Brocade to restate four years of financials as DoJ and SEC look on

Option issues linger

By Ashlee Vance, 16th May 2005

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For the second time this year, Brocade Communications will have to restate past financial statements to correct the way it accounted for stock-based compensation. In addition, the storage switch maker today revealed that the US Department of Justice has joined the Securities and Exchange Commission in an investigation of the company's accounting.

After completing an internal audit, Brocade has decided to restate results reported between 2001 and 2004. Its earnings per share (EPS) for 2001 will be trimmed by between 5 cents and 11 cents. The EPS for 2002 will be reduced by between 8 cents to 9 cents. The EPS results for 2003 and 2004 will remain unchanged or be cut by no more than 1 cent each year. Brocade will not change revenue figures from these periods.

At issue is the way Brocade handled stock-based compensation for employees on leaves of absences and those "in transition roles prior to ceasing employment."

"Prior to 2003, Brocade's (leave of absence) policy allowed certain employees to continue vesting in their stock options and to have extended stock option exercise periods for up to three months from the start of the (leave of absence)," Brocade said. "The expected charges relate principally to options that continued to vest for employees who were on (leave of absences) for a period greater than three months."

Brocade first revealed these accounting problems in January, when it agreed to restate results from 2002 and 2003.

Along with the restatements, Brocade also said it was under investigation by the DoJ and SEC.

"It is not unusual in the current environment that multiple relevant government agencies will take an interest in these types of matters," said Michael Klayko, Brocade's CEO. "We are cooperating fully with the SEC and DoJ and hope that the investigation can be concluded as quickly as possible.

Klayko stepped in to replace former CEO Greg Reyes after the accounting issues were first disclosed. ®

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