2K Sports 2008 Annual Report Download - page 41

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business are dependent in part upon our ability to continually release new, commercially successful
products and to manage software product development costs. We develop most of our frontline products
internally and own the intellectual property associated with most of our titles, which we believe best
positions us financially and competitively. We have internal development studios located in the United
States, Canada, United Kingdom, Australia, Czech Republic and China.
Operating margins associated with our externally developed titles, or titles for which we do not own the
intellectual property, are generally lower because they require us to acquire licenses, provide minimum
development guarantees, and pay third party royalties. Agreements with third party 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. We continue to develop new revenue streams
as they evolve, including higher margin sources such as downloadable content, which we expect will
become more significant to our business over time. We announced plans to leverage our wholly-owned
intellectual property, BioShock, by allowing Universal Pictures to develop it into a feature film.
Revenue in our distribution segment is derived from the sale of third party software titles, accessories and
hardware in North America. Operating margins in our distribution business depend in large part on the
mix of software and hardware sales, with software sales generally yielding higher margins than hardware.
We have focused on improving margins in our distribution business. In 2008, we sold certain assets of our
distribution segment pertaining to the warehouse management, processing and value-added service
operations of our distribution facility to Ditan Distribution LLC (‘‘Ditan’’), a logistics management
solutions provider. In addition, we agreed to outsource the pick, pack, ship and warehousing functions for
our publishing and distribution businesses to Ditan. We believe this will allow Jack of All Games to better
focus on purchasing, sales and service for their customers.
Recent Developments
During the year ended October 31, 2008, Electronic Arts Inc. (‘‘EA’’) extended a tender offer to our
stockholders (the ‘‘Offer’’) to acquire all outstanding shares of our Common Stock. Our Board of
Directors, upon the advice of its financial and legal advisors, unanimously determined that the Offer was
inadequate and recommended that stockholders not accept it. The Offer was extended several times
through August 2008, at which time the Offer expired. Our management and Board commenced a formal
process to review strategic alternatives beginning in April 2008 that included discussions with potential
interested parties. In October 2008, we announced the conclusion of our strategic review process. We
incurred $11.1 million of costs in 2008 related to the EA Offer and our strategic review process.
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