
    
    $
    5,761
    
    
    $
    (3,936
    )
    
    $
    1,825Customer based assets
    
    
    22,599
    
    
    
    (12,731
    )
    
    
    9,868Other intangible assets
    
    
    4,855
    
    
    
    (3,327
    )
    
    
    1,528Balance as of June 30, 2005
    
    $
    33,215
    
    
    $
    (19,994
    )
    
    $
    13,221
   Current Portion of Long-term Debt
  Long-term Debt
  Page 7




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Three months
    
    Six monthsended June 30,
    
    ended June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    32,586
    
    
    $
    21,905
    
    
    $
    59,028
    
    
    $
    40,648Foreign currency translation adjustments
    
    
    2,486
    
    
    
    (1,676
    )
    
    
    3,556
    
    
    
    3,410Other
    
    
    
    
    
    
    (373
    )
    
    
    
    
    
    
    250Total comprehensive income
    
    $
    35,072
    
    
    $
    19,856
    
    
    $
    62,584
    
    
    $
    44,308
   June 30, 2005
    
    December 31, 2004Deferred compensation
    
    $
    (7,719
    )
    
    $
    (9,761
    )Other
    
    
    (213
    )
    
    
    88Total other stockholders equity
    
    $
    (7,932
    )
    
    $
    (9,673
    )
     Page 8




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Industry
    
    Government
    
    TechnologySolutions
    
    Services
    
    Services
    
    Other
    
    TotalFor the three months ended June 30, 2005:Revenue
    
    $
    388,324
    
    
    $
    67,343
    
    
    $
    43,148
    
    
    $
    (10,583
    )
    
    $
    488,232Income before taxes
    
    
    40,067
    
    
    
    3,739
    
    
    
    7,583
    
    
    
    (488
    )
    
    
    50,901For the three months ended June 30, 2004:Revenue
    
    $
    336,581
    
    
    $
    68,409
    
    
    $
    35,251
    
    
    $
    (6,447
    )
    
    $
    433,794Income before taxes
    
    
    23,344
    
    
    
    3,388
    
    
    
    7,267
    
    
    
    629
    
    
    
    34,628For the six months ended June 30, 2005:Revenue
    
    $
    768,653
    
    
    $
    130,148
    
    
    $
    82,810
    
    
    $
    (20,108
    )
    
    $
    961,503Income before taxes
    
    
    75,085
    
    
    
    7,360
    
    
    
    14,030
    
    
    
    (830
    )
    
    
    95,645For the six months ended June 30, 2004:Revenue
    
    $
    664,073
    
    
    $
    133,171
    
    
    $
    68,321
    
    
    $
    (11,967
    )
    
    $
    853,598Income before taxes
    
    
    45,547
    
    
    
    7,204
    
    
    
    11,298
    
    
    
    471
    
    
    
    64,520
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For the three months ended June 30,2005
    
    2004Basic Earnings per Common ShareNet income
    
    $
    32,586
    
    
    $
    21,905Weighted average common shares outstanding
    
    
    117,622
    
    
    
    114,659Basic earnings per common share
    
    $
    0.28
    
    
    $
    0.19Diluted Earnings per Common ShareNet income
    
    $
    32,586
    
    
    $
    21,905Weighted average common shares outstanding
    
    
    117,622
    
    
    
    114,659Incremental shares assuming dilution
    
    
    3,831
    
    
    
    4,951Weighted average diluted common shares outstanding
    
    
    121,453
    
    
    
    119,610Diluted earnings per common share
    
    $
    0.27
    
    
    $
    0.18
 For the six months ended June 30,2005
    
    2004Basic Earnings per Common ShareNet income
    
    $
    59,028
    
    
    $
    40,648Weighted average common shares outstanding
    
    
    117,663
    
    
    
    114,302Basic earnings per common share
    
    $
    0.50
    
    
    $
    0.36Diluted Earnings per Common ShareNet income
    
    $
    59,028
    
    
    $
    40,648Weighted average common shares outstanding
    
    
    117,663
    
    
    
    114,302Incremental shares assuming dilution
    
    
    4,265
    
    
    
    5,251Weighted average diluted common shares outstanding
    
    
    121,928
    
    
    
    119,553Diluted earnings per common share
    
    $
    0.48
    
    
    $
    0.34
  Page 10




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Litigation
   IPO Allocation Securities Litigation
    Page 11




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Litigation Relating to the California Energy Market
   Other
  Contract-related Contingencies
     Page 12




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This quarterly report contains forward-looking statements. These statements relate to future events
or our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, forecasts, expects, plans,
anticipates, believes, estimates, predicts, potential, see, target, projects,
position, or continue or the negative of such terms and other comparable terminology. These
statements reflect our current expectations, estimates, and projections. These statements are not
guarantees of future performance and involve risks, uncertainties, and assumptions that are
difficult to predict. Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including the risks 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.
 
