Brocade: Overstated 2001-04 Earnings

Data storage equipment maker Brocade Communications Systems Inc. (BRCD) Monday said it overstated its earnings from 2001 through 2004 by as much as $52 million due to improper accounting of its stock option expenses and said it was the target of a government probe.

The San Jose, Calif., company, whose shares fell as much as 4 percent, said it is cooperating with a joint investigation of its stock option practice by the Justice Department (search) and the Securities and Exchange Commission (search).

The restatements include as much as $3.2 million stock option expenses in 2003 and 2004 on top of a restatement announced in January that wiped out a combined $41 million of net income for the two years. The company had originally reported a combined net loss of $137.5 million for the two years.

The company said in January that the accounting errors related to the dates the options were granted to certain employees. The company said Monday that an additional $800,000 in expenses were uncovered in an audit that began in January.

After discovering the additional errors, the company found it incorrectly accounted for the cost of stock-based compensation between 2001 and 2004 for employees on leaves of absence and employees who took on other roles before ultimately leaving the company.

The company said it would add as much as $49 million in stock option expenses in 2001 and 2002, which would cut its profit for the two years by nearly 40 percent.

The company said none of the additional expenses affect the company's revenue, cash position or non-stock option related operating expense.

It does not expect to post any additional expenses in the fiscal year 2005.

"We are cooperating fully with the SEC and DOJ and hope that the investigation can be concluded as quickly as possible." Chief Executive Michael Klayko said in a statement, "The Board and management team are absolutely committed to the highest standard of accounting and continuously improving our internal controls and compliance with our policies."

The restatements come on top of a difficult market for data storage. The company said earlier this month that its second-quarter sales would fall short of estimates hurt by weakness in its March sales.

Shares fell 8 cents to $4.09 a share in Nasdaq trading after hitting $4.01 earlier in the session.