THQ 2004 Annual Report Download - page 43

COSTS AND EXPENSES, NET INTEREST INCOME, OTHER INCOME (EXPENSE) AND INCOME TAXES
The following table sets forth information about our costs and expenses, net interest income, other income (expenses) and income taxes for the periods
indicated as a percentage of total net sales:
Percent of Net Sales
Twelve Months Ended
March 31,
2004 2003
(Unaudited)
Costs and expenses:
Cost of sales 35.8% 38.1%
License amortization and royalties 11.1 8.3
Software development amortization 16.5 18.2
Product development 5.8 7.8
Selling and marketing 14.4 15.2
Payment to venture partner 1.5 2.0
General and administrative 7.3 7.9
Total costs and expenses 92.4 97.5
Income from operations 7.6 2.5
Interest income, net 0.4 1.0
Other income (expense) 0.6 (2.6)
Income before income taxes 8.6 0.9
Income taxes 3.0 0.4
Net income 5.6% 0.5%
Costs and expenses for the fiscal year ended March 31, 2004 increased over the prior twelve-month period, from $455.7 million to $592.0 million;
however, costs and expenses as a percent of net sales decreased from 98% to 92%. The largest component of costs and expenses is the cost of sales,
which consisted of $178.3 million in the twelve months ended March 31, 2003 and $229.2 million in fiscal 2004. Software development amortization and
selling and marketing expenses are generally the next most significant factors which impacted costs and expenses.
COST OF SALES
Cost of sales represented 36% and 38% of net sales for the twelve-month periods ended March 31, 2004 and 2003, respectively. The primary factors that
decreased the cost of sales as a percentage of net sales for the fiscal year ended March 31, 2004 were: (1) higher margins on software developed for
GBA; (2) higher average net selling price for our PC CD-ROM products due to the success of Disney/Pixar’s Finding Nemo; and (3) the increase percentage
of wireless net sales which carry little to no cost of sales. We expect improved operating margins in fiscal 2005 due to key releases of higher priced
PC CD-ROM products, including Full Spectrum Warrior, S.T.A.L.K.E.R.: Shadow of Chernobyl, and Warhammer 40,000:Dawn of War.
LICENSE AMORTIZATION AND ROYALTIES
License amortization and royalties increased as a percentage of net sales for the fiscal year ended March 31, 2004 as compared to the same twelve-month
period last year. In absolute dollars, license amortization and royalties for the fiscal year ended March 31, 2004 also increased over the prior twelve-month
period, from $39.0 million to $71.1 million. This increase was primarily volume driven led by the release of Disney/Pixar’s Finding Nemo on all platforms,
which generated significant net revenue and at a higher overall royalty rate than the titles released in the same twelve-month period last year, which included
Red Faction II, an internally owned brand, which carried no license fees.
SOFTWARE DEVELOPMENT AMORTIZATION
Software development amortization costs increased from $84.9 million in the twelve-month period ended March 31, 2003 to $105.6 million in fiscal 2004.
Software development amortization for the twelve-month period ended March 31, 2003 included a charge of approximately $12 million related to
an assessment of the recoverability of capitalized development costs pertaining to 20 SKUs. Excluding this charge, software development amortization
increased as a percentage of net sales by approximately 1%. This increase is due to the higher mix of net sales from console products which carry
higher development costs.
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THQ : 2004 : ANNUAL REPORT