| TAKE TWO INTERACTIVE SOFTWARE INC Item 1A Risk Factors We anticipate that we will incur a net loss for the quarter ending January 31, 2006, and we may incur future net losses |
| Although we have achieved increasing levels of revenue and have generated profits in each of our last three fiscal years, we anticipate that we will incur a net loss for the quarter ending January 31, 2006 primarily as a result of a weak retail environment during the holiday season |
| We expect to incur increased levels of expenses associated with significant product development and licensing commitments over the next year in connection with the diversification of our product offerings |
| We may not generate sufficient levels of revenues to offset these increased costs, and we may incur losses in future periods |
| Continued losses could adversely affect the price of our common stock |
| The market for our titles is characterized by short product life cycles |
| Delays in product releases or disruptions following the commercial release of our products may have a material adverse effect on our operating results |
| The market for our titles is characterized by short product life cycles and frequent introductions of new products |
| New products may not achieve significant market acceptance or generate sufficient sales to permit us to recover development, manufacturing and marketing costs associated with these products |
| The life cycle of a title generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales |
| Because revenues associated with an initial product launch generally constitute a high percentage of the total revenues associated with the life of a product, delays in product releases or disruptions following the commercial release of one or more new products could have a material adverse effect on our operating results and cause our operating results to be materially different from expectations |
| We have experienced delays in product releases and in fiscal 2005 our revenues were negatively impacted by product returns due to the re-rating by the ESRB of Grand Theft Auto: San Andreas from “M” (age 17 and older) to “AO” (age 18 and older) |
| Such delays and disruptions may occur in the future |
| In addition, if we release a limited number of new products during any period, the failure of one or more of such products to achieve market acceptance could result in lower than anticipated revenues and significant operating losses |
| Rapidly changing technology and hardware cycles could adversely affect our operations and our ability to forecast our operating results |
| The interactive entertainment industry is cyclical and is associated with rapidly changing technology |
| Microsoft introduced its next generation hardware platform into the marketplace in November 2005, and we expect that Sony and Nintendo will introduce their respective next generation hardware platforms in 2006 |
| As a result, we anticipate that as these newer and more advanced hardware platforms achieve market acceptance, consumer demand for software for older platforms will decline |
| During the transition to next generation platforms, we expect to continue to devote significant development resources on products designed for current generation platforms, including Sony’s PlayStation 2 and Microsoft’s Xbox |
| Consumers may elect to defer purchases of game software for these platforms until newer platforms become available |
| If consumer demand for these platforms declines generally or as a result of a next generation platform transition or if we are required to reduce prices for our current generation titles sooner than anticipated, we may experience lower than expected sales or losses from products designed for older platforms |
| During the transition to next generation platforms, we also expect to devote significant development resources on products designed for next generation hardware platforms, initially for the Xbox 360 video game and entertainment system from Microsoft |
| Our ultimate success will depend on our ability to accurately predict which platforms will achieve widespread consumer acceptance |
| The time, resources and costs associated with the development of next generation software have increased substantially, which increases our risk of loss in the event that new platforms do not achieve commercial success |
| It is difficult to anticipate hardware development cycles, and we have made and will continue to make both internal and external software development commitments and product investment decisions well in advance of the introduction of new hardware platforms, resulting in cash outflows without corresponding revenues |
| If new hardware platforms are delayed or do not achieve 11 ______________________________________________________________________ [82]Back to Index consumer acceptance, we may be unable to recover our investments and our business and operating results could be materially adversely affected |
| Furthermore, during such transition, our operating results may become more volatile and more difficult to predict, which could cause wide fluctuations in our stock price |
| A number of software publishers who compete with us have developed and commercialized or are currently developing online games for use by consumers over the Internet |
| Future increased consumer acceptance and increases in the availability of online games or technological advances in online game software or the Internet could result in a decline in platform-based software and negatively impact sales of our products |
| Direct sales of software over the Internet by competitors could materially adversely affect our distribution business |
| A substantial portion of our revenues is derived from a limited number of titles, and we must continue to publish “hit” titles in order to succeed |
| Grand Theft Auto and certain of our other titles are “hit” products and have historically accounted for a substantial portion of our revenues |
