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SEC Checking EDS Navy Contract

Electronic Data Systems , already facing a Securities and Exchange Commission probe over its stock-selling strategies, has been asked by the SEC to produce documents regarding its troubled intranet outsourcing contract with the U.S. Navy.

In its latest quarterly filing with the SEC, the computer services company said the SEC staff has requested certain documents related to the company's $334 million loss on its contract with the U.S. Navy Marine Corps Intranet (NMCI) project.

The multi-year contract to build an intranet for the Navy's Marine Corps is valued at around $6.9 billion. EDS said the contract, which has been beset by delays, led to a first quarter net loss of $126 million for EDS, largely due to a write-off of $334 million from the Navy deal. During the same quarter last year, EDS declared a profit of $354 million, or 72 cents per share.

Under the contract, EDS provides "end-to-end IT infrastructure" on a "seat management basis" to the Department of the Navy, which includes the U.S. Navy and Marine Corps. The first quarter loss, or write off of $334 million on the NMCI contract, was the result of a "decline in the average seat price based on the types of seats ordered and expected to be ordered" by the Department of the Navy, EDS said in its quarterly filing with the SEC.

Last week, during a conference call to discuss the company's earnings, Bob Swan, EDS's chief financial officer, said he didn't expect the U.S. Navy contract to become cash-flow positive until mid-2004.

Delays in "cutting over" seats, or bringing workstations live in the Navy unit's intranet, as well as the lower cost to purchase workstations, cut into EDS's expected profit on the contract, officials said. EDS officials describe "cutover" as a point at which Navy's Marines network users actually receive new desktop computers, operating systems and software and are fully connected to the network services of the new intranet.

EDS is currently transferring, or "cutting over" to the Navy's network 160,000 computer terminals that had been upgraded but held up for testing.

Although Swan said the Navy contract is expected to become cash flow positive during second half of 2004, for now, as part of a strategic review of its contracts and balance sheet, the company is assuming that the contract may never be profitable for EDS.

Because of its ongoing strategic review, expected to be complete in six months, EDS declined to give guidance on its outlook for the second quarter, only to say it expects results to come in below expectations.

EDS has been weathering a tumultuous six months, which have included the ouster in March of former CEO Dick Brown. He was replaced by former CBS chief executive Michael Jordan.

EDS said it is responding to the SEC subpoena regarding the Navy contract and is cooperating with the investigation.