##### 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 March 31, 2007
 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
    
    75-2230700(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)
 
 
 þ o
  þ o o
 o þ




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##### 



PagePART I:
    
    FINANCIAL INFORMATIONITEM 1:
    
    FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets as of  March 31, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Income Statements for the three months ended March 31, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows  for the three months ended March 31, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 3:
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    17ITEM 4:
    
    CONTROLS AND PROCEDURES
    
    
    17PART II:
    
    OTHER INFORMATIONITEM 1:
    
    LEGAL PROCEEDINGS
    
    
    17ITEM 1A:
    
    RISK FACTORS
    
    
    18ITEM 2:
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    18ITEM 6:
    
    EXHIBITS
    
    
    18SIGNATURES
    
    
    
    
    20Rule 13a-14 CertificationRule 13a-14 CertificationSection 1350 CertificationSection 1350 Certification




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##### Table of Contents



March 31, 2007
    
    
    December 31, 2006(Dollars in millions)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    145
    
    
    $
    250Short-term investments
    
    
    21
    
    
    
    133Accounts receivable, net
    
    
    421
    
    
    
    338Prepaid expenses and other
    
    
    77
    
    
    
    62Total current assets
    
    
    664
    
    
    
    783Property, equipment and purchased software, net
    
    
    227
    
    
    
    220Goodwill
    
    
    627
    
    
    
    463Deferred contract costs, net
    
    
    69
    
    
    
    61Other non-current assets
    
    
    120
    
    
    
    54Total assets
    
    $
    1,707
    
    
    $
    1,581LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    63
    
    
    $
    52Deferred revenue
    
    
    42
    
    
    
    42Accrued compensation
    
    
    42
    
    
    
    65Income taxes payable
    
    
    22
    
    
    
    37Accrued and other current liabilities
    
    
    114
    
    
    
    105Total current liabilities
    
    
    283
    
    
    
    301Long-term debt
    
    
    159
    
    
    
    84Non-current deferred revenue
    
    
    83
    
    
    
    82Other non-current liabilities
    
    
    24
    
    
    
    9Total liabilities
    
    
    549
    
    
    
    476Commitments and contingenciesStockholders equity:Common stock
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    554
    
    
    
    533Retained earnings
    
    
    606
    
    
    
    575Treasury stock
    
    
    (21
    )
    
    
    (21
    )Accumulated other comprehensive income
    
    
    18
    
    
    
    17Total stockholders equity
    
    
    1,158
    
    
    
    1,105Total liabilities and stockholders equity
    
    $
    1,707
    
    
    $
    1,581
  1




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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
 
    Three Months Ended March 31,2007
    
    
    2006(Dollars in millions, except pershare data)Revenue
    
    $
    590
    
    
    $
    542Direct cost of services
    
    
    485
    
    
    
    443Gross profit
    
    
    105
    
    
    
    99Selling, general and administrative expenses
    
    
    71
    
    
    
    64Operating income
    
    
    34
    
    
    
    35Interest income
    
    
    2
    
    
    
    2Interest expense
    
    
    (2
    )
    
    
    (1
    )Income before taxes
    
    
    34
    
    
    
    36Provision for income taxes
    
    
    11
    
    
    
    13Net income
    
    $
    23
    
    
    $
    23Earnings per share of common stock:Basic
    
    $
    0.19
    
    
    $
    0.19Diluted
    
    $
    0.19
    
    
    $
    0.19Weighted average number of common shares outstanding (in thousands):Basic
    
    
    121,562
    
    
    
    118,642Diluted
    
    
    124,125
    
    
    
    121,553
  2




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Three Months Ended March 31,2007
    
    
    2006(Dollars in millions)Cash flows from operating activities:Net income
    
    $
    23
    
    
    $
    23Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    24
    
    
    
    18Stock-based compensation
    
    
    4
    
    
    
    4Change in deferred taxes
    
    
    (14
    )
    
    
    8Excess tax benefits from stock-based compensation arrangements
    
    
    (1
    )
    
    
    (1
    )Other non-cash items
    
    
    
    
    
    
    (1
    )Changes in assets and liabilities (net of effects from acquisitions of businesses):Accounts receivable, net
    
    
    (29
    )
    
    
    (26
    )Prepaid expenses
    
    
    (16
    )
    
    
    (11
    )Deferred contract costs, net
    
    
    (12
    )
    
    
    (8
    )Accounts payable and accrued liabilities
    
    
    2
    
    
    
    19Accrued compensation
    
    
    (33
    )
    
    
    (25
    )Deferred revenue
    
    
    1
    
    
    
    14Income taxes
    
    
    13
    
    
    
    (6
    )Other current and non-current assets
    
    
    
    
    
    
    (4
    )Other current and non-current liabilities
    
    
    
    
    
