2K Sports 2008 Annual Report Download - page 55

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In 2008, we incurred a foreign exchange transaction loss of $5.1 million for the year ended October 31,
2008, reflecting a strengthening United States dollar in the fourth quarter of 2008, compared to a foreign
exchange transaction gain of $1.6 million for the year ended October 31, 2007.
Provision for income taxes. Income tax expense was $15.0 million for the year ended October 31, 2008, as
compared to $10.2 million for the year ended October 31, 2007. Our effective tax rate differed from the
federal statutory rate due to foreign earnings taxed at lower rates and the application of net operating
losses carried forward to 2008 taxable income. The use of the net operating losses enabled the reversal of
valuation allowances of $19.3 million in 2008, while the 2007 taxable loss required an increase to the
valuation allowance of $40.6 million last year.
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 (loss) and earnings (loss) per share. For the year ended October 31, 2008, net income was
$97.1 million, compared to a net loss of $138.4 million for the year ended October 31, 2007. Basic and
diluted earnings per share for the year ended October 31, 2008 was $1.29 and $1.28, respectively,
compared to a loss per share of $1.93 for the year ended October 31, 2007. Weighted average shares
outstanding increased compared to the prior period, mainly due to an increase in the exercise of stock
options as a result of a higher average stock price in the 2008 period and the issuance of 1,496,647 shares
of restricted stock in connection with our acquisition of 2K Czech, formerly known as Illusion Softworks.
Years Ended October 31, 2007 and 2006
Publishing
%
Increase/ Increase/
(thousands of dollars) 2007 % 2006 % (decrease) (decrease)
Net revenue $692,341 100.0% $753,315 100.0% $(60,974) (8.1)%
Product costs 248,744 35.9% 279,946 37.2% (31,202) (11.1)%
Software development costs and royalties 136,485 19.7% 193,539 25.7% (57,054) (29.5)%
Internal royalties 28,892 4.2% 40,413 5.4% (11,521) (28.5)%
Licenses 58,569 8.5% 52,763 7.0% 5,806 11.0%
Cost of goods sold(1) 472,690 68.3% 566,661 75.2% (93,971) (16.6)%
Gross profit $219,651 31.7% $186,654 24.8% $ 32,997 17.7%
(1) Includes $3,216 and $1,263 of stock-based compensation expense in 2007 and 2006, respectively, included in software
development costs and royalties.
Net revenue from our Grand Theft Auto franchise was $103.7 million lower in 2007, reflecting a decrease
from the strong sales of Grand Theft Auto: Liberty City Stories for PS2 and PSP in the prior year. In
addition, net revenue related to The Elder Scrolls IV: Oblivion, which was released in the second quarter of
2006, was approximately $63.1 million lower in 2007. Partially offsetting the decline in our net revenue
were sales of BioShock, our new title that was released in the fourth quarter of 2007 on the Xbox 360 and
PC, and which had sales of $85.1 million. In addition, revenue from our baseball titles increased by
$38.2 million due to better performance of Major League Baseball↦ 2K7 compared to its predecessor title
and a greater number of product releases, including The BIGS on five platforms and MLB↦ Power Pros on
two platforms.
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