Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended
March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period
from ___ to ___
Commission File No. 0-17948
ELECTRONIC ARTS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2838567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1450 FASHION ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 571-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE,
HELD BY NON-AFFILIATES OF THE REGISTRANT ON JUNE 3, 1996 WAS $1,277,076,666.
AS OF JUNE 3, 1996, THERE WERE 53,065,600 SHARES OF REGISTRANT'S COMMON STOCK,
$.01 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1996 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 60 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 54.
Page 1 of 60
ELECTRONIC ARTS INC.
1996 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 4A. Executive Officers of the Registrant 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholders Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 45
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 47
Signatures 52
Exhibit Index 54
2
PART I
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS") CONTAINS FORWARD LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE
FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND
UNCERTAINTIES DISCUSSED IN "FACTORS AFFECTING FUTURE PERFORMANCE" BELOW AT
PAGES 23 TO 24. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY
MAY DIFFER MATERIALLY FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND
UNCERTAINTIES.
ITEM 1: BUSINESS
OVERVIEW
Electronic Arts' predecessor was incorporated in California in 1982. In
September 1991, Electronic Arts was reincorporated under the laws of Delaware.
Unless otherwise indicated, the "Company" or "Electronic Arts" refers to
Electronic Arts Inc., a Delaware corporation, its California predecessor and
its wholly-owned and majority-owned subsidiaries. Electronic Arts' principal
executive offices are located at 1450 Fashion Island Boulevard, San Mateo,
California 94404. Its telephone number is (415) 571-7171.
Electronic Arts creates, markets and distributes interactive entertainment
software for a variety of hardware platforms. As of March 31, 1996, the
Company marketed approximately 118 titles developed by it and/or published
under one of its brand names, including older titles marketed as "Classics" or
"Publisher's Choice". The Company also distributed approximately 500
additional titles developed by other software publishers ("Affiliated
Labels"), which includes over 100 additional titles distributed under an
exclusive distribution agreement to certain key accounts on behalf of other
third party publishers. As of March 31, 1996, the Company had developed 79
titles that had each generated life-to-date net revenues in excess of
$5,000,000. Since its inception, the Company has developed products for 34
different computer hardware platforms, including the following: IBM personal
computer and compatibles, Amiga, 8-bit Nintendo Entertainment System (the
"NES"), 16-bit Sega Genesis videogame system (the "Genesis"), 16-bit Super
Nintendo Entertainment System (the "SNES"), Sega CD-ROM (Compact Disc-Read Only
Memory) peripheral device, IBM PC-CD and compatibles, Macintosh CD, 3DO
Interactive Multiplayer, the Sony PlayStation ("PlayStation") and the Sega
Saturn ("Saturn"). Substantially all of the Company's products sold during the
Company's 1996 fiscal year were developed for 16-bit and 32-bit platforms. The
Company is currently also developing software products for use with the new
64-bit Nintendo 64 platform. As of March 31, 1996, the Company was developing
products for 8 different hardware platforms.
3
The Company's product development methods and organization are modeled on
those used in the entertainment industry, and the Company markets its products
with techniques borrowed from other entertainment companies such as record
producers, magazine publishers and video distributors. Company employees called
"producers", who are each responsible for the development of one or more
products, oversee product development and direct teams comprised of both
Electronic Arts employees and outside contractors. Electronic Arts' designers
regularly work with celebrities and organizations in sports, entertainment and
other areas to develop products that provide gaming experiences that are as
realistic and interactive as possible. Celebrities and organizations with whom
the Company has had contracts include: Mario Andretti, Michael Jordan,
Shaquille O'Neal, Road & Track, John Madden, Mark Hamill, the National
Basketball Association, the PGA TOUR and the National Hockey League. The
Company maintains development studios in California, Texas, Washington,
Maryland, Canada, Japan and the United Kingdom.
The Company invests in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools, such as the
Company's "Artist Workstation," allow for more cost-effective product
development and the ability to more efficiently convert products from one
hardware platform to another. The Company has also made investments in new
facilities and equipment to facilitate the creation and editing of digital
forms of video and audio recordings and product development efforts for new
hardware platforms.
Additionally, the Company produces film, videotape and audio recordings to
include in its products. Two of the Company's subsidiaries, Electronic Arts
Productions Inc. (d/b/a Crocodile Productions) and Electronic Arts Productions
Ltd., have signed agreements with the Screen Actors Guild (SAG) and American
Federation of Television and Radio Artists (AFTRA) in the United States and
with British Actors Equity Association (Equity) in the UK, respectively, giving
the Company access to a wide range of talent for use in Company-produced film
and video for inclusion in the Company's products. See FACTORS AFFECTING FUTURE
PERFORMANCE - FILM AND VIDEOTAPE at page 24.
Electronic Arts distributes its products and those of its Affiliated
Labels primarily by direct sales to retail chains and outlets in the United
States and Europe. In Japan and the South Asia Pacific region, the Company
distributes products both directly to retailers and through third party
distributors. In fiscal 1996, the Company signed a distribution agreement with
a third party to distribute the Company's products in certain countries in
Southeast Asia including Singapore, Malaysia, Hong Kong and Thailand. The
Company's products are available in over 50,000 retail locations worldwide. In
fiscal 1996, approximately 42% of the Company's net revenues were generated by
international operations, compared to 32% and 25% in fiscal 1995 and fiscal
1994, respectively.
4
ACQUISITIONS, INVESTMENTS AND JOINT VENTURES
ACQUISITIONS
In February 1996, Electronic Arts acquired Manley & Associates, an
interactive software developer based in Seattle, Washington. In March 1996,
the Company acquired Vision Software, a distributor of interactive software
based in Johannesburg, South Africa. These acquisitions have expanded the
Company's direct distribution capabilities and its development resources. See
Note 12 of the Notes to Consolidated Financial Statements included in Item 8
hereof.
INVESTMENTS
The Company has made investments as part of its overall strategy and
currently holds minority equity interests in several companies, including
Novalogic, Inc., Tiburon Entertainment and The 3DO Company ("3DO"). There can
be no assurance that the Company will realize long term benefits from any or
all of these investments or that it will continue to carry any or all of these
investments at their current value.
JOINT VENTURES
The Company has a majority interest in a joint venture corporation,
Electronic Arts Victor, Inc., for the development and distribution of
entertainment software products in Japan as well as certain Asian countries.
See Note 11 of the Notes to Consolidated Financial Statements included in Item
8 hereof.
The Company and Capital Cities/ABC, Inc. formed a joint venture company,
in December 1994, Creative Wonders, LLC. (formerly ABC/EA Home Software, LLC),
to develop and publish children's edutainment and interactive entertainment
titles as well as reference products. The Company currently distributes
Creative Wonders' products as one of the Company's Affiliated Labels. See Note
11 of the Notes to Consolidated Financial Statements included in Item 8 hereof.
MARKET
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. This phenomenon has
resulted in the Company developing products at one time or another for 34
different hardware platforms. Today, the competition in the market for
hardware platforms has intensified, with the introduction of 32-bit videogame
systems, planned introduction of the new 64-bit videogame systems and the
rising installed base of multimedia-enabled home computers. This multi-
platform approach continues to be a cornerstone of the Company's strategy and
the Company plans to continue to develop and publish products for multiple
platforms.