    
    (1
    )Net cash provided by (used in) operating activities
    
    
    (38
    )
    
    
    3Cash flows from investing activities:Purchases of property, equipment and purchased software
    
    
    (21
    )
    
    
    (17
    )Acquisitions of businesses, net
    
    
    (244
    )
    
    
    (21
    )Purchases of short-term investments
    
    
    (362
    )
    
    
    Net proceeds from sale of short-term investments
    
    
    474
    
    
    
    Other
    
    
    (1
    )
    
    
    Net cash used in investing activities
    
    
    (154
    )
    
    
    (38
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    75
    
    
    
    Proceeds from issuance of common stock
    
    
    10
    
    
    
    4Proceeds from issuance of treasury stock
    
    
    
    
    
    
    8Excess tax benefits from stock-based compensation arrangements
    
    
    1
    
    
    
    1Net cash provided by financing activities
    
    
    86
    
    
    
    13Effect of exchange rate changes on cash and cash equivalents
    
    
    1
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (105
    )
    
    
    (22
    )Cash and cash equivalents at beginning of period
    
    
    250
    
    
    
    260Cash and cash equivalents at end of period
    
    $
    145
    
    
    $
    238
  3




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Financial instruments
   Significant accounting standards to be adopted
 FASB Statement No. 157
  FASB Statement No. 159
    4




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Current assets
    
    $
    53Property, equipment and purchased software, net
    
    
    1Goodwill
    
    
    170Indentifiable intangible assets
    
    
    50274Current liabilities
    
    
    (30
    )Total consideration paid as of March 31, 2007
    
    $
    244
  Three months endedMarch 31,2007
    
    2006(Unaudited)(in millions, except pershare data)Revenue
    
    $
    615
    
    
    $
    615Income before taxes
    
    
    35
    
    
    
    38Net income
    
    
    24
    
    
    
    24Basic earnings per common share
    
    $
    .20
    
    
    $
    .20Diluted earnings per common share
    
    $
    .19
    
    
    $
    .20
    ConsultingandIndustry
    
    
    Government
    
    
    ApplicationsSolutions
    
    
    Services
    
    
    Solutions
    
    
    Total(in millions)Balance as of December 31, 2006
    
    $
    255
    
    
    $
    128
    
    
    $
    80
    
    
    $
    463Goodwill resulting from QSS acquisition
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Other
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Balance as of March 31, 2007
    
    $
    255
    
    
    $
    298
    
    
    $
    74
    
    
    $
    627
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As of March 31, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    BookValue
    
    
    Amortization
    
    
    Value(in millions)Service mark
    
    $
    1
    
    
    $
    (1
    )
    
    $
    Customer-based assets
    
    
    82
    
    
    
    (19
    )
    
    
    63Other intangible assets
    
    
    3
    
    
    
    (1
    )
    
    
    2Total
    
    $
    86
    
    
    $
    (21
    )
    
    $
    65
    Three MonthsEnded March 31,2007
    
    
    2006(in millions)Net income
    
    $
    23
    
    
    $
    23Foreign currency translation adjustments
    
    
    1
    
    
    
    Total comprehensive income
    
    $
    24
    
    
    $
    23
      Stock-based compensation
  6




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Three months endedMarch 31,2007
    
    2006(in millions, except pershare data)Direct cost of services
    
    $
    1
    
    
    $
    2Selling, general and administrative expenses
    
    
    2
    
    
    
    2Total stock compensation expense from stock options and ESPP
    
    
    3
    
    
    
    4Stock compensation expense from stock options and ESPP, net of tax
    
    
    2
    
    
    
    2Decrease in diluted earnings per share of common stock
    
    $
    .02
    
    
    $
    .02
   Activity in our stock-based compensation plans
  Three months ended March 31,2007
    
    2006Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    PriceOutstanding at January 1
    
    
    18,169
    
    
    
    14.42
    
    
    
    25,342
    
    
    
    14.81Granted
    
    
    26
    
    
    
    16.19
    
    
    
    41
    
    
    
    15.14Exercised
    
    
    (876
    )
    
    
    8.95
    
    
    
    (1,212
    )
    
    
    8.43Forfeited
    
    
    (512
    )
    
    
    16.74
    
    
    
    (4,042
    )
    
    
    21.37Outstanding at March 31
    
    
    16,807
    
    
    
    14.64
    
    
    
    20,129
    
    
    
    13.87Exercisable at March 31
    
    
    9,755
    
    
    
    15.32
    
    
    
    10,873
    
    
    
    14.82
    7




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Consulting andIndustry
    
    Government
    
    ApplicationsSolutions
    
    Services
    
    Solutions
    
    Other
    
    Total(in millions)For the quarter ended March 31, 2007:Revenue
    
    $
    424
    
    
    $
    114
    
    
    $
    71
    
    
    $
    (19
    )
    
