THQ 2004 Annual Report Download - page 48

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International Net Sales
International net sales increased by 5% for the year ended December 31, 2002 as compared to 2001, from $116.3 million to $122.4 million. Net sales in all
of the international territories, with the exception of France, increased slightly for the year ended December 31, 2002 as compared to the same period of 2001.
• The more modest increase as compared to North America was primarily due to the launches of next generation hardware platforms occurring
at later dates in foreign territories, resulting in a smaller installed base.
• Net sales in France declined by $3.6 million or 20% for the year ended December 31, 2002 as compared to the same period of 2001. This decline
was due to lower demand for Red Faction II for PS2 and slower than anticipated growth of the GameCube installed base.
COSTS AND EXPENSES, NET INTEREST INCOME, OTHER EXPENSES AND INCOME TAXES
The following table sets forth information about our costs and expenses, net interest income, other expenses and income taxes for the periods indicated
as a percentage of total net sales:
Percent of Net Sales
Years Ended December 31,
2002 2001
Costs and expenses:
Cost of sales 38.6% 40.9%
License amortization and royalties 8.4 8.7
Software development amortization 17.4 9.3
Product development 7.2 4.7
Selling and marketing 13.8 12.3
Payment to venture partner 2.1 2.3
General and administrative 7.4 7.5
Total costs and expenses 94.9 85.7
Income from operations 5.1 14.3
Interest income, net 1.1 0.7
Other expenses (2.1) —
Income before income taxes 4.1 15.0
Income taxes 1.4 5.5
Net income 2.7% 9.5%
Costs and expenses for the year ended December 31, 2002 increased over the prior twelve-month period, from $324.8 million to $456.0 million.
The largest component is the cost of sales, which consisted of $154.9 million in fiscal 2001 and $185.6 million in fiscal 2002. Software development
amortization and selling and marketing expenses were the next largest components of costs and expenses.
COST OF SALES
Cost of sales represented 39% and 41% of net sales for the years ended December 31, 2002 and 2001, respectively. The primary factor that decreased the
cost of sales as a percentage of net sales for the year ended December 31, 2002 was a larger proportion of sales in fiscal 2002 of next generation console
games, which have lower manufacturing costs is a percentage of net sales than handheld games, as well as a reduction in the manufacturing costs for the
games for GBA in fiscal 2002.
LICENSE AMORTIZATION AND ROYALTIES
License amortization and royalties decreased slightly as a percentage of net sales for the year ended December 31, 2002 as compared to 2001. In absolute
dollars, license amortization and royalties for the year ended December 31, 2002 increased over the prior year, from $33.1 million to $40.5 million. The
decrease in this expense as a percentage of net sales was primarily due to (i) the sale of key titles in 2002 that had lower royalty rates than the titles that
were sold in 2001; and (ii) the sale of titles published by ValuSoft in 2002, which carry a lower mix of licensed PC CD-ROM products.