5
Early generation computer systems for which interactive software products
were published such as the Apple II and the Commodore 64 were 8-bit floppy-disk-
based personal computers. Several years ago these systems were eclipsed by
more powerful personal computer systems based on 16-bit microprocessors, such
as the IBM PC and compatibles, the Commodore Amiga and the Apple Macintosh.
Current computer systems utilize 32-bit microprocessor technology and typically
run CD-ROM based products.
In North America, videogame systems have likewise changed significantly
over time. In 1986 and 1987, Nintendo Co., Ltd. ("Nintendo") and Sega
Enterprises, Ltd. ("Sega"), respectively, introduced 8-bit videogame systems
that, compared to existing general-purpose computer systems available at the
time, were low in price, easy to use and had more sophisticated audio-video
capabilities. In late 1989, Sega began shipping its Genesis system, a more-
powerful 16-bit videogame system. In August 1991, Nintendo introduced its 16-
bit SNES videogame system. In late 1992, Sega introduced the Sega CD-ROM drive
as an add-on peripheral to its Genesis system.
The interactive software industry has recently undergone another
significant change due in part to the introduction or planned introduction of
new hardware platforms, as well as remote and electronic delivery systems. The
new generation of systems are based on 32-bit and 64-bit microprocessors that
incorporate dedicated graphics chipsets. Many of these systems utilize CD-ROM
drives. The Company began development of 32-bit software products over four
years ago by creating the original software development system for the first of
these advanced products, the 3DO Interactive Multiplayer, which began selling
in calendar 1993. Sega and Sony each began distribution of their next
generation hardware systems (named the "Saturn" and "PlayStation",
respectively) in Japan during the quarter ended December 1994. Sega began
limited shipment of the Saturn in North America in May 1995 and Sony commenced
shipping the PlayStation in North America in September 1995. Nintendo shipped
the Nintendo 64 ("N64") system in Japan in June 1996 and announced plans to
begin shipping the N64 in North America in the fall of 1996. In October 1995,
The 3DO Company announced an agreement to license its next generation system,
the "M2", to Matsushita Electric Industrial Co., Ltd. ("MEI").
New entrants in the interactive entertainment and multimedia industries,
such as cable television, telephone and diversified media and entertainment
companies, and a proliferation of new technologies, such as on-line networks
and the Internet, are making market forecasting and prediction of financial
results increasingly difficult for the Company. However, in the near term, the
Company expects that the continued transition from 16-bit cartridge-based game
machines to the advanced systems described above will continue to adversely
affect the near term financial results of the Company. The Company's new
product releases in its 1997 fiscal year will be primarily for 32-bit
platforms, including the IBM PC-CD and compatibles, the Sony PlayStation and
the Sega Saturn, and to a lesser degree 16-bit videogame systems. See FACTORS
AFFECTING FUTURE PERFORMANCE -THE INDUSTRY AND COMPETITION at page 23.
6
As the 16-bit cartridge market has matured, related hardware and software
sales have declined and are expected to significantly decline further in fiscal
1997. In addition, sales in the 16-bit software market have become more "hits"
driven. Fewer products in that market are successful and publishers of these
games, including the Company, must incur additional marketing and sales
expenses to promote retailers' sales of their 16-bit cartridge products. In
fiscal 1996, the Company released fewer titles for these platforms,
concentrated releases during the year-end holiday seasons and focused marketing
efforts on promoting hit products. In fiscal 1997, the Company plans to follow
the same strategy and intends to release even fewer products for these
platforms. The Company's total net revenues derived from 16-bit videogames
declined in fiscal 1996 and is expected to significantly decline further in
fiscal 1997.
The Company also believes that investment in products for the 32-bit
market, including both Compact Disk personal computer ("PC-CD") and CD-
dedicated videogame ("CD-Videogame") platforms, is strategically important and
the Company is therefore continuing its aggressive development activities for
32-bit platforms. Though Sega and Sony have announced price reductions of their
32-bit systems, the 32-bit CD-Videogame market may grow at a slower than
expected rate. In addition, the Company's revenues and earnings are dependent
on its ability to meet its product release schedule and its failure to meet
those schedules may result in reduced revenues and earnings for fiscal 1997
and, in particular, in reduced revenues and a net loss in the first fiscal
quarter. See FACTORS AFFECTING FUTURE PERFORMANCE - DEVELOPMENT AND PLATFORM
CHANGES, respectively, at page 23.
COMPETITION
See FACTORS AFFECTING FUTURE PERFORMANCE - THE INDUSTRY AND COMPETITION at
page 23.
7
RELATIONSHIPS WITH SIGNIFICANT HARDWARE PLATFORM COMPANIES
SEGA
Under the terms of a licensing agreement entered into with Sega in July
1992, as amended (the "16-bit Sega Agreement"), the Company is authorized to
develop and manufacture ROM-cartridge software products compatible with the
Sega Genesis system through December 1997 and to distribute those cartridges
through June 1998. In addition, the Company is authorized to develop and
distribute CD-ROM software products compatible with the Sega CD add-on drive
for the Genesis through December 1996. Genesis cartridges are manufactured by
the Company in Puerto Rico under the 16-bit Sega Agreement. Genesis CD-ROM
products are manufactured by third party manufacturers. A shortage of
components, or other factors outside the control of the Company could impair
the Company's ability to obtain an adequate supply of cartridges or CD-ROMs.
The Company currently derives a significant portion of its revenues from
products developed for the Sega Genesis. In the fiscal year ended March 31,
1996, approximately 26% of the Company's net revenue came from sales of Sega
Genesis products compared to 43% in fiscal 1995. During fiscal 1996, the
Company released ten Genesis games compared to seventeen in fiscal 1995. Among
these releases were MADDEN FOOTBALL '96, NBA LIVE '96, NHL HOCKEY '96, FIFA
SOCCER '96 and COLLEGE FOOTBALL '96. The volume of sales of Sega Genesis
products significantly declined in fiscal 1996 and is expected to decline
significantly further in fiscal 1997. The Company plans to continue to develop
and distribute titles for the Sega Genesis, though on a more limited scale than
in the past, throughout fiscal 1997.
Under the terms of a licensing agreement entered into with Sega in January
1995 (the "Sega Saturn Agreement"), the Company is authorized to develop and
distribute CD based software products compatible with the Sega Saturn.
Pursuant to the Sega Saturn Agreement, the Company engages various third party
manufacturers approved by Sega to supply its Saturn CDs for distribution.
Accordingly, the Company has limited ability to control its supply of Saturn CD
products or the timing of their delivery.
During the third quarter of fiscal 1996, the Company had its initial
release of products for the Sega Saturn. During fiscal 1996, the Company
released four Saturn products.
8
NINTENDO
The Company released five SNES games in fiscal 1996 compared to six games
in fiscal 1995. Among these releases were JOHN MADDEN FOOTBALL '96, NBA LIVE
'96, FIFA SOCCER '96, AND NHL HOCKEY '96. In fiscal 1996, approximately 12% of
the Company's net revenues were derived from sales of software for the SNES
platform compared to 14% in fiscal 1995. During fiscal 1996 the Company sold
SNES products in Europe, while in fiscal 1995 the Company licensed its products
for publication in Europe on SNES to a third party. Accordingly, the Company's
net revenues from SNES products attributable to Europe was significantly higher
in fiscal 1996 than in fiscal 1995. Worldwide, the volume of sales of SNES
products declined in fiscal 1996 and is expected to significantly decline in
fiscal 1997.