    $
    590Income before taxes
    
    
    19
    
    
    
    5
    
    
    
    10
    
    
    
    
    
    
    
    34For the quarter ended March 31, 2006:Revenue
    
    $
    418
    
    
    $
    76
    
    
    $
    59
    
    
    $
    (11
    )
    
    $
    542Income before taxes
    
    
    23
    
    
    
    4
    
    
    
    8
    
    
    
    1
    
    
    
    36
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For the Three Months EndedMarch 31,2007
    
    
    2006(in millions)Basic Earnings per Common ShareNet income
    
    $
    23
    
    
    $
    23Weighted average common shares outstanding
    
    
    121,562
    
    
    
    118,642Basic earnings per common share
    
    $
    0.19
    
    
    $
    0.19Diluted Earnings per Common ShareNet income
    
    $
    23
    
    
    $
    23Weighted average common shares outstanding
    
    
    121,562
    
    
    
    118,642Incremental shares assuming dilution
    
    
    2,563
    
    
    
    2,911Weighted average diluted common shares outstanding
    
    
    124,125
    
    
    
    121,553Diluted earnings per common share
    
    $
    0.19
    
    
    $
    0.19
    Litigation
   IPO Allocation Securities Litigation
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Other
  10




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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 described in our Annual Report on Form
10-K for the year ended December 31, 2006. These risk factors describe reasons why our actual
results may differ materially from any forward-looking statement. We disclaim any intention or
obligation to update any forward-looking statement.
 
  RESULTS OF OPERATIONS
  Lines of Business
  Overview of Our Financial Results for the First Quarter of 2007
   Effect of the End of Our Infrastructure Outsourcing Contract with UBS
  11




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Revenue Growth
  
    
    Revenue from a company acquired during the first quarter of 2007 and a company acquired
during the first quarter of 2006 for which we did not recognize a full quarter of revenue
during the first quarter of 2006.
 
    
    A net increase in revenue from the expansion of base services and discretionary technology
investments by our existing long-term customers.
 
    
    Revenue from new contracts signed during the twelve-month period following the first
quarter of 2006 and from new contracts signed in the first quarter of 2006 for which we did
not recognize a full quarter of revenue.
  Earnings Growth
  
    
    Profits from our infrastructure outsourcing contract with UBS decreased by $14 million in
2007 as compared to 2006 as a result of the end of the UBS contract. The loss from this
infrastructure outsourcing contract resulted in a decrease in earnings of approximately $0.07
per diluted share.
 
    
    This decrease was partially offset by an overall net increase in profitability from
existing commercial customer contracts, including two contracts that were modified in the
third quarter and fourth quarter of 2006.
 
    
    Additionally, in the first quarter of 2007, we reduced an income tax valuation allowance by
$2 million, which resulted in a benefit of approximately $0.02 per diluted share.
 Free Cash Flow
  Twelve MonthsEndedMarch 312007
    
    
    2006Net cash provided by operating activities
    
    $
    172
    
    
    $
    160Purchases of property, equipment and purchased software
    
    
    (97
    )
    
    
    (73
    )Free cash flow
    
    $
    75
    
    
    $
    87
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TCV of Contracts Signed
   Additional Measurements
  Comparison of the Three Months Ended March 31, 2007 and 2006
 Revenue
  Three Months Ended March 312007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeIndustry Solutions
    
    $
    424
    
    
    $
    418
    
    
    $
    6
    
    
    
    1.4
    %Government Services
    
    
    114
    
    
    
    76
    
    
    
    38
    
    
    
    50.0
    %Consulting and Applications Solutions
    
    
    71
    
    
    
    59
    
    
    
    12
    
    
    
    20.3
    %Elimination of intersegment revenue
    
    
    (19
    )
    
    
    (11
    )
    
    
    (8
    )
    
    
    72.7
    %Total
    
    $
    590
    
    
    $
    542
    
    
    $
    48
    
    
    
    8.9
    %
 Industry Solutions
  
    
    $37 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.
 
    
    $24 million increase from new contracts signed during the twelve-month period following the
first quarter of 2006 and from new contracts signed in the first quarter of 2006 for which we
did not recognize a full quarter of revenue in 2006. This increase was composed of $17 million
and $7 million from new contracts signed in the Healthcare and Commercial Solutions groups,
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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.
    
    $9 million increase from revenue related to an acquisition within our Commercial Solutions
group during the first quarter of 2006 for which we did not recognize a full quarter of
revenue in 2006. The acquired company is a provider of product engineering outsourcing
services.
   
    
    Our solutions for the healthcare market were developed over several years and are highly
customized to the specific business needs of the market. We identified certain aspects of the
healthcare market as core to our long-term service offerings several years ago when the market
for technology and business process services was immature. As a result, we have an established
presence and brand, which we have strengthened primarily through internal investments in
software and solutions.
 
