##### Table of Contents



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




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PagePART I: FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004
    
    
    1Condensed Consolidated Income Statements for the three and
nine months ended September 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 4: CONTROLS AND PROCEDURES
    
    
    29PART II: OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGS
    
    
    30ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    31ITEM 6: EXHIBITS
    
    
    32SIGNATURES
    
    
    33Rule 13a-14 Certification, President and CEORule 13a-14 Certification, Vice President and CFOSection 1350 Certification, President and CEOSection 1350 Certification, Vice President and CFO




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##### Table of Contents



ASSETSSeptember 30, 2005
    
    
    December 31, 2004Current assets:Cash and cash equivalents
    
    $
    230,840
    
    
    $
    304,786Accounts receivable, net
    
    
    283,131
    
    
    
    233,875Prepaid expenses and other
    
    
    64,567
    
    
    
    51,920Total current assets
    
    
    578,538
    
    
    
    590,581Property, equipment and purchased software, net
    
    
    179,080
    
    
    
    144,425Goodwill
    
    
    438,938
    
    
    
    359,033Deferred contract costs, net
    
    
    81,482
    
    
    
    48,459Other non-current assets
    
    
    64,514
    
    
    
    81,113Total assets
    
    $
    1,342,552
    
    
    $
    1,223,611LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    75,498Accounts payable
    
    
    40,393
    
    
    
    34,114Accrued liabilities
    
    
    78,626
    
    
    
    98,298Accrued compensation
    
    
    62,899
    
    
    
    65,706Income taxes payable
    
    
    38,187
    
    
    
    34,306Deferred revenue and other current liabilities
    
    
    26,037
    
    
    
    22,626Total current liabilities
    
    
    246,142
    
    
    
    330,548Long-term debt
    
    
    76,505
    
    
    
    Non-current deferred revenue and other non-current liabilities
    
    
    71,875
    
    
    
    31,029Total liabilities
    
    
    394,522
    
    
    
    361,577Commitments and contingenciesStockholders equity:Common stock
    
    
    1,201
    
    
    
    1,173Additional paid-in capital
    
    
    495,235
    
    
    
    478,266Retained earnings
    
    
    467,435
    
    
    
    382,962Treasury stock
    
    
    (20,655
    )
    
    
    Other stockholders equity
    
    
    (7,095
    )
    
    
    (9,673
    )Accumulated other comprehensive income
    
    
    11,909
    
    
    
    9,306Total stockholders equity
    
    
    948,030
    
    
    
    862,034Total liabilities and stockholders equity
    
    $
    1,342,552
    
    
    $
    1,223,611
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Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    510,078
    
    
    $
    454,290
    
    
    $
    1,471,581
    
    
    $
    1,307,888Direct cost of services
    
    
    403,636
    
    
    
    356,256
    
    
    
    1,151,889
    
    
    
    1,036,785Gross profit
    
    
    106,442
    
    
    
    98,034
    
    
    
    319,692
    
    
    
    271,103Selling, general and administrative expenses
    
    
    66,098
    
    
    
    62,058
    
    
    
    185,924
    
    
    
    170,072Operating income
    
    
    40,344
    
    
    
    35,976
    
    
    
    133,768
    
    
    
    101,031Interest income
    
    
    1,758
    
    
    
    625
    
    
    
    5,597
    
    
    
    1,361Interest expense
    
    
    (869
    )
    
    
    (537
    )
    
    
    (2,474
    )
    
    
    (1,512
    )Other income (expense), net
    
    
    612
    
    
    
    651
    
    
    
    599
    
    
    
    355Income before taxes
    
    
    41,845
    
    
    
    36,715
    
    
    
    137,490
    
    
    
    101,235Provision for income taxes
    
    
    16,400
    
    
    
    10,114
    
    
    
    53,017
    
    
    
    33,986Net income
    
    $
    25,445
    
    
    $
    26,601
    
    
    $
    84,473
    
    
    $
    67,249Basic and diluted earnings per common share:Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.23
    
    
    $
    0.72
    
    
    $
    0.59Weighted average common shares outstanding
    
    
    118,098
    
    
    
