2K Sports 2008 Annual Report Download - page 57

price points than their predecessor products. In addition, sales of hardware increased $7.9 million, or 8.4%,
due to the introduction of the PS3 and Wii systems. The increase in net revenue was partially offset by a
decrease in prior generation software sales of $14.8 million in 2007 as a result of the continued decline in
sales volume and average selling price of value and frontline software titles as the gaming industry
transitions to current generation platforms. In addition, we experienced a decline in sales of our PC
products of $10.0 million, or 18.5%. Foreign currency exchange rates increased net revenue by
approximately $2.8 million in 2007. Gross profit margins remained relatively consistent compared to the
prior year.
Operating Expenses
%
% of net % of net Increase/ Increase/
(thousands of dollars) 2007 revenue 2006 revenue (decrease) (decrease)
Selling and marketing $130,652 13.3% $139,250 13.4% $ (8,598) (6.2)%
General and administrative 150,432 15.3% 156,191 15.0% (5,759) (3.7)%
Research and development 48,455 4.9% 64,258 6.2% (15,803) (24.6)%
Business reorganization and related 17,467 1.8% —0.0% 17,467 N/M
Impairment of long-lived assets — 0.0% 15,608 1.5% (15,608) N/M
Depreciation and amortization 27,449 2.8% 26,399 2.5% 1,050 4.0%
Total operating expenses(1) $374,455 38.1% $401,706 38.7% $(27,251) (6.8)%
(1) Includes stock-based compensation expense, which was allocated as follows:
2007 2006
Selling and marketing $1,232 $ 1,256
General and administrative 7,080 13,277
Research and development 3,735 6,135
Business reorganization and related 2,066 —
Selling and marketing
Selling and marketing expenses decreased $8.6 million in 2007 as compared to 2006 primarily due to:
i. $5.3 million more in marketing and promotion expenditures in 2006 mainly attributable to
advertising campaigns for our Grand Theft Auto products; and
ii. $2.5 million less in marketing at the annual E3 trade show event in 2007 as a result of the industry
wide downsizing of the event compared to past years.
General and administrative
General and administrative expenses decreased $5.8 million in 2007 as compared to 2006 primarily due to:
i. $6.2 million less in stock-based compensation expense, reflecting cost savings associated with the
departure of our former management team;
ii. approximately $2.8 million of cost savings in 2007 as a result of our 2006 studio closures, for
which we recorded $1.9 million of severance and lease termination expenses in 2006; and
iii. $2.3 million recorded in 2006 related to the relocation of our international publishing
headquarters to Geneva, Switzerland, partially offset by;
iv. higher expenses related to information technology system improvements of approximately
$2.6 million in 2007.
General and administrative expenses for 2007 and 2006 also includes occupancy expense (primarily rent,
utilities and office expenses) of $14.9 million and $15.2 million, respectively, related to our development
studios.
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