Under the terms of its licensing agreement with Nintendo, the Company
engages Nintendo to manufacture its SNES cartridges. The Company has little
ability to control its supply of cartridges or the timing of their delivery. A
shortage of microchips, or other factors outside the control of the Company
could impair the Company's ability to obtain an adequate supply of cartridges.
In connection with the Company's purchases of Nintendo cartridges to be
distributed in North America, Nintendo requires that the Company provide it
with irrevocable letters of credit prior to Nintendo's acceptance of purchase
orders from the Company. For purchases of Nintendo cartridges for distribution
in Japan and Europe, Nintendo requires the Company to make cash deposits.
Furthermore, Nintendo maintains a policy of not accepting returns. Because of
these and other factors, the carrying of an inventory of cartridges entails
significant investment and risk. See FACTORS AFFECTING FUTURE PERFORMANCE -
HARDWARE COMPANIES at page 24.
SONY
In fiscal 1996, approximately 9% of the Company's net revenues were
derived from sales of software for the PlayStation. PlayStation products were
first released during the second quarter of fiscal 1996. During fiscal 1996,
the Company released thirteen PlayStation games. Among these releases were FIFA
SOCCER '96, PGA TOUR GOLF '96, THEME PARK, ROAD RASH, AND THE NEED FOR SPEED.
9
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 ( the "Sony Agreement"), the Company is
authorized to develop and distribute CD based software products compatible with
the Sony PlayStation. Pursuant to the Sony Agreement, the Company engages Sony
to supply its PlayStation CDs for distribution by the Company. Accordingly the
Company has limited ability to control its supply of PlayStation CD products or
the timing of their delivery. See FACTORS AFFECTING FUTURE PERFORMANCE -
HARDWARE COMPANIES at page 24.
In connection with the Company's purchases of Sony products to be
distributed in Japan, Sony of Japan requires cash deposits totaling one-third
of the purchase orders. At March 31, 1996, the Company had $197,000 of cash
deposits to Sony. EAV utilizes a line of credit to fund these deposits. At
March 31, 1996, EAV had an outstanding balance on this line of approximately
$1,900,000.
3DO
One of the advanced 32-bit platforms supported by the Company is the 3DO
Interactive Multiplayer. At March 31, 1996, the Company owned approximately
12% of the common stock of 3DO. See Note 3 of the Notes to the Consolidated
Financial Statements included in Item 8 hereof.
During fiscal 1996, the Company released eight 3DO games, including WING
COMMANDER 3. The Company released eight 3DO games in fiscal 1995. As
discussed above, The 3DO Company announced that it has licensed the technology
for the "M2" system - the next generation platform to the 3DO Interactive
Multiplayer to MEI and thus 3DO will become primarily a software publishing
company competing directly with the Company on multiple platforms. The Company
currently has no planned releases of 3DO games in fiscal 1997.
There can be no assurance that 3DO as a company will be successful.
Because of the Company's equity stake in and historical association with 3DO, a
material adverse effect on the business or prospects of 3DO or a substantial
adverse change in the stock price of 3DO could have a material adverse effect
on the Company's stock price.
10
PRODUCTS AND PRODUCT DEVELOPMENT
In fiscal 1996, the Company generated approximately three-quarters of its
revenues from products released during the year. See FACTORS AFFECTING FUTURE
PERFORMANCE - PRODUCTS at page 23. As of March 31, 1996, Electronic Arts was
actively marketing approximately 118 titles, comprising approximately 224 stock
keeping units ("sku's"), that were published by the Company's development
divisions and subsidiaries ("EA Studios"). During fiscal 1996, the Company
introduced over 22 EA Studios titles, representing over 64 sku's, compared to
51 EA Studio titles, comprising over 85 sku's, in fiscal 1995. From the
inception of the Company through March 31, 1996, the EA Studios organization
had created and published 79 titles that have each generated more than
$5,000,000 in life-to-date net revenues for the Company.
The products published by EA Studios are designed and created by its in-
house designers and artists and by independent software developers
("independent artists"). The Company typically pays the independent artists
royalties ranging from 4% to 15% of net revenues, as defined in the related
independent artist agreements.
For fiscal 1996, the Company had one title, FIFA SOCCER '96, published on
six platforms, represented 11% of the total 1996 net revenues. No one title
accounted for more than 10% of the Company's net revenues for fiscal 1995.
For fiscal 1994, the Company had two titles, JOHN MADDEN FOOTBALL '94,
published on three platforms, and NHL HOCKEY '94, published on four platforms,
which represented approximately 13% and 11%, respectively, of the total 1994
net revenues.
The Company publishes products in a number of categories such as sports,
action and interactive movies, strategy, simulations, role playing and
adventure, each of which is becoming increasingly competitive. The Company's
sports-related products, marketed under the EA Sports brand name, accounted for
a significant percentage of net revenues in fiscal years 1996 and 1995. There
can be no assurance that the Company will be able to maintain its market share
in the sports category. See FACTORS AFFECTING FUTURE PERFORMANCE -THE INDUSTRY
AND COMPETITION at page 23.
The retail selling prices in North America of the Company's products,
excluding older titles (marketed as "Classics" and "Publisher's Choice"),
typically range from $35.00 to $70.00. "Classics" and "Publisher's Choice"
titles have retail selling prices that range from $15.00 to $20.00. The retail
selling prices of EA titles outside of North America vary based on local market
conditions.
11
The Company currently develops or publishes products for 8 different
hardware platforms and has from time to time developed and marketed products on
34 different and incompatible platforms in the past. The Company's current and
planned product introductions are predominantly for 32-bit platforms such as
the IBM PC and compatibles, the Sony PlayStation and the Sega Saturn and to a
lesser degree 16-bit platforms, the Genesis videogame system and SNES. See
FACTORS AFFECTING FUTURE PERFORMANCE - DEVELOPMENT AND PLATFORM CHANGES,
respectively, at page 23.
As compact discs have emerged as the preferred medium for interactive
entertainment, education, and information software, the Company continued its
investment in the development of CD-ROM tools and technologies in fiscal 1996
and currently has more than 60 products in development for new CD-ROM
platforms, including the IBM PC and compatibles, the Sony PlayStation and the
Sega Saturn. Most of these products will be convertible for use on multiple
advanced hardware systems. During the fiscal years 1996, 1995 and 1994, the
Company had research and development expenditures of $99.6 million, $73.9
million, and $62.6 million, respectively. See FACTORS AFFECTING FUTURE
PERFORMANCE - DEVELOPMENT at page 23.
Additionally, the Company produces film and videotape to include in
certain products pursuant to agreements between certain of the company's
subsidiaries with SAG, AFTRA and Equity. With extensive use of video in some of
the Company's products, particularly its products in the interactive movie
category, there can be no assurance that the significantly higher sales levels
required to make these products profitable will be achieved. The Company
expects to release one product with significant video content during fiscal
1997. See FACTORS AFFECTING FUTURE PERFORMANCE - FILM AND VIDEOTAPE at page
24.