    115,241
    
    
    
    117,810
    
    
    
    114,617Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.70
    
    
    $
    0.56Weighted average diluted common shares outstanding
    
    
    121,794
    
    
    
    119,855
    
    
    
    121,540
    
    
    
    119,666
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Nine months ended September 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    84,473
    
    
    $
    67,249Adjustments to reconcile net income to
net cash provided by operating
activities:Depreciation and amortization
    
    
    42,823
    
    
    
    41,445Change in deferred taxes
    
    
    20,979
    
    
    
    (7,478
    )Other non-cash items
    
    
    1,942
    
    
    
    1,819Changes in assets and liabilities (net of effects from
acquisitions of businesses):Accounts receivable, net
    
    
    (52,533
    )
    
    
    (27,066
    )Prepaid expenses
    
    
    (7,969
    )
    
    
    (5,430
    )Deferred contract costs, net
    
    
    (36,245
    )
    
    
    (26,433
    )Accounts payable and accrued liabilities
    
    
    1,912
    
    
    
    (3,626
    )Accrued compensation
    
    
    (11,447
    )
    
    
    14,128Deferred revenue
    
    
    24,120
    
    
    
    14,274Income taxes
    
    
    3,863
    
    
    
    23,785Other current and non-current assets
    
    
    8,689
    
    
    
    (9,655
    )Other current and non-current liabilities
    
    
    3,377
    
    
    
    990Net cash provided by operating activities
    
    
    83,984
    
    
    
    84,002Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (54,116
    )
    
    
    (22,260
    )Acquisitions of businesses, net of cash acquired of
$5,748 and $0, respectively
    
    
    (93,368
    )
    
    
    (8,850
    )Net proceeds from the sale of short-term investments
    
    
    
    
    
    
    37,725Other
    
    
    53
    
    
    
    (19
    )Net cash (used in) provided by investing activities
    
    
    (147,431
    )
    
    
    6,596Cash flows from financing activities:Repayment of debt
    
    
    (78,652
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    76,505
    
    
    
    Proceeds from issuance of common stock
    
    
    17,319
    
    
    
    15,299Purchase of treasury stock
    
    
    (20,655
    )
    
    
    Other
    
    
    (864
    )
    
    
    345Net cash (used in) provided by financing activities
    
    
    (6,347
    )
    
    
    15,644Effect of exchange rate changes on cash and cash equivalents
    
    
    (4,152
    )
    
    
    187Net (decrease) increase in cash and cash equivalents
    
    
    (73,946
    )
    
    
    106,429Cash and cash equivalents at beginning of period
    
    
    304,786
    
    
    
    123,770Cash and cash equivalents at end of period
    
    $
    230,840
    
    
    $
    230,199
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Stock-Based Compensation
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net incomeAs reported
    
    $
    25,445
    
    
    $
    26,601
    
    
    $
    84,473
    
    
    $
    67,249Add: stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    (75
    )
    
    
    683
    
    
    
    724
    
    
    
    943Less: total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (2,638
    )
    
    
    (6,433
    )
    
    
    (10,353
    )
    
    
    (16,869
    )Pro forma
    
    $
    22,732
    
    
    $
    20,851
    
    
    $
    74,844
    
    
    $
    51,323Basic earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.23
    
    
    $
    0.72
    
    
    $
    0.59Pro forma
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.64
    
    
    $
    0.45Diluted earnings per common shareAs reported
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.70
    
    
    $
    0.56Pro forma
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.62
    
    
    $
    0.45
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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average risk free interest rates
    
    
    4.00
    %
    
    
    2.80
    %
    
    
    3.87
    %
    
    
    2.51
    %Weighted average life (in years)
    
    
    5.0
    
    
    
    3.2
    
    
    
    5.1
    
    
    
    3.5Volatility
    
    
    44
    %
    
    
    43
    %
    
    
    43
    %
    
    
    47
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average grant-date fair value per
share of options granted
    
    $
    6.18
    
    
    $
    4.66
    
    
    $
    6.14
    
    
    $
    5.04
  Significant Accounting Standards to be Adopted
 Statement of Financial Accounting Standards Board No. 123R
  Statement of Financial Accounting Standards No. 154
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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    515,687
    
