Network Associates Hit By SEC Accounting Probe

Network Associates Inc. McAfee.com Corp.

The U.S. Securities and Exchange Commission has launched a formal inquiry into Network Associates' fiscal 2000 accounting practices, the Santa Clara, Calif. company said.

Network Associates stock was off about 13 percent at $21.70 in early trading on the New York Stock Exchange. Shares of McAfee, an anti-virus software maker that is 75 percent owned by Network Associates, also fell sharply, dropping $3.40, or about 18 percent, to $15.11 on Nasdaq.

In consolidated trading, Network Associates traded as low as $21.20, its lowest level since Nov. 1, when it changed hands at $19.64. It competes against companies like Symantec which at $39.88, is up 38 percent since Nov. 1.

The inquiry comes at a time when the SEC and investors are scrutinizing corporate accounting due partly to the collapse of energy trading company Enron Corp., which began with accounting irregularities.

During a conference call, Network Associates Chief Executive Officer George Samenuk said that the SEC contacted the company informally after it announced on Dec. 26, 2000 a $120 million revenue shortfall and said it would change the way it booked revenue from its distributors.

"We believe they're looking at Dec. 26 and then all of 2000, to look at if everything was properly accounted for," Samenuk said.

He said that the SEC contacted it about its formal investigation on Friday after the market closed but that the company waited for more information that it received on Monday to disclose the news.

Samenuk said its outside auditors, PricewaterhouseCoopers, reviewed its accounting for fiscal 2000 and believes the accounting was proper.

Some Wall Street analysts believe the investigation is about practices of a previous management.

"Frankly I think management was clear in stating that they've gone back through the financials. The existing management team and PWC see nothing wrong with the accounting," said Rob Owens, an analyst at Pacific Crest.

"It was merely a shortfall in the business and they changed some of their business practices to help mitigate the risk of that happening again," Owens said.

Nonetheless, the outlook for the stock is hazy, said J.P. Morgan analyst Sterling Auty, after cutting the company's rating to "market performer" from "buy."

"While the investigation will not impact operations in our opinion, and is looking at old issues, it will be a cloud over the stock until resolved," he said in a note.

Network Associates General Counsel Ken Roberts said the company was unaware what specifically triggered the formal investigation.

The SEC's move comes on the heels of McAfee's rejection of Network Associates $211 million buyout offer. Network Associates already owns about 75 percent of McAfee after having spun off the company in 1999.

McAfee on Sunday said its board had rejected Network Associates' March 16 bid, calling it "financially inadequate." On Monday, Network Associates stood by its offer, saying it was confident the offer would be well received by shareholders.

Network Associates has been reorganizing its operations since Chief Financial Officer Steve Richards and Samenuk, chairman and chief executive, came on board in early 2001.

The company has closed its MyCIO.com unit, stopped selling its PGP encryption product, bought back its Japanese distributorship and is in the process of selling its Gauntlet firewall business.

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