THQ 2005 Annual Report Download - page 87

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64
Advertising.Advertising and sales promotion costs are generally expensed as incurred, except for
television airtime and print media costs associated with media campaigns, which are deferred and charged
to expense inthe period the airtime or advertising space is used for the first time. Advertising costs for the
fiscal years ended March 31, 2005 and 2004, Transition 2003 and the year ended December 31, 2002 were
$57 million, $45.3 million, $5.2 million and $34.4, respectively.
Employee Stock-Based Compensation. We account for our employee stock-based compensationplans
under the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock option
compensation expense, other than acquisition-related compensation, is recognized in our consolidated
statements of operations because all stock options granted had an exercise price equal to the fair value of
the underlying common stock on the grant date, except for options issued by Locomotive Games,Inc.
(which changed its name from Pacific Coast Power & Light Company in April 2005) and Genetic
Anomalies prior to their acquisitions, which were issued at below market. The estimated fair value of the
options granted in the fiscal years ended March 31, 2005 and 2004, Transition 2003 and the year ended
December 31, 2002 was $22.7 million, $20.6 million, $3.4 million and $31.3 million, respectively.
On November 13, 2003, we commenced a Stock Option Exchange Program (“the Program”) under which
eligible employees holding options to purchase an aggregate of 1,494,614 shares of our common stock, with
a weighted average exercise price of $30.77 per share and a range of $27.49 to $39.11 per share, could elect
to exchange their options for a designated fewer number of replacement options with a new exercise price
to be granted at least six months and one day from the cancellation date. Our executive officers and
directors were not eligible to participate in the Program. In accordance with the terms of the Program, we
canceled 1,216,903 outstanding stock options on December 15, 2003 and on June21, 2004 granted, in
exchange for the canceled options, 758,836 new options. The replacement options have an exercise price of
$21.73, which was the closing price of a share of THQ common stock on the Nasdaq Stock Market on
June21, 2004 and were fully vested as of December 21, 2004. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the table below
includes a modification of the 1,216,903 stock options canceled under the Exchange Program that were
immediately reissued as 758,836 new options on the cancellation date.
The fair value of options granted under the stock option plans during the fiscal years ended March 31,
2005 and 2004, Transition 2003 and the year ended December 31, 2002, respectively, was determined using
the Black-Scholes option pricing model utilizing the following assumptions:
Fiscal Year Ended
March 31Transition
Year Ended
December 31,
2005 2004 2003 2002
Dividend yield ................................. 0% 0% 0% 0%
Anticipated volatility ........................... 57% 69% 73% 73%
Weighted average risk-free interest rate........... 3.48% 2.60% 3.46% 3.46%
Expected lives................................. 4 years 4 years 4 years 4 years