| For the year ended October 31, 2005, our ten best selling titles accounted for approximately 48dtta2prca of our revenues, with Grand Theft Auto: San Andreas for the PlayStation 2 accounting for 25dtta6prca of our revenues; Midnight Club 3: DUB Edition for the PlayStation 2 accounting for 4dtta4prca of our revenues; Grand Theft Auto: San Andreas for Xbox accounting for 4dtta1prca of our revenues; and Grand Theft Auto: Liberty City Stories for the PSP accounting for 3dtta0prca of our revenues |
| For the year ended October 31, 2004, our ten best selling titles accounted for approximately 46dtta3prca of our revenues, with Grand Theft Auto: San Andreas for the PlayStation 2 accounting for 20dtta9prca of our revenues; Grand Theft Auto Double Pack for the Xbox accounting for 5dtta7prca of our revenues; Grand Theft Auto: Vice City for the PlayStation 2 accounting for 3dtta6prca of our revenues; and Max Payne 2: The Fall of Max Payne for the PlayStation 2 accounting for 3dtta2prca of our revenues |
| For the year ended October 31, 2003, our ten best selling titles accounted for approximately 50dtta6prca of our revenues, with Grand Theft Auto: Vice City for the PlayStation 2 and PCaccounting for 36dtta2prca of our revenues |
| If we fail to continue to develop and sell new commercially successful “hit” titles or experience any delays in product releases or disruptions following the commercial release of our “hit” titles, our revenues and profits may decrease substantially and we may incur losses |
| We are dependent on our management and other key personnel for our success |
| If we fail to retain creative and product development personnel, our business could be seriously harmed |
| We rely on our management and other key personnel for the successful operation of our business |
| In particular, we are highly dependent on the expertise, skills and knowledge of certain of our Rockstar employees responsible for content creation and development of Grand Theft Auto and other titles |
| We have reached an agreement in principle with respect to mutually satisfactory incentive compensation arrangements to retain these individuals for a three-year period, subject to the execution of a definitive agreement |
| The compensation arrangements could result in increased expenses and have a negative impact on our operating results |
| If we are unable to enter into a definitive agreement to continue to retain these individuals, or if one or more of these individuals otherwise leave the company, we may lose additional personnel, experience material interruptions in product development and delays in bringing products to market (including delays to our previously announced product release schedule), which could have a material adverse effect on our operating results |
| Additionally, failure to continue to attract and retain qualified management personnel could adversely affect our business and prospects |
| Our efforts to diversify our product offerings and expand into the market for sports and other licensed titles may not be successful |
| Our significant investments in licenses for sports titles may not result in profitable operations |
| We have recently diversified our product offerings by capitalizing on significant growth opportunities in the market for sports and other licensed action and strategy titles |
| Our success in this market will depend in part on our ability to attract licensors with popular properties and to enter into favorable arrangements with these licensors, including licensors representing the major sports leagues and players’ associations |
| Competition for sports and other licensed properties is intense |
| If we are unable to continue to obtain and maintain licenses to popular properties, our revenue and profitability with respect to these products could decline dramatically |
| Competition for licenses has also increased advances and royalties payable to licensors, which currently represent substantial financial commitments on our behalf |
| We may be unable to continue to enter into favorable license agreements, for financial or other reasons, and despite our efforts to diversify our product offerings, we may be unable to achieve increased levels of revenues or profitability |
| 12 ______________________________________________________________________ [83]Back to Index Our business is dependent on our ability to enter into favorable publishing and intellectual property licensing arrangements with third parties |
| Our success depends on our ability to continually identify and develop new titles on a timely basis |
| We have entered into agreements with third parties to acquire the rights to publish and distribute interactive entertainment software as well as to use licensed intellectual properties in our titles |
| These agreements typically require us to make advance payments, pay royalties and satisfy other conditions |
| Our advance payments may not be sufficient to permit developers to develop new software successfully, which could result in material delays and significantly increase our costs to bring particular products to market |
| Software development costs, promotion and marketing expenses and royalties payable to software developers and third-party licensors have increased significantly in recent years and reduce potential profits derived from sales of our software |
| Future sales of our titles may not be sufficient to recover advances to software developers and licensors, and we may not have adequate financial and other resources to satisfy our contractual commitments, which are approximately dlra60dtta0 million for licensing and marketing and approximately dlra50dtta0 million for software development for the fiscal year ending October 31, 2006 |
| If we fail to satisfy our obligations under agreements with third-party developers and licensors, the agreements may be terminated or modified in ways that may be burdensome to us, and materially adversely affect our operating results |
| Failure to commercialize products that require significant investments could result in corresponding charges to earnings |
| ” We are subject to product development risks which could result in delays and additional costs, and we must adapt to changes in software technologies |
| We rely on third-party software developers for the development of certain of our titles |
| Quality third-party developers are continually in high demand |
