Broadcom to Take $2.22 Billion Charge Due to Backdated Options

Broadcom, a supplier of semiconductor chips used in communication devices, said Tuesday it would record $2.22 billion in non-cash expenses for the years 1998 through 2005 for stock option accounting flaws--nearly triple what it originally estimated last July.

The company said the charges complete its investigation into option grant irregularities. No option grant requiring a revised date was issued to Broadcom co-founders Henry Samueli and Henry T. Nicholas III, any subsequent chief executive, or any current or former member of the board of directors, the company said.

Broadcom Chairman and CEO Scott A. McGregor said the charge was so large because the company issued options to purchase nearly 240 million shares to employees from June 1998, the time of the company's initial stock offering, through May 2003, "a period of unprecedented market volatility."

The company also disclosed that it was unable to locate records needed to confirm whether some grants had been properly awarded.

Broadcom said none of the employees found to be responsible for the problems is still employed by the company.

Broadcom's option grants are the subject of a formal inquiry by the Securities and Exchange Commission and an informal inquiry by federal prosecutors.

The company first revealed last July that its audit committee discovered that some stock option grants awarded from 2000 to 2002 had been backdated, and that it expected to record an additional $750 million in stock-based compensation expenses.

In September, the company said it had found additional backdated stock options which would cause it to record expenses of at least $1.5 billion.

The company said Tuesday it would also record an options-related charge of $17.2 million for the first quarter of 2006. It also filed all outstanding earnings reports with the SEC, a step necessary to prevent its stock from being delisted from the Nasdaq Stock Market.

The charges relate to the company's actual earnings under Generally Accepted Accounting Principles, or GAAP. The charges do not affect revenue, cash, cash equivalents or marketable securities balances, the company said. They do affect earnings per share reported for those periods, the company said.

Analysts Not Worried

Despite the huge recognition of expenses, analysts did not seem overly worried about the effect of the charges.

"It is paper to a great extent, but the restatement is larger than what we anticipated," said Shawn Wu, an analyst with American Technology Research. "While it is non-cash for the most part, it is dilutive to shareholders."

The effect is also less severe because the company noted that less than one-third of the total charges relate to options that were actually exercised or remain outstanding, one analyst noted.

"I don't see any material impact from the options backdating resolution with the exception of the positive impact of moving forward," said Craig Berger, an analyst with Wedbush Morgan Securities Inc.

Before Broadcom's announement, the company's shares fell 20 cents, or 0.7%, to close at $29.46 on the Nasdaq. They lost another 26 cents in after-hours trading.

Like many technology companies, Broadcom used stock options as an incentive to attract and retain talent.

The practice of backdating the options was once widespread. It involves pegging stock options to favorable grant dates in the past to boost the recipients' award.

The manipulation itself isn't necessarily illegal, but securities laws require companies to properly disclose the practice in its accounting and settle any charges that may result.

Other companies have recorded expenses for prior years after investigating the backdating of options grants, but none to the extent of Broadcom.

Apple, for instance, a major Broadcom customer, last month said it would record an options-related expense of $84 million.

"The review process was extremely thorough, as we said it would be," McGregor said. "We are pleased that our SEC periodic filings are now current and we look forward to putting this matter behind us."