Rough day for Take-Two

Publisher put on notice that SEC is preparing civil action against it. Good financial numbers don't stop its stock from sinking.

Today should have been a good day for Take-Two. The parent of Grand Theft Auto publisher Rockstar Games reported $278.5 million in revenue and $26.6 million in profit for the third quarter of 2003, up from $218 million and $22.3 million in 2002. The company predicted $412 million in earnings for the company's upcoming Q1 (ending January 31, 2004), and reiterated its $1.18 billion forecast for the full fiscal year that ends October 31, 2004. The entire report can be read here.

But instead of busting out the champagne, executives are more likely popping aspirin. Take-Two's stock fell nearly $2--over 6 percent--on the news that the Security and Exchange Commission has given the company a "Well's Notice." In layman's terms, a Well's Notice does two things. One, it tells a company that a regulator (in this case the SEC) has found it in violation of the law, and, two, it offers said company one last chance to convince the regulator not to recommend legal action.

Take-Two's legal troubles stem from its surprise December 2001 announcement that it was revising its previous seven quarters' worth of financial statements. Two months later, the SEC formally launched an investigation into the company's bookkeeping, which has been ongoing ever since.

Although today's Well's Notice means a civil action by the SEC is likely, Take-Two stressed that it was not an inevitability. "We have initiated discussions with the SEC," said CEO Jeffrey Lapin in a conference call. He added, "The only thing we can say is the process is moving along, and we'll have to see where it proceeds."

In the same call, Lapin assessed the company's sales record for the year. Although an NPD report showed that Manhunt has only sold 75,000 copies, the CEO said the controversial title "has met expectations." However, Lapin said that the PC Max Payne 2 sold "slower than we might have hoped"--accounting for 8 percent of its Q3 sales--and that the PlayStation 2 Grand Theft Auto Double Pack "was below our expectations."

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