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Justice Department Probes Network Associates, Which Will Restate Revenue

Mar 25, 2003 (07:03 PM EST)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=8700077


Network Associates Inc. said Wednesday that the Department of Justice has launched an investigation against the information-security software maker. The government scrutiny follows an ongoing Securities and Exchange Commission investigation involving how the company reported sales revenue for the years 1998 through 2000.

George Samenuk, the company's CEO, said in a conference call that Network Associates learned of the investigation some time this quarter. Samenuk didn't provide many details or comment on the scope of the investigation.

As a result of the investigation, Network Associates will postpone the filing of its 2002 annual financial statement and restate financial results for 1998, 1999, and 2000. Company officials seem confident the years 2001 and beyond won't be affected.

This isn't the first time Network Associates has had to restate its earnings for those three years. In June 2002, the company reduced revenue for 1998 by $4 million; stated that net revenue for 1999 was overstated by $28.2 million and operating costs and expenses were understated by $1.5 million; and that the company's net loss for 2000 was increased by $21.2 million.

Those prior revisions came after the company said in May 2002 that it discovered irregularities during an internal tax audit in April. At that time, Samenuk said the accounting abnormalities were allegedly created by an "unnamed individual." Samenuk became CEO in January 2001.

About a month before Samenuk took the helm, Network Associates said it would miss sales projections for the year by $120 million, and lost its CEO, its president, and its CFO. The company said then that it would alter the way it recognized revenue. The news caught the attention of the SEC.

Prior to 2001, there had been allegations in the industry that Network Associates claimed revenue for products sold to the channel or its distributors, but that had yet to be purchased by customers. Such "sales" could disappear if channel partners returned software that hadn't been sold.

The company said Wednesday that its earnings restatement will reflect sales to distributors on a sell-through basis, which is how the company says it has reported such sales since Samenuk joined the company.

In a statement, the company said it will endeavor to complete the restatements for those fiscal years in its 2002 Form 10K "as promptly as reasonably possible."