The Securities and Exchange Commission has launched a second investigation into business activities at EDS, the Texas-based IT-outsourcing provider. In a regulatory filing, EDS management said the SEC has requested information related to the company’s technology-outsourcing contract with the U.S. Navy, a deal worth a whopping $7 billion.
That contract has ended up costing EDS hundreds of millions of dollars. So far, the Navy deal has yet to produce revenue or profits, according to the Financial Times.
Last year the commission launched a probe of EDS’s hedging activities, which reportedly produced large losses and sent the company’s share price tumbling in September. This go-round, EDS management reportedly warned of sharply lower profits and revenue due, in part, to the problems with the Navy contract.
Since signing on with the Navy, EDS has lost big outsourcing deals to IBM, its largest competitor. The company has also reshuffled its senior management.
Despite these setbacks, EDS management claims the troubled Navy contract might start producing revenues by the end of this year—and will become profitable next year. Senior executives at the outsourcing specialist have reportedly vowed to improve the company’s business strategy, weaning it away from “megadeals” with thin profit margins.
Lucent in SPE Dispute
Telecom equipment maker Lucent Technologies may be forced to pay up to $140 million for principal, interest, and fees on loans it made to an off-balance-sheet trust. This according to a Reuters report.
In an SEC filing, Lucent noted that the trust was created in September 2000. The company’s management also indicated it had sold some of Lucent’s vendor-financing loans and receivables to the special-purpose entity as a way to raise cash.
In an April letter, an unidentified insurance company reportedly claimed that about $175 million in loans made to Lucent’s off-balance-sheet trust were not eligible for coverage due to the credit quality of the debt. The insurer has threatened to stop paying claims on the loans and is demanding a refund on $19 million in claims it has already paid, according to Lucent’s SEC filing.
Lucent management denies the insurer’s assertions and may seek binding arbitration to settle the dispute, according to Reuters.
A spokesman for Lucent told Reuters the company has no partnership with the trust and that company directors are not involved in its operation. Lenders simply took up the loans and then received the payments as they came due. For its part, Lucent hedged the loans by insuring them, the spokesman told Reuters.
In a filing, management at the Murray Hill, New Jersey—based Lucent said the company intends to consolidate the trust in the quarter ending in September. Consolidating the trust would put the off-balance-sheet entity back on the network-equipment maker’s balance sheet.
Reportedly J.P. Morgan analyst Ehud Gelblum said in a research note that Lucent’s reserve for the off-balance-sheet trust is $356 million. About $300 million of that is apparently insured by the carrier now disputing the trust. The rest of the reserve is covered by a Lucent-owned insurance company.
According to Gelblum, Lucent has sufficient reserves against the trust’s loans.
Actuaries: Discount Rate a Problem
At a briefing held on Friday, the American Academy of Actuaries, which focuses on pension funding issues, said lawmakers should make long-lasting changes to rules governing how U.S. companies finance employee retirement plans.
“Congress needs to fix the rule in a permanent way,” Ron Gebhardtsbauer, a senior pension fellow at the academy, told a reporter after the briefing.
One of the biggest challenges with pension funding these days is the steep fall in the 30-year Treasury bond interest rate (federal law requires plan sponsors to use the long bond to calculate pension liabilities). The drop in the so-called discount rate has forced companies to make higher contributions to fund defined benefit retirement plans for workers.
Last year lawmakers tried to mitigate the problem by allowing employers to use a higher discount rate through 2003. Next year, however, the pension rules go back to low discount rates.
“It is not a good time to be forcing corporations to pay more,” said Gebhardtsbauer.
Dividend Plan Squeaks By in Senate
President Bush’s proposal to eliminate double taxation on dividends just scraped through the Senate late Thursday night.
Votes were split 50-50 on the issue, with Vice President Dick Cheney casting the tie-breaking vote. Washington watchers have been saying all along that the dividend provision would be one of the most contentious parts of the President’s original $726 billion tax-cut package, which he unveiled in January.
Although the vote was seen as a victory for the Administration, the $350 billion overall reduction in taxes is less than half what President Bush had originally pushed for.
Lawmakers in the House of Representatives are also grappling with the dividend tax-cut issue. Last week the House passed a $550 billion tax-cut plan that would reduce the tax rates on dividends to 15 percent. Currently dividend taxes are based on a recipient’s tax-bracket rate, which can be as high as 38.6 percent.
Under the Senate plan, the tax on dividends would be cut by half this year and scrapped altogether in the three years after that. It would be imposed again in 2007, however. The Senate’s dividend plan, if signed into law, will cost the U.S. government up to $124 billion in lost revenues. Of course, under the White House’s original proposal, the Treasury Department would have lost out on nearly $400 billion in taxes.
* Former Tyco International CEO Dennis Kozlowski received court approval this week to catch up on $750,000 in late maintenance payments to his former wife. Angeles Kozlowski put up a $10 million surety bond for her former husband’s $100 million bail last year after his criminal indictment. According to papers filed in New York’s state supreme court, Kozlowski is required to pay his ex-wife $125,000 each month. Kozlowski argued he had fallen behind on as much as $750,000 in support payments because of a temporary restraining order that requires court approval before the ex—Tyco CEO can access his bank accounts.
* Brian Turner, the CFO at digital media software maker Real Networks, is resigning due to health concerns. Turner will remain with Real Networks until June. Michael Eggers, general manager of finance at the Seattle-based company, will assume CFO duties until a replacement is found. CEO Rob Glaser said the company is already looking for Turner’s replacement, and that he expects the search to take “single-digit months, not days.”
* Donald Fleming is the new finance chief at Staten Island Bancorp. Fleming, who joined the Staten Island, New York—based bank in 1997, replaces Edward Klingele. Klingele will stay on at the company, with responsibilities in budgeting, planning, and asset-management reporting. Fleming is a bank senior vice president and certified public accountant. Prior to joining Staten Island Bancorp, he worked for North Side Savings Bank, also in the New York City area.