2K Sports 2003 Annual Report Download - page 19

Interest (Income) Expense, net. Interest income of $2,265 for
fiscal 2003 was attributable to interest earned on the invested cash.
Interest expense of $480 for fiscal 2002 reflected borrowings from our
credit facilities, which were repaid in early fiscal 2002.
Class Action Settlement Costs. During fiscal 2002, we recorded
$1,468 of class action settlement costs, which represents a settlement
of $7,500 and related legal fees, net of $6,145 of insurance proceeds.
Provision for Income Taxes. Income tax expense was $67,197 for
fiscal 2003 as compared to $49,375 for fiscal 2002. The increase was
primarily attributable to increased taxable income. The effective tax
rate was 40.6% for fiscal 2003, as compared to an effective tax rate of
40.8% for fiscal 2002. The effective income tax rate differs from the
statutory rate primarily as a result of non-taxable foreign income, non-
deductible expenses, valuation allowances for deferred tax assets and
the mix of foreign and domestic taxes as applied to the income. The
valuation allowances relate to capital loss and state net operating loss
carryforwards.
At October 31, 2003 and October 31, 2002, we had capital loss
carryforwards totaling approximately $21,000. The capital loss carry-
forwards will expire in the periods fiscal 2006 through fiscal 2008.
Failure to achieve sufficient levels of taxable income from capital
transactions might affect the ultimate realization of the capital loss
carryforwards. At October 31, 2002, management had a strategy of
selling net appreciated assets of the company, to the extent required
to generate sufficient taxable income prior to the expiration of these
benefits. At October 31, 2003, based on management’s future plans,
this strategy was no longer viable, and accordingly a valuation
allowance has been recorded for this asset. At October 31, 2003,
we had foreign net operating losses of $9,800 expiring between
2005 and 2010, and state net operating losses of $41,700 expiring
between 2021 and 2023. Limitations on the utilization of these losses
may apply, and accordingly valuation allowances have been recorded
for these assets.
Net Income. Net income increased $26,555, or 37.1%, to $98,118
for fiscal 2003 from $71,563 for fiscal 2002, due to the changes
referred to above.
Diluted Net Income per Share. Diluted net income per share
increased $0.46, or 25.4%, to $2.27 for fiscal 2003 from $1.81 for
fiscal 2002. The increase in net income was partly offset by the higher
weighted average shares outstanding. The increase in weighted
shares outstanding resulted from the issuance of shares underlying
stock options and to the acquisitions of the Max Payne intellectual
property and the development studios.
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Fiscal Years Ended October 31, 2002 and 2001
Net Sales
Years ended October 31,
2002 % 2001 % $ Increase % Inc
Publishing $568,492 71.5 $244,071 54.1 $324,421 132.9
Distribution 226,184 28.5 207,325 45.9 18,859 9.1
Net sales $794,676 100.0 $451,396 100.0 $343,280 76.0
Net Sales. The increase in revenues was primarily attributable to
growth in publishing operations. Included in net sales for fiscal 2001
was $23,846 attributable to the adoption of SAB 101. See Note 3 to
Consolidated Financial Statements.
The increase in publishing revenues was primarily attributable to
the continued strong sales of Grand Theft Auto 3 for PlayStation 2
and the release of Grand Theft Auto: Vice City for the PlayStation 2,
Max Payne for the PlayStation 2 and Xbox, State of Emergency for
the PlayStation 2 and Grand Theft Auto 3 for the PC. Fiscal 2001
included $17,248 of net sales attributable to the adoption of
SAB 101.
Products designed for video game console platforms accounted
for 83.9% of fiscal 2002 publishing revenues as compared to 57.6%
for fiscal 2001. The increase was primarily attributable to continued
sales of Grand Theft Auto 3 for PlayStation 2 and the release of
Grand Theft Auto: Vice City for the PlayStation 2, Max Payne for
PlayStation 2 and Xbox and State of Emergency for PlayStation 2.
Products designed for the PC accounted for approximately 14.3%
of fiscal 2002 publishing net sales as compared to 35.6% for fiscal
2001. The decrease is a result of fewer PC titles released during
fiscal 2002.
The increase in distribution revenues was primarily attributable to
the commercial introduction of Xbox and GameCube and the contin-
ued rollout of PlayStation 2 and the sale of software for these console
platforms. Distribution revenue represented 28.5% and 45.9% of net
sales for fiscal 2002 and 2001, respectively. Fiscal 2001 included
$6,598 attributable to the adoption of SAB 101.
International operations accounted for approximately $159,245, or
20.0% of net sales for fiscal 2002 compared to $106,565, or 23.6% for
fiscal 2001. The increase in absolute dollars was primarily attributable
to expanded publishing operations in Europe, including the release
of Max Payne and State of Emergency for PlayStation 2, Grand Theft
Auto 3 for the PC and continued sales of Grand Theft Auto 3 for
PlayStation 2.