    
    $
    466,447
    
    
    $
    1,504,145
    
    
    $
    1,342,497Income before taxes
    
    
    34,676
    
    
    
    37,507
    
    
    
    132,846
    
    
    
    102,501Net income
    
    
    18,229
    
    
    
    27,106
    
    
    
    79,013
    
    
    
    68,240Basic earnings per common share
    
    
    0.15
    
    
    
    0.24
    
    
    
    0.67
    
    
    
    0.60Diluted earnings per common share
    
    
    0.15
    
    
    
    0.23
    
    
    
    0.65
    
    
    
    0.57
    Industry
    
    
    Government
    
    
    ApplicationsSolutions
    
    
    Services
    
    
    Solutions
    
    
    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
    
    
    
    
    
    
    
    17,000Goodwill for PrSM acquisition
    
    
    
    
    
    
    6,110
    
    
    
    
    
    
    
    6,110Estimated goodwill for TAG acquisition
    
    
    47,516
    
    
    
    
    
    
    
    
    
    
    
    47,516Other
    
    
    2,250
    
    
    
    
    
    
    
    151
    
    
    
    2,401Balance as of September 30, 2005
    
    $
    244,807
    
    
    $
    127,280
    
    
    $
    66,851
    
    
    $
    438,938
   Deferred Contract Costs, Net
  Page 7




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Identifiable Intangible Assets
  Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    ValueService marks
    
    $
    5,761
    
    
    $
    (4,110
    )
    
    $
    1,651Customer based assets
    
    
    33,449
    
    
    
    (13,842
    )
    
    
    19,607Other intangible assets
    
    
    6,430
    
    
    
    (3,703
    )
    
    
    2,727Balance at September 30, 2005
    
    $
    45,640
    
    
    $
    (21,655
    )
    
    $
    23,985
   Current Portion of Long-term Debt
  Long-term Debt
  Page 8




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Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    25,445
    
    
    $
    26,601
    
    
    $
    84,473
    
    
    $
    67,249Foreign currency translation adjustments
    
    
    (953
    )
    
    
    (1,323
    )
    
    
    2,603
    
    
    
    2,088Other
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    357Total comprehensive income
    
    $
    24,492
    
    
    $
    25,385
    
    
    $
    87,076
    
    
    $
    69,694
   September 30, 2005
    
    
    December 31, 2004Deferred compensation
    
    $
    (7,087
    )
    
    $
    (9,761
    )Other
    
    
    (8
    )
    
    
    88Total other stockholders equity
    
    $
    (7,095
    )
    
    $
    (9,673
    )
     Page 9




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Page 10




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Industry
    
    
    Government
    
    
    ApplicationsSolutions
    
    
    Services
    
    
    Solutions
    
    
    Other
    
    
    TotalFor the three months ended September 30, 2005:Revenue
    
    $
    405,642
    
    
    $
    69,216
    
    
    $
    47,276
    
    
    $
    (12,056
    )
    
    $
    510,078Income before taxes
    
    
    24,697
    
    
    
    4,609
    
    
    
    12,307
    
    
    
    232
    
    
    
    41,845For the three months ended September 30, 2004:Revenue
    
    $
    356,662
    
    
    $
    67,829
    
    
    $
    38,079
    
    
    $
    (8,280
    )
    
    $
    454,290Income before taxes
    
    
    27,151
    
    
    
    3,637
    
    
    
    5,080
    
    
    
    847
    
    
    
    36,715For the nine months ended September 30, 2005:Revenue
    
    $
    1,174,295
    
    
    $
    199,364
    
    
    $
    130,086
    
    
    $
    (32,164
    )
    
    $
    1,471,581Income before taxes
    
    
    99,782
    
    
    
    11,969
    
    
    
    26,337
    
    
    
    (598
    )
    
    
    137,490For the nine months ended September 30, 2004:Revenue
    
    $
    1,020,735
    
    
    $
    201,000
    
    
    $
    106,400
    
    
    $
    (20,247
    )
    
    $
    1,307,888Income before taxes
    
    
    72,698
    
    
    