MARKETING AND DISTRIBUTION
The Company distributes both EA Studio products and products developed and
published by other software publishers known as "Affiliated Labels".
In most cases, Affiliated Label products are delivered to the Company as
completed products. As of March 31, 1996, the Company distributed
approximately 500 Affiliated Label titles. During fiscal 1996 the Company
introduced over 600 Affiliated Label titles, as compared to more than 130
titles in fiscal 1995. The increase in the number of Affiliated Label titles
marketed and released was primarily due to the acquisition of Kingsoft GmbH in
Germany at the end of fiscal 1995. Starting in fiscal 1996, the Company began
to derive revenues from the exclusive distribution of PC entertainment and 3DO
products to key accounts on behalf of other third party publishers. No single
Affiliated Label has accounted for more than 10% of the Company's net revenue
in any of the last three fiscal years.
12
The Company generated approximately 84% of its North American net revenues
from direct sales through a field sales organization of professionals and a
group of telephone sales representatives. The remaining 16% of its North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where the Company believes direct
sales would not be economical. The Company had no customers accounting for more
than 10% of total net revenues for the years ended March 31, 1996 and 1995.
The Company had sales to one customer which represented 10.8% of total net
revenues for fiscal 1994.
As discussed above, (See MARKET above) the 16-bit videogame business has
become increasingly "hits" driven, requiring significantly greater expenditures
for advertising, particularly for television advertising. There can be no
assurance that the Company will continue to produce hit products or that
advertising expenditures will increase sales sufficiently to recoup the
advertising expenditures.
The Company has stock-balancing programs for its personal computer
products (whether provided on floppy-disk or CD-ROM) that, under certain
circumstances and up to a specified amount, allow for the exchange of personal
computer products by resellers. The Company also typically provides for price
protection for its personal computer and 16-bit and 32-bit videogame system
products that, under certain conditions, allows the reseller a price reduction
from the Company for unsold products. The Company maintains a policy of
exchanging products or giving credits, but does not give cash refunds. The
risk of price protection requirements is increasing as a result of the maturing
and the increasingly hit-based nature of the 16-bit video cartridge market.
Moreover, the risk of product returns may increase as new hardware platforms
become more popular or market factors force the Company to make changes in its
distribution system. The Company monitors and manages the volume of its sales
to retailers and distributors and their inventories as substantial overstocking
in the distribution channel can result in high returns or the requirement for
substantial price protection in subsequent periods. The Company believes that
it provides adequate reserves for returns and price protection which are based
on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of the Company's products and other factors, and that its current
reserves will be sufficient to meet return and price protection requirements
for the foreseeable future. However, there can be no assurance that actual
returns or price protection will not exceed the Company's reserves. See FACTORS
AFFECTING FUTURE PERFORMANCE - REVENUES AND EXPENSES at page 24.
The Company also has a fulfillment group that sells product directly to
consumers through a toll-free number listed in advertising by the Company and
its Affiliated Labels. This group is also responsible for targeted direct mail
marketing and sells product upgrades, backups and accessories to registered
customers.
13
The distribution channels through which consumer software products are
sold have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The development of remote and
electronic delivery systems will create further changes. The bankruptcy or
other business difficulties of a distributor or retailer could render
Electronic Arts' accounts receivable from such entity uncollectible, which
could have an adverse effect on the operating results and financial condition
of the Company. Uncollectible receivables from certain accounts in Japan
resulted in an increase in bad debt reserves in fiscal 1995. In addition, an
increasing number of companies are competing for access to these channels.
Electronic Arts' arrangements with its distributors and retailers may be
terminated by either party at any time without cause. Distributors and
retailers often carry products that compete with those of the Company.
Retailers of Electronic Arts' products typically have a limited amount of shelf
space and promotional resources for which there is intense competition. There
can be no assurance that distributors and retailers will continue to purchase
Electronic Arts' products or provide Electronic Arts' products with adequate
levels of shelf space and promotional support.
INTERNATIONAL OPERATIONS
The Company has wholly-owned subsidiaries in the United Kingdom, France,
Spain, Germany, Australia, Canada, South Africa, Singapore, Sweden and Puerto
Rico as well as a majority-owned subsidiary in Japan. The amounts of net
revenues, operating profit and identifiable assets attributable to each of the
Company's geographic regions for each of the last three fiscal years are set
forth in Note 16 of the Notes to the Consolidated Financial Statements included
in Item 8 hereof. In comparison to fiscal 1995, international net revenues
increased by 43% due primarily to the increase in sales of PC-CD and Sony
products together with increased SNES sales in Europe. These increases were
offset by reduced Sega and floppy revenue.
14
In fiscal 1996, net revenues from Europe increased by 40% to $157,999,000
compared to $112,907,000 in fiscal 1995. The increase was due mainly to higher
revenues generated by Kingsoft GmbH in Germany and DROSoft in Spain. Europe
also implemented a pan-European distribution network that resulted in a
significant portion of products being distributed directly to retailers.
During fiscal 1996, Electronic Arts opened EA Nordic in Stockholm, Sweden to
distribute the Company's products in Sweden, Norway, Finland, Denmark and
Iceland. In March 1996, Electronic Arts acquired Vision Software, a
distributor of interactive software based in Johannesburg, South Africa. In
fiscal 1996, Japan net revenues increased by 43% to $45,865,000 compared to
$31,997,000 in fiscal 1995. The increase was due to an increase in net
revenues derived from a higher volume of CD based products (PC-CD and CD-
Videogames) and Affiliated Label products. In fiscal 1996, net revenues from
South Asia Pacific increased by 66% to $21,794,000 compared to $13,139,000 in
fiscal 1995. As mentioned earlier, Electronic Arts signed a distribution
agreement with a third party to distribute the Company's products in certain
countries in Southeast Asia. The increase in net revenues was due mainly to
sales in new markets, including Singapore and Malaysia.
Though international revenues are expected to grow in fiscal 1997,
international revenues may not grow at as high a rate as in prior years.
MANUFACTURING
The Company's Genesis cartridge products are manufactured by the Company
in Puerto Rico under the terms of a manufacturing license agreement with Sega.
The assembly of the final packaged product is performed by outside
organizations under the supervision of the Company's operations organization.
The Company's SNES products are purchased as finished goods from Nintendo.
Manufacturing and assembly of floppy-disk and CD products is performed by
outside organizations under the supervision of the Company's operations
organization. The manufacturing process for all software involves the
duplication of software code onto floppy diskettes, ROM chips, or CD's,
printing of packaging and documentation, and assembly of the final packaged
product. Quality control tests are performed on all products by Company
employees, and the products are then warehoused and shipped to customers by the
Company.
In many instances, the Company is able to acquire materials on a volume-
discount basis. The Company has multiple potential sources of supply for most
materials. Except with respect to its SNES and Sony products, the Company also
has alternate sources for the manufacture and assembly of most of its products.
To date, the Company has not experienced any material difficulties or delays in
production of its software and related documentation and packaging. However,
a shortage of components or other factors beyond the control of the Company
could impair the Company's ability to manufacture, or have manufactured, its
products. SEE FACTORS AFFECTING FUTURE PERFORMANCE - HARDWARE COMPANIES at
page 24.