  RESULTS OF OPERATIONS
  Lines of Business
  Overview of Our Financial Results for the Second Quarter of 2005
   Page 13




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Revenue Growth
  
    
    Revenue from contracts signed with new customers during the
twelve-month period following the second quarter of 2004.
    
    An increase in revenue from the expansion of base services and
discretionary technology investments by our existing long-term
customers, which we believe is due to improved economic
conditions.
 Earnings Growth
  
    
    A reduction to direct costs of services of $10.3 million, or $0.05
per diluted share, in the second quarter of 2005 associated with
the settlement of a dispute with a former customer related to a
contract we exited in 2003.
    
    An overall net increase in profitability for existing commercial
customer contracts, which is primarily due to an increase in the
amount of services we perform in addition to our base level of
services. These increased services are discretionary in nature,
and the associated margins are typically higher than those we
realize on our base level of services.
 Free Cash Flow
  Twelve MonthsEndedJune 302005
    
    2004Net cash provided by operating activities
    
    $
    172.1
    
    
    $
    113.2Purchases of property, equipment and software
    
    
    (52.2
    )
    
    
    (24.4
    )Free cash flow
    
    $
    119.9
    
    
    $
    88.8
 TCV of Contracts Signed
  Page 14




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Additional Measurements
  Comparison of the Three Months Ended June 30, 2005 and 2004
 Revenue
  Three months ended June 302005
    
    2004
    
    $ Change
    
    % ChangeIndustry Solutions
    
    $
    388.3
    
    
    $
    336.6
    
    
    $
    51.7
    
    
    
    15.4
    %Government Services
    
    
    67.3
    
    
    
    68.4
    
    
    
    (1.1
    )
    
    
    (1.6
    %)Technology Services
    
    
    43.1
    
    
    
    35.2
    
    
    
    7.9
    
    
    
    22.4
    %Elimination of intersegment revenue
    
    
    (10.5
    )
    
    
    (6.4
    )
    
    
    (4.1
    )
    
    
    64.1
    %Total
    
    $
    488.2
    
    
    $
    433.8
    
    
    $
    54.4
    
    
    
    12.5
    %
 Industry Solutions
  
    
    $34.0 million increase from contracts signed with new customers during the twelve-month
period following the second quarter of 2004. This increase is composed of $23.7 million and
$10.3 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.The strength in healthcare new sales revenue comes from two primary factors:
 
    
    Our solutions for the healthcare market were developed over several years and are
highly
customized to the specific business needs of the market. We identified certain aspects of
the healthcare market as core to our long-term service offerings several years ago when the
market for technology and business process outsourcing was immature. As a result, we have an
established presence and brand, which we have strengthened through internal investment in
software and solutions and through acquisitions.
 Page 15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 
    
    The healthcare industry continues to be in a state of change as health systems look
to transform their clinical and administrative back-office operations, payer organizations
work to develop new consumer-based health models, and as the rate of medical cost
inflation continues to be high. Clinical transformation revolutionizes the way in which
the healthcare community receives patient-specific data that spans the entire continuum of
care, including centralization of patient data and electronic order entry and decision
support.
 We are experiencing an increase in new sales revenue from the markets served by our Commercial
Solutions group. This increase is primarily the result of improved focus and selectivity in
our sales processes, as well as improved collaboration between our consulting and technology
outsourcing teams that deliver services to these markets.
    
    $20.3 million net increase from existing accounts and short-term project work. This net
increase results 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 includes short-term project work, can vary from period-to-period
depending on many factors, including specific customer and industry needs and economic
conditions. The increase is related to contracts in the Healthcare and Commercial Solutions
groups:
 
    
    The state of change in the healthcare industry has required increased system
investment, which creates demand for our services. Because of the complexities
associated with system changes combined with our customers desire to focus on core
functions, the healthcare outsourcing market has experienced increased levels of
business.
    
