2K Sports 2004 Annual Report Download - page 20

commercially successful products. We develop most of our frontline products internally, and we own major
intellectual properties, which we believe permits us to maximize profitability. Operating margins for titles
based on licensed properties are affected by our costs to acquire licenses.
Our distribution revenues are derived from the sale of third-party software titles, accessories and hardware.
Operating margins in our distribution business are dependent on the mix of software and hardware sales, with
software generating higher margins than hardware. Publishing activities generate significantly higher margins
than distribution activities, with sales of PC software titles resulting in higher margins than sales of products
designed for video game consoles and handheld platforms.
Through our Rockstar Games subsidiary, we have pursued a growth strategy by capitalizing on the widespread
market acceptance of video game consoles, as well as the growing popularity of innovative action games that
appeal to mature audiences. We have established a portfolio of successful proprietary software content for the
major hardware platforms. We expect to continue to be the leader in the mature, action product category by
leveraging our existing franchises and developing new brands. We currently anticipate that the release of
Grand Theft Auto: San Andreas for the Xbox and PC, Midnight Club 3: DUB Edition for the PlayStation 2
and Xbox and The Warriors for the PlayStation 2 will generate significant cash flow from our publishing
business in fiscal 2005.
We are also seeking to diversify our product offerings through our Globalstar subsidiary by capitalizing on
significant growth opportunities in the market for sports and other licensed action and strategy titles. We
recently made strategic acquisitions of sports development studios, and we have the right to acquire Visual
Concepts and Kush.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported
amounts of net sales and expenses during the reporting periods. The most significant estimates and
assumptions relate to the recoverability of prepaid royalties, capitalized software development costs and
intangibles, inventories, realization of deferred income taxes and the adequacy of allowances for returns, price
concessions and doubtful accounts. Actual amounts could differ significantly from these estimates.
Revenue Recognition
We recognize revenue upon the transfer of title and risk of loss to our customers. We apply the provisions of
Statement of Position 97-2, “Software Revenue Recognition” in conjunction with the applicable provisions of
Staff Accounting Bulletin No. 104, “Revenue Recognition.” Accordingly, we recognize revenue for software
when there is (1) persuasive evidence that an arrangement with our customer exists, which is generally a
customer purchase order, (2) the software is delivered, (3) the selling price is fixed or determinable and
(4) collection of the customer receivable is deemed probable. Our payment arrangements with customers
typically provide net 30 and 60-day terms.
Revenue is recognized after deducting estimated reserves for returns and price concessions. In specific
circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to
determine that collection of receivables is probable, we defer the sale until such time as we can reliably
estimate any related returns and allowances and determine that collection of the receivables is probable.
Allowances for Returns and Price Concessions
We accept returns and grant price concessions in connection with our publishing arrangements. Following
reductions in the price of our products, we grant price concessions to permit customers to take credits against
amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy certain
conditions to entitle them to return products or receive price concessions, including compliance with
applicable payment terms and confirmation of field inventory levels.
Our distribution arrangements with customers do not give them the right to return titles or to cancel firm
orders. However, we sometimes accept returns from our distribution customers for stock balancing and make
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