15
BACKLOG
The Company normally ships product within a few days after receipt of an
order. However, a backlog may occur for EA Studios and Affiliated Label
products that have been announced for release but not yet shipped. The Company
does not consider backlog to be an indicator of future performance.
SEASONALITY
The Company's business is highly seasonal. The Company typically
experiences its highest revenues and profits in the calendar year-end holiday
season and a seasonal low in revenues and profits in the quarter ending in
June. In its 1997 fiscal year, and particularly in the June and September
quarters, the Company expects these seasonal trends to be magnified by general
economic and industry factors, including the continued transition from 16-bit
cartridge-based game machines to the new 32-bit systems and the concentration
of the Company's product releases in the second half of fiscal 1997.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 1,500 people, of
whom over 700 were outside the United States. The Company believes that its
ability to attract and retain qualified employees is an important factor in its
growth and development and that its future success will depend, in large
measure, on its ability to continue to attract and retain qualified employees.
To date, the Company has been successful in recruiting and retaining sufficient
numbers of qualified personnel to conduct its business successfully. See
FACTORS AFFECTING FUTURE PERFORMANCE - EMPLOYEES at page 24.
16
ITEM 2: PROPERTIES
The Company's principal administrative, sales and marketing, research and
development, and support facility is located in four modern buildings in San
Mateo, California, 15 miles south of San Francisco. The Company presently
occupies approximately 196,000 square feet in these buildings, under leases that
expire at various times between August 1998 and April 1999.
In addition, the Company leases and occupies a 54,000 square foot
facility, used as an office and warehouse in Hayward, California, and a 120,000
sq. ft. warehouse facility in Louisville, Kentucky. The Company also occupies
sales offices in the metropolitan areas of Toronto, Chicago, Dallas and New
York.
The Company's North American research and development activities are
supported by a 69,000 square foot development facility in Burnaby, British
Columbia, Canada. The Company also owns a 178,000 square foot development
facility in Austin, Texas and leases a 5,000 sq. ft. development facility in
Baltimore, Maryland.
The Company's United Kingdom subsidiary occupies administrative, sales,
and distribution facilities in Langley, England, under a long-term lease for a
total of 66,000 square feet as well as 10,500 square foot development facility
in Surrey, England. In Europe, the Company also leases two administrative,
sales and distribution facilities in Germany, one for 1,000 square feet and
another for 78,000 square feet, as well as sales and distribution facilities in
Madrid, Spain, Lyon, France, and a sales office in Stockholm, Sweden. The
Company also maintains an 8,000 square foot sales and distribution facility in
Brisbane, Australia, a 10,000 square foot sales, distribution and development
facility in Tokyo, Japan, a representative office in Beijing, China, and a
manufacturing facility in San Juan, Puerto Rico. See Notes 4 and 9 to Notes to
Consolidated Financial Statements included in Item 8 hereof.
In February 1995, the Company entered into a master operating lease for
land and a building to be constructed in Redwood City, California. The facility
is to be used as a corporate headquarters for EA. The above mentioned rental
space EA currently occupies is expected to be vacated upon the completion of the
new corporate headquarters. The square footage of the new facilities is
expected to be approximately 375,000.
In connection with its fiscal 1996 acquisitions (See ACQUISITIONS,
INVESTMENTS AND JOINT VENTURES above), the Company assumed leases for 7,000
square feet of sales and distribution facilities in Johannesburg, South Africa
and 10,000 square feet of development facilities in Seattle, Washington.
The Company believes that these facilities are adequate for its current
needs. The Company believes that suitable additional or substitute space will
be available as needed to accommodate the Company's future needs.
17
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to a number of routine pending litigation matters.
Management, after review and consultation with counsel, considers that any
liability from the disposition of such matters would not have a material adverse
effect upon the financial condition or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1996.
18
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are chosen by and serve at the
discretion of the Board of Directors, are as follows:
Name Age Position
---- --- --------
Lawrence F. Probst III 46 Chairman of the Board of
Directors and Chief
Executive Officer
William Bingham Gordon 46 Executive Vice President,
Marketing
Monty Finefrock 47 Senior Vice President, San Mateo
Studios
Mark S. Lewis 46 Senior Vice President,
International
E. Stanton McKee, Jr. 51 Senior Vice President, Chief
Financial and Administrative
Officer
Donald A. Mattrick 32 Senior Vice President, North
American Studios
Nancy L. Smith 43 Senior Vice President, North
American Sales and Distribution
David L. Carbone 45 Vice President, Finance
Ruth A. Kennedy 41 Vice President, General
Counsel and Secretary
MR. PROBST has been a director of the Company since January 1991 and
currently serves as Chairman of the Board of Directors, and Chief Executive
Officer. He was elected as Chairman in July 1994. Mr. Probst served as Senior
Vice President of EA Distribution, the Company's distribution division, from
January 1987 to January 1991, and from September 1984, when he joined the
Company, until December 1986, served as Vice President of Sales. Mr. Probst
holds a B.S. degree from the University of Delaware.
MR. GORDON has served as Executive Vice President, Marketing since
October 1995. From August 1993 to October 1995, he served as Executive Vice
President of EA Studios. Prior to this, he served as Senior Vice President
of Entertainment Production since February 1992. From December 1989 to
January 1992, he served as the Senior Vice President of Marketing. He also
served as General Manager of EA Studios, as Vice President of Marketing,
Director of Advertising and Vice President of the Company's former
entertainment division while employed by the Company. Mr. Gordon holds a
B.A. degree from Yale University and an M.B.A. degree from Stanford
University.
19
MR. FINEFROCK has served as Senior Vice President, San Mateo Studios
since October 1995. Prior to this he served as Senior Vice President and
General Manager of the EA Entertainment division since March 1994. From
February 1992 to March 1994, he served as Vice President of EA Studio Operations
and Development. From July 1989 to February 1992, Mr. Finefrock served as Vice
President of Studio Operations. Mr. Finefrock joined the Company in April 1983.
He holds a B.S. degree in Business Administration from the University of
Redlands.
MR. LEWIS has served as Senior Vice President of International since July
1993. From August 1991 to July 1993, he served as President of Electronic Arts,
Limited, a wholly-owned subsidiary of the Company which serves the European
market from its base in Langley, England. He has also served as Managing
Director of Electronic Arts, Ltd., Director of European Publishing, and as a
Producer and Manager of Product Support and Acquisitions during his tenure with
the Company. He has been employed by the Company since 1984. Mr. Lewis is a
graduate of Yale University.
MR. MCKEE joined the Company as Senior Vice President and Chief Financial
and Administrative Officer in March 1989. Mr. McKee holds B.A. and M.B.A.
degrees from Stanford University and is also a Certified Public Accountant.
MR. MATTRICK has served as Senior Vice President, North American Studios,
since October 1995. From July 1991 to October 1995 he served as Vice President
of Electronic Arts and Executive Vice President/General Manager for EA Canada.
Mr. Mattrick was founder and former chairman of Distinctive Software Inc. from
1982 until it was acquired by the Company in 1991.
MS. SMITH has served as Senior Vice President of North American Sales and
Distribution since July 1993 and as Vice President of Sales from 1988 to 1993.
Ms. Smith has also served as Western Regional Sales Manager and National Sales
Manager since she joined the Company in 1984. Ms. Smith holds a B.S. degree in
management and organizational behavior from the University of San Francisco.
