2K Sports 2009 Annual Report Download - page 40

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In fiscal 2009, we continued to leverage advances in technology and consumer reach by introducing a
variety of digital content. We released two downloadable episodes for Grand Theft Auto IV exclusively on
Xbox LIVE Marketplace (‘‘Xbox LIVE’’), Microsoft’s online entertainment and gaming network, and
downloadable content for Midnight Club: Los Angeles on Xbox LIVE and PlayStationNetwork (‘‘PSN’’).
We also released NBA 2K10: Draft Combine, a download-only experience on Xbox LIVE Arcade
(‘‘XBLA’’) and PSN. We have also begun to develop and publish titles for the iPhoneand iPodtouch,
including Sid Meier’s Civilization Revolution which was released this year, and casual gaming titles
exclusively for XBLA, including the launch of Axel & Pixel this fall.
The installed base of current generation hardware platforms continued to increase in 2009. 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 the first quarter of fiscal 2009, we announced a new incentive compensation program for the Rockstar
Games label that was primarily based on a profit sharing arrangement and at the same time we entered
into new long-term employment agreements with members of the creative team of our wholly-owned
Rockstar Games label. The employment agreements have an initial term ending on January 31, 2012.
In June 2009, we issued $138.0 million aggregate principal amount of 4.375% convertible senior notes due
2014 (‘‘Convertible Notes’’), which raised approximately $116.0 million of cash after taking into
consideration transaction fees and costs related to hedging instruments. Interest on the Convertible Notes
is payable semi-annually in arrears on June 1st and December 1st of each year, commencing on
December 1, 2009. The Convertible Notes mature on June 1, 2014, unless earlier redeemed or repurchased
by the Company or converted. See ‘‘Liquidity and Capital Resources’’ for more information on our
Convertible Notes offering.
During our annual goodwill impairment test we determined that goodwill attributed to our distribution
reporting unit was impaired due to a decline in the retail environment in 2009 and its impact on our
outlook for our distribution reporting unit. For the fiscal year ended October 31, 2009, we recorded a
goodwill and intangible impairment charge of $14.8 million related to our distribution segment.
In the fourth quarter of 2009, we released the majority of our biggest titles for the year such as
Borderlands, NBA 2K10, Grand Theft Auto: Chinatown Wars for the PSP and Grand Theft Auto: Episodes
from Liberty City, which includes both episode one The Lost and Damned, and episode two The Ballad of
Gay Tony together on a single disc exclusively for Xbox 360.
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
and judgments on historical experience, current trends and other factors that management believes to be
relevant at the time our consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial
statements are fairly presented in accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual amounts could differ significantly from these estimates.
We have identified the policies below as critical to our business operations and the understanding of our
financial results and they require management’s most difficult, subjective or complex judgments, resulting
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