2K Sports 2008 Annual Report Download - page 43

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2008 Financial Summary
The release of Grand Theft Auto IV on April 29, 2008 highlighted our 2008 fiscal year, driving a significant
increase in revenue and net income. It has been reported that the title surpassed all-time entertainment
records for first day and first week retail sales, with approximately six million units purchased by consumers
globally in the first week at an estimated retail value of more than $500 million.
Overall, we believe that our product lineup grew stronger in 2008, marked by the continued success of our
critically acclaimed BioShock, a wholly owned and internally developed title for Xbox 360 and Games for
Windows↦ that debuted in late fiscal year 2007. We shipped over three million units of BioShock on the
Xbox 360, PC and PS3 through October 2008. In addition, we announced that Universal Pictures is
developing a feature film based on BioShock to be directed by Gore Verbinski, director of the Pirates of the
Caribbean trilogy.
The 2008 fiscal year evidenced a distinct shift in focus toward casual game play and the Wii home video
game system from Nintendo continued its popularity. Carnival Games↩, our wholly owned and internally
developed title for the Wii and DS, continued its success in 2008 and exceeded expectations for sales and
profitability. Through October 31, 2008 we had shipped over two million units of Carnival Games since it
made its debut in late fiscal year 2007. In October 2008, we expanded the franchise with Carnival Games↩
MiniGolf.
In 2008, our 2K label acquired 2K Czech, formerly known as Illusion Softworks, a studio based in the
Czech Republic and the developer of the Mafia franchise. In addition, our sports titles performed better
than in prior years, primarily benefiting from the release of Top Spin 3 in the third quarter of 2008.
However, we continue to face increased competition in the sports genre.
We are focusing on improving the 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 and outsourced the pick, pack, ship and warehousing
functions for our publishing and distribution business to Ditan.
The increased installed base of current generation hardware platforms also helped to improve our business
in 2008. As a result, we continued to make significant investments in current generation game
development. We expect sales on the prior generation platforms to continue to decline because of the
ongoing hardware transition and have therefore reduced the number of titles in development for these
platforms. We have reduced pricing on several of our software titles for the prior generation platforms as
the market for that generation continues to decline and the current generation hardware installed base
grows.
In April 2008, we amended our Management Agreement with ZelnickMedia. The amended agreement
provides for management fees of $2.5 million ($0.75 million prior to the amendment that was effective as
of April 1, 2008) and a maximum bonus of $2.5 million per fiscal year ($0.75 million prior to the
amendment that was effective as of April 1, 2008) based on the Company achieving certain performance
thresholds. The amendment also provided for a grant of 600,000 shares of restricted stock to ZelnickMedia
that vest annually over a three year period, and 900,000 shares of restricted stock that vest over a four year
period through 2012, provided that the price of our common stock outperforms 75% of the companies in
the NASDAQ Industrial Index. The shares were granted on June 13, 2008. See Note 15 to the
Consolidated Financial Statements for more information regarding our stock compensation expense.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America (‘‘GAAP’’) requires management to make estimates and assumptions about
future events and apply judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial statements and the reported
amounts of net revenues and expenses during the reporting periods. We base our estimates, assumptions
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