| Due to the limited number of third-party software developers and the limited control that we exercise over them, these developers may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all |
| We depend on third-party software developers and our internal development studios to develop new interactive entertainment software within anticipated release schedules and cost projections |
| The development cycle for new titles ranges from twelve to thirty-six months and is expected to increase in connection with the development of next generation software |
| After development of a product, it may take between nine to twelve additional months to develop the product for other hardware platforms |
| If developers experience financial difficulties, additional costs or unanticipated development delays, we will not be able to release titles according to our schedule and at budgeted costs |
| Additionally, in order to stay competitive, our internal development studios must anticipate and adapt to rapid technological changes affecting software development |
| Any inability to respond to technological advances and implement new technologies could render our products obsolete or less marketable |
| The interactive entertainment software industry is highly competitive both for our publishing and distribution operations |
| We compete for both licenses to properties and the sale of interactive entertainment software with Sony, Microsoft and Nintendo, each of which is a large developer and marketer of software for its own platforms |
| Each of these competitors has the financial resources to withstand significant price competition and to implement extensive advertising campaigns, particularly for television spots |
| These companies may also increase their own software development efforts or focus on developing software products for third-party platforms |
| We also compete with domestic game publishers such as Electronic Arts, Activision, THQ, Midway Games and Atari and international publishers, such as SEGA, Vivendi, Ubi Soft, SCi Entertainment, Capcom, Konami and Namco |
| As our business is driven by hit titles, which require increasing budgets for development and marketing, the availability of significant financial resources has become a major competitive factor in developing and marketing software games |
| Some of our competitors have greater financial, technical, personnel and other resources than we do and are able to finance larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable properties |
| Our titles also compete with other forms of entertainment such as motion pictures, television and audio and video products featuring 13 ______________________________________________________________________ [84]Back to Index similar themes, online computer programs and forms of entertainment which may be less expensive or provide other advantages to consumers |
| Our distribution business also operates in a highly competitive environment |
| Competition is based primarily on breadth, availability and quality of product lines; price; terms and conditions of sale; credit terms and availability; speed and accuracy of delivery; and effectiveness of sales and marketing programs |
| Our competitors include regional, national and international distributors, as well as hardware manufacturers and software publishers |
| We may lose market share or be forced in the future to reduce our prices in response to our competitors |
| Our distribution business has been adversely affected by lower sales volume of software titles, a decrease in average selling prices of interactive entertainment products as our industry transitions to next generation technology and increased competition in the value software market |
| Increased competition for limited shelf space and promotional support from retailers could affect the success of our business and require us to incur greater expenses to market our titles |
| Retailers have limited shelf space and promotional resources, and competition is intense among an increasing number of newly introduced interactive entertainment software titles for adequate levels of shelf space and promotional support |
| Competition for retail shelf space is expected to increase, which may require us to increase our marketing expenditures to maintain desirable levels of sales of our titles |
| Competitors with more extensive lines and popular titles may have greater bargaining power with retailers |
| Accordingly, we may not be able to achieve the levels of promotional support and shelf space that such competitors receive |
| A limited number of customers account for a significant portion of our sales |
| The loss of a principal customer could seriously hurt our business |
| A substantial portion of our product sales are made to a limited number of customers, two of which have recently merged |
| Sales to our five largest customers accounted for approximately 40dtta7prca and 38dtta9prca of our net revenues, respectively, for the fiscal years ended October 31, 2005 and 2004 |
| For the fiscal year ended October 31, 2005, sales of our products to Wal-Mart accounted for 14dtta9prca of our net revenues |
| Our sales are made primarily pursuant to purchase orders without long-term agreements or other commitments, and our customers may terminate their relationship with us at any time |
| The loss of our relationships with principal customers or a decline in sales to principal customers, including as a result of a product being re-rated to “AO” (age 18 and over), could materially adversely affect our business and operating results |
| Bankruptcies or consolidations of certain large retail customers could seriously hurt our business |
| Returns of our published titles by our customers and price concessions granted to our customers may adversely affect our operating results |
| We are exposed to the risk of product returns and price concessions with respect to our customers |
| Our distribution arrangements with customers generally do not give them the right to return titles to us or to cancel firm orders |
