2K Sports 2008 Annual Report Download - page 58

Research and development
Research and development expenses decreased $15.8 million in 2007 compared to 2006 primarily due to:
i. approximately $3.5 million of severance expense recorded in 2006 relating to the termination of
research and development employees resulting from studio closures; and
ii. $12.3 million higher software capitalization costs as a result of increased development work in
progress for technologically feasible current generation platform titles.
Business reorganization and related costs
Business reorganization and related expenses were $17.5 million in 2007. There were no business
reorganization expenses incurred in 2006. Business reorganization and related expenses in 2007 include
employee termination costs of $10.1 million, primarily as a result of severance for former management and
consolidating our international operations. In 2007 we recorded $2.9 million of facility related and
relocation costs for our 2K headquarters move to California. In total, we spent $4.4 million on professional
fees and other costs related to the replacement of prior management and the election of five new directors
to our Board of Directors at our annual stockholders’ meeting (rather than the six incumbent directors
nominated and recommended by our incumbent Board of Directors), $2.0 million of which was investment
banking fees incurred by prior management to consider the possibility of presenting alternative proposals
to our stockholders, including a potential sale of the Company.
Impairment of long-lived assets
In 2006, we recorded an impairment charge of $8.1 million related to goodwill and fixed assets at our
Joytech subsidiary, a manufacturer and distributor of video game accessories, which operates within our
publishing segment. The impairment charges reflected a decline in the fair value of Joytech’s business
resulting from increased competition and a decline in the price and sales volume of prior generation
accessories due to weaker market conditions and the ongoing transition to current generation platforms.
Additional impairment charges of approximately $7.5 million were related to the write-off of certain
trademarks, acquired intangibles, investments and fixed assets. These write-offs were based on
management’s assessment of the future value of these assets, including future business prospects and
estimated cash flows to be derived from these assets.
Interest and other, net
%
Increase/ Increase/
(thousands of dollars) 2007 % 2006 % (decrease) (decrease)
Interest income, net $ 2,274 0.2% $2,664 0.3% $ (390) (14.6)%
Loss on sale and deconsolidation (4,469) (0.5)% — 0.0% (4,469) N/M
Foreign exchange gain (loss) 1,644 0.2% 2,176 0.2% (532) (24.4)%
Other 34 0.0% 20 0.0% 14 70.0%
Interest and other, net $ (517) (0.1)% $4,860 0.5% $(5,377) (110.6)%
In September 2007, we sold substantially all of the assets, primarily inventory and accounts receivable, of
our wholly-owned Joytech video game accessories subsidiary, formerly a component of our publishing
segment, for approximately $3.6 million in cash. The disposition of Joytech did not involve a significant
amount of assets or materially impact our operating results. We recognized a $3.1 million loss on the sale
of our Joytech business.
In the fourth quarter of 2007, we recognized a loss of $1.4 million when we deconsolidated the net assets of
Blue Castle Games, Inc., which was previously accounted for, in accordance with FIN 46(R), as a wholly-
owned subsidiary and considered to be a variable interest entity. Blue Castle continues to develop certain
of our sports titles; however, we are no longer considered to be the primary beneficiary of Blue Castle’s
future profits or losses.
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