THQ 2009 Annual Report Download - page 45

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Cost of Sales—Software Amortization and Royalties (in thousands)
Year Ended Year Ended
March 31, 2009 % of net sales March 31, 2008 % of net sales % change
$296,688 35.7% $231,800 22.5% 28.0%
Software amortization and royalties consists of amortization of capitalized payments made to third-party
software developers and amortization of capitalized internal studio development costs. Commencing upon
product release, capitalized software development costs are amortized to software amortization and
royalties based on the ratio of current revenues to total projected revenues. In fiscal 2009 software
amortization and royalties increased by 13.2 points as a percentage of net sales as compared to fiscal 2008.
The increase was primarily due to non-cash charges of $63.3 million incurred in fiscal 2009 related to
games that were cancelled as part of our business realignment, compared to $23.9 million incurred in
fiscal 2008. The increase was also due to lower net sales on fiscal 2009 new releases as compared to
fiscal 2008.
Cost of Sales—License Amortization and Royalties (in thousands)
Year Ended Year Ended
March 31, 2009 % of net sales March 31, 2008 % of net sales % change
$83,066 10.0% $99,524 9.7% 16.5%
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. License amortization and
royalties decreased on a dollar basis due to lower net sales from our portfolio of licensed products in
fiscal 2009 as compared to fiscal 2008. Also, net sales of our licensed properties made up a smaller portion
of our net sales mix in fiscal 2009 with approximately 66% of our net sales compared to fiscal 2008 with
approximately 76% of our net sales. Although net sales of our licensed properties made up a smaller
portion of our net sales mix, license amortization and royalties as a percentage of net sales increased
slightly in fiscal 2009 as compared to fiscal 2008. This slight increase is primarily the result of overall higher
license rates due to the performance of our licensed properties and contractual minimum license
requirements, which results in a higher effective rate.
Cost of Sales—Venture Partner Expense (in thousands)
Year Ended Year Ended
March 31, 2009 % of net sales March 31, 2008 % of net sales % change
$19,707 2.4% $24,056 2.3% 18.1%
Venture partner expense is related to the license agreement that the THQ/JAKKS Pacific joint venture,
comprised of THQ and JAKKS Pacific, Inc. (‘‘JAKKS’’), has with the WWE, under which our role is to
develop, manufacture, distribute, market and sell WWE video games. Venture partner expense decreased
by $4.3 million in fiscal 2009 as compared to fiscal 2008. This decrease is due to an overall decrease in net
sales of games based on the WWE license. We have not paid these amounts to JAKKS; see ‘‘Item 3—Legal
Proceedings’’ for information regarding our venture partner agreement.
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