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6/18/2003
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Network Associates Postpones Earnings Restatements

Security software vendor expects to file revised financial statements by Sept. 30.

Security software maker Network Associates Inc. said late Tuesday that it will delay filing its anticipated restated financial results with regulators. The company said it's encountered a greater amount of work than it originally anticipated while going through its books.

The company now says it expects to file its 2002 annual report, as well as results for the first two quarters of 2003, to the Securities and Exchange Commission by Sept 30. The company's anticipated restatements for fiscal 1998 through 2000 also will be delayed.

Last week, former Network Associates executive Terry Davis pleaded guilty to his part in a scheme to inflate Network Associates' revenue from 1998 through 2000. The charges against Davis arose from a federal investigation of the company after it restated earnings last year for fiscal years 1998, 1999, and 2000. Davis admitted to giving false financial statements to auditor PricewaterhouseCoopers.

The company said in March that the Department of Justice has launched an investigation into the firm's books for previous years. The government scrutiny follows an ongoing SEC 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 in March that Network Associates had learned of the investigation in the first quarter 2003. Samenuk didn't provide many details or comment on the scope of the investigation. As a result of the investigation, Network Associates said it would postpone the filing of its 2002 annual financial statement and restate financial results for 1998, 1999, and 2000. Company officials seemed 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 that 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 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 were allegations 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 published earlier this year, the company said it would endeavor to complete the restatements for those fiscal years in its 2002 Form 10K "as promptly as reasonably possible."

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