Blizzard 2003 Annual Report Download - page 22

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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Product development expenses of $41.0 million and $41.4 million represented 7% and 9% of publishing
net revenues for the year ended March 31, 2002 and 2001, respectively. The decrease in product develop-
ment expenses as a percentage of publishing net revenue is reflective of the fact that during the year
ended March 31, 2002, a higher proportion of product development expenditures were incurred subse-
quent to the establishment of technological feasibility as compared to the prior fiscal year in which more
product development expenditures were incurred prior to the establishment of technological feasibility
and were, accordingly, charged directly to product development expense. In addition, our “Greenlight
Process” for the selection, development, production and quality assurance of our products has exercised
rigorous control over product development expenditures.
Sales and marketing expenses of $86.2 million and $85.4 million represented 11% and 14% of consoli-
dated net revenues for the year ended March 31, 2002 and 2001, respectively. This decrease as a percent-
age of consolidated net revenues reflects our ability to generate savings by building on the existing
awareness of our branded products and sequel titles sold during fiscal 2002. It also reflects the savings we
receive from the increased success of releasing a higher proportion of our branded products simultane-
ously on multiple platforms.
General and administrative expense for the year ended March 31, 2002 increased 13%, from $39.0 million
to $44.0 million. As a percentage of consolidated net revenues, general and administrative expenses
remained relatively constant at approximately 6%. The increase in the dollar amount of general and
administrative expenses was due to an increase in worldwide administrative support needs and head-
count related expenses. Partially offsetting this increase was a decrease in amortization of intangibles,
which is included in general and administrative expenses, from $1.5 million for the year ended March 31,
2001 to zero for the year ended March 31, 2002. Effective April 1, 2001, we adopted the provisions of SFAS
No. 142, “Goodwill and Other Intangibles.” SFAS No. 142 addresses financial accounting and reporting
requirements for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill is deemed
to have an indefinite useful life and should not be amortized but rather tested at least annually for impair-
ment. As such, we did not record goodwill amortization for the year ended March 31, 2002.
Operating Income. Operating income for the year ended March 31, 2002, was $80.6 million, compared to
$39.8 million in the prior fiscal year. The increase in operating income for the year ended March 31, 2002
over the prior fiscal year was primarily due to an increase in the success of our publishing business due to
branding, cross platform releases and operating efficiencies obtained via the leveraging of our infrastruc-
ture and, to a lesser degree, an increase in our distribution business resulting from the growth of the next
generation hardware and software markets.
Investment Income, Net. Investment income, net changed to $2.5 million of investment income for the
year ended March 31, 2002, from $7.3 million of interest expense for the year ended March 31, 2001. This
change was due to our improved cash position in fiscal 2002 resulting in higher investment income, the
elimination of bank borrowings and the conversion and/or redemption of our $60.0 million convertible
subordinated notes in the first quarter of fiscal 2002.
Provision for Income Taxes. The income tax provision of $30.9 million for the year ended March 31, 2002,
reflects our effective income tax rate of approximately 37%. The significant items generating the variance
between our effective rate and our statutory rate of 35% are state taxes and an increase in our deferred
tax asset valuation allowance which is partially offset by research and development tax credits and the
impact of foreign tax rate differentials. The realization of deferred tax assets is dependent on the genera-
tion of future taxable income. We believe that it is more likely than not that we will generate sufficient tax-
able income to realize the benefit of net deferred tax assets recognized.
Quarterly Operating Results
Our quarterly operating results have in the past varied significantly and will likely vary significantly in the
future, depending on numerous factors, several of which are not under our control. Our business also has
experienced and is expected to continue to experience significant seasonality, largely due to consumer