CNET Networks, Inc. (NASDAQ: CNET) today announced that it has
filed with the United States Securities and Exchange Commission
("SEC") an amended annual report on Form 10-K/A for the year ended
December 31, 2005, an amended quarterly report on Form 10-Q/A for
the quarter ended March 31, 2006, and quarterly reports on Form
10-Q for the quarters ended June 30, 2006 and September 30, 2006.
At this time the Company is current with all of its required
filings with the SEC. The Company believes that the filing of these
reports also satisfies the conditions established by The Nasdaq
Listing Qualification panel for continued listing on the Nasdaq
Global Select Market. As discussed below, the Company has restated
its historical financial statements to reflect the results of an
investigation into its historical stock option grant practices, and
has recorded cumulative non-cash, stock compensation charges of
$105.7 million associated with stock options grants made from 1996
through 2005. Background On May 16, 2006, the Center for Financial
Research and Analysis, or CFRA, 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 between 1998 and 2001
with exercise prices that matched or were close to a forty-day low
for the Company�s stock price. On May 22, 2006, the Company
announced that its Board of Directors appointed a Special Committee
comprised of independent directors to conduct, with the assistance
of legal counsel and outside accounting experts, an internal
investigation relating to past option grants, the timing of such
grants and related accounting matters. On July 10, 2006, CNET
Networks announced that the Special Committee had reached the
preliminary conclusion that the actual measurement dates for the
grants identified in the CFRA report differed from the recorded
measurement dates. Charges related to the change in measurement
dates for these stock options were determined to be material and as
a result, the Company announced that it expected to restate its
financial statements. On October 11, 2006, the Company announced
that the Special Committee reported its findings on the Company's
options granting practices and procedures to the Board of
Directors. The Special Committee concluded that there were
deficiencies with the process by which options were granted at CNET
Networks, including in some instances the backdating of option
grants, during the period from the Company's IPO in July 1996
through at least 2003, which resulted in accounting errors. The
Special Committee report concluded that a number of executives of
the Company, including the former CFO and the recently resigned
CEO, General Counsel and SVP of Human Resources, bore varying
degrees of responsibility for these deficiencies. The report did
not conclude that any current employees of the Company or any
recently resigned employees engaged in intentional wrongdoing. On
December�20, 2006, certain of CNET Networks� executive officers
holding stock options which were granted with per share exercise
prices below the fair market value of a share of CNET Networks
common stock on the date of grant (referred to as discount stock
options) each entered into agreements pursuant to which they agreed
to amend the exercise price of the discount stock options to the
extent not vested as of December 31, 2004 and still outstanding at
December 20, 2006. These executive officers held approximately 1
million discount stock options with a weighted average exercise
price of approximately $9.03 per share which were repriced to their
fair market value. Under these agreements, the amended exercise
prices of such options have been changed to and are equal to the
fair market value of a share of CNET Networks� common stock on the
date of grant of each option. Based on the re-pricing, the 1
million options had a revised weighted average exercise price of
approximately $9.92 per share. The non-executive members of CNET
Networks� Board of Directors each entered into similar agreements
to those entered into by the executive officers described above
except that each non-executive director also agreed to re-price any
discount option, whether or not vested as of December 31, 2004. The
non-executive directors also agreed, with respect to any discount
options which were previously exercised, to repay to the company an
amount equal to the difference between the original exercise price
and the fair market value of CNET Networks� common stock on the
date of grant of such options, net of taxes. Approximately 283,000
discount stock options with a weighted average exercise price of
$9.40 per share held by non-executive members of CNET Networks�
board of directors were repriced to their fair market value. The
weighted average exercise price of these 283,000 shares after the
re-pricing was $10.07 per share. The estimated amount of repayment
to the Company for the difference between the original exercise
price and the fair value of approximately 27,000 options which were
previously exercised by these directors is approximately $16,000