    10,841
    
    
    
    16,378
    
    
    
    1,318
    
    
    
    101,235
   For the three months endedSeptember 30,2005
    
    
    2004Basic Earnings per Common ShareNet income
    
    $
    25,445
    
    
    $
    26,601Weighted average common shares outstanding
    
    
    118,098
    
    
    
    115,241Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.23Diluted Earnings per Common ShareNet income
    
    $
    25,445
    
    
    $
    26,601Weighted average common shares outstanding
    
    
    118,098
    
    
    
    115,241Incremental shares assuming dilution
    
    
    3,696
    
    
    
    4,614Weighted average diluted common shares outstanding
    
    
    121,794
    
    
    
    119,855Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.22
 Page 11




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For the nine months endedSeptember 30,2005
    
    
    2004Basic Earnings per Common ShareNet income
    
    $
    84,473
    
    
    $
    67,249Weighted average common shares outstanding
    
    
    117,810
    
    
    
    114,617Basic earnings per common share
    
    $
    0.72
    
    
    $
    0.59Diluted Earnings per Common ShareNet income
    
    $
    84,473
    
    
    $
    67,249Weighted average common shares outstanding
    
    
    117,810
    
    
    
    114,617Incremental shares assuming dilution
    
    
    3,730
    
    
    
    5,049Weighted average diluted common shares outstanding
    
    
    121,540
    
    
    
    119,666Diluted earnings per common share
    
    $
    0.70
    
    
    $
    0.56
   Litigation
   IPO Allocation Securities Litigation
  Page 12




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Litigation Relating to the California Energy Market
   Page 13




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Other
  Contract-related Contingencies
  Expected Effects of the End of Our Outsourcing Contracts with Two Customers
  Page 14




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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 Third Quarter of 2005
   Page 15




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Revenue Growth
  
    
    Revenue from contracts signed during the third quarter of 2004 for which we did not recognize a full quarter of revenue
in the third quarter of 2004.
 
    
    Revenue from contracts signed with new customers during the twelve-month period following the third 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.
 
    
    Revenue from an acquisition within our Commercial Solutions group in the third quarter of 2005.
 Earnings Growth
  Free Cash Flow
  Twelve MonthsEndedSeptember 302005
    
    
    2004Net cash provided by operating activities
    
    $
    158.3
    
    
    $
    109.6Purchases of property, equipment and software
    
    
    (65.1
    )
    
    
    (27.8
    )Free cash flow
    
    $
    93.2
    
    
    $
    81.8
 TCV of Contracts Signed
  Page 16




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Additional Measurements
  Comparison of the Three Months Ended September 30, 2005 and 2004
 Revenue
  Three months ended September 302005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    405.7
    
    
    $
    356.7
    
    
    $
    49.0
    
    
    
    13.7
    %Government Services
    
    
    69.2
    
    
    
    67.8
    
    
    
    1.4
    
    
    
    2.1
    %Applications Solutions
    
    
    47.3
    
    
    
    38.1
    
    
    
    9.2
    
    
    
    24.1
    %Elimination of intersegment revenue
    
    
    (12.1
    )
    
    
    (8.3
    )
    
    
    (3.8
    )
    
    
    45.8
    %Total
    
    $
    510.1
    
    
    $
    454.3
    
    
    $
    55.8
    
    
    
    12.3
    %
 Industry Solutions
  
    
    $21.0 million from contracts signed during the third quarter of
2004 for which we did not recognize a full quarter of revenue in
the third quarter of 2004. This revenue includes $17.5 million
and $3.5 million from contracts signed in the third quarter of
2004 in the Healthcare and Commercial Solutions groups,
respectively. The services that we are providing to these
customers are primarily the same services that we provide to the
majority of our other long-term outsourcing customers.
 
    
    $14.4 million increase from contracts signed with new customers
during the twelve-month period following the third quarter of
2004. This increase is composed of $9.6 million and $4.8 million
from new contracts signed in the Commercial Solutions and
Healthcare 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 increase in new sales revenue from the markets
served by our Commercial Solutions group 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.
 