| However, we sometimes accept product returns from our distribution customers for stock balancing and negotiate accommodations to customers which include credits and returns, when demand for specific products falls below expectations |
| We accept returns and grant price concessions in connection with our publishing arrangements and revenue is recognized after deducting estimated reserves for returns and price concessions |
| While we believe that we can reliably estimate future returns and price concessions, if return rates and price concessions for our published titles exceed our reserves, our revenues could decline |
| Failure to collect our accounts receivables on a timely basis will negatively impact our cash flow |
| We do not hold any collateral to secure payment by our customers |
| As a result, we are subject to credit risks, particularly in the event that any of our receivables represent sales to a limited number of retailers or are concentrated in foreign markets |
| Although we continually assess the creditworthiness of our customers, which are principally large, national retailers, if we are unable to collect our accounts receivable as they become due, it could adversely affect our financial condition and cash flow |
| From time to time we purchase insurance from financial institutions on our receivables, with certain limits, to help protect us from loss in the event of a customer’s bankruptcy or insolvency |
| 14 ______________________________________________________________________ [85]Back to Index We are subject to the rating of our content by the Entertainment Software Rating Board |
| Failure to obtain “M” ratings for certain of our products could negatively impact our sales |
| We are also subject to a Federal Trade Commission inquiry, class action complaints and a certain civil complaint |
| The Entertainment Software Rating Board, sometimes referred to as the ESRB, requires game publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and imposes significant penalties for noncompliance |
| Certain countries have also established similar rating systems as prerequisites for product sales in those countries |
| In some instances, we may be required to modify our products to comply with the requirements of rating systems, which could delay or disrupt the release of our products |
| Our software titles receive a rating of “E” (age 6 and older), “E10+” (age 10 and older), “T” (age 13 and over) or “M” (age 17 and over) |
| We believe that we comply with rating systems and properly display the ratings and content descriptions received for our titles |
| Although game publishers have been able to modify content to satisfy ESRB ratings standards for “M” ratings, if we are unable to obtain “M” ratings as a result of changes in the ESRB’s ratings standards or for other reasons, including the adoption of legislation in this area, our business and prospects could be negatively affected |
| The ESRB requires publishers to conduct pertinent content audit certifications with respect to certain top selling titles, the objective of which is to assess what portion, if any, of the games on the market include undisclosed pertinent content on the disc that undermines the accuracy of the ESRB rating |
| This self audit procedure applies to certain current titles and may be applied to additional titles in the future |
| We are currently conducting a self audit in accordance with the ESRB’s requirements |
| It is possible that there may be content in our games that could be determined to be pertinent content that causes a change to our current ESRB rating |
| In such event, we may be required to record a reserve for anticipated product returns and inventory obsolescence which could expose us to additional litigation, administrative fines and penalties and other potential liabilities, and could adversely affect our operating results |
| In July 2005, we were notified that the staff of the Federal Trade Commission’s Division of Advertising Practices is conducting an inquiry into advertising claims made for Grand Theft Auto: San Andreas following the re-rating of the title by the ESRB from an “M” rating to an “AO” rating (18 and over) |
| This title was re-rated after an unauthorized third-party made certain content accessible that was not intended by us to be accessible in the playable version of the title |
| We have also received requests for documents and information relating to such title from certain states, and we are subject to class action complaints alleging consumer deception, false advertising and common law fraud and an action brought by the City Attorney of Los Angeles |
| We cannot predict the outcome of these pending matters, which could result in the imposition of significant fines and penalties and judgments |
| Additionally, we have incurred and may continue to incur significant legal and other professional fees and expenses in connection with pending regulatory matters and litigation, and these matters have also diverted management’s attention from our business |
| ” Our business and products are subject to increasing potential legislation |
| The adoption of such proposed legislation could limit the retail market for our products |
| Several proposals have been made for federal legislation to regulate our industry, including a bill, referred to as The Family Entertainment Protection Act, which was recently introduced into the Senate |
| If the bill is adopted into law, it may limit the potential market for our “M” rated products, and adversely affect our operating results |
| Several proposals have also been made by state legislators (including in California, Michigan and Illinois) to regulate the sale of interactive entertainment software products containing violent or sexually explicit material by prohibiting the sale of such products to under 17 or 18 audiences and proposing penalties for noncompliance |
| While such legislation has been successfully enjoined by industry and retail groups, the adoption into law of such legislation in federal and/or in state jurisdictions in which we do significant business could severely limit the retail market for our “M” rated titles |
| Content policies adopted by retailers, consumer opposition and litigation could negatively impact sales of our products |
