Accounting & Tax

Brocade Options Lead to Restatement

Based on an internal audit, the company states, it had not followed its own guidelines regarding stock-option grants.
Stephen TaubMay 18, 2005

Networking storage company Brocade Communications Systems Inc. announced that it will restate its financials by between $31 million and $52 million for fiscal years 2001 through 2004 because it understated charges related to stock-option expenses.

The San Jose, California-based company also disclosed that the Department of Justice and the Securities and Exchange Commission are investigating its stock-option practices. “We are cooperating fully,” stated chief executive officer Michael Klayko, who also asserted that the company is “absolutely committed to the highest standard of accounting and continuously improving our internal controls and compliance with our policies.”

None of the charges will have an impact on historical revenues, cash positions, or operating expenses unrelated to stock options, the company added.

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Brocade stated that based on an audit that began in January, the company discovered that between August 2003 and November 2004, it had not followed its own guidelines regarding stock-option grants. Restating its financials to allow for stock options granted during that time, the company added, are expected to result in a cumulative increase in non-cash stock-option compensation expense of $800,000 over fiscal years 2003 and 2004.

The company added that it then launched a review of certain other practices that could impact stock-option accounting. Brocade determined that from 2001 through 2004, it had not “appropriately accounted for” the cost of stock-based compensation for certain employees on leaves of absences and in transition roles prior to leaving the company.

Prior to 2003, the company elaborated, its 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. The expected charges relate principally to options that continued to vest for employees who were on leave for more than three months.