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Table of Contents
Prior Restatement of Previously Reported Selected Financial Data
Following the completion of the investigation by the Audit Committee of our Board of Directors on April 26, 2004, we filed a Current
Report on Form 8-K to restate certain financial data for the fiscal years ended March 31, 2001 and 2000 (we refer to this restatement as
the prior restatement as distinct from the later restatements described below). On September 22, 2004, we filed an amended Current
Report on Form 8-K/A that included, among other things, a provision to provide audited restated financial statements for the fiscal years
ended March 31, 2001 and 2000. We filed an amended Current Report on Form 8-K/A dated October 18, 2005 that included the audited
restated financial statements for the fiscal years ended March 31, 2001 and 2000 (these three Current Reports, together, the Prior
Restatement 8-Ks). None of the adjustments set forth for this prior restatement affected the amounts shown in our Consolidated Balance
Sheets as of March 31, 2005, 2004, 2003, or 2002, and the related Consolidated Statements of Operations, Stockholders’ Equity, and
Cash Flows for each of the fiscal years ended March 31, 2005, 2004, 2003, or 2002. As a result of the conduct leading to the prior
restatement, the United States Attorney’ s Office for the Eastern District of New York (USAO) and the SEC had previously launched
investigations of the Company’ s accounting practices and related obstruction of their investigations. On September 22, 2004, we
reached agreements with the USAO and SEC by entering into the Deferred Prosecution Agreement (DPA) with the USAO and by
consenting to the SEC’ s filing of a Final Consent Judgment in the United States District Court for the Eastern District of New York.
Refer to Note 7, “Commitments and Contingencies” of the Consolidated Financial Statements as well as the Current Report on Form
8-K/A dated October 18, 2005 for more information concerning the Audit Committee’ s investigation and the agreements with the
USAO and SEC.
The Audit Committee’ s investigation included a detailed review of our compliance with American Institute of Certified Public
Accountants’ Statement of Position (SOP) 97-2, “Software Revenue Recognition.” Under SOP 97-2, a requirement for revenue
recognition is “persuasive evidence of an arrangement.” Pursuant to paragraph 16 of SOP 97-2, if a vendor has a customary business
practice of utilizing written contracts, which has been our general business practice, then to satisfy the evidence of an arrangement
requirement, a contract must be signed by both parties. The internal investigation revealed that this requirement was not met in a number
of cases during the prior business model period and an analysis of the extent and quantification of the prematurely recognized revenue
was performed, which forms the basis of the prior restatement. The analysis included a review of arrangements where customer
signatures were obtained late as well as where the customer signature was timely but our countersignature was obtained late. The
analysis also included a review of other revenue recognition requirements so as to ensure the accuracy and completeness of the
restatement.
The Audit Committee’ s investigation found accounting irregularities that led to material misstatements of our financial reports for fiscal
years 2001 and 2000, and prior periods. The effect of such prior period errors which have an impact on fiscal year 2000 have been
considered as part of our prior restatement in the Prior Restatement 8-Ks. The Audit Committee believes that several factors contributed
to the improper recognition of revenue in these periods, including a practice of holding the financial period open after the end of the
fiscal quarters, providing customers with contracts with preprinted signature dates, late countersignatures by Company personnel,
backdating of contracts, and not having sufficient controls to ensure the proper accounting under SOP 97-2. In addition, the Audit
Committee found that certain former executives and other personnel were engaged in the practice of “cleaning up” contracts by, among
other things, removing fax time stamps before providing agreements to the outside auditors. Certain of these executives and personnel
have admitted to misleading our outside counsel, the Audit Committee and its counsel, and accounting advisers regarding these
accounting practices. The exact findings of fact with respect to the Company’ s actions can be found in the DPA, Final Consent Judgment,
and related documents filed, including in the Current Report on Form 8-K/A filed September 22, 2004. We believe that we now have
adequate systems and controls in place to assure proper treatment of revenue recognition for contracts executed under our current
Business Model but will also consider additional improvements.
As noted in the restated financial data tables that were filed as part of the Prior Restatement 8-Ks, the net effect on revenue related to the
restatement was an increase of $558 million and a decrease of $2 million in the fiscal years ended March 31, 2001 and 2000, respectively.
The net effect on net loss for fiscal 2001 was a decrease of $333 million and the net effect on net income for fiscal 2000 was immaterial.
Although not presented separately in the restated financial data tables, the Company estimates that the net effect on revenue in periods
prior to fiscal year 2000 was an aggregate decrease of $561 million and the aggregate impact on net income for these years was a
decrease of $333 million.
Restatements
In addition to the prior restatement, in the Original 2005 Form 10-K, the Company restated its consolidated financial statements for the
fiscal years ended March 31, 2004 and 2003, the quarterly periods in fiscal years 2005 and 2004, and the selected financial data for fiscal
years 2002 and 2001. Also, in this Amended Form 10-K, the Company is restating its consolidated financial statements for the fiscal
years ended March 31, 2005, 2004, and 2003, as well as the quarterly periods in fiscal years ended March 31, 2005 and 2004, and the
selected financial data for fiscal year ended March 31, 2002. The effects of these subsequent restatements are more fully described under
the “Explanatory
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