MR. CARBONE has been with the Company since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Prior to joining the Company, Mr. Carbone served as Controller for
Magnetic Pulse, Inc., a privately held designer of tools for hydrocarbon
exploration, and was previously employed as Vice President of Finance for Vicom
Systems Inc., a supplier of high-end graphics and imaging systems, from August
1989 to February 1990. Mr. Carbone holds a B.S. degree in accounting from
King's College and is a Certified Public Accountant.
MS. KENNEDY has been employed by the Company since February 1990. She
served as Corporate Counsel until March 1991 and is currently Vice President,
General Counsel and Secretary. Ms. Kennedy was elected Secretary in September
1994. Ms. Kennedy is a member of the State Bars of California and New York and
received her B.A. degree from William Smith College and her Juris Doctor from
the State University of New York.
20
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the National Market under the symbol
"ERTS". The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock from April 1, 1994 through March 31, 1996.
Such prices represent prices between dealers and does not include retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
Closing Sales Prices
--------------------
High Low
---- ---
Fiscal Year Ended March 31, 1995:
First Quarter $25.75 $13.00
Second Quarter 18.75 13.50
Third Quarter 22.50 17.50
Fourth Quarter 25.75 16.75
Fiscal Year Ended March 31, 1996:
First Quarter $30.00 $20.13
Second Quarter 41.75 27.13
Third Quarter 38.75 23.13
Fourth Quarter 28.50 22.13
There were approximately 2,085 holders of record of the Company's Common Stock
as of June 3, 1996. The Company believes that a significant number of
beneficial owners of its Common Stock hold their shares in street names.
DIVIDEND POLICY
The Company has not paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future.
21
ITEM 6: SELECTED FINANCIAL DATA
ELECTRONIC ARTS
SELECTED FIVE-YEAR FINANCIAL DATA
Year Ended March 31,
(In thousands, except per share data)
INCOME STATEMENT DATA 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Net revenues $531,887 $493,346 $418,289 $298,386 $175,094
Cost of goods sold 273,594 263,357 224,606 160,578 90,915
---------------------------------------------------------------------------
Gross profit 258,293 229,989 193,683 137,808 84,179
Operating expenses:
Marketing and sales 72,928 61,951 46,847 38,465 22,679
General and administrative 32,207 29,308 23,767 20,713 13,962
Research and development 99,627 73,902 62,570 37,451 21,533
---------------------------------------------------------------------------
Total operating expenses 204,762 165,161 133,184 96,629 58,174
---------------------------------------------------------------------------
Operating income 53,531 64,828 60,499 41,179 26,005
Interest and other income, net 6,021 13,250 3,782 2,537 1,522
---------------------------------------------------------------------------
Income before provision for income taxes and
minority interest 59,552 78,078 64,281 43,716 27,527
Provision for income taxes 18,759 24,980 19,450 13,421 8,839
---------------------------------------------------------------------------
Income before minority interest 40,793 53,098 44,831 30,295 18,688
Minority interest in consolidated joint venture (304) 2,620 (94) 563 -
---------------------------------------------------------------------------
Net income $ 40,489 $ 55,718 $ 44,737 $ 30,858 $ 18,688
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income per share $ 0.75 $ 1.07 $ 0.86 $ 0.62 $ 0.40
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of shares used in computation 54,163 52,297 52,286 49,992 47,165
---------------------------------------------------------------------------
---------------------------------------------------------------------------
BALANCE SHEET DATA AT FISCAL YEAR END
- ------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments $147,983 $174,121 $130,318 $ 98,029 $ 59,053
Marketable securities 37,869 10,725 11,931 --
Working capital 199,713 168,742 135,741 85,094 57,375
Long-term investments 24,200 14,200 - - -
Total assets 424,219 341,239 273,651 181,257 105,773
Total liabilities 100,625 103,018 97,988 67,687 37,764
Minority interest 1,277 1,148 3,485 2,999 -
Total stockholders' equity 322,317 237,073 172,178 110,571 68,009
22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE PERFORMANCE
THE INDUSTRY AND COMPETITION. The interactive software business has
historically been a volatile and highly dynamic industry affected by changing
technology, limited hardware platform life cycles, hit products, competition,
component supplies, seasonality, consumer spending and other economic trends.
The business is also intensely competitive. A variety of companies offer
products that compete directly with one or more of the Company's products.
These direct competitors vary in size from very small companies to companies
with financial, managerial and technical resources comparable to or greater
than those of the Company. Typically, the Company's chief competitor on
dedicated game platforms is the hardware manufacturer/ licenser itself, to
which the Company must pay royalties, and in the case of Sony and Nintendo,
manufacturing charges. For example, Sony has aggressively launched sports
product lines that directly compete with the Company's sports products on the
PlayStation. In addition, competition for creative talent has intensified, and
the attraction and retention of key personnel by the Company is increasingly
difficult.
PRODUCTS. Interactive entertainment software products typically have life
spans of only 3 to 12 months. In addition, the market is crowded with a large
number of titles competing for limited shelf space at retail. The Company's
future success will depend in large part on its ability to develop and
introduce new competitive products on a timely basis and to get those products
distributed widely at retail. To compete successfully, new products must adapt
to new hardware platforms and emerging industry standards, provide additional
functionality and be successfully distributed in numerous changing worldwide
markets. If the Company were unable, due to resource constraints or
technological or other reasons, to successfully develop and distribute such
products in a timely manner, this inability would have a material adverse
effect on its operating results and financial condition.
DEVELOPMENT. Product development schedules, particularly for new hardware
platforms and high-end multimedia PC's are difficult to predict because they
involve creative processes, use of new development tools for new platforms and
the learning process, research and experimentation associated with development
for new technologies. CD-ROM products frequently include more content and are
more complex, time-consuming and costly to develop than cartridge products and,
accordingly, cause additional development and scheduling risk. For example,
WING COMMANDER IV, a major product scheduled to ship for the PC platform in the
December quarter, did not ship until February, 1996, due to delays in the final
editing and testing process. Similarly, JOHN MADDEN FOOTBALL 96 and NHL HOCKEY
96 for the Sony PlayStation did not ship at all due to significant delays in
development that made the delayed completion date untimely for these products.
Because of the increased cost of compact disk product development, write-offs
of advance payments made to outside artists for discontinued or unsuccessful
products have and may continue to increase. In addition, development risks
for CD-ROM products can cause particular difficulties in predicting quarterly
results because brief manufacturing lead times allow finalizing products and
projected release dates late in a quarter. Manufacturing lead times during the
year for CD based products have been as brief as one to three weeks; cartridge
products more typically have had a six to twelve week lead time for
manufacture.
PLATFORM CHANGES. A large portion of the Company's revenues are derived from
the sale of products designed to be played on proprietary videogame platforms
such as the Sony PlayStation, Sega Saturn, Super Nintendo Entertainment System
and Sega Genesis. The interdependent nature of the Company's business and that
of its hardware licensers brings significant risks to the Company's business.
