CNET to Restate Earnings

CNET Networks, Inc. announced today that it will be restating financial results for 2003, 2004 and 2005 earnings because it back-dated stock options granted to executives. The first signs of trouble came on May 24th when they issued a press release that the SEC was conducting an informal inquiry into its stock option grants:

On May 16, 2006, the Center for Financial Research and Analysis issued an analysis of stock option exercise prices relative to stock price ranges for certain companies during the period 1997 to 2002. The report identified CNET Networks as having granted stock options on four occasions between 1998 and 2001 with exercise prices that matched or were close to a 40-day low for its stock price. On May 22, 2006, CNET Networks announced that its Board of Directors had appointed a special committee of independent directors to conduct an internal investigation relating to past option grants, the timing of such grants and related accounting matters. The Special Committee is being assisted by independent legal counsel.

Today's press release states the preliminary conclusion of the investigation indicates that the measurements dates of some stock options grants between 1998 and 2001 "differ from the recorded measurement dates." That is fairly vague, but my guess is that the measurement dates gave the executives a better strike price than the recorded date. As anyone who's been granted stock options can tell you, you make the difference between the strike price typically determined by the average stock price of the grant date, and the market price at which you sell. The dates indicated covered a few years during the internet boom, and modifying the grant day by as little as one day could be very significant depending upon the number of shares involved. At any rate, c|net explicitly states "these charges are material."

C|NET's stock is already down 45% this year, and this is not the type of news that will provide much comfort to shareholders. Nonetheless, I doubt that the restatements will have much impact on their current balance sheet, but the real risk for C|NET comes in the form of litigation from shareholders. Might be a good time for C|NET to be sold.