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O.C. BUSINESS PLUS

Broadcom Cuts Sales Report by 10%

Accounting: Irvine firm recants its fourth-quarter calculations, resulting in $38.6 million less revenue.

March 22, 2001|From Times Staff and Wire Services

The decision to change its unusual and much-criticized method of accounting for some of its acquisitions led Broadcom Corp. on Wednesday to reduce its previously reported fourth-quarter sales by 10%.

The Irvine communications chip maker cut about $38.6 million from its quarterly report of revenue to account for costs associated with customer agreements reached by three companies it acquired during the final three months. The reduction from its original report of $378.8 million lowered sales for the year by 3.4%.

The company said most of the deals that had provided customers with warrants to buy stock have been canceled. The accounting changes, along with the canceled warrant deals, also helped to reduce Broadcom's net losses by 3 cents a share for the third quarter and by 2 cents a share for the year.

Broadcom said the revisions had only "a minor impact" on results and brought a measure of relief to executives.

"Now we have certainty," said William Ruehle, chief financial officer. "This was a legitimate misunderstanding. It's a new area, so the rules were not clear. Now that we know what the rules are, great."

Broadcom's stock, which had lost about 89% of its value since August, gained $1.13 Wednesday to close at $31.63 a share on Nasdaq. It had hit a 52-week low of $30.44 a share Tuesday.

The company said it changed its accounting procedure on five acquisitions after consulting with its auditors, Ernst & Young, and with the U.S. Securities and Exchange Commission.

Broadcom acknowledged last month that in five of 12 acquisitions last year it had arranged for warrants--or rights to stock--to be issued to customers of the companies it was buying in order to lock in future sales. It accounted for much of the warrants' value as goodwill, an asset to be written off over time.

Critics said Broadcom was essentially offering deep discounts to some of its customers without adequately accounting for the costs of those discounts in the company's financial statements, hence inflating sales and gross margins.

But in a filing late Monday with the Securities and Exchange Commission, Broadcom said it will change its accounting for its purchase in November of VisionTech Ltd. It said it will reflect 5.7 million warrants issued as a reduction to revenue when customers meet the purchase requirements and exercise the warrants, which is what critics said should have been done all along.

On Tuesday, Broadcom ended its review of its accounting method by changing the way it accounted for the other transactions, including three it closed in the fourth quarter.

The warrant deals would have allowed 13 key customers of the five companies acquired by Broadcom to buy up to 11 million Broadcom shares upon meeting future purchases of Broadcom products, said Henry T. Nicholas III, Broadcom's chief executive.

But with the industry slowdown and the slide in Broadcom stock, Nicholas said, many customers were happy to cancel the deals. He said the company still has "positive relationships" with those customers.

Only four customers remain under the warrants-for-sales contracts, which could result in the sale of up to 3 million shares to them, he said. The company will account for the value of any such shares issued as a reduction in revenue, he said.

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Times staff writer Karen Alexander contributed to this report. Bloomberg News and Dow Jones Newswires were used in compiling the story.

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