It pays to get it right

CSC issues correction on $50 million contract win

"An announcement like that gets everyone excited. We don't want misinformation [released]." ? Mark Emery, acting deputy chief information officer at TSA

Henrik G. de Gyor

With companies throughout the nation under intense scrutiny for financial reporting, one federal contractor is finding that even a seemingly minor misstatement regarding subcontract work can touch off repercussions, whether with a partner, a customer or Wall Street analysts.

Computer Sciences Corp. in September issued a press release stating it had secured a subcontract valued at $50 million with Unisys Corp. to provide services under the Transportation Security Administration infrastructure project. It turned out, however, that CSC had only signed a teaming agreement with Unisys, with the scope of work and contract value to be negotiated.

And so, six weeks later, CSC retracted the announcement.

"The press release should have stated that CSC had entered into a teaming agreement with Unisys to provide support to TSA under the IT infrastructure contract," CSC of El Segundo, Calif., said in an Oct. 22 statement released to Washington Technology. "CSC estimates the value to CSC of the work expected to result from the agreement to remain at approximately $50 million. CSC regrets the error."

The company declined further comment on the matter.

Despite the controversy, Unisys officials said they still want CSC as a teammate and are negotiating the specific work to be performed on the TSA contract. At least two Wall Street analysts who follow CSC said they are satisfied the error was unintentional, and it has not changed their overall view of the firm.

But some experts also said the misstep shows that companies need to be careful about reporting contracts and expected revenue, and that CSC still needs to disseminate its retraction more widely.

The highly prized TSA contract, awarded to Unisys Aug. 13, is worth up to $1 billion over seven years. It calls for Unisys to help TSA build its information technology and telecommunications infrastructure, including hardware and software services, help desk, network and security operations and business processes.

Unisys of Blue Bell, Pa., has put together an all-star team for the contract, which includes major partners IBM Corp. of Armonk, N.Y., and DynCorp of Reston, Va., as well as about 35 other companies, including CSC. Thus far, TSA has awarded Unisys two task orders, which are worth $244 million through the end of fiscal 2003.

The original CSC press release announcing its subcontracting role was distributed Sept. 10 over PR Newswire, an electronic business information distribution service, and posted on CSC's Web site until the retraction was issued.

Both TSA and Unisys officials said they were surprised by the announcement, and that CSC was notified immediately that the information was incorrect.

Mark Emery, acting deputy chief information officer at TSA, said the agency contacted Unisys, as the prime contractor, to get the matter straightened out.

"An announcement like that gets everyone excited," he said. "We don't want misinformation [released]."

Unisys public relations officials reviewed a draft press release by CSC, but "the draft we saw didn't have a contract value," said a Unisys official who asked not to be named. Unisys reviewed the draft to make sure the TSA contract and Unisys were represented properly, "but nobody at any time approved that we awarded a $50 million contract," the official said.

The retraction was issued to Washington Technology and other media outlets that inquired about the matter, but as of press time it had not been sent over the news wire or put on the corporate Web site.

One issue raised by a misleading announcement made by a publicly traded company is the question of materiality. Information is considered material if it could influence a reasonable investor in determining the value of the company, according to James Jaconette. He is an attorney with Milberg Weiss Bershad Hynes & Lerach LLP, a San Diego law firm specializing in plaintiffs' securities lawsuits.

In a company of CSC's size -- $11.5 billion in revenue for fiscal 2002, with some 66,000 employees worldwide -- a $50 million subcontract spread out over several years might not be large enough to be considered material, said Jaconette and other securities lawyers and law professors.

But they also said that non-quantitative factors, such as the importance of the market segment or the company's position in that segment, also can determine whether information is material.

Manning Warren III, a law professor at the University of Louisville and former member of the Securities and Exchange Commission's federal advisory committee on market transactions, said the fact that CSC sent out a press release on the subcontract in a growing and high profile market area lends credence to the idea that the company considered it materially significant.

But two financial analysts who track CSC said they don't view the incident as an attempt to deceive, nor of major concern.

"CSC has a good reputation in the government market," said Bill Loomis, managing director of the Technology Research Group at Legg Mason Wood Walker Inc. in Baltimore. "In the case of CSC, $50 million over several years is not materially significant. This was highly unusual, but it seems to be a slip up, not a deliberate attempt to deceive."

Gregory Gieber, vice president with securities firm A.G. Edwards & Sons Inc., St. Louis, wrote extensively about this episode in a report for the First Call Research Network.

"Save calling it a 'subcontract,' there is absolutely nothing wrong with what CSC did in saying that it estimates a potential revenue flow of $50 million [OF] work related to TSA," Gieber wrote.

Like Loomis, Gieber said $50 million is a rather small sum within the scope of CSC's total revenue. "We are not trying to make a mountain out of a molehill regarding the firm's outlook," he wrote.

But Gieber also wrote that, when he talked to Unisys about CSC's announcement: "Unisys professed to have no knowledge of where the $50 million value estimate came from or how it was determined."

The lesson, Gieber said, is that revenue estimates by some companies can be relatively "soft," or less reliable as a guide for accurately predicting future revenue streams. "We prefer the style of Unisys to that of CSC," he wrote.

As for correcting misleading or incorrect information, experts agreed that companies must be as aggressive in notifying prospective and current investors of the correction as they were with the original information.

"In a case where you have a misleading statement, any curative disclosure must be transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by the misleading statement," Jaconette said. "That's federal law. The nature of the dissemination is a factor to consider whether a curative disclosure [has been made]."

Warren also questioned CSC's effort to correct the misleading press release.

"What they did was pretty abominable," he said. "It's not like an accounting [question]. They announced they had a contract in a rapidly expanding area. To dematerialize information, you have to give the retraction the same intense publicity."

Despite the imbroglio, Unisys and CSC are still negotiating to turn the teaming agreement into a subcontract.

"We asked CSC to be a teammate on the proposal because they have certain skills and resources we would like to be able to avail ourselves of for our government customer," said a Unisys official. "That is still the case." *

Staff Writer Patience Wait can be reached at pwait@postnewsweektech.com.

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