Network Associates restates three years of financials

Network Associates announced Friday that as a result of an internal review of its bookkeeping practices, it would restate its financial reports for 1998, 1999 and 2000. The company also said it would amend its balance sheets for the fiscal 2001 and the first quarter of 2002, though the operating results from those periods will not be affected.

The investigation came after Network Associates (NAI) discovered accounting irregularities for 1998, 1999 and 2000 during the course of an internal tax audit announced in late April. As a result of that discovery, the company dropped its bid to buy out its subsidiary company McAfee.com Corp.

NAI is also under investigation by the U.S. Securities and Exchange Committee (SEC) for its accounting practices related to fiscal year 2000, though that inquiry is "unrelated" to Friday's announcement, according to NAI Chief Executive Officer George Samenuk.

The problems with the company's books that were announced Friday "appear to be linked to one individual," said Samenuk, speaking on a conference call. NAI reviewed all transactions related to that individual, conducted extensive interviews with all employees closely associated with the individual and reviewed all bookkeeping entries over $1 million, he said.

The individual in question left NAI before the accounting problems were discovered, said Kent Roberts, NAI executive vice president and chief counsel, in a separate interview. Roberts declined to name the individual or comment on whether he was fired or left NAI on his own.

Likewise, Roberts declined to comment on whether the individual's actions were illegal, saying that the company would inform the SEC of the matter and allow the SEC to proceed as it sees fit. If the SEC does pursue action against the individual, however, NAI will not help in his defense, Roberts said.

The problems with the three years of figures don't appear to fall at the feet of current management, however, as nearly all of NAI's management has been replaced since Samenuk took over in early 2001 after the previous management team resigned en masse at the end of 2000. Since Samenuk took over, he has replaced all of the top financial executives in the company worldwide, he said.

NAI expects that the SEC will continue its investigation into the company's fiscal year 2000 accounting practices, Roberts said on the conference call.

The company has "a clear and complete understanding of the problems," said Samenuk.

"We certainly want to get all of these past problems behind us and move forward," he said.

The company's investigation into fiscal 1998 found that tax liabilities were inaccurately classified as general and administrative liabilities, causing operating costs and expenses for the year to be understated by US$6.2 million, the company said in a statement. As a result, income from operations and income before income taxes were overstated by $6.2 million for that year and the provision for income taxes was overstated by $2.2 million, NAI said. The new figures serve to reduce NAI's net income for 1998 by $4.0 million, from $36.4 million to $32.4 million. The new figures also cause a reduction in the company's per share income of $0.03 per share, from $0.26 per share to $0.23 per share, for that year.

Net revenue results for 1999 were overstated by $28.2 million, with operating costs and expenses being understated by $1.5 million, due to three reclassifications of money: From tax liability to general and administrative liability, from tax liability to the sales return reserve account and from general and administrative liability to marketing liability, NAI said. The company's loss from operations and loss before income taxes were understated by $29.7 million and the provision for income taxes was overstated by $32.7 million, the company said. The corrected 1999 figures decrease the company's net loss for the year by $3.0 million to $156.9 million and decrease the per share loss by $0.02 per share from $1.15 per share to $1.13 per share, NAI said.

The results for 2000 were riddled with inaccuracy, with at least six inaccurate accounting entries, according to NAI's statement. For that year, the company's balance sheet recorded payment to a distributor in a tax liability account instead of as a reduction to net revenue, reclassified some tax liability to the general and administrative and marketing liability accounts, reclassified sales return reserves as tax liability rather than a reduction in net revenue, increased tax liability by reducing net revenue, and overstated net revenue and understated interest and other income by affecting foreign currency accounts, NAI said.

As a result, the company overstated net revenue for the year by $15.3 million, overstated the cost of net revenue by $1 million, and understated operating costs and expenses by $2.9 million, the company said. Also understated was the loss from operations by $17.2 million, interest and other income by $2.6 million, the loss before the provision for income taxes and minority interest by $14.6 million and the provision for income taxes by $6.6 million.

The new results for 2000, increase the company's net loss for the year by $21.2 million to $123.9 million, NAI said. NAI's loss per share for the year was $0.16 higher than previously reported, rising from $0.74 per share to $0.90 per share, the company said.

The figures announced by the company Friday were arrived at with the help of forensic auditors from PricewaterhouseCoopers LLP and the firm signed off on NAI's final results, Samenuk said.

Despite amending the 2001 and 2002 figures, the company "found no evidence of incorrect entries" for those years, he said. The amendment was made, he said, to give effect to the other restatements for those years.

Markets reacted favorably to the news Friday, sending NAI's stock (NYSE: NET) up $1.91, or 9.41 percent, to $22.20.

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