2K Sports 2004 Annual Report Download - page 30

lower allowances were required. We had accounts receivable days outstanding of 59 days for the three months
ended October 31, 2004, as compared to 56 days for the three months ended October 31, 2003. Receivable
days outstanding increased primarily as a result of the significant amount of sales of a major product release
at year end. Our receivable days outstanding fluctuate from period to period depending on the timing of
product releases.
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 and our receivables are generally not covered by insurance. 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 concentrated in foreign markets. If we are unable to collect our accounts receivable
as they become due, it could adversely affect our liquidity and working capital position and we would be
required to increase our provision for doubtful accounts.
Inventories of $154,345 at October 31, 2004 increased $52,597 from October 31, 2003, reflecting higher
levels of distribution products. Accounts payable of $163,961 at October 31, 2004 increased $57,789 primarily
due to the increase in inventory levels. Accrued expenses increased as a result of an increase in royalties
payable under a royalty program based on product sales for certain of our internal development personnel and
the provision for the offer of settlement with the SEC.
Loan Facilities: In December 1999, we entered into a credit agreement, as amended and restated in August
2002, with a group of lenders led by Bank of America, N.A., as agent. The agreement provides for
borrowings of up to $40,000 through the expiration of the line of credit on August 28, 2005. Generally,
advances under the line of credit are based on a borrowing formula equal to 75% of eligible accounts
receivable plus 35% of eligible inventory. Interest accrues on such advances at the bank’s prime rate plus
0.25% to 1.25%, or at LIBOR plus 2.25% to 2.75% depending on the Company’s consolidated leverage ratio
(as defined). We are required to pay a commitment fee to the bank equal to 0.5% of the unused loan balance.
Borrowings under the line of credit are collateralized by our accounts receivable, inventory, equipment,
general intangibles, securities and other personal property, including the capital stock of our domestic
subsidiaries. Available borrowings under the agreement are reduced by the amount of the outstanding
standby letter of credit, which was $1,560 at October 31, 2004. The loan agreement contains certain financial
and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio
and consolidated fixed charge coverage ratio. As of October 31, 2004, we were in compliance with such
covenants. The loan agreement limits or prohibits us from declaring or paying cash dividends, merging or
consolidating with another corporation, selling assets (other than in the ordinary course of business), creating
liens and incurring additional indebtedness. We had no outstanding borrowings under the revolving line of
credit as of October 31, 2004 and 2003.
In February 2001, our United Kingdom subsidiary entered into a credit facility agreement, as amended in
March 2002 and April 2004, with Lloyds TSB Bank plc (“Lloyds”) under which Lloyds agreed to make
available borrowings of up to approximately $24,000. Advances under the credit facility bear interest at the
rate of 1.25% per annum over the bank’s base rate, and are guaranteed by us. Available borrowings under
the agreement are reduced by the amount of outstanding guarantees. The facility expires on March 31, 2005.
We had no material outstanding guarantees and no borrowings under this facility as of October 31, 2004
and 2003.
Capital Expenditures: We expect to spend an additional $3.5 million in connection with the continued
improvement of our software systems for our domestic and international operations. We also expect to
make additional capital expenditures of $4.5 million for leasehold improvements and equipment in our new
warehouse facilities in Cincinnati, Ohio. 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 transactions. 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 regulatory and compliance matters.
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