The success of the Company's products is significantly affected by market
acceptance of the new videogame hardware systems and the life span of older
hardware platforms, and the Company's ability to accurately predict these
factors with respect to each platform. In many cases, the Company will have
expended a large amount of development and marketing resources on products
designed for new videogame systems (such as the new 32-bit systems) that have
not yet achieved large installed bases or continued product development for
older hardware platforms that may have shorter life cycles than the Company
expected. Conversely, if the Company does not choose to develop for a platform
that achieves significant market acceptance, or discontinues development for a
platform that has a longer life cycle than expected, the Company's revenue
growth may be adversely affected.
23
HARDWARE COMPANIES. The Company's contracts with hardware licensers, which are
also some of the Company's chief competitors, often grant significant control
to the licenser over the manufacturing of the Company's products. This fact
could, in certain circumstances, leave the Company unable to get its products
manufactured and shipped to customers. In most events, control of the
manufacturing process by hardware companies increases both the manufacturing
lead times and the expense to Company over the lead times and costs that the
Company can achieve independently. In fiscal 1996, for example, the Company
experienced delays in the manufacturing of Sony PlayStation products which
caused delays in shipping those products. The results of future periods may be
affected by similar delays. Finally, the Company's contracts with its hardware
licensers often require the Company to take significant risks in holding or
prepaying for its inventory of products.
REVENUE AND EXPENSES. A substantial majority of the revenue of the Company in
any quarter typically results from orders received in that quarter and products
introduced in that quarter. The Company's expenses are based, in part, on
development of products to be released in the future. Certain overhead and
product development expenses do not vary directly in relation to revenues. As
a result, the Company's quarterly results of operations are difficult to
predict, and small delays in product deliveries may cause quarterly revenues,
operating results and net income to fall significantly below anticipated
levels. The Company typically receives orders shortly before shipments, making
backlog an unreliable indicator of quarterly results. A shortfall in shipments
at the end of any particular quarter may cause the results of that quarter to
fall significantly short of anticipated levels. In addition, due in part to
the volume of products introduced into the market and the short shelf life of
most products, there is increasing pressure from retailers to offer price
protection and accept returns of retailers' excess inventory.
FILM AND VIDEOTAPE. The Company produces film and videotape to include in
certain products pursuant to agreements between certain of the Company's
subsidiaries with SAG, AFTRA and Equity. However, the costs of video
production are significantly higher than for software production, and for
products which include a substantial amount of video such as certain
interactive movies, the costs of producing the video component is significantly
higher than the cost of developing the software component. For example, the
film component of WING COMMANDER IV cost approximately $8.0 million.
Accordingly, more units of such products must be sold to recoup the development
and production costs. While WING COMMANDER IV has sold sufficient units to
recoup the full costs of development, there can be no assurances that other
products including significant film or videotape components be commercially
successful enough to recoup development costs. In addition, the Company's
agreements with SAG and AFTRA expire during the current calendar year, and
there can be no assurances that the Company will be able to renegotiate
favorable terms.
EMPLOYEES. Competition for employees in the interactive software business is
intense and increasing as competition in the industry increases. In the last
fiscal year, recruiting of the Company's employees generally and its executive
officers in particular has been severe. Large software and media companies
frequently offer significantly larger cash compensation than does the Company,
placing pressure on the Company's base salary and cash bonus compensation.
Small start-up companies such as those proliferating in the on-line business
areas offer significant potential equity gains which are difficult for more
mature companies like the Company to match without significant shareholder
dilution. In the last eighteen (18) months, three of the Company's executive
officers have resigned to work with small start-up ventures, and virtually all
of the executives are under intense recruiting pressure. There can be no
assurances that the Company will be able to continue to attract and retain
enough qualified employees in the future. None of the Company's employees is
subject to a collective bargaining agreement, and the Company believes that its
employee relations are excellent.
FLUCTUATIONS IN STOCK PRICE. Due to analysts' expectations of continued growth
and other factors, any shortfall in earnings could have an immediate and
significant adverse effect on the trading price of the Company's common stock
in any given period. As a result of the factors discussed in this annual
report and other factors that may arise in the future, the market price of the
Company's common stock may be subject to significant fluctuations over a short
period of time. These fluctuations may be due to factors specific to the
Company, to changes in analysts' earnings estimates, or to factors affecting
the computer, software, entertainment, media or electronics industries or the
securities markets in general.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
24
RESULTS OF OPERATIONS
Comparison of Fiscal 1996 to 1995
1996 1995 % change
- --------------------------------------------------------------------------------
Net revenues $531,887,000 $493,346,000 7.8
- --------------------------------------------------------------------------------
The Company derives revenues from shipments of EA Studio cartridge products,
EA Studio Compact Disk ("CD") personal computer products ("PC-CD") and
floppy-disk personal computer products (primarily entertainment software), EA
Studio CD products for dedicated entertainment systems ("CD-Videogame"),
licensing of EA Studio products, distribution of EA Studio products through
hardware companies ("OEMs") all of which comprise its "published revenues"
and shipments of Affiliated Label CD and floppy-disk products that are
created by third parties.
Total net revenues increased compared to the prior year primarily due to an
increase in net revenues derived from a higher volume of CD based products (PC-
CD and CD-Videogames), and Affiliated Label products. This was partially offset
by a decrease in sales of 16-bit Sega Genesis Videogame Cartridges ("Genesis")
and EA floppy-disk products.
Net revenues generated by 16-bit videogame cartridge based products were
$202,599,000 or 38% of consolidated net revenues in fiscal 1996 compared to
$281,933,000 or 57% of net revenues in fiscal 1995. The mix of net revenue in
fiscal 1996 reflects the continued impact of the transition from the mature 16-
bit cartridge based market to the emerging CD based market. As the 16-bit
market has matured, sales of hardware and software have declined and are
expected to significantly decline further in fiscal 1997. During fiscal 1996,
the Company released fewer titles for these platforms and intends significantly
fewer releases in fiscal 1997.
Sales of EA Studio Genesis cartridge products in fiscal 1996 declined to
$138,643,000, or 26% of total revenue, compared to $213,471,000, or 43% of total
revenue in fiscal 1995. The Company released 10 new Genesis titles in fiscal
1996 compared to 17 in fiscal 1995.
Net revenues derived from cartridge products for the Super Nintendo
Entertainment System ("Super NES") were $63,956,000, or 12% of total revenue, in
fiscal 1996 compared to $68,462,000, or 14% of total revenue in fiscal 1995.
The Company released five new titles for the Super NES in fiscal 1996 compared
to six in fiscal 1995.
Net revenues from PC-CD products increased to $140,594,000 in fiscal 1996,
representing 26% of total net revenues, from $72,227,000, or 15% of total net
revenues in fiscal 1995. The Company released 22 PC-CD titles in fiscal 1996
compared to 30 in fiscal 1995. The Company expects revenues from PC-CD products
to continue to grow, but as revenues for PC-CD products increase, the Company
does not expect to maintain these growth rates.
CD-Videogame products, primarily the Sony PlayStation in fiscal 1996 and the
3DO Interactive Multiplayer in fiscal 1995, generated net revenues of
$76,523,000 in fiscal 1996, representing 14% of the total net revenues compared
to $27,230,000, or 6% of total net revenues in fiscal 1995. The Company
released 25 CD-Videogame titles in fiscal 1996 compared to eight in fiscal 1995.
