2K Sports 2009 Annual Report Download - page 58

Interest and other expense, net
% of net % of net Increase/ % Increase/
(thousands of dollars) 2008 revenue 2007 revenue (decrease) (decrease)
Interest income (expense), net $ 695 0.0% $ 2,274 0.2% $(1,579) (69.4)%
Gain (loss) on sale and deconsolidation 277 0.0% (4,469) (0.5)% 4,746 (106.2)%
Foreign exchange gain (loss) (5,097) (0.3)% 1,644 0.2% (6,741) (410.0)%
Other 415 0.0% 34 0.0% 381 1120.6%
Interest and other expense, net $(3,710) (0.2)% $ (517) (0.1)% $(3,193) 617.6%
In 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 business, to
Mad Catz Interactive, Inc. for approximately $3.6 million in cash and notes receivable, resulting in a
recognized loss on the sale of $3.1 million. The disposition of Joytech did not involve a significant amount
of assets or materially impact our operating results.
Also, in 2007, we recognized a loss of $1.4 million when we deconsolidated the net assets of Blue Castle
Games, Inc. (‘‘Blue Castle’’), which was previously accounted for, in accordance with the Variable Interest
Entity guidance, as a wholly-owned subsidiary and considered to be a variable interest entity. We are no
longer considered to be the primary beneficiary of Blue Castle’s profits or losses.
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.
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.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development, manufacturing and marketing of
our published products, (ii) working capital, (iii) acquisitions and (iv) capital expenditures. We expect to
rely on funds provided by our operating activities, our credit agreement and our recently issued
Convertible Notes to satisfy our working capital needs.
In June 2009, we issued $138.0 million aggregate principal amount of 4.375% convertible senior notes due
2014 (‘‘Convertible Notes’’). The issuance of the Convertible Notes included $18.0 million related to the
exercise of an over-allotment option by the underwriters. Interest on the Convertible Notes is payable
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