March 31,	December 31,
	2004	2003
ASSETS
Current assets
Cash and cash equivalents	$      1,982	$       2,197
Marketable securities	150	116
Accounts receivable, net	2,994	3,101
Prepaids and other	1,089	1,055
Deferred income taxes	310	108
Assets held for sale	1,623	1,539
Total current assets	8,148	8,116
Property and equipment, net	2,747	2,818
Deferred contract costs, net	815	870
Investments and other assets	990	1,051
Goodwill	3,485	3,472
Other intangible assets, net	1,177	1,231
Deferred income taxes	481	722
Total assets	$   17,843	$    18,280
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$         505	$         572
Accrued liabilities	2,908	3,244
Deferred revenue	1,115	1,079
Income taxes	71	50
Current portion of long-term debt and secured A/R facility	2,253	2,275
Liabilities held for sale	276	262
Total current liabilities	7,128	7,482
Pension benefit liability	1,125	1,116
Long-term debt, less current portion	3,580	3,488
Minority interests and other long-term liabilities	398	480
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value; authorized 200,000,000 shares; none issued	-	-
Common stock, $.01 par value; authorized 2,000,000,000 shares; 495,604,217 shares issued at March 31, 2004 and December 31, 2003	5	5
Additional paid-in capital	838	917
Retained earnings	5,624	5,812
Accumulated other comprehensive loss	(152)	(131)
Treasury stock, at cost, 11,032,707 shares at March 31, 2004 and 14,999,431 shares at December 31, 2003	(703)	(889)
Total shareholders' equity	5,612	5,714
Total liabilities and shareholders' equity	$   17,843	$    18,280

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)
 

	Three Months Ended
	March 31,
	2004	2003
Cash Flows from Operating Activities
Net loss	$          (12)	$      (1,431)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization and deferred cost charges	532	472
Deferred compensation	12	27
Cumulative effect on prior years of changes in accounting principles	-	1,432
Intangible and fixed asset write-downs	35	-
Other	(42)	(18)
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable	138	210
Prepaids and other	(10)	(47)
Deferred contract costs	(26)	(125)
Accounts payable and accrued liabilities	(438)	(59)
Deferred revenue	48	(26)
Income taxes	(12)	(118)
Total adjustments	237	1,748
Net cash provided by operating activities	225	317
Cash Flows from Investing Activities
Proceeds from sales of marketable securities	12	13
Proceeds from investments and other assets	32	209
Proceeds from divested assets	85	-
Payments for purchases of property and equipment	(182)	(186)
Payments for investments and other assets	(99)	(164)
Payments related to acquisitions, net of cash acquired	(50)	(1)
Payments for purchases of software and other intangibles	(103)	(47)
Payments for purchases of marketable securities	(43)	(1)
Other	6	16
Net cash used in investing activities	(342)	(161)
Cash Flows from Financing Activities
Proceeds from long-term debt and secured A/R facility	6	23
Payments on long-term debt and secured A/R facility	(6)	(86)
Net decrease in borrowings with original maturities less than 90 days	-	(76)
Capital lease payments	(45)	(23)
Employee stock transactions	16	10
Dividends paid	(73)	(71)
Other	(7)	(8)
Net cash used in financing activities	(109)	(231)
Effect of exchange rate changes on cash and cash equivalents	(11)	(18)
Net decrease in cash and cash equivalents	(215)	(93)
Cash and cash equivalents at beginning of period	2,197	1,642
Cash and cash equivalents at end of period	$      1,982	$      1,549

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Electronic Data Systems Corporation ("EDS" or the "Company") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information. In the opinion of management, all material adjustments, which are of a normal recurring nature and necessary for a fair presentation, have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. The information contained herein should be read in conjunction with the Company's 2003 Annual Report on Form 10‑K.

 

The unaudited condensed consolidated financial statements include the accounts of EDS and its controlled subsidiaries. The Company defines control as a non-shared, non-temporary ability to make decisions that enable it to guide the ongoing activities of a subsidiary and the ability to use that power to increase the benefits or limit the losses from the activities of that subsidiary. Subsidiaries in which other shareholders effectively participate in significant operating decisions through voting or contractual rights are not considered controlled subsidiaries. The Company's investments in entities it does not control, but in which it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Under such method, the Company recognizes its share of the subsidiaries' income (loss) in other income (expense). If EDS is the primary beneficiary of variable interest entities, the unaudited condensed consolidated financial statements include the accounts of such entities. No variable interest entities were consolidated during the periods presented.

 

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are used include, but are not limited to, cost estimation for construction elements associated with client contracts, projected cash flows associated with recoverability of deferred contract costs, contract concessions and long-lived assets, liabilities associated with pensions and performance guarantees, loss accruals for litigation, and receivables collectibility.

 

Certain reclassifications have been made to the 2003 unaudited condensed consolidated financial statements to conform to the 2004 presentation.

 

NOTE 2:  ACCOUNTING CHANGES

 

During the third quarter of 2003, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, on a cumulative basis as of January 1, 2003. EITF 00-21 modified the application of existing contract accounting literature followed by the Company prior to January 1, 2003. EITF 00-21 governs how to identify whether goods or services, or both, that are to be delivered separately in a bundled sales arrangement should be accounted for separately. In most circumstances, EITF 00-21 also limits the recognition of revenue in excess of amounts billed (e.g., unbilled revenue) to the amount that would be received if the client contract was terminated for any reason. The adoption of EITF 00-21 resulted in a non-cash adjustment reported as a cumulative effect of a change in accounting principle of $1.42 billion ($2.24 billion before tax). The adjustment resulted primarily from the reversal of unbilled revenue associated with the Company's IT service contracts which had been accounted for as a single unit using the percentage-of-completion method of revenue recognition. Such reversal resulted from the fact that typical termination provisions of an IT service contract do not provide for the recovery of unbilled revenue in the event the contract is terminated for the Company's nonperformance. The adjustment also reflects the deferral and subsequent amortization of system construction costs. Such costs were previously expensed as incurred and included in the percentage-of-completion model for the respective contracts. The effect of the EITF 00‑21 accounting change in the three months ended March 31, 2003 was to increase income from continuing operations and net income by $110 million ($0.23 per share).

 

During the three months ended March 31, 2004 and 2003, the Company recognized revenues of approximately $100 million and $90 million, respectively, which had been recognized prior to January 1,