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Brocade to Restate Four Fiscal Years

Both the SEC and DOJ have begun a probe.

In its second restatement of financial results this year,

Brocade

(BRCD)

will restate four years of earnings as it faces a joint investigation by the

Securities and Exchange Commission

and the Department of Justice.

Brocade said Monday that after an audit of four years of records it determined that it must record additional charges for stock-based compensation expenses, and that it had not followed its own guidelines regarding the granting of stock options during two of those years. As a result, EPS for the year ending 2001 will be reduced by 5 cents to 11 cents; by 8 cents to 9 cents in 2002 and by no more than 1 cent in 2003 and 2004. The company's revenue and cash positions were not affected.

Management estimates the total increase in noncash compensation expense related to these matters to be in a range of about $31 million to $52 million for fiscal years 2001 through 2004.

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There was some concern on Wall Street that management may have underestimated the restatement's effect on Brocade's bottom line. "Our confidence in management's estimates at this point remains fairly low, and management does expect additional adjustments for options of employees in a transition role in thenear future," said Baird analyst Daniel J. Renouard.

Prior to 2003, Brocade's leave of absence policy allowed certain employees

in transition to continue vesting in their stock options for up to three months from the start of the leave -- and the company may not have accounted for those options appropriately.

Baird has an investment banking relationship with Brocade.

The storage-equipment maker announced a restatement and informal SEC probe in January, Renouard noted. "But the involvement of the DOJ implies something other than informal, in our opinion, and we believe the former CEO (and possibly others) could be implicated in wrongdoing around the stock compensation issue."

The analyst added, however, that the investigation could be the first step toward removing "an earnings quality/accounting overhang" from the stock.

"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 replaced former CEO and Chairman Greg Reyes in January.

In recent trading, shares of Brocade were off 6 cents, or 1.4%, to $4.11.