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EDS files to dismiss shareholder lawsuit

Lawyers representing Electronic Data Systems have filed a legal motion to dismiss a class-action lawsuit by shareholders who allege that the company committed securities fraud and improperly handled "problem contracts", including the $6.9bn Navy/Marine intranet (N/MCI) deal.

A court date to determine whether the case will go ahead has been tentatively set for 10 November.

However, Ron Zahn, a certified public accountant and fraud investigator who has been retained by the New York law firm representing the shareholders, said EDS's filings with the US Securities and Exchange Commission show that "they admit certain things" regarding the company's alleged mishandling of the N/MCI contract.

In a financial statement filed with the SEC in March, EDS acknowledged, among other things, that "material delays in the assumption of responsibility for or installation of additional seats under (the N/MCI) contract could negatively impact the financial performance of this contract and significantly reduce our earnings and operating cash flow during the quarter in which any such delays occur".

EDS also acknowledged that the N/MCI rollout schedule on which the company's pricing was based has been delayed significantly, and that it released the Navy from any liability under the contract for certain potential claims.

According to the company's most quarterly earnings report, EDS intends to defend itself against the shareholder lawsuit "vigorously". That statement also noted that the SEC has requested documents related to the N/MCI contract.

Kevin Lightfoot, a spokesman for EDS, said "nothing has changed since last quarter" regarding the lawsuit and the company's estimates of what effect, if any, it might have on the future of the N/MCI contract.

Meanwhile, EDS has extended and expanded the finance vehicle associated with the N/MCI contract.

Under the terms of the new agreement, EDS's line of credit to cover investments in the contract has increased from $600m to $900m and has been extended from 2005 to 2007. According to Lightfoot, the $300m increase matches the existing N/MCI equipment deployment forecast.

"This line of credit allows us to accelerate our receipt of cash by selling future receivables to financial institutions to match our cash flow," said Lightfoot.

This enables EDS to be paid immediately for hardware deployments, even though the Navy is not contractually required to pay for the equipment for 60 to 90 days after deployment.

EDS will release its third-quarter earnings report on Wednesday.

Dan Verton writes for Computerworld


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