2K Sports 2004 Annual Report Download - page 37

Accordingly, slight variations in operating costs and expenses could result in losses in our distribution
business from period to period.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden
decrease in demand. A significant portion of our selling and general and administrative expense is comprised
of personnel and facilities. In the event of a significant decline in net sales, we may not be able to exit
facilities, reduce personnel, or make other significant changes to our cost structure without significant
disruption to our operations or without significant termination and exit costs. Management may not be able
to implement such actions in a timely manner, if at all, to offset an immediate shortfall in net sales and
gross profit.
Our distribution business is dependent on suppliers to maintain an adequate supply of products to fulfill
customer orders on a timely basis. Our ability to obtain particular products in required quantities and to fulfill
customer orders on a timely basis is critical to our success. In most cases, we have no guaranteed price or
delivery agreements with suppliers. In certain product categories, limited price concessions or return rights
offered by publishers may have a bearing on the amount of product we may be willing to purchase. Our
industry may experience significant hardware supply shortages from time to time due to the inability of certain
manufacturers to supply certain products on a timely basis. As a result, we have experienced, and may in the
future continue to experience, short-term hardware inventory shortages. In addition, manufacturers or
publishers who currently distribute their products through us may decide to distribute, or to substantially
increase their existing distribution, through other distributors, or directly to retailers.
We are subject to the risk that our inventory values may decline and protective terms under supplier
arrangements may not adequately cover the decline in values. The interactive entertainment software and
hardware industry is characterized by the introduction of new and enhanced generations of products and
evolving industry standards. These changes may cause inventory to decline substantially in value or to become
obsolete. We are also exposed to inventory risk in our distribution business to the extent that supplier price
concessions are not available on all products or quantities and are subject to time restrictions. In addition,
suppliers may become insolvent and unable to fulfill price concession obligations.
We are subject to risks and uncertainties of international trade. Sales in international markets, primarily in
the United Kingdom and other countries in Europe, have accounted for a significant portion of our net sales.
Sales in international markets accounted for approximately 27.5% and 27.9%, respectively, of our revenues for
fiscal 2004 and 2003. We are subject to risks inherent in foreign trade, including increased credit risks; tariffs
and duties; fluctuations in foreign currency exchange rates; shipping delays; and international political,
regulatory and economic developments, all of which can have a significant impact on our operating results.
All of our international sales are made in local currencies.
The market price for our common stock may be highly volatile. The market price of our common stock has
been and may continue to be highly volatile. Factors such as our operating results, announcements by us or
our competitors and various factors affecting the interactive entertainment software industry may have a
significant impact on the market price of our common stock.
We are subject to rapidly evolving regulation affecting financial reporting, accounting and corporate
governance matters. In response to recent corporate events, legislators and government agencies have focused
on the integrity of financial reporting, and regulatory accounting bodies have recently announced their
intention to issue several new accounting standards, including accounting for stock options as compensation
expense, certain of which are significantly different from current accounting standards. We cannot predict the
impact of the adoption of any such proposals on our future financial results. Additionally, recently enacted
legislation focused on corporate governance, auditing and internal accounting controls imposes compliance
burdens on us, and will require us to devote significant financial, technical and personnel resources to address
compliance issues.
We are dependent on our management and key personnel. We rely on our management and other key
personnel for the successful operation of our business. We are dependent upon the expertise and skills of
certain of our Rockstar employees responsible for content creation and product development and marketing.
Although we have employment agreements with each of these creative, development and marketing personnel,
and we have granted them incentives in the form of an internal royalty program based on sales of Rockstar
29