before taxes. The Company�s former Chairman and Chief Executive
Officer and a current member of CNET Networks� board of directors
entered into a similar agreement to those entered into by the
Company�s non-executive directors covering 700,000 discount options
outstanding with a weighted average exercise price of $3.96 per
share and were repriced to their fair market value. This agreement
did not provide for the repayment of amounts related to previously
exercised options because the former Chairman had not exercised any
options. The weighted average exercise price of these 700,000
shares after the repricing was $8.57 per share. In January 2007,
CNET Networks� management completed its review of the Company�s
stock option grant activity. The review conducted by management
covered approximately 97 percent of option grants to all employees,
directors and consultants for all grant dates during the period
from CNET Networks� initial public offering in July 1996 through
May 2006. As a result of the Special Committee�s investigation and
the Company�s internal review of its historical financial
statements, the Company has recorded significant adjustments to its
previously filed financial statements. Restatement Methodology and
Evaluation Process The following describes the methodology and
evaluation process used by management in determining the
appropriate measurement date for various option grants and
reviewing modifications to determine if they were appropriately
accounted for at the date of modification. The measurement date is
the date on which the option is deemed granted under applicable
accounting principles, which for all relevant periods was
Accounting Principles Board Opinion No. 25, �Accounting for Stock
Issued to Employees� and related interpretations (�APB 25�), and is
the first date on which all of the following are known: (1) the
individual who is entitled to receive the option grant; (2) the
number of options that an individual is entitled to receive; and
(3) the option�s exercise price. The majority of the measurement
date determinations were based on objective evidence, such as
minutes from Compensation Committee meetings, unanimous written
consents of the Compensation Committee, Board of Director meeting
minutes, reports filed on Form 4 filed with the SEC,
contemporaneous emails, personnel files, payroll records, and
various records maintained by the Company�s Human Resources
department. Specific information as to when a grant was finalized
was not apparent for certain grants. In these cases, management
considered all available relevant information to form a reasonable
conclusion as to the most likely measurement date for these grants,
and when there was no evidence to indicate which date was more
likely the true measurement date, management calculated
compensation expense utilizing the median price of the stock over
the likely period in which the measurement date occurred.
Management believes that the use of the median price gives a more
reasonable approximation of the compensation expense related to
these options than the amount calculated using either the high or
the low price during the period, as there is no evidence to
indicate that either the date on which the high or the low price
occurred was the true measurement date. A more detailed description
of the methodology used for the objective and subjective
determinations of appropriate measurement dates for these grants
can be found in the amended annual report on Form 10-K/A for the
year ended December 31, 2005 filed today with the SEC. Findings and
Associated Adjustments Based on the separate reviews of management
and the Special Committee, the Company identified instances where
the grant date used as the measurement date for accounting
purposes, differed from the measurement date as defined in APB 25,
for more than the grants identified in the CFRA report. As a
result, the Company corrected the measurement date for
approximately 40.8 million options out of a total of 73.8 million
options granted from July 1996 through December 2005, with nearly
all of these corrections relating to options granted prior to
December 31, 2003. In addition to measurement date corrections,
management also identified instances where the Company incorrectly
accounted for certain option grants that were modified after the
grant date. The restated financial statements also reflect other
adjustments consisting of reclassifications of certain foreign
transactional taxes on the Company�s consolidated statements of
operations and other tax reclassifications on its consolidated
balance sheets, and other adjustments to operating expenses for
previously known errors and corrections to the Company�s provision
for income tax resulting from computational errors. These items
were previously not recorded by the Company because in each case,
and in the aggregate, the underlying errors were not considered by
management to be material to its consolidated financial statements.
