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Chip Maker to Restate Earnings

Broadcom plans to take a $750-million charge to correct its accounting of stock option grants.

July 15, 2006|James S. Granelli | Times Staff Writer

Broadcom Corp. said Friday that it would restate earnings back to 2000 and take a noncash charge of at least $750 million to account for improperly recorded stock options.

The Irvine chip maker is one of dozens of companies discovering instances of options backdating -- or manipulating the timing of an options grant to match a slump in the stock price to create bigger paydays for executives.

A federal task force is investigating the practice, which is most common at technology companies.

Broadcom said Friday that initial results of an ongoing internal review turned up "a few" questionable grants. The bulk of the options identified so far were set aside May 26, 2000, but not issued to employees until several months later.

"Our preliminary review shows that in the case of the May 26 options, the grant date and price were picked in a timely manner, and thus not backdated," said Broadcom spokesman William Blanning.

The $750 million will be added to Broadcom's accumulated losses of $6.6 billion between 2000 and 2003 and will not require a cash outlay by Broadcom.

The company also warned that further accounting revisions were likely to be substantial and that it probably would delay the release of its second-quarter earnings, originally scheduled for July 20.

Ultimately, Broadcom could end up restating its results for every quarter since it became a public company in 1998.

Analysts noted that Broadcom has been criticized in the past for improper bookkeeping but said it did not appear that company executives were manipulating option dates to enrich themselves. The vast majority of Broadcom's options -- 95% -- go to rank-and-file employees outside of top management.

Broadcom's findings "just shows how the handling of options is a very murky area," said Marc A. Siegel, research director for the Center for Financial Research and Analysis in Rockville, Md. For many companies, he said, "adequate internal controls might not have been in place to catch this."

Siegel identified Broadcom and others in May as companies with potential backdating issues. Since then, shareholder pressure, government inquiries and internal investigations are uncovering more companies with possible problems.

Shares of Broadcom rose 24 cents Friday to $28.13, well below the split-adjusted price of $78.92 at which most of the options were granted. None have been exercised.

Broadcom's stock had been falling recently, "so a little up-tick is not a big deal," said stock analyst David Wu of Global Crown Capital in San Francisco. "These restatements are noncash events and are nothing that will affect cash flow or the future of the company. So you look at this and say, 'So what?' "

Broadcom's announcement Friday was one of a number of similar disclosures:

* Corinthian Colleges Inc., a Santa Ana company that operates 131 schools in North America, said it would voluntarily review its option practices.

* Monster Worldwide Inc., a New York-based job search firm, said that three new lawsuits were filed against it and that it would restate financial results.

* Bookseller Barnes & Noble Inc. said that it would review its option practices and that a shareholder had sued the company.

"This will eventually reverberate through all public companies," said James J. Moloney, a securities law expert at Gibson, Dunn & Crutcher's Irvine office. "Everyone will have to take a look at their option practices over the past five years."

Like many young tech companies, Broadcom used its hefty stock value to attract top engineers, who helped it become a major supplier of chips for TV set-top boxes and cellphones.

Broadcom said the bulk of the grants at issue involved 8.5 million options set up on May 26, 2000, when its stock hit what was then about $118 a share, or $78.92 after adjusting for a subsequent stock split. Those options, however, didn't vest for at least a year, enough time for Broadcom's share price to be dragged down when the tech bubble burst later in 2000.

The audit committee found "no issues" with awards granted to top executives, including co-founders Henry T. Nicholas III and Henry Samueli.

Among the reports to be restated are those for last year, when Broadcom reported earnings of $412 million on sales of $2.67 billion, and the first three months of this year, when it posted a profit of $134.9 million on sales of $900.6 million.

Broadcom has built itself into a powerhouse in the communications chip industry, battling the likes of Intel Corp. and Qualcomm Inc.

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