2K Sports 2004 Annual Report Download - page 27

of approximately $62,000 expiring between 2021 and 2023. If these losses are determined to not be utilizable
prior to expiration, additional valuation allowances may need to be recorded in future periods.
Recently enacted legislation generally provides that the ETI benefit described above will be reduced by 20%
in 2005 and 40% in 2006, and will be eliminated in its entirety in 2007, which may result in higher future
effective tax rates. Although this legislation also provides for future phased-in deductions for qualifying
domestic production activities, we are presently unable to determine whether we will be able to realize any
benefit from this provision. In addition, the legislation makes available a one-time 85% tax reduction with
respect to repatriated foreign earnings through 2005. We do not believe that this provision will provide a
material benefit to us.
We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in
excess of amounts claimed and the payment of additional taxes. We believe that our tax positions comply with
applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.
Net Income. Net income decreased $32,740 or 33.4%, to $65,378 for fiscal 2004 from $98,118 for fiscal
2003, due to the changes referred to above.
Diluted Net Income per Share. Diluted net income per share decreased $0.84 or 37.0%, to $1.43 for fiscal
2004 from $2.27 for fiscal 2003.
Years Ended October 31, 2003 and 2002
Net Sales
Years ended October 31,
2003 % 2002 %
Increase
(Decrease)
%
Incr
(Decr)
Publishing ........................... $ 671,892 65.0 $568,492 71.5 $103,400 18.2
Distribution .......................... 361,801 35.0 226,184 28.5 135,617 60.0
Total net sales ....................... $1,033,693 100.0 $794,676 100.0 $239,017 30.1
Net Sales. The increase in net sales was attributable to growth in our publishing and distribution operations.
The increase in publishing revenues was primarily attributable to sales of Grand Theft Auto: Vice City for
PlayStation 2, which was released in October 2002 in North America and in November 2002 internationally
and reflected the growth of our publishing operations in Europe. Publishing revenues in fiscal 2003 and 2002
include licensing revenues of $25,002 and $13,873, respectively.
Products designed for video game console platforms accounted for 81.2% of publishing revenues for fiscal
2003 as compared to 83.9% for fiscal 2002. Products designed for PC platforms accounted for 17.2% of
publishing revenues for fiscal 2003 as compared to 14.3% for fiscal 2002.
Distribution revenues are derived from the sale of third-party software titles, accessories and hardware. The
increase in distribution revenues was primarily attributable to our increasing market share for budget titles in
North American retail channels.
International operations accounted for approximately $288,753, or 27.9% of net sales for fiscal 2003 compared
to $159,245, or 20.0% of net sales for fiscal 2002. The increases were primarily attributable to expanded
publishing operations in Europe, which benefited from the November 2002 release of Grand Theft Auto: Vice
City for PlayStation 2, and strengthening of foreign currencies relative to the US dollar.
Cost of Sales
Years ended October 31,
2003
%of
Sales 2002
%of
Sales Increase
%
Incr
Product costs ........................ $537,257 52.0 $411,518 51.8 $125,739 30.6
Royalties ............................. 89,294 8.6 80,442 10.1 8,852 11.0
Software development costs ......... 11,003 1.1 8,124 1.0 2,879 35.4
Total cost of sales ................... $637,554 61.7 $500,084 62.9 $137,470 27.5
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