In December 2003, we acquired all of the outstanding capital stock and paid certain liabilities of TDK. The purchase price of approximately $14,276 consisted of $17,116 in cash and issuance of 163,641 restricted shares of our common stock (valued at $5,160), reduced by approximately $8,000 due to TDK under a distribution agreement. 

Our accounts receivable, less allowances, which includes doubtful accounts, returns, price concessions, rebates and other sales allowances at October 31, 2003 was $166,536 as compared to $105,576 at October 31, 2002. 

The increase of $92,971 in gross accounts receivable at October 31, 2003 principally reflects increased product releases at year end as well as cash received in advance of products shipped at the end of fiscal 2002. Two retail customers each accounted for more than 10% of the domestic receivable balance (28.3% in aggregate) at October 31, 2003. As of October 31, 2003, most of our receivables had been covered by insurance, with certain limits and deductibles, in the event of a customer’s bankruptcy or insolvency. In November 2003, we ter- minated our domestic receivables insurance. Generally, we have been able to collect our receivables in the ordinary course of business. We do not hold any collateral to secure payment from customers. As a result, we are subject to credit risks, particularly in the event that any of the receivables represent a limited number of retailers or are con- centrated in foreign markets. If we are unable to collect our accounts receivable as they become due, we could be required to increase our allowance for doubtful accounts, which could adversely affect our liquidity and working capital position. 

Our allowances increased from $30,806 at October 31, 2002 to $62,817 at October 31, 2003 and increased as a percentage of gross receivables from 22.6% at October 31, 2002 to 27.4% at October 31, 2003. The increase was due to additional price concessions and returns for our published products and additional bad debts, net of deductibles and insurance proceeds, related to the bankruptcy of two customers, the losses from which were not entirely covered by insur- ance. We had accounts receivable days outstanding of 54 days for the three months ended October 31, 2003, as compared to 45 days for the three months ended October 31, 2002. Receivable days outstanding increased primarily as a result of increased product releases at year end. Our receivable days outstanding fluctuate from period to period depending on the timing of product releases. 

Inventories of $101,748 at October 31, 2003 increased $27,357 from October 31, 2002, reflecting higher levels of distribution products to support the growth of this business. Accounts payable of $106,172 at October 31, 2003 increased $26,512 primarily due to the increase in inventory levels. 

In September 2002, we relocated our principal executive offices to 622 Broadway, New York, New York. We have recently leased additional space at 622 Broadway to accommodate our expanded operations. We estimate that as of October 31, 2003 we will incur an additional $1,200 in capital expenditures for continuing renova- tions and leasehold improvements for this space. In connection with signing a ten year lease, we provided a standby letter of credit of 

## Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 

(Dollars in thousands, except per share amounts) 

$1,560, expiring December 31, 2003. As a result of the relocation, we recorded expenses of $363 and $514 in fiscal 2003 and 2002, respectively, related to lease costs with regard to our former execu- tive offices. In addition, we expect to spend an additional $4,000 in connection with the implementation of accounting software systems for our international operations and the upgrade for our domestic operations. We are considering expanding our distribution facilities in Cincinnati, Ohio, which would require additional capital expendi- tures for leasehold improvements and equipment. As of the date of this report, we have no other material commitments for capital expenditures. 

Our Board of Directors authorized a stock repurchase program under which we may repurchase up to $25,000 of our common stock from time to time in the open market or in privately negotiated transac- tions. We have not repurchased any shares under this program. 

We have incurred and may continue to incur significant legal, accounting and other professional fees and expenses in connection with pending regulatory matters. 

Based on our currently proposed operating plans and assump- tions, we believe that projected cash flow from operations and avail- able cash resources will be sufficient to satisfy our cash requirements for the reasonably foreseeable future. 

## Contractual Obligations and Contingent Liabilities and Commitments 

Our offices and warehouse facilities are occupied under non- cancelable operating leases expiring at various times from December 2003 to October 2013. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through October 2007. Our future minimum rental payments for the year ending October 31, 2004 are $7,268 and aggregate minimum rental payments through applicable lease expirations are $37,865. 

We have entered into distribution agreements under which we purchase various software games. These agreements, which expire between June 2004 and March 2005, require remaining aggregate minimum guaranteed payments of $14,330 at October 31, 2003, including $3,491 of payments due pursuant to an agreement with TDK. These agreements are collateralized by a standby letter of credit of $3,600 at October 31, 2003. Additionally, assuming performance by third-party developers, we have outstanding commitments under various software development agreements to pay developers an aggregate of $27,224 over the fiscal year ending October 31, 2004. 

In connection with our acquisition of the publishing rights to the Duke Nukem franchise for PC and video games in December 2000, we are obligated to pay $6,000 contingent upon delivery of the final version of Duke Nukem Forever for the PC. In May 2003, we agreed to pay up to $6,000 upon the achievement of certain sales targets for Max Payne 2 . We also agreed to make additional payments of up to $2,500 to the former owners of Cat Daddy based on a percentage Cat Daddy’s profits for the first three years after acquisition. The payables will be recorded when the conditions requiring their payment are met. 