    
    The healthcare industry continues to be in a state of change as health systems 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
provider community uses information technology to automate the clinical process resulting in
improvements in both healthcare quality and efficiency.
 Government Services
  Consulting and Applications Solutions
  Gross Margin
  
    
    In the first quarter of 2007, we acquired QSS within our Government Services group. The
gross margins associated with the acquisition are typically lower than those we realize within
our consolidated margins because of the cost plus nature of their work.
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
    
    A $14 million decrease in gross profit from the expiration of our infrastructure
outsourcing contract with UBS that is reported within the Industry Solutions line of business.
  Selling, General and Administrative Expenses
  Other Income Statement Items
  Liquidity and Capital Resources
  Operating Activities
  
    
    Cash provided by changes in accounts payable and accrued liabilities was $2 million for the
three months ended March 31, 2007, as compared to cash provided of $19 million for the same
period of the prior year. This decrease is primarily due to the timing of vendor payments.
 
    
    During the three months ended March 31, 2007, there was a decrease of $13 million in
deferred revenue received from clients as compared to the same period in 2006.
 
    
    Bonuses paid to associates under our bonus plans in the first quarters of 2007 and 2006
(including payments of annual bonuses relating to the previous years bonus plan) were $42
million and $53 million, respectively. Included in these bonus amounts paid were approximately
$6 million and $23 million 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
  15




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
    
    During the three months ended March 31, 2007, we paid $244 million, net of cash acquired,
for the acquisition of QSS, an information technology services company providing services to
the U.S. federal government.
 
    
    During the three months ended March 31, 2007, we liquidated short-term investments of $112
million, net.
 
    
    During the three months ended March 31, 2007, we purchased $21 million of property,
equipment and purchased software as compared to $17 million during the three months ended
March 31, 2006. This increase was primarily related to our business expansion needs for data
center and office facilities.
 
    
    During the three months ended March 31, 2006, we paid $21 million for the acquisition of
eServ LLC, a leading provider of high-end product engineering outsourcing services.
 Financing Activities
   Contractual Obligations
  Significant accounting standards to be adopted
 FASB Statement No. 157
  FASB Statement No. 159
  16




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IPO Allocation Securities Litigation
   17




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Other
  
   
  Issuer Purchases of Equity Securities
 Total Number
    
    Approximateof Shares
    
    Dollar Value ofTotal Number
    
    Average
    
    Purchased as
    
    Shares that Mayof Shares
    
    Price Paid
    
    Part of Publicly
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    per Share
    
    Announced Plans (1)
    
    Under the Plans (1)February 1, 2007  February 28, 2007
    
    
    4,266
    (2)
    
    $
    16.78
    
    
    
    
    
    
    $
    74,700,000
 
 (1)
    
    Our current stock buyback program authorizes 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. 
   EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT3.1
    
    Third Amended and Restated Certificate of Incorporation of
Perot Systems Corporation (the Company) (Incorporated by
reference to Exhibit 3.1 of the Companys Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002.)3.2
    
    Fourth Amended and Restated Bylaws. (Incorporated by
reference to Exhibit 3.2 of the Companys Current Report on
Form 8-K filed September, 24, 2004).4.1
    
    Specimen of Class A Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Companys Registration
Statement on Form S-1, Registration No. 333-60755.)4.2
    
    Rights Agreement dated January 28, 1999 between the Company
and The Chase Manhattan Bank (Incorporated by reference to
Exhibit 4.2 of the Companys Registration Statement on Form
S-1, Registration No. 333-60755.)4.3
    
    Form of Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock (included as
Exhibit A-1 to the Rights Agreement) (Incorporated by
reference to Exhibit 4.3 of the Companys Registration
Statement on Form S-1, Registration No. 333-60755.)4.4
    
    Form of Certificate of Designation, Preferences, and Rights of
Series B Junior Participating Preferred Stock (included as
Exhibit A-2 to the Rights Agreement) (Incorporated by
reference to Exhibit 4.4 of the Companys Registration
Statement on Form S-1, Registration No. 333-60755.)31.1*
    
    Rule 13a-14 Certification
dated May 7, 2007, by Peter A.
Altabef, President and Chief Executive Officer.31.2*
    
    Rule 13a-14 Certification
dated May 7, 2007, by Russell
Freeman, Vice President and Chief Financial Officer.
 18




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EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBIT32.1**
    
    Section 1350 Certification
dated May 7, 2007, by Peter A.
Altabef, President and Chief Executive Officer.32.2**
    
    Section 1350 Certification
dated May 7, 2007, by Russell
Freeman, Vice President and Chief Financial Officer.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 19




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PEROT SYSTEMS CORPORATION(Registrant)Date: May 7, 2007
    
    By
    
    /s/ ROBERT J. KELLYRobert J. KellyCorporate Controller and PrincipalAccounting Officer
 20