2K Sports 2008 Annual Report Download - page 23

Download and view the complete annual report

Please find page 23 of the 2008 2K Sports annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

granted a security interest in connection with certain compensatory arrangements which limits our ability
to incur senior debt in excess of certain amounts. Accordingly, we may be restricted from taking actions
that management believes would be desirable and in the best interests of us and our stockholders. Our
credit agreement also requires us to satisfy specified financial and non-financial covenants. A breach of any
of the covenants contained in our credit agreement could result in an event of default under the agreement
and allow our lenders to pursue various remedies, including accelerating the repayment of any
indebtedness outstanding under the agreement.
Our involvement, and the involvement of some of our former executive officers in a wide variety of lawsuits,
investigations and proceedings has had, and may in the future have, a material adverse effect on us.
We and some of our former officers, directors and employees have been, and are subject to, a wide variety
of lawsuits, investigations and proceedings, including the following:
Former Officers. Our former Chairman and Chief Executive Officer pled guilty to two felony counts
relating to our historical stock option granting practices and the Securities and Exchange Commission
(‘‘SEC’’) instituted a civil action against him. In addition, certain other former officers have been convicted
of crimes relating to their conduct during their employment with us.
Stock Option Granting Practices. In 2006, a Special Committee of our Board of Directors conducted an
investigation into our historical stock option granting practices. The Special Committee determined that
there were improprieties in the process of granting and documenting stock options and that incorrect
measurement dates for some stock option grants had been used for financial reporting purposes. As a
result, we recorded additional non-cash stock-based compensation expense and related tax effects with
respect to some of our stock-based awards and restated certain previously filed financial information in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2006. Several derivative complaints and
a class action complaint have been filed in state and federal courts against some of our current and former
directors and some of our former executive officers relating to our historical stock option granting
practices.
FTC Consent Order. We have entered into an agreement with the staff of the Federal Trade Commission
that contains a consent order requiring us to maintain a comprehensive system reasonably designed to
ensure that all content in our electronic games is considered and reviewed in preparing submissions to a
U.S. rating agency. We have also agreed to represent accurately the rating and content descriptors for
games we publish and to disclose to consumers the presence of any content relevant to the rating that was
not disclosed to the rating authority.
Personal Injury Actions. We are named as a defendant in a personal injury and wrongful death action.
SEC Investigation. We have received a notice from the SEC that it is conducting a formal investigation
into our historical stock option granting practices. We have also received a ‘‘Wells’’ notice informing us of
the SEC’s intention to file charges against us and seek a civil monetary penalty in connection with this
investigation.
IRS Request for Information. We have received requests for information from the Internal Revenue
Service relating to the granting and exercise of certain stock options and tax deductions taken by us with
respect thereto.
Electronic Arts Inc.’s Tender Offer. Stockholder lawsuits have been filed against us in the Court of
Chancery of the State of Delaware and New York state court contending that our directors breached their
fiduciary duties by, among other things, allegedly refusing to explore premium offers by Electronic
Arts Inc. (‘‘EA’’) to acquire all of the Company’s shares, enacting a bylaw amendment allegedly designed to
entrench the current board by preventing stockholders from nominating and electing alternative directors,
agreeing to an amendment to a management agreement with ZelnickMedia, issuing a proxy statement for
the 2008 annual meeting of stockholders that allegedly contained misleading and incomplete information
13