Accounting & Tax

CNet to Restate Financials, Delay 10-Q

Stock-option backdating stings another company, as CNet announces it will restate three years of financial statements.
Helen ShawJuly 10, 2006

Online media company CNet announced that it expects to restate its financial statements to correct errors related to accounting for stock-based compensation from at least 2003.

The announcement arrives amid the technology publisher’s internal review by independent directors of its past stock option grants and their timing. Additionally, on May 24, CNet announced that the Securities and Exchange Commission had initiated an informal inquiry into the company’s options grants. The SEC and other regulators are currently probing dozens of companies on possible illegal options-granting practices.

The focus on “backdating” stock options concerns companies selecting a stock option grant date from the past, when a share price was lower than the date when the employee received the option. Notably, not all backdating practices violate securities laws; for example, backdated options that are properly accounted for and disclosed are legitimate.

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To date, the committee and CNet have arrived at the preliminary conclusion that the actual measurement dates for certain stock options granted between 1998 and 2001 differ from the recorded measurement dates. However, CNet’s special committee has not completed its review of the company’s option-granting practices or reached final conclusions.

As a result, the San Francisco-based company expects to record non-cash charges for stock-based compensation expense in certain reported periods starting with the year ended December 31, 1998. Because the charges continue for the option vesting periods, they will affect subsequent periods and decreasing net income or increasing net loss.

CNet said the charges are material and that it expects to restate its financial statements from 2003 and the company’s balance sheet as of March 31, 2006. Depending upon the special committee’s continuing review, CNet may also restate its financial statements for earlier years and its operating results for the first quarter of 2006.

On July 24, 2006, CNet plans to announce its second quarter revenue results and cash position as of June 30, 2006, along with third quarter and calendar year 2006 revenue guidance. However, the company said it won’t be able to announce additional financial results for the second quarter until its committee has completed its review of stock-based compensation, and will delay its second quarter 10-Q filing.

In a related story, Take-Two Interactive Software, the owner of the “Grand Theft Auto” video game series, has announced that the Securities and Exchange Commission has begun an informal investigation into its stock options policies since 1997 and now. As CNet did, the New York-based Take-Two launched an internal review of its options compensation practices before it was informed of the SEC’s investigation.

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