CNet Networks’ fourth-quarter profit plunged 70 percent, dragged down by the fallout from a stock option scandal that will force the Web provider of technology news and reviews to record more than $100 million in losses dating back to 1996.
According to its earnings report released Monday, fixing the stock option problems required CNet to absorb non-cash charges of $105.7 million during the 10 years ended in 2005, revising its financial statements from that period.
The company had previously reported annual losses in all the years covered by the restatements except for 2005, 2004, 1999 and 1998. The charges erased earnings totaling $35.5 million for the four profitable years.
The San Francisco-based company reported net income of $6.3 million, or 4 cents a share, for the final three months of 2006. That compared with earnings of $20.7 million, or 13 cents a share, in the same period a year ago.
The 2006 results would have been higher if not for a $6.5 million bill for an internal investigation that uncovered rampant mishandling of past employee stock options – a shady practice that has come back to haunt dozens of other companies across the country.
In Monday’s post-mortem, CNet disclosed that it improperly booked 55 percent of the 73.8 million stock options issued to its employees from July 1996 through December 2005. Virtually all the stock option trouble involved grants made before 2004, according to CNet.
CNet’s stock option headaches revolve around backdating, which involves changing the timing of stock option grants to give the recipients a head-start to paper profits.
If they aren’t properly disclosed, backdated options can inflate corporate profits and result in an underpayment of taxes.
Drawn by those potential legal violations, federal prosecutors and the Securities and Exchange Commission are investigating the stock option practices at more than 100 companies, including CNet.
As part of its housecleaning, CNet parted ways with its longtime chief executive, Shelby Bonnie, as well as its general counsel and head of human resources in an October purge. The company also re-priced the backdated stock options of its executives and directors so they wouldn’t benefit from the manipulation.
CNet’s stock option investigation cost the company $13.7 million in 2006, including the fourth-quarter expense. The stock option investigation was the main reason CNet’s profit for all of 2006 fell 60 percent to $7.8 million, or 5 cents a share.
Investors seemed largely unfazed by the financial damage caused by the stock option imbroglio, preferring to focus on CNet’s fourth-quarter progress.
If not for the costs of its stock option investigation and other expenses unrelated to its ongoing operations, CNet would have earned 13 cents a share in last year’s final quarter.