    Within the manufacturing market and the construction and engineering market
served by our Commercial Solutions group, we have experienced increased levels of
business primarily as a result of customers continuing needs to reduce expense and to
improve the efficiency of their operations.
 Government Services
  Technology Services
  Page 16




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UBS
  Three months endedJune 302005
    
    2004
    
    ChangeUBS revenue in Industry Solutions
    
    $
    67.7
    
    
    $
    57.5
    
    
    
    17.7
    %UBS revenue in Technology Services
    
    
    8.5
    
    
    
    7.4
    
    
    
    14.9
    %Total revenue from UBS
    
    $
    76.2
    
    
    $
    64.9
    
    
    
    17.4
    %
  Gross Margin
  
    
    In the second quarter of 2005, we settled a dispute with a former
customer. As a result, we received a $7.6 million payment and
reduced our liabilities by $2.7 million, both of which were
recorded as a reduction to direct costs of services. The dispute
related to a contract we exited in 2003. This settlement resulted
in a 2.1 percentage point increase in our gross margin for the
second quarter of 2005.
 
    
    An overall net increase in profitability from existing commercial
customer contracts, which is primarily due to an increase in the
amount of services we perform in addition to our base level of
services. The increased services are discretionary in nature, and
the associated gross margins are typically higher than those we
realize on our base level of services. As discussed above, we have
seen increased demand for discretionary investment from several
customers, primarily in the healthcare industry.
  Selling, General and Administrative Expenses
  Other Income Statement Items
  Page 17




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Comparison of the Six Months Ended June 30, 2005 and 2004
 Revenue
  Six months ended June 302005
    
    2004
    
    $ Change
    
    % ChangeIndustry Solutions
    
    $
    768.7
    
    
    $
    664.1
    
    
    $
    104.6
    
    
    
    15.8
    %Government Services
    
    
    130.1
    
    
    
    133.2
    
    
    
    (3.1
    )
    
    
    (2.3
    %)Technology Services
    
    
    82.8
    
    
    
    68.3
    
    
    
    14.5
    
    
    
    21.2
    %Elimination of intersegment revenue
    
    
    (20.1
    )
    
    
    (12.0
    )
    
    
    (8.1
    )
    
    
    67.5
    %Total
    
    $
    961.5
    
    
    $
    853.6
    
    
    $
    107.9
    
    
    
    12.6
    %
 Industry Solutions
  
    
    $65.2 million increase from contracts signed with new customers during the twelve-month
period following the second quarter of 2004. This increase is composed of $47.1 million and
$18.1 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.The strength in healthcare new sales revenue comes from two primary factors:
 
    
    Our solutions for the healthcare market were developed over several years and are
highly customized to the specific business needs of the market. We identified certain
aspects of the healthcare market as core to our long-term service offerings several years
ago when the market for technology and business process outsourcing was immature. As a
result, we have an established presence and brand, which we have strengthened through
internal investment in software and solutions and through acquisitions.
    
    The healthcare industry continues to be in a state of change as health systems look
to transform their clinical and administrative back-office operations, payer organizations
work to develop new consumer-based health models, and as the rate of medical cost
inflation continues to be high. As a result, approximately half of the contracts we signed
during the twelve-month period following the second quarter of 2004 included a clinical
transformation component. Clinical transformation revolutionizes the way in which the
healthcare community receives patient-specific data that spans the entire continuum of
care, including centralization of patient data and electronic order entry and decision
support.
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We are experiencing an increase in new sales revenue from the markets served by our Commercial
Solutions group. This increase is primarily the result of improved focus and selectivity in
our sales processes, as well as improved collaboration between our consulting and technology
outsourcing teams that deliver services to these markets.
 
    
    $33.2 million net increase from existing accounts and short-term project work. This net
increase results 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 offerings and project work, can vary from
period-to-period depending on many factors, including specific customer and industry needs and
economic conditions. The increase is related to contracts in the Healthcare and Commercial
Solutions groups:
 
    
    The state of change in the healthcare industry has required increased system
investment, which creates demand for our services. Because of the complexities
associated with system changes combined with our customers desire to focus on core
functions, the healthcare outsourcing market has experienced increased levels of
business.
    
    Within the manufacturing market and the construction and engineering market
served by our Commercial Solutions group, we have experienced increased levels of
business primarily as a result of customers continuing needs to reduce expense and to
improve the efficiency of their operations.
 
