2K Sports 2008 Annual Report Download - page 31

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Gross margins relating to our distribution business have historically been narrow, which increases the impact
of variations in costs on our operating results.
As a result of intense price competition, our gross margins in our distribution business have historically
been narrow and may continue to be narrow in the future. 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 attributable to expenses for
personnel and facilities. In the event of a significant decline in revenue, we may not be able to dispose of
facilities, reduce personnel or make other changes to our cost structure without 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 revenue and profit. Moreover,
reducing costs may impair our ability to produce and develop software titles at sufficient levels in the
future.
We are subject to risks and uncertainties of international trade, including fluctuations in the values of local
foreign currencies against the dollar.
Sales in international markets, primarily in Europe, have accounted for a significant portion of our net
revenue. We have also recently expanded our Asian operations in an effort to increase our geographical
scope and diversify our revenue base. Sales in international markets accounted for approximately 40.7%,
31.3% and 39.4%, respectively, of our net revenue for the years ended October 31, 2008, 2007 and 2006,
respectively. 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, which could fluctuate against the dollar. While
we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our
results of operations could be adversely affected by unfavorable foreign currency fluctuations.
Our business may be affected by issues in the economy that affect consumer spending.
Most of our products involve discretionary spending on the part of consumers. We believe that consumer
spending is influenced by general economic conditions and the availability of discretionary income. This
makes our products particularly sensitive to general economic conditions and economic cycles. Certain
economic conditions such as U.S. or international general economic downturns, including periods of
increased inflation, unemployment levels, tax rates, interest rates, gasoline and other energy prices or
declining consumer confidence could reduce consumer spending. Reduced consumer spending may result
in reduced demand for our products and may also require increased selling and promotional expenses. A
reduction or shift in domestic or international consumer spending could negatively impact our business,
results of operations and financial condition. Consumers are generally more willing to make discretionary
purchases, including purchases of products like ours, during periods in which favorable economic
conditions prevail. If economic conditions worsen, our business, financial condition and results of
operations could be adversely affected.
Our stock price has been volatile and may continue to fluctuate significantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to
significant fluctuations. These fluctuations may be due to factors specific to us including those discussed in
the risk factors under this Item 1A as well as others not currently known to us or that we currently do not
believe are material, to changes in securities analysts’ earnings estimates or ratings, to our results or future
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