U.S. Inquiry into Network Associates' Accounting

[R. A. Hettinga]

http://www.nytimes.com/2002/03/27/business/27PLAC.html?dlbk=&pagewanted=print



March 27, 2002

MARKET PLACE


U.S. Inquiry into Network Associates' Accounting


By CHRIS GAITHER



ARES in Network Associates (news/quote), the computer security company,
tumbled 11 percent yesterday after it disclosed that federal regulators had
begun a formal investigation into its accounting practices during 2000.

The inquiry and falling stock price caused Network Associates to delay its
$248 million offer to buy out its former spinoff, McAfee.com. That news
sent shares of McAfee.com (news/quote) down 16 percent.

Under George Samenuk as chief executive, Network Associates' top managers
had made strides in distancing themselves from the missteps of their
predecessors, who resigned in December 2000 amid revelations of a steep
profit shortfall and concerns about the methods used to book sales. After
Mr. Samenuk took the helm on Jan. 3, 2001, the company's stock rose more
than 500 percent that year, from $4.19 to $25.85.

But the questions about the old accounting methods returned in force
yesterday with the disclosure of the investigation by the Securities and
Exchange Commission.

Several Wall Street analysts downgraded their ratings on the company's
stock. Heightened fear of accounting irregularities in the wake of the
Enron (news/quote) scandal would cause some investors to stay clear of
Network Associates stock, they said.

Shares of Network Associates fell $2.77, to $22.23. Shares of McAfee.com
shed $2.96, closing at $15.55. The inquiry was disclosed before the markets
opened.

Network Associates, based in Santa Clara, Calif., said it had received a
formal notice of investigation, which grants the commission broader powers
to subpoena information from the company and its distributors. While the
commission would neither confirm nor deny that it had begun an
investigation, Mr. Samenuk said the inquiry "centers on" the company's 2000
financial results and actions announced on Dec. 26, 2000.

On that day, the company announced three resignations of top executives and
said it would probably report fourth-quarter sales of $65 million and a
$140 million loss, instead of the $250 million in sales and the profit it
had predicted two months earlier. Network Associates also said it would
begin booking revenue when products were sold to the customer, instead of
when products were shipped to the retailer.

Shareholder lawsuits followed, accusing the company of stuffing the retail
channel with products to inflate sales. A class-action suit is still
pending, the company said yesterday.

The Securities and Exchange Commission began asking questions about the
company's accounting practices last year but only issued a formal notice of
investigation on Friday, Mr. Samenuk said. He said Network Associates'
accountants and its independent auditor, PricewaterhouseCoopers, have
scrutinized the company's financial results from 2000 and found no
improprieties.

"We do not expect this to have any effect on our day-to-day operations, our
current business or future growth opportunities," he said.

The notification came less a week after Network Associates offered to buy
the 25 percent of McAfee.com that it did not already own. McAfee.com, the
online seller of antivirus software, was spun off in 1999.

On Sunday, McAfee.com's board rejected the buyout offer as inadequate, but
Network Associates said Monday that it would take the proposal to
McAfee.com shareholders. Yesterday, however, Network Associates postponed
the offer.

Several analysts and fund managers praised the company's turnaround in the
last year and said they expected the inquiry to have little impact on its
sales or profits this year. But they warned that the stock price would
probably continue to suffer. Until the inquiry is resolved, they said,
investors will fear the worst.

"It could be a whole slew of things," Allan House, an analyst with
Federated Investors, which owned 521,000 shares of Network Associates on
Dec. 31, said of the reason behind the inquiry. "Until we find out, it adds
risk to the name."

-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA

The IBUC Symposium on Geodesic Capital
April 3-4, 2002, The Downtown Harvard Club, Boston
<mailto: rah at ibuc.com> for details...

"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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