    
    $6.9 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
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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. This net increase is primarily related to
contracts in the Healthcare group. 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.
 
    
    $6.7 million increase from revenue related to an acquisition
within our Commercial Solutions group in the third quarter of
2005. The acquired company is a leading provider of policy
administration and business process services to the life insurance
and annuity industry.
 Government Services
  Applications Solutions
  UBS
  Three months endedSeptember 302005
    
    
    2004
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    66.0
    
    
    $
    63.9
    
    
    
    3.3
    %UBS revenue in Applications Solutions
    
    
    9.4
    
    
    
    8.5
    
    
    
    10.6
    %Total revenue from UBS
    
    $
    75.4
    
    
    $
    72.4
    
    
    
    4.1
    %
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Gross Margin
  
    
    Lower margins in the early phases of contracts signed with new
customers during the third quarter of 2004 and in the twelve-month
period following the third quarter of 2004. The profitability for
commercial customer contracts, particularly our fixed- and
unit-priced contracts, tends to improve with the maturity of the
contract as we develop operating efficiencies.
 
    
    A net decrease in profitability from UBS primarily due to the
reversal of an accrued liability in the third quarter of 2004 for
the variable component of our annual fee, which was eliminated as
part of the Transition Agreement between us and UBS in September
of 2004.
  Selling, General and Administrative Expenses
  Other Income Statement Items
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Comparison of the Nine Months Ended September 30, 2005 and 2004
 Revenue
  Nine months ended September 302005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    1,174.3
    
    
    $
    1,020.7
    
    
    $
    153.6
    
    
    
    15.0
    %Government Services
    
    
    199.4
    
    
    
    201.0
    
    
    
    (1.6
    )
    
    
    (0.8
    %)Applications Solutions
    
    
    130.1
    
    
    
    106.4
    
    
    
    23.7
    
    
    
    22.3
    %Elimination of intersegment revenue
    
    
    (32.2
    )
    
    
    (20.2
    )
    
    
    (12.0
    )
    
    
    59.4
    %Total
    
    $
    1,471.6
    
    
    $
    1,307.9
    
    
    $
    163.7
    
    
    
    12.5
    %
 Industry Solutions
  
    
    $73.5 million increase from contracts signed during the first nine months of 2004 for which
we did not recognize a full nine months of revenue in 2004. This increase is composed of
$61.0 million and $12.5 million from 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 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. 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.
 The increase in sales revenue from the markets served by our Commercial Solutions group 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.
    
    $36.8 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,
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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.
 
    
    $30.4 million increase from contracts signed with new customers
during the twelve-month period following the third quarter of
2004. This increase is composed of $20.1 million and $10.3 million
from new contracts signed in the Commercial Solutions and
Healthcare 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.
 
    
    $6.7 million increase from revenue related to an acquisition
within our Commercial Solutions group in the third quarter of
2005. The acquired company is a leading provider of policy
administration and business process services to the life insurance
and annuity industry.
 
    
    $6.2 million termination fee associated with the early termination
of a contract in the first quarter of 2005.
 Government Services
  Applications Solutions
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UBS
  Nine months endedSeptember 302005
    
    
    2004
    
    
    ChangeUBS revenue in Industry Solutions
    
    $
    196.6
    
    
    $
    179.8
    
    
    
    9.3
    %UBS revenue in Applications Solutions
    
    
    26.4
    
    
    
    24.0
    
    
    
    10.0
    %Total revenue from UBS
    
    $
    223.0
    
    
    $
    203.8
    
    
    
    9.4
    %
  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 cost of services. The dispute
related to a contract we exited in 2003. This settlement resulted
in a 0.7 percentage point increase in our gross margin for the
first nine months ended September 30, 2005.
 
    
    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 that are 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 and Commercial
Solutions Group.
 
    
    In the first quarter of 2005, we recorded revenue of $6.2 million
and related direct cost 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 0.3
percentage point increase in our gross margin for the first nine
months ended September 30, 2005.
  Selling, General and Administrative Expenses
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Other Income Statement Items
     Contract-related Matter
  Expected Effects of the End of Our Outsourcing Contracts with Two Customers
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Liquidity and Capital Resources
  Operating Activities
  
    
    Net income for the nine months ended September 30, 2005, increased
$17.2 million to $84.5 million, which includes the receipt of $7.6
million related to the settlement of a contract dispute with a
former customer.
 