| Retailers may decline to sell interactive entertainment software containing graphic violence or sexually explicit material that they deem inappropriate for their businesses |
| If retailers decline to sell our “M” rated products or products containing graphic violence or sexually explicit material generally, or if our “M” rated products are re-rated “AO,” we might be required to significantly change or discontinue particular titles, which in the case of our best selling Grand Theft Auto titles could seriously hurt our business |
| Consumer advocacy groups have opposed sales of interactive entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns |
| Additionally, although lawsuits seeking damages for injuries allegedly suffered by third parties as a result of video games have been unsuccessful in the courts, claims of this kind have been asserted against us from time to time |
| See “Legal Proceedings |
| ” 15 ______________________________________________________________________ [86]Back to Index We cannot publish our console titles without the approval of hardware licensors who are also our competitors |
| We are required to obtain a license from Sony, Microsoft and Nintendo, who are also our competitors, to develop and publish titles for their respective hardware platforms |
| Our existing platform licenses require that we obtain approval for the publication of new titles on a title-by-title basis |
| As a result, the number of titles we are able to publish for these hardware platforms, and our ability to manage the timing of the release of these titles and, accordingly, our net revenues from titles for these hardware platforms, may be limited |
| If any licensor chooses not to renew or extend our license agreement at the end of its current term, or if the licensor were to terminate our license for any reason, we would be unable to publish additional titles for that licensor’s platform |
| Termination of any such agreements could seriously hurt our business and prospects |
| Microsoft released its next generation hardware platform into the marketplace in November 2005, and we expect that each of Sony and Nintendo will introduce their respective next generation platforms into the marketplace in 2006 |
| In order to publish products for a new platform, we will be required to enter into a license agreement in advance of a platform’s commercial introduction, which gives the platform licensor the opportunity to set our fee structure |
| Certain platform licensors have retained the right to change fee structures for online game play, and each licensor’s ability to set royalty rates makes it difficult for us to forecast our costs |
| Increased costs could negatively impact our operating margins |
| We may be unable to enter into license agreements for certain next generation platforms on satisfactory terms or at all |
| Failure to enter into any such agreement could also seriously hurt our business |
| Sony and Nintendo are the sole manufacturers of the titles we publish under license from them |
| Games for the Xbox and Xbox 360 must be manufactured by manufacturers pre-approved by Microsoft |
| Each of these manufacturers also publishes software for its own platforms and manufactures titles for all of its other licensees and may choose to give priority to its own titles or those of other publishers if it has insufficient manufacturing capacity or if there is increased demand for its or other publishers’ products |
| In addition, these manufacturers may not have sufficient production capacity to satisfy our scheduling requirements during any period of sustained demand |
| If manufacturers do not supply us with finished titles on favorable terms without delays, our operations would be materially interrupted, and we would be unable to obtain sufficient amounts of our product to sell to our customers |
| If we cannot obtain sufficient product supplies, our net revenues will decline and we could incur losses |
| Our quarterly operating results are highly seasonal and may fluctuate significantly, which could cause our stock price to decline |
| We have experienced and may continue to experience wide fluctuations in quarterly operating results |
| The interactive entertainment industry is highly seasonal, with sales typically higher during the fourth calendar quarter (our fourth and first fiscal quarters), due primarily to increased demand for games during the holiday buying season |
| Our failure or inability to introduce products on a timely basis to meet seasonal fluctuations in demand could adversely affect our business and operating results |
| The uncertainties associated with software development, manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship and therefore may cause us to fail to meet financial expectations |
| In future quarters, our operating results may fall below the expectations of securities analysts and investors and the price of our stock could decline significantly |
| Our expansion and acquisitions may strain our operations, and we may not have sufficient financial resources to continue to expand our operations at previous levels |
| We have expanded through internal growth and acquisitions, which has placed and may continue to place a significant strain on our management, administrative, operational, financial and other resources |
| We have expanded our publishing operations, significantly increased our advances to licensors and developers and manufacturing expenditures and enlarged our work force |
| To successfully manage this growth, we must continue to implement and improve our operating systems as well as hire, train and manage a substantial and increasing number of management, technical, marketing, administrative and other personnel |
| We may be unable to effectively manage our expanding and geographically dispersed operations |
| 16 ______________________________________________________________________ [87]Back to Index We have acquired rights to various properties and businesses, and we intend to continue to pursue opportunities by making selective acquisitions consistent with our business strategy |
| We may be unable to successfully integrate new personnel, properties or businesses into our operations |
