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EDS Sinks Navy Estimates

IT services giant EDS wrote off $375 million of its ever-shrinking $7 billion contract with the U.S. Navy after reporting third-quarter 2004 results Tuesday.

The write-off contributed to a third-quarter, $153 million net loss for the Plano, Texas-based company; officials also indicated they would restate their quarterly statement from fiscal year 2003 to revise bonus expense allocations throughout the effected year.

Last year, EDS had to take a $334 million pre-tax loss on the Navy Marine Corps Intranet (NMCI) contract, as the company struggled to get past delays in performance service levels and contract modifications, a slow-down in customer satisfaction improvement rates and failures in getting military service members switched over to workstations on the new intranet.

Operating losses on the NMCI contract amounted to $106 million in the third quarter of 2004, a figure that's not part of the company's $375 million write off.

Until EDS meets service performance levels, it won't receive full value for its contract, either. Part of the contract stipulates the company can't charge more than 85 percent of the "per-seat" costs until certain service performance levels have been met. Officials say that as of Sept. 30, no seats have been billed at 100 percent, and only 217,000 seats have been transitioned over to the new intranet.

Still, officials are looking for something positive to come from the whole affair. Michael Jordan, EDS chairman of the board and CEO, told analysts at a conference Tuesday morning the company is looking at re-negotiating with the Navy to gain better terms on the $200 million yearly cost to maintain legacy system before they're switched to the NMCI.

"We're in the process of negotiating with the Navy, some modifications," he said. "These are to recover the cost of doing that or, where the Navy doesn't seem to think they want to pay for it, to stop doing it," he said.

Other bright spots in an otherwise gloomy fiscal quarter include a four percent increase, to $3.2 billion, in contracts. Also, the company realized after-tax gains of $18 million for the sale of its mobile telecom clearinghouse, Interoperator Services, in August. However, third-quarter revenues were down 1 percent to $4.95 billion.

The company, along with its financial difficulties, is also working to shift its strategy to compete globally. In January, the company announced it would eliminate jobs in the United States to make room for more IT centers in Europe and the Asia-Pacific region, as well as to compete with the IT services provide by low-cost outfits local to the regions.