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42
Costs and Expenses, Interest Income, Other Income, Income Taxes and MinorityInterest
Our costs and expenses increased in fiscal 2005 to $682.8 million, from $592.0 million in fiscal 2004;
however, total costs and expenses as a percentage of net sales decreased from 92% of net sales to 90% of
net sales. As a percentageof net sales, the greatest increase in costs were due to product development
expenses as we more than doubled the size of our internal product development organization, aggressively
ramped up development of next-generation console games and increased development of wireless games.
Cost of Sales (in thousands)
Year Ended
March 31,2005% of net sales
Year Ended
March 31,2004% of net sales % change
$255,187 33.7% $ 2 34,574 36.6% 8.8%
Cost of sales primarily consists of direct manufacturing costs net of manufacturer volume rebates and
discounts. Cost of sales as a percentage of net sales decreased for fiscal 2005 as compared to fiscal 2004,
primarily due to lower average manufacturing costs across all platforms and higher average selling price of
Game Boy Advance and PC products.
License Amortization and Royalties (in thousands)
Year Ended
March 31, 2005% of net sales
Year Ended
March 31, 2004% of net sales % change
$85,92611.4% $ 7 1,132 11.1%20.8%
License amortization and royalties expense consists of royalty payments due to licensors, which are
expensed at the higher of (1) the contractual royalty rate based on actual net product sales for such license
or (2) an effective rate based upon total projected revenue for such license. For fiscal 2005, license
amortization and royalties as a percentage of net sales remained relatively flat as compared to fiscal 2004.
This is primarily due to our top three selling brands—Disney/Pixar, SpongeBob SquarePants and WWE
licensing amortization rates by brand remaining relatively constant for fiscal 2005 and 2004.
Software Development Amortization (in thousands)
Year Ended
March 31, 2005% of net sales
Year Ended
March 31, 2004% of net sales % change
$93,622 12.4 % $ 1 05,632 16.5% (11.4)%
Software development amortization consists of amortization of capitalized payments made to third-party
software developers and amortization of capitalized internal studio development costs. Software
development costs are expensed at the higher of (1) the contractual rate based on actual net product sales
for such software or (2) an effective rate based upon total projected revenue forsuch software. For fiscal
2005 software development amortization as a percentage of net sales decreased as compared to fiscal 2004
primarily due to our strategy of bringing the development of games based upon our core franchises, such as
Disney/Pixar’s The Incredibles, in-house, as compared to Disney/Pixar’s Finding Nemo, which was externally
developed. Also, the effective amortization rate for The SpongeBob SquarePants Movie released in fiscal
2005 was lower as compared to the amortization rate for SpongeBob SquarePants: Battle for Bikini Bottom
released in fiscal 2004 as we were able to leverage the technology developed on the fiscal 2004 title.
Further, in fiscal 2004 wehad high development costs associated with creatingSphinx and theCursed
Mummy, an original brand for which we did not develop a title in fiscal 2005.