    
    Cash provided by the changes in other current and non-current
assets was $8.7 million for the first nine months of 2005 as
compared to cash used of $9.7 million for the same period of the
prior year. This change includes a payment of $10.0 million made
in the first nine months of 2004 relating to a purchase commitment
of air travel mileage that did not recur in 2005.
  
    
    The amount of bonuses paid to associates under our bonus plans in the first nine 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
$64.7 million and $42.3 million, respectively. Included in the bonus amounts that were paid in the first nine months of
2005 and 2004 were approximately $23.7 million and $19.6 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.
 
    
    We typically collect our accounts receivable within 45 days to 60 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 collections from our customers, which can vary significantly from
period to period. Our days sales outstanding at September 30, 2005, of 50 days has increased as
compared to days sales outstanding at September 30, 2004, of 47 days due to an increase in
expenses that are rebillable to customers and the two acquisitions made during the third
quarter of 2005 for which we did not
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recognize a full quarter of revenue. This increase has
negatively impacted our cash provided by operating activities for the first nine months of
2005. Days sales outstanding is calculated as our outstanding accounts receivable balance at
the end of the period divided by revenue for the most recent quarterly period and multiplied by
90 days.
 Investing Activities
  
    
    During the nine months ended September 30, 2005, we paid $93.4
million for acquisitions, including $60.0 million (net of cash
received) for the acquisition of Technical Management, Inc. and
its subsidiaries, including Transaction Applications Group, Inc.,
$17.0 million as additional consideration related to the
acquisition of Soza & Company, Ltd., $7.3 million (net of cash
received) for the acquisition of PrSM Corporation, $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 nine months ended September 30, 2005, we purchased
$54.1 million of property, equipment and purchased software as
compared to $22.3 million during the nine months ended September
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 could increase our future capital expenditures from
current levels and reduce the amount of our available cash
balances and borrowing capacity.
 
    
    During the nine months ended September 30, 2004 we recorded $37.7
million of net proceeds from the sale of short-term investments
relating to the conversion of Applications Solutions
short-term investments to cash and cash equivalents.
 
    
    During the nine months ended September 30, 2004, we paid $8.8
million as additional consideration for acquisitions, including
$6.3 million and $2.5 million related to the acquisitions of Soza
and ADI, respectively.
 Financing Activities
   Current Portion of Long-term Debt
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Long-term Debt
  Stock Repurchase Program
  Significant Accounting Standards to be Adopted
 Statement of Financial Accounting Standards No. 123R
  Statement of Financial Accounting Standards No. 154
  Page 26




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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. Future contract signings and performance on
existing contracts could result in increases or decreases in the total amount of efficiencies that are realized in
future periods.
 
    
    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 during 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 delays or fail to
perform well in the market, which could decrease our profits and impair our assets.
 
    
    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.
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
    
    Provisions of our certificate of incorporation, bylaws, stockholders rights plan, and Delaware law could deter
takeover attempts.
  Page 28




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Page 29




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IPO Allocation Securities Litigation
    Page 30




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Litigation Relating to the California Energy Market
   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)January 1, 2005 - January 31, 2005
    
    
    3,521
    
    
    $
    15.71May 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.
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Exhibit No.
    
    Document31.1*
    
    Rule 13a-14 Certification dated November 1, 2005, by Peter A. Altabef, President and Chief
Executive Officer.31.2*
    
    Rule 13a-14 Certification dated November 1, 2005, by Russell Freeman, Vice President and
Chief Financial Officer.32.1**
    
    Section 1350 Certification dated November 1, 2005, by Peter A. Altabef, President and Chief
Executive Officer.32.2**
    
    Section 1350 Certification dated November 1, 2005, by Russell Freeman, Vice President and
Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. Page 32




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PEROT SYSTEMS CORPORATION
(Registrant)Date: November 1, 2005
    By:
    /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and Principal
Accounting Officer Page 33