    
    $6.2 million termination fee associated with the early termination of a contract in the
first quarter of 2005.
 Government Services
  Technology Services
  Page 19




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UBS
  Six
months endedJune 302005
    
    2004
    
    ChangeUBS revenue in Industry Solutions
    
    $
    130.6
    
    
    $
    115.9
    
    
    
    12.7
    %UBS revenue in Technology Services
    
    
    17.1
    
    
    
    15.5
    
    
    
    10.3
    %Total revenue from UBS
    
    $
    147.7
    
    
    $
    131.4
    
    
    
    12.4
    %
  Gross Margin
  
    
    In the second quarter of 2005, we settled a dispute with a former
customer. As a result, we received a $7.6 million payment and
reduced our liabilities by $2.7 million, both of which were
recorded as a reduction to direct costs of services. The dispute
related to a contract we exited in 2003. This settlement resulted
in a 1.1 percentage point increase in our gross margin for the
first six months ended June 30, 2005.
 
    
    An overall net increase in profitability from existing commercial
customer contracts, which is primarily due to an increase in the
amount of services we perform in addition to our base level of
services. The increased services are discretionary in nature, and
the associated gross margins are typically higher than those we
realize on our base level of services. As discussed above, we have
seen increased demand for discretionary investment from several
customers, primarily in the healthcare industry.
 
    
    In the first quarter of 2005, we recorded revenue of $6.2 million
and related direct costs of services of $0.6 million, resulting in
gross profit of $5.6 million, associated with the termination of a
contract. This additional gross profit resulted in a 0.4
percentage point increase in our gross margin for the first six
months ended June 30, 2005.
  Selling, General and Administrative Expenses
  Page 20




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Other Income Statement Items
     Expected Effects of the End of Our Outsourcing Contracts with Two Customers
   Liquidity and Capital Resources
  Page 21




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Operating Activities





    
    Net income for the six months ended June 30, 2005, increased $18.4
million to $59.0 million, which, includes the receipt of $7.6
million related to the settlement of a contract dispute with a
former customer.



    
    Partially offsetting the increased cash generated from our
increase in income is an increase in the amount of bonuses paid to
associates under our bonus plans in the first six months of 2005
as compared to the same period in 2004 (primarily representing
payments of annual bonuses relating to the prior years bonus
plan), which were $63.0 million and $39.5 million, respectively.
Included in the bonus amounts that were paid in the first six
months of 2005 and 2004 were approximately $23.6 million and $19.4
million, respectively, of bonus payments that are reimbursable by
our customers. The amount of bonuses that we pay each year is
based on several factors, including our financial performance and
managements discretion.


Investing Activities





    
    During the six months ended June 30, 2004 we recorded $37.7
million of net proceeds from the sale of short-term investments
relating to the conversion of Technology Services short-term
investments to cash and cash equivalents.



    
    During the six months ended June 30, 2005, we purchased $33.4
million of property, equipment and purchased software as compared
to $14.5 million during the six months ended June 30, 2004. This
increase is primarily related to our business expansion needs for
data center and office facilities. We plan to
significantly increase our data center capacity in the next 12
months, which we expect to reduce the amount of our available cash
balances and borrowing capacity.



    
    During the six months ended June 30, 2005, we paid $26.1 million
as additional consideration for acquisitions, including $17.0
million as additional consideration related to the acquisition of
Soza & Company, Ltd., $6.9 million as additional consideration
related to the acquisition of ADI Technology Corporation, and $2.2
million related to the acquisition of one other company.



    
    During the six months ended June 30, 2004, we paid $8.6 million as
additional consideration for acquisitions, including $6.3 million
and $2.3 million related to the acquisitions of Soza and ADI,
respectively.


Financing Activities




Page 22



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Current Portion of Long-term Debt
  Long-term Debt
  Stock Repurchase Program
  Subsequent Events
   Page 23




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Significant Accounting Standards to be Adopted
 Statement of Financial Accounting Standards No. 123R
  Statement of Financial Accounting Standards No. 154
  RISK FACTORS
  
    
    Our outsourcing agreement with UBS, the largest of our UBS
agreements, ends in January 2007, and we expect the end of this
agreement to result in the loss of a substantial majority of
revenue and profit from our UBS relationship.
 
    
    We may not be able to successfully implement planned operating
efficiencies and expense reduction initiatives and achieve the
planned timing and amount of any resulting benefits.
 
