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Veritas to Restate Results After SEC Inquiry

Veritas Software Corp. will restate its financial results for 2000 and 2001, reflecting accounting changes for two transactions with AOL Time Warner . The two transactions are currently being reviewed by the Securities and Exchange Commission.

Veritas received subpoenas from the SEC last summer regarding to the AOL transactions, which involve a $50 million software purchase and a $20 million advertising services purchase from AOL. Veritas, in a statement, said the $20 million of license and support fees won't be recognized as revenue in the restatement, and $20 million in advertising services on AOL's network will not be recorded as an expense.

SEC investigators are looking at whether America Online was involved in a variety of concurrent deal with suppliers and partners, in an attempt to inflate its revenues. It is precisely barter deals like the AOL-Veritas transaction that are being more closely monitored by financial regulators.

Veritas is a leading supplier of data availability software, including storage management, data protection, clustering, replication and storage area networking applications. The company is expected to disclose more details about the AOL transactions in question, during a conference call on January 28th, when it releases its fourth quarter 2002 results.

Veritas originally posted $37 million of revenue in the fourth quarter of 2000, and the recognized the remaining $13 million in revenue over a three-year period. The restatement will increase Veritas' loss for 2000 to $627 million, from a previously reported level of $620 million, and will reduce revenue by $17 million. In 2001, Veritas will report a net loss of close to $643 million, down from its previously reported $651 million. For the first nine months of 2002, Veritas will reduce its reported net income by less than $1 million, and cut revenue by $1 million to about $1.1 billion.

While the reinstatement is embarrassing for Veritas, the software company clearly is cooperating with SEC investigators, which could potentially lead to a wider investigations of AOL's barter and swap deals.

AOL has been under scrutiny for a deal it did with Homestore.com in mid-2000, when the online service agreed to a five-year, $200 million ad deal that included only $20 million in cash upfront, with the balance of the deal paid in stock, loan guarantees and advertising. Also in 2000, AOL renegotiated an $89 million multi-year advertising contract with DrKoop.com, accepting stock instead of cash. The inquiry of AOL is also said to be looking at its deal with PurchasePro, which AOL is said to have take a stake in for selling advertising for the company, but has been said to have accounted sales in PurchasePro stock as advertising revenue. Equity sales are expected to be booked as one-time investment gains, not as revenue.

The Washington Post published a series of reports alleging AOL reported equity sales as ad revenue. The Post reports went on to say that AOL bartered ads for computer equipment, and shifted revenues for different divisions to boost ad revenues in its financial results.

While the Justice Department and the SEC's investigation of AOL has been going on for some time, no specific reprimands or sanctions against the online media giant have been levied. AOL Time Warner management said accounting firm Ernst & Young reviewed all of its deals and confirmed all of its transactions were in keeping with recognized accounting standards.