One day after McAfee.com Corp. rejected its exchange offer, security vendor Network Associates Inc. on Tuesday revealed that it is the subject of a formal investigation by the Securities and Exchange Commission.
The SEC on Friday informed the company that it has begun an inquiry into NAIs accounting practices during the 2000 fiscal year. As is typical of such actions, the commission gave little detail about its investigation, but NAI executives say they believe the probe will have no effect on the companys operations or long-term prospects.
"Let me be clear: We do not expect this to have any effect on our day-to-day operations," said George Samenuk, CEO of NAI, based in Santa Clara, Calif.
In the short term, however, the investigation has already caused NAI to postpone its proposed exchange offer with McAfee.com indefinitely.
The investigation stems from a series of events that occurred in December 2000, including a change in the companys accounting policy, the resignation of its CEO and two other senior officers, and the announcement of a large net loss for the fourth quarter of 2000. NAI at that time changed its revenue-recognition model to book revenue only after its resellers had actually sold the product to customers.
Previously, the company recognized revenue as soon as it shipped its products to resellers, a practice that angered many of its distributors and triggered a lawsuit that accused NAI of channel-stuffing.
In a conference call Tuesday explaining the SEC action, NAI executives said they had no idea why the commission had chosen to initiate a formal investigation at this particular time, but emphasized that they believe the companys accounting policies were and are sound.
NAIs outside auditor, PricewaterhouseCoopers plc., conducted a review of the companys books from the time frame in question, and "we continue to believe that the accounting was proper," said Samenuk. He also pointed out that the events that the SEC is investigating all predate the arrival of the current management team, which began with Samenuks hiring in January 2001.
Samenuk added that he expects to revisit the McAfee.com exchange offer once the SEC investigation is closed. The company, which was formerly a wholly owned division of Network Associates, said that its former parent companys proposal undervalues McAfee.coms long-term potential. In rejecting the offer on Monday, McAfee.com directors said that the suggested 0.675 share-exchange ratio represents a severe discount of the companys recent closing prices.