THQ 2004 Annual Report Download - page 49

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SOFTWARE DEVELOPMENT AMORTIZATION
Software development amortization costs increased from $35.1 million in the year ended December 31, 2001 to $83.7 million in 2002, and also increased
as a percentage of net sales, from 9% in 2001 to 17% in 2002. The $48.6 million increase includes a write-off of approximately $11.5 million for the
discontinued product development of 20 SKUs which were determined to be not marketable. The increase is also due to lower sales during the fourth
quarter of 2002 and the increased percentage of next generation console games sold during 2002, as compared to 2001, which have longer development
cycles and higher development costs than handheld games.
PRODUCT DEVELOPMENT
Product development expenses increased as a percentage of net sales from 5% for the year ended December 31, 2001 to 7% for the fiscal year 2002, an
increase of $17.0 million. The increase in product development expenses is primarily due to the costs incurred by the three development studios acquired
or formed during fiscal 2001 and fiscal 2002: Rainbow, Outrage and Cranky Pants. We also increased the number of personnel in 2002 in our corporate
product development department to support the increased number of SKUs under development.
SELLING AND MARKETING
Selling and marketing expenses of $66.4 million and $46.7 million represented 14% and 12% of net sales for the years ended December 31, 2002 and 2001,
respectively. The increase of $19.7 million was primarily due to an increase in television media expenditures for a greater number of SKUs in 2002 as
compared to 2001.
PAYMENT TO VENTURE PARTNER
The payment to JAKKS remained relatively constant as a percentage of total net sales for the year ended December 31, 2002 as compared to the same
period of 2001. The payment of $10.1 million to JAKKS in 2002 primarily related to WWE SmackDown! Shut Your Mouth!, while the payment of $8.7
million in 2001 primarily related to WWF SmackDown! Just Bring It.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the year ended December 31, 2002 increased $6.5 million from the prior year, from $28.5 million to $35.0 million;
however, as a percentage of net sales remained relatively consistent, at 7% in both years. The $6.5 million increase in fiscal 2002 was due to an increase in
the allowance for doubtful accounts related to the Chapter 11 bankruptcy filing of Kmart, and the inclusion of ValuSoft’s general and administrative expenses.
INTEREST INCOME, NET
Net interest income increased for the year ended December 31, 2002 as compared to 2001 as a result of higher average cash, cash equivalents and short-
term investment balances which increased as a result of our public offering of our common stock in November 2001.
OTHER EXPENSES
Other expenses for the year ended December 31, 2002 include a $7.0 million charge related to the settlement of the class action lawsuit. This consisted
of $2.0 million for the portion of the settlement and legal fees that exceeded our directors’ and officers’ insurance coverage and $5.0 million as a reserve
against a receivable from our insurer due to a dispute in the amount of coverage. Other expenses also included a $3.0 million non-cash charge related to
the discontinuation of our online joint venture in the United Kingdom (Network Interactive Sports, Ltd.).
INCOME TAXES
The income tax provision of $6.8 million for the year ended December 31, 2002 reflected our effective income tax rate of 34%, as compared to income
taxes of $20.7 million in 2001, or an effective rate of 37%. The decrease in the effective tax rate was due primarily to tax benefits related to our
international business activities.
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THQ : 2004 : ANNUAL REPORT