2K Sports 2003 Annual Report Download - page 18

Cost of Sales
Years ended October 31,
% of % of
2003 Sales 2002 Sales $ Increase % Inc
Product costs $537,257 52.0 $411,518 51.8 $125,739 30.6
Royalties 89,294 8.6 80,442 10.1 8,852 11.0
Software development costs 11,003 1.1 8,124 1.0 2,879 35.4
Total cost of sales $637,554 61.7 $500,084 62.9 $137,470 27.5
Operating Expenses
Years ended October 31,
% of % of
2003 Sales 2002 Sales $ Increase % Inc
Selling and marketing $103,015 10.0 $ 77,990 9.8 $25,025 32.1
General and administrative 88,083 8.5 71,544 9.0 16,539 23.1
Research and development 25,107 2.4 11,524 1.5 13,583 117.9
Depreciation and amortization 16,923 1.6 10,829 1.4 6,094 56.3
Total operating expenses $233,128 22.6 $171,887 21.6 $61,241 35.6
TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
16
Selling and marketing. The increase in selling and marketing
expense was attributable to increased levels of advertising and pro-
motional support for existing and new titles as well as higher person-
nel expenses and is consistent with the growth of our business.
General and administrative. The general and administrative
expense increase in absolute dollars was principally attributable to costs
associated with the consolidation of our distribution operations, as well
as increased personnel expenses (including bonuses, severance pay-
ments and the issuance of restricted stock), higher rent and bad debt
expenses. Higher costs were partly offset by lower professional fees,
including the reimbursement of $1,100 of legal fees from insurance
proceeds in fiscal 2003 relating to costs recorded in the prior year.
Fiscal 2002 costs reflected litigation settlement costs of $1,190 relating
to a distribution arrangement. The fiscal 2003 net consolidation charge
of $2,621 consisted of: lease termination costs, representing the fair
value of remaining lease payments, net of estimated sublease rent; dis-
position of fixed assets, representing the net book value of fixed assets
and leasehold improvements; and other exit costs. Bad debt expense
increased as a result of customer bankruptcies not covered by insur-
ance during the current year.
Research and development. Research and development costs
increased primarily due to the acquisitions of development studios, as
well as increased personnel costs. Once software development projects
reach technological feasibility, which is relatively early in the development
process, a substantial portion of our research and development costs are
capitalized and subsequently amortized as cost of goods sold.
Depreciation and amortization. Depreciation and amortization
expense increase includes $4,407 related to the impairment of a cus-
tomer list from a previous acquisition as a result of the consolidation
of our distribution operations, higher amortization of intangible assets
as a result of acquisitions and higher depreciation related to the
implementation of accounting software systems.
Income from Operations. Income from operations increased
by $40,306, or 32.8%, to $163,011 for fiscal 2003 from $122,705 for
fiscal 2002, due to the changes referred to above.
Cost of Sales. The increase in product costs is primarily attributa-
ble to higher costs associated with our expanded distribution opera-
tions. These costs were partly offset by lower product pricing from
suppliers and lower manufacturing costs (principally attributable to
volume purchase discounts and rebates) and lower cost PC titles.
Product costs for fiscal 2003 included a charge of $7,892 relating to
the impairment of intangibles related to certain products in develop-
ment, including Duke Nukem Forever and its sequel. The impairment
was based on continued product development delays and our
assessment of current market acceptance and projected cash flows
for these products. Product costs for fiscal 2002 included $3,064 of
litigation settlement costs relating to a distribution agreement.
Royalties. The increase in royalties was primarily due to expense
under a royalty program based on product sales for certain of our
internal development personnel, partly offset by lower royalties
payable to third parties and lower write-downs and amortization of
prepaid royalties. Our internal royalty program may continue to be a
significant expense in future periods.
Software Development Costs. Software development costs
increased due to the release of a greater number of internally devel-
oped titles during this period resulting in higher amortization in the
current period. These software development costs relate to our
internally developed titles.
In future periods, cost of sales may be adversely affected by man-
ufacturing and other costs, price competition and by changes in prod-
uct and sales mix and distribution channels.