2K Sports 2004 Annual Report Download - page 13

For fiscal 2004, 2003 and 2002, research and development expenses relating to our software titles were
$43.3 million, $25.1 million and $11.5 million, respectively. Additionally, for these years, we capitalized
software development costs of $26.0 million, $15.9 million and $9.6 million, respectively.
Certain of our titles are developed by third parties. Agreements with developers generally give us exclusive
publishing and marketing rights and require us to make advance royalty payments, pay royalties based on
product sales and satisfy other conditions. Royalty advances for software titles are recoupable against royalties
otherwise due to developers.
Our agreements with developers generally provide us with the right to monitor development efforts and to
cease making advance payments if specified development milestones are not satisfied. We monitor the level of
advances in light of expected sales for the related titles and write off unrecoverable advances to cost of sales
in the period in which we determine the advance will not be fully recouped.
The development cycle for new console, handheld and PC titles ranges from twelve to twenty-four months.
After initial development of a product, it may take between nine to twelve months to develop the product for
other hardware platforms. The cost to develop a frontline product generally ranges from $3 million to
$10 million. We expect that development costs will increase for next-generation platforms.
Arrangements with Platform Manufacturers
We have entered into license agreements with Sony, Microsoft and Nintendo to develop and publish software
in North America and Europe for the PlayStation, PlayStation 2, PSP, Xbox, Game Boy Advance and
GameCube. We are not required to obtain any licenses to develop titles for the PC.
Sony. We entered into a Licensed Publisher Agreement with Sony Computer Entertainment America, Inc. in
May 2000. Under the agreement, Sony granted us the right and license to develop, market, publish and
distribute software titles for the PlayStation 2 in North America. The agreement requires us to submit products
to Sony for its approval. The agreement provides for Sony to be the exclusive manufacturer of our products
for the PlayStation 2 and for us to pay royalties to Sony based on the number of units manufactured.
The agreement with Sony is automatically renewable for successive one-year terms, unless terminated by
Sony in the event of a breach by us or our bankruptcy or insolvency. Sony may also terminate the agreement
on a title-by-title basis. Upon expiration or termination of this agreement, we have certain rights to sell off
existing inventories. We also entered into a similar agreement with Sony for PlayStation 2 covering European
territories and Australia.
In September 2004, we entered into a three-year agreement with Sony pursuant to which Sony granted us the
right and license to develop, market, publish and distribute software titles for the PSP in North America. We
entered into a four-year Licensed Publisher Agreement with Sony in April 2004 under which Sony granted us
the right and license to develop, market, publish and distribute software titles for the PlayStation in North
America. We also entered into a similar agreement with Sony for PlayStation covering European territories
and Australia.
Microsoft. We entered into a Publisher License Agreement with Microsoft in December 2000. Under the
agreement, Microsoft granted us the right and license to develop, market, publish and distribute software titles
for Microsoft’s Xbox in territories to be determined on a title-by-title basis. The agreement requires us to
submit products to Microsoft for its approval and for us to make royalty payments to Microsoft based on the
number of units manufactured. Products for the Xbox must be manufactured by pre-approved manufacturers.
The agreement may be terminated by either party in the event of a material breach and expires in March
2005. Microsoft also has the right to terminate on a title-by-title basis. Upon expiration or termination of the
agreement, we have certain rights to sell off existing inventories.
Nintendo. We entered into a Confidential License Agreement with Nintendo that expires in December 2007.
Under the agreement, Nintendo granted us the right and license to develop, market, publish and distribute
software for Nintendo’s GameCube in the western hemisphere. The agreement requires us to submit products
to Nintendo for its approval. The agreement also provides for Nintendo to be the exclusive manufacturer of
our products and for us to make royalty payments to Nintendo based on the number of units manufactured.
The agreement may be terminated by either party in the event of a breach and may be terminated by Nintendo
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