2K Sports 2009 Annual Report Download - page 63

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Historically, fluctuations in interest rates have not had a significant impact on our operating results. Under
our Credit Agreement, outstanding balances bear interest at our election of (a) 2.00% to 2.50% above a
certain base rate with a minimum 6.00% base rate (8.00% at October 31, 2009), or (b) 3.25% to 3.75%
above the LIBOR rate with a minimum 4.00% LIBOR Rate (7.25% at October 31, 2009), with the margin
rate subject to the achievement of certain average liquidity levels. Changes in market rates may impact our
future interest expense if there is an outstanding balance on our line of credit. The Convertible Notes pay
interest semi-annually at a fixed rate of 4.375% per annum and we expect that there will be no fluctuation
related to the Convertible Notes impacting our current year interest expense. In addition, we amortize
debt issuance costs to interest expense. Upon adoption of the new accounting guidance for convertible
debt arrangements requiring separate accounting for the liability and equity components of convertible
debt instruments, we will reclassify a portion of our debt balance to additional paid-in-capital, representing
a bifurcation based on the fair value of the embedded conversion option in the Convertible Notes. The
difference between the principal amount of the Convertible Notes and the remaining liability component
after the bifurcation will be reported as a debt discount. We will be required to amortize the debt discount
using the interest method, as non-cash interest expense on our statement of operations in addition to the
coupon interest on the Convertible Notes. Upon adoption of this guidance on November 1, 2009 we will
reclassify $43.6 million of our Convertible Notes to additional paid-in-capital, representing a bifurcation
based on the fair value of the Convertible Notes’ embedded conversion option. As of November 1, 2009 we
have begun amortizing the debt discount as non-cash interest expense on our consolidated statement of
operations in addition to the Convertible Notes’ coupon interest payments. For additional details of our
Convertible Notes see Note 9 to our Consolidated Financial Statements.
Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign
currency exchange rates. Accounts relating to foreign operations are translated into United States dollars
using prevailing exchange rates at the relevant quarter end. Translation adjustments are included as a
separate component of stockholders’ equity. For the year ended October 31, 2009, our foreign currency
translation gain adjustment was approximately $15.7 million. We recognized a foreign exchange transaction
gain in interest and other expense, net in our consolidated statement of operations for the year ended
October 31, 2009 of $3.7 million and a foreign exchange transaction loss for the year ended October 31,
2008 of $5.1 million.
We use forward foreign exchange contracts to mitigate foreign currency risk related to foreign currency
transactions. These transactions primarily relate to non-functional currency denominated inter-company
funding loans, non-functional currency denominated accounts receivable and non-functional currency
denominated accounts payable. We do not enter into derivative financial instruments for trading purposes.
At October 31, 2009, we had forward contracts outstanding to purchase $30.4 million of foreign currency in
exchange for U.S. dollars with a 30 day maturity to November 30, 2009 and recorded a $0.1 million foreign
currency transaction loss related to these contracts in interest and other expense, net.
For the year ended October 31, 2009, 32.5% of the Company’s revenue was generated outside the United
States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S. dollar against all
currencies would decrease revenues by 3.2%, while a hypothetical 10% decrease in the value of the U.S.
dollar against all currencies would increase revenues by 3.2%. In the opinion of management, a substantial
portion of this fluctuation would be offset by cost of goods sold and operating expenses incurred in local
currency. As a result, a hypothetical 10% movement of the value of the U.S. dollar against all currencies in
either direction would impact the Company’s gross margin by 0.6%.
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