That’s No Virus, That’s Our Restatement

Maker of McAfee software debugs its revenue recognition. Also: Footstar treads carefully toward its restatement; ''off-balance'' clarifications from FASB; the SEC subpoenas seven specialists; mutual fund management shake-up.

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Network Associates, one of the high-fliers of the late 1990s and still well-known for its McAfee anti-virus and computer security products, announced that it will restate its revenues and earnings going all the way back to 1998.

The revisions had been anticipated since March, when the company announced that it would restate “as a result of information obtained in connection with investigations currently being conducted by the SEC and the Department of Justice.”

The restatement stems from how the company recognized revenue on sales to distributors and resellers. The company acknowledged that its revenue recognition from 1998 to 2000 was not appropriate in light of apparent concessions provided by the company during that period, including noncontractual return rights.

In the course of preparing these corrected financial statements, added the company, it identified other items and errors for which accounting adjustments were necessary.

The adjustments primarily resulted in revenue originally recognized during the years 1998 through 2000 being deferred into later years, and earnings being adjusted in each of the years from 1998 through 2003, stated the company. It added, however, that certain adjustments resulted in permanent reductions to both revenues and earnings.

Revenues from 1998 through 2002 were permanently reduced by $112.6 million. In addition, the company changed a previously announced first-quarter 2003 net loss of $3.7 million to a net profit of $10.5 million, and it increased a previously announced second-quarter 2003 net profit of $1.1 million to a net profit of $3.6 million.

Network Associates added that the full effect of the restatement was already reflected in the third-quarter 2003 results, which were announced on October 23, 2003.

In late December 2000, Network Associates warned of a fourth-quarter loss and a significant change of accounting methods. In addition, CFO Prabhat Goyal, CEO William Larson, and president Peter Watkins resigned. In September of this year, the company agreed to pay shareholders $70 million to settle a class-action lawsuit over improperly booking revenue to inflate its share price, according to Reuters.

“To have this out and over with is a positive thing,” Richard Williams, an analyst at Summit Analytic Partners, told Reuters. “The biggest threat was of a surprise in the numbers, but this doesn’t materially change anything.” George Samenuk, the company’s chairman and chief executive officer, said in a statement that “We are glad to put this restatement behind us.”

On Monday, Network Associates’ share price rose by more than 4 percent.

Footstar Treads Carefully Toward Its Restatement

Shoe retailer Footstar Inc. announced on Friday that it would not meet its previously announced October 31 deadline to release the restatement of its financials for fiscal year 1997 through June 2002.

The company now expects the restatement will reduce earnings by between $51 million and $55 million before minority interest and taxes (or $31 million to $38 million after) for the five-and-a-half year period. The previously announced ranges were $48 million to $53 million before minority interest and taxes, ($29 million to $32 million after).

Footstar, which has a $345 million senior secured credit facility, stated that it has received a waiver and extension from a syndicate of banks led by Fleet National. The company now has until January 30, 2004, to provide audited financial statements.

The company maintained that it still expects the restatement will not affect the more than $10 billion in revenues, or net cash flows, during the period in question.

”Off-Balance” Clarifications from FASB

The Financial Accounting Standards Board has published an exposure draft to clarify some of the provisions of Interpretation No. 46, “Consolidation of Variable Interest Entities.”

Several weeks ago the standards board postponed the implementation of FIN 46, which had been scheduled for the September quarter; it will now apply to companies’ first financial statement after December 15.

FASB issued FIN 46 in January to prevent companies from using off-balance-sheet partnerships and other special-purpose entities, or SPEs (which the board now calls variable interest entities, or VIEs) to hide debt and inflate profits, as Enron is alleged to have done in particularly aggressive fashion.

These latest modifications are intended to clarify and identify exceptions to the application of the rule, FASB stated, “in accordance with the objective of requiring an enterprise to consolidate entities in which it has a controlling financial interest.”

Among FASB’s latest modifications: Mutual fund sponsors won’t be required to consolidate mutual funds, and banks won’t be required to consolidate assets held in client trusts, since the fund sponsor and the bank are not the main beneficiaries of those entities. (For a more, see our January special report on off-balance-sheet financing.)

SEC Subpoenas Seven Specialists

The Securities and Exchange Commission has subpoenaed seven New York Stock Exchange specialist firms as it widens its investigation into suspected trading violations, The Washington Post reported Sunday.

The paper said the SEC is seeking trading records, organizational charts, and E-mails dating back to the beginning of 2000. Much of the data being sought has already been provided to the NYSE, which has conducted an investigation of its own, the paper added.

The seven firms are LaBranche & Co., FleetBoston Financial Corp.’s Fleet Specialists, Spear, Leeds & Kellogg LP, Van Der Moolen Specialists USA, Bear Wagner Specialists LLC, Performance Specialist Group LLC, and Susquehanna Specialists Inc.

Meanwhile, Monday’s Wall Street Journal reported that in a confidential October 10 report, the SEC “blasted the NYSE for failing to police its floor-trading firms” and for ignoring blatant violations that cost investors $155 million in trades involving more than 2.2 billion shares over the past three years.

The report alleges that the floor-trading system is riddled with abuses, that specialists routinely trade ahead of their customers, and that the in-house regulator was either ill-equipped or uninterested in increasing its workload.

In a separate story, the Journal reported that the SEC is investigating whether Richard Grasso influenced trading activity while he was head of the New York Stock Exchange.

Last month, the paper reported that Grasso may have influenced trading in American International Group Inc.

Mutual Fund Management Shake-Up

Two very successful high-profile CEOs of major mutual fund companies lost their jobs over the weekend as a direct result of the probe into trading abuses.

Lawrence Lasser, who has headed Putnam Investments for 18 years, resigned in the wake of civil securities fraud charges filed last week by the state of Massachusetts and by the Securities and Exchange Commission against Putnam and two of its managers.

“We are taking measures to see that this does not happen again. The kind of conduct that has occurred has no place at Putnam,” said Jeffrey Greenberg, the chief executive of Putnam’s parent, Marsh & McLennan Cos., in a statement.

Lasser, one of the most highly compensated fund executives, will be replaced at the fifth-largest mutual fund company by Charles Haldeman as chief executive and president, and by A.J.C. Smith as chairman.

Meanwhile, Richard Strong resigned as chairman of Strong Mutual Funds on Sunday, just a few days after New York Attorney General Eliot Spitzer said he would bring charges for improper trading. Spitzer’s office alleges that Strong and others close to him made as much as $600,000 over five years by making rapid trades in his company’s funds.

On Monday, the SEC — which is also looking into Strong’s trading activities — said that more than one-fourth of top U.S. brokerage firms have allowed customers to illegally trade mutual fund shares after hours at prices set at the close of trading, according to Reuters.

Stephen Cutler, Director of the SEC’s Enforcement Division, testified on the alleged trading abuses before the Senate Subcommittee on Financial Management. Cutler stated that the SEC found E-mails showing that about 10 percent of fund groups may have been involved in late trading, the wire service reported.

Almost 30 percent of broker-dealers, he added, “indicate that they assisted market timers in some way.” Cutler also reportedly testified that the SEC found more than 80 percent of fund groups allowed intermediaries to send in orders after closing time. Securities lawyers have claimed that intermediaries who process trades in mutual-fund shares may be hiding late trading in the batch orders they send to funds, the wire service noted.

In another blockbuster statement, Cutler announced that the SEC issued a Wells notice — usually an indication of imminent legal action — against “a major financial institution,” involving revenue sharing between funds and brokerages.

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