| If we are unable to successfully integrate personnel, properties or businesses into our operations, we may incur significant charges |
| Our publishing and distribution activities require significant cash resources |
| We may be required to seek debt or equity financing to fund the cost of continued expansion |
| The issuance of equity securities would result in dilution to the interests of our stockholders |
| Our business is subject to risks generally associated with the entertainment industry, and we may fail to properly assess consumer tastes and preferences |
| Our business is subject to all of the risks generally associated with the entertainment industry and, accordingly, our future operating results will depend on numerous factors beyond our control, including the popularity, price and timing of new hardware platforms being released; economic, political and military conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot be predicted |
| In order to plan for acquisition and promotional activities, we must anticipate and respond to rapid changes in consumer tastes and preferences |
| A decline in the popularity of certain game genres or particular platforms could cause sales of our titles to decline dramatically |
| The period of time necessary to develop new game titles, obtain approvals of platform licensors and produce finished products is unpredictable |
| During this period, consumer appeal for a particular title may decrease, causing product sales to fall short of expectations |
| We may not be able to protect our proprietary rights or avoid claims that we infringe on the proprietary rights of others |
| We develop proprietary software and have obtained the rights to publish and distribute software developed by third parties |
| We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution |
| Our software is susceptible to piracy and unauthorized copying |
| Unauthorized third parties may be able to copy or to reverse engineer our software to obtain and use programming or production techniques that we regard as proprietary |
| Well organized piracy operations have also proliferated in recent years resulting in the ability to download pirated copies of our software over the Internet |
| Although we attempt to incorporate protective measures into our software, piracy of our products could negatively impact our future profitability |
| With advances in technology, game content and software graphics are expected to become more realistic |
| As a result, we believe that interactive entertainment software will increasingly become the subject of claims that such software infringes the intellectual property rights of others |
| From time to time, we receive notices from third parties or are named in lawsuits by third parties alleging infringement of their proprietary rights |
| Although we believe that our software and technologies and the software and technologies of third-party developers and publishers with whom we have contractual relations do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary rights of others has or may occur |
| Any claims of infringement, with or without merit, could be time consuming, costly and difficult to defend |
| Moreover, intellectual property litigation or claims could require us to discontinue the distribution of products, obtain a license or redesign our products, which could result in additional substantial costs and material delays |
| Our software is susceptible to errors, which can harm our financial results and reputation |
| The technological advancements of new hardware platforms results in the development of more complex software products |
| As software products become more complex, the risk of undetected errors in products when first introduced increases |
| If, despite testing, errors are found in new products or releases after shipments have been made, we could experience a loss of or delay in timely market acceptance, product returns, loss of revenues and damage to our reputation |
| 17 ______________________________________________________________________ [88]Back to Index Gross margins relating to our distribution business have been historically 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 comprised of personnel and facilities |
| In the event of a significant decline in revenues, we may not be able to exit 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 revenues and profit |
| Our distribution business is dependent on suppliers to maintain an adequate supply of products to fulfil 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 important 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 |
| Further, 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 over time or to become obsolete |
| We are exposed to inventory risk in our distribution business to the extent that supplier price concessions are not available to us on all products or quantities |
| In addition, suppliers may become insolvent and unable to fulfil price concession obligations |
| 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 the United Kingdom and other countries in Europe, have accounted for a significant portion of our net revenues |
| Sales in international markets accounted for approximately 32dtta0prca and 27dtta5prca, respectively, of our net revenues for fiscal 2005 and 2004 |
| 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 |
| 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 |
| The market price for our common stock may be highly volatile as a result of, among other things, factors affecting the industry |
| 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 |
| 18 ______________________________________________________________________ [89]Back to Index 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 a recently adopted standard that accounts for stock options as compensation expense |
| Additionally, recently enacted legislation focused on corporate governance, auditing and internal accounting controls imposes compliance burdens on us, and will require us to continue to devote substantial financial, technical and personnel resources to address various compliance issues and audit requirements |