    
    We may bear the risk of cost overruns under custom software
development and implementation services, and, as a result, cost
overruns could adversely affect our profitability.
 
    
    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 revenues and profits. One of these customers,
Harvard Pilgrim, has notified us that it intends to transition the
services that we provide them to its new business partner in 2006
and 2007.
 
    
    If entities we acquire fail to perform in accordance with our
expectations or if their liabilities exceed our expectations, our
profits per share could be diminished and our financial results
could be adversely affected.
 
    
    Development of our software products may cost more than we
initially project, and we may encounter
 Page 24




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##### Table of Contents




    
    Our financial results are materially affected by a number of economic and business factors.
 
    
    If we are unable to successfully integrate acquired entities, our profits may be less and our operations
more costly or less efficient.
 
    
    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.
 
    
    Some contracts contain fixed-price provisions or penalties that could result in decreased profits.
 
    
    Fluctuations in currency exchange rates may adversely affect the profitability of our foreign operations.
 
    
    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 a significant business presence in India, and risks associated with doing business there could
decrease our revenue and profits.
 
    
    Our government contracts contain early termination and reimbursement provisions that may adversely
affect our revenue and profits.
 
    
    If customers reduce spending that is currently above contractual minimums, our revenues and profits
could diminish.
 
    
    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.
 
    
    Increasingly complex regulatory environments may increase our costs.
 
    
    Our quarterly financial results may vary.
 
    
    Changes in technology could adversely affect our competitiveness, revenue, and profit.
 
    
    We could lose rights to our company name, which may adversely affect our ability to market our services.
 
    
    Failure to recruit, train, and retain technically skilled personnel could increase costs or limit growth.
 
    
    Alleged or actual infringement of intellectual property rights could result in substantial additional
costs.
 
    
    Provisions of our certificate of incorporation, bylaws, stockholders rights plan, and Delaware law
could deter takeover attempts
 
 Page 25




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Page 26




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##### Table of Contents



IPO Allocation Securities Litigation
    Litigation Relating to the California Energy Market
  Page 27




---



##### Table of Contents



Other
  
  Total Number
    
    Approximate Dollarof Shares
    
    Value of SharesTotal Number
    
    Average
    
    Purchased as
    
    that May Yet Beof Shares
    
    Price Paid
    
    Part of Publicly
    
    Purchased Under thePeriod
    
    Purchased
    
    per Share
    
    Announced Plans (1)
    
    Plans (1)May 1, 2005  May 31, 2005
    
    1,555,300 (2)
    
    $
    13.27
    
    
    
    1,555,300
    
    
    $
    54,300,000
 
 (1)
    
    On May 3, 2005, we announced that we initiated a $75 million stock buyback program. Pursuant
to the program, we may repurchase shares 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. Page 28




---



##### Table of Contents



Nominee
    
    For
    
    WithheldRoss Perot
    
    
    86,684,428
    
    
    
    20,824,022Ross Perot,
Jr.
    
    
    86,608,644
    
    
    
    20,899,807Peter A. Altabef
    
    
    87,354,586
    
    
    
    20,153,865Steve Blasnik
    
    
    88,072,334
    
    
    
    19,436,117John S.T. Gallagher
    
    
    106,142,254
    
    
    
    1,366,196Carl Hahn
    
    
    105,759,327
    
    
    
    1,749,124DeSoto Jordan
    
    
    82,755,914
    
    
    
    24,752,536Thomas Meurer
    
    
    104,499,666
    
    
    
    3,008,785Cecil H. (C.
H.) Moore, Jr.
    
    
    106,165,490
    
    
    
    1,342,961Anuroop (Tony) Singh
    
    
    106,264,081
    
    
    
    1,244,369
  
   Exhibit No.
    
    Document31.1*
    
    Rule 13a-14 Certification dated August 2, 2005, by Peter A.
Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification dated August 2, 2005, by Russell
Freeman, Vice President and Chief Financial Officer.32.1**
    
    Section 1350 Certification dated August 2, 2005, by Peter A. Altabef,
President and Chief Executive Officer.32.2**
    
    Section 1350 Certification dated August 2, 2005, by Russell Freeman, Vice
President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. Page 29




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##### Table of Contents



PEROT SYSTEMS CORPORATION
(Registrant)Date: August 2, 2005
    By  /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal
Accounting Officer Page 30