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SEC Expands EDS Probe

Computer services giant EDS , struggling to regain its footing amid a sharp drop in IT services contracts, said that an informal inquiry by the Securities and Exchange Commission regarding its stock sales and recent earnings guidance has moved to a formal investigation.

In a brief statement late Friday, the Plano, Texas IT company said it would continue to cooperate fully with the SEC in the matter.

In October, EDS said it received a request from the SEC for information regarding an informal inquiry. The probe was related to a stock-hedging maneuver that cost EDS $225 million, and events surrounding a drastic cut in its earnings guidance that it announced in September.

The company's stock is down by close to 50 percent since September 18th when it announced it would lower previous third quarter guidance from 74 cents per share to between 12 percent and 15 cents, a drop of about 80 percent.

For the third quarter of 2002, EDS declared a profit of $86 million (18 cents per share) for the third quarter, down by 59.4 percent compared to the same time last year when its net income came in at $212 million. It also announced at the time it would trim its workforce by up to 5,600 jobs and sell off over $500 million worth of "non-strategic" assets.

Third quarter revenue was off by 3 percent to $5.41 billion for the quarter, compared to $5.56 billion during the same time last year. But even more troubling for analysts was news that EDS had only signed about $3 billion worth of contracts during the quarter, roughly half as much than the same quarter in 2001.

The question over its move to spend $225 million on a stock hedging transaction raised questions about its liquidity at a time when its landmark, $6.9 billion outsourcing contract with the U.S. Navy was being held up for routine government reviews of major contracts.

Although the company has been able to renegotiate the agreement and expects the contract to start generating cash in the first half of 2003, analysts have noted that the megadeal with the government and its provisions for up-front work have been a strain on the company's cash flow when IT spending has fallen overall.

In addition, EDS's outsourcing revenue has been hit by bankruptcies of major clients such as US Airways and WorldCom.

Earlier this month, the turmoil apparently reached upper management when EDS announced a replacement for its Chief Financial Officer Jim Daley, who said he would step down from the post.

The company named Robert Swan, a former GE and TRW executive, as the replacement for Daley, who is moving to oversee EDS's client care organizations. Swan's appointment to CFO is effective February 10th, the company said. His title will also be executive vice president and he will report directly Chairman and CEO Dick Brown.

At the time, company officials said the CFO replacement was nothing more than good timing, as Swan became available for the position as EDS was mulling succession candidates for Daley, who is soon to turn 62 and nearing retirement age. The statement, however, was in response to questions from analysts over whether Daley's role in the major earnings revision in September, and the company's subsequent slide in its stock price, were related to his decision to step aside.

After a difficult third quarter, EDS managed to snag its share of big outsourcing contracts during the fourth quarter, despite losing out to IBM recently in a major $5 billion outsourcing contract with JP Morgan Chase.

The signings include a $4.5 billion deal to outsource major operations for Bank of America and a $1.3 billion outsourcing contract with Dutch bank ABN Amro.