The following table sets forth the impact of the non-cash charges
for stock compensation expense and the other adjustments and
reclassifications for the years ended December 31, 2005, 2004,
2003, 2002, 2001, 2000, 1999, 1998, 1997 and 1996: (in thousands)
Year Ended December 31, 2005� 2004� 2003� 2002� 2001� � � Stock
compensation expense adjustments: Stock compensation expense $
6,357� $ 8,991� $ 8,175� $ 22,866� $ 18,909� Capitalized
compensation expense (13) -� (29) (271) (507) Related payroll tax
expense 83� 128� 12� -� -� Total stock compensation expense
adjustments 6,427� 9,119� 8,158� 22,595� 18,402� � Reclassification
of foreign transactional tax: � Revenues (1,258) (887) (651) (681)
(461) Sales and marketing 1,545� 1,075� 738� 681� 548� Income tax
(benefit) (287) (188) (87) -� (87) Total reclassification of
foreign transactional tax -� -� -� -� -� � Other adjustments, net
1,724� 589� (198) (381) (105) � Other income tax adjustments (41)
138� (414) (239) (714) � Total decreases to net income and
increases to net loss from all restatement adjustments � $ 8,110� $
9,846� $ 7,546� $ 21,975� $ 17,583� � � (in thousands) Year Ended
December 31, 2000� 1999� 1998� 1997� 1996� � Stock compensation
expense adjustments: Stock compensation expense $ 23,862� $ 12,940�
$ 3,443� $ 795� $ 151� Capitalized compensation expense -� -� -� -�
-� Related payroll tax expense -� -� -� -� -� Total stock
compensation expense adjustments 23,862� 12,940� 3,443� 795� 151� �
Reclassification of foreign transactional tax: � Revenues -� -� -�
-� -� Sales and marketing -� -� -� -� -� Income tax (benefit) -� -�
-� -� -� Total reclassification of foreign transactional tax -� -�
-� -� -� � Other adjustments, net -� -� -� -� -� � Other income tax
adjustments (2,685) (843) -� -� -� � Total decreases to net income
and increases to net loss from all restatement adjustments � $
21,177� $ 12,097� $ 3,443� $ 795� $ 151� For further explanations
and tables summarizing the impact of the non-cash charges for stock
compensation expense and the other adjustments and
reclassifications on the Company�s historical statements of
operations for years prior to 2003, as well as balance sheet and
cash flow statements adjustments, please see the amended annual
report on Form 10-K/A for the year ended December 31, 2005, filed
today with the SEC. The effects of these restatements are reflected
in the financial statements and other supplemental data, including
the unaudited quarterly data for 2005 and 2004 and selected
financial data, included in the amended Form 10-K/A. CNET Networks
has not amended and does not intend to amend any of its previously
filed annual reports on Form 10-K for the periods affected by the
restatement or adjustments, other than in its 2005 Annual Report on
Form 10-K/A, or any of its previously filed Quarterly Reports on
Form 10-Q for any period prior to December 31, 2005. Evaluation of
Controls and Procedures In connection with the restatement of CNET
Networks� consolidated financial statements, under the supervision
of the Company�s CEO and CFO, CNET Networks reevaluated its
disclosure controls and procedures and internal control over
financial reporting. Based on this reevaluation, the CEO and CFO
concluded that CNET Networks� disclosure controls and procedures
were effective as of December 31, 2005. In management�s and the
Special Committee�s review of the Company�s historical stock option
grants and practices, deficiencies in internal control over
financial reporting with respect to stock option grants were
determined to exist related to options granted prior to January 1,
2004. However, in 2004, the Company changed its practices related
to stock option grants and remediated prior deficiencies. Based on
the results of management�s review of stock option grant activity
during 2005, an evaluation of disclosure controls and procedures
and assessment of internal control over financial reporting as of
December 31, 2005, the Company and its independent auditors
concluded that there was not a material weakness in disclosure
controls and procedures or of internal control over financial
reporting related to accounting for stock options as of such date.
Management also assessed the effectiveness of the Company�s
internal control over financial reporting as of December 31, 2005
based on criteria established in Internal Control�Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. As a result of this assessment, management
concluded that, as of December 31, 2005, the Company�s internal
control over financial reporting was effective in providing
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. This press release should be read in conjunction with
the amended 2005 Annual Report on Form 10-K/A, the amended
Quarterly Report on Form 10-Q/A and the Quarterly Reports on Form
10-Q referred to in the release. The Company issued a separate
release today reporting results for the fourth quarter and year
ended December 31, 2006. Safe Harbor This press release contains
forward-looking statements concerning the Company�s satisfaction of
the conditions for continued listing on the Nasdaq Global Select
Market. There can be no assurance that the filing of the amended
annual report on Form 10-K/A, amended quarterly report on Form
10-Q/A and the delinquent form 10-Qs with the Securities and
Exchange Commission will satisfy the Nasdaq Listing Qualifications
Panel�s requirements. Forward-looking statements are made as of the
date of this press release and, except as required by law, the
Company does not undertake an obligation to update its
forward-looking statements to reflect future events or
circumstances. About CNET Networks, Inc. CNET Networks, Inc.
(Nasdaq:CNET - News; www.cnetnetworks.com) is an interactive media
company that builds brands for people and the things they are
passionate about, such as gaming, music, entertainment, technology,
business, food, and parenting. The Company's leading brands include
CNET, GameSpot, TV.com, MP3.com, Webshots, CHOW, ZDNet and
TechRepublic. Founded in 1993, CNET Networks has a strong presence
in the US, Asia, and Europe.
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