Licensing of EA Studio products generated $27,018,000 in fiscal 1996, compared
to $21,001,000 in fiscal 1995. The increase primarily resulted from increased
distribution of EA's products through OEMs.
Net revenues from shipments of Affiliated Label products in fiscal 1996
increased to $76,302,000 from $48,480,000 in fiscal 1995. The increase was
primarily attributable to revenues from the exclusive distribution of certain PC
entertainment and 3DO products to key accounts on behalf of other third party
publishers which began in fiscal 1996. Additionally , the Company had increased
Affiliated Label net revenues in Japan and Europe due to higher sales from
several new and existing affiliates. Affiliated Label CD based products
represented 96% of total Affiliated Label net revenues in fiscal 1996, compared
to 59% in fiscal 1995.
The Company's revenues from floppy-disk products, hand-held cartridge products
and products from the Sega 32X platform decreased to $8,851,000 or 2% of the
total in 1996 from $42,475,000 or 9% in fiscal 1995. Results continue to
reflect the rapid market shift away from these products to CD based products.
The Company produced no new games for these platforms in fiscal 1996 and does
not expect to release any new titles in fiscal 1997. In fiscal 1995, the Company
released 14 floppy-disk titles.
On a geographic basis, the revenue mix reflects the Company's growth in
worldwide operations. International net revenues increased by 43% to
$225,658,000 or 42% of consolidated 1996 net revenues compared to $158,043,000
or 32% of the 1995 total. The increase in international revenues was
attributable to higher worldwide sales of CD based products, primarily PC-CD and
Sony PlayStation together with an increase in sales of Super NES products in
Europe, which were licensed in 1995. This was partially offset by a decrease in
floppy-disk and Genesis products.
North American net revenues totaled $306,229,000 in fiscal 1996, representing
a decrease of 9% over the $335,303,000 generated in fiscal 1995. The decrease
was attributable to the decline in 16-bit cartridge revenues partially offset by
the increase in shipments of PC-CD products and CD-Videogames.
25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 % change
- --------------------------------------------------------------------------------
Cost of goods sold $273,594,000 $263,357,000 3.9
As a percentage of
net revenues 51.4% 53.4%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1996 reflects lower
product costs associated with CD based products offset by higher production
costs for multimedia releases, higher professional and celebrity royalties,
higher distribution and manufacturing expenses for the operations in Europe and
growth in the lower margin distribution business.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING EXPENSES 1996 1995 % change
- --------------------------------------------------------------------------------
Marketing and sales $72,928,000 $61,951,000 17.7
As a percentage of
net revenues 13.7% 12.6%
- --------------------------------------------------------------------------------
General and
administrative $32,207,000 $29,308,000 9.9
As a percentage of
net revenues 6.1% 5.9%
- --------------------------------------------------------------------------------
Research and
development $99,627,000 $73,902,000 34.8
As a percentage of
net revenues 18.7% 15.0%
- --------------------------------------------------------------------------------
The increase in marketing and sales expenses was affected by higher trade show
expenses and higher co-op advertising expenses associated with higher revenues.
Additionally, marketing and sales expenses, along with general and
administrative expenses, increased due to additional headcount and higher
facility expenses related to the prior year acquisitions and the opening of new
sales offices in International markets. Increases in general and administrative
expenses were partially offset by a decrease in bad debt expenses in Japan as
compared to fiscal 1995.
The increase in research and development expenses was primarily due to
additional headcount relating to increased in-house development capacity, higher
average development costs for CD based products than for cartridge products,
increased reserves against artist advances due to product delays, primarily on
CD-Videogame platforms, and the acquisition of Manley & Associates, a Seattle
based development company in 1996. The Company released a total of 64 new
products in fiscal 1996 compared to 86 in fiscal 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 % change
- --------------------------------------------------------------------------------
Operating income $53,531,000 $64,828,000 (17.4)
As a percentage
of net revenue 10.1% 13.1%
- --------------------------------------------------------------------------------
The decrease in operating income was primarily due to higher operating expenses
partially offset by an increase in net revenues.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $6,021,000 $13,250,000 (54.6)
As a percentage
of net revenues 1.1% 2.7%
- --------------------------------------------------------------------------------
The decrease in other income was primarily due to a one-time payment of
$10,000,000 from Broderbund Software, Inc. ("Broderbund"), offset by costs of
$1,400,000 incurred by the Company, associated with the termination of the
merger agreement between the Company and Broderbund in fiscal 1995.
In fiscal 1996, the Company also had higher interest income related to higher
average cash balances and interest rates worldwide together with gains on the
sales of marketable securities and fixed assets. These gains were substantially
offset by losses and write-offs of certain investments in affiliates.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995 % change
- -------------------------------------------------------------------------------
Income taxes $18,759,000 $24,980,000 (24.9)
Effective tax rate 31.5% 32.0%
- -------------------------------------------------------------------------------
The effective tax rate for fiscal 1996 decreased over the prior year primarily
as a result of the fiscal 1995 impact of the operating loss reported by
Electronic Arts Victor ("EAV") and the use of those losses to offset EAV's
profits in 1996. Tax benefits from the Company's Puerto Rico operations were
lower in the current year as a result of lower sales of cartridge products.
26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint
venture $(304,000) $2,620,000 N/M
As a percentage
of net revenues (0.1%) 0.5%
- --------------------------------------------------------------------------------
EAV is sixty-five percent owned by the Company and thirty-five percent owned by
Victor Entertainment Industries, Inc. ("VEI"), a wholly owned subsidiary of
Victor Company of Japan, Limited. Minority interest for fiscal 1996 represents
VEI's pro rata share of net income from EAV's operations. Conversely, the
fiscal 1995 minority interest represents VEI's pro rata share of EAV's net loss
for that period.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 % change
- --------------------------------------------------------------------------------
Net income $40,489,000 $55,718,000 (27.3)
As a percentage
of net revenues 7.6% 11.3%
- --------------------------------------------------------------------------------
The decrease in net income was due to higher operating expenses partially
reduced by higher revenue combined with the prior year impact of the after-tax
net gain of approximately $5,800,000 from the one-time payment of a merger
termination fee.
27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULT OF OPERATIONS
Comparison of Fiscal 1995 to 1994
1995 1994 % change
- --------------------------------------------------------------------------------
Net revenues $493,346,000 $418,289,000 17.9
- --------------------------------------------------------------------------------
Total fiscal 1995 net revenues increased compared to fiscal 1994 primarily due
to increased net revenues derived from a higher volume of CD based products (PC-
CD and 3DO Interactive Multiplayer), EA License/OEM products and Affiliated
Label products. This was partially offset by decreased sales of 16-bit Super
Nintendo Entertainment System ("Super NES") and EA floppy-disk products.
Net revenues generated by 16-bit cartridge based products were $281,933,000
or 57% of consolidated net revenues in fiscal 1995 compared to $309,929,000 or
74% of net revenues in fiscal 1994. The mix of net revenue in fiscal 1995
reflected the impact of the transition from the mature 16-bit cartridge based
market to the emerging 32-bit CD- Videogame market. Additionally, as the 16-bit
market has become more "hits-driven", the Company released fewer titles for
these platforms in fiscal 1995.
Sales of EA Studio Sega Genesis ("Genesis") cartridge products in fiscal 1995
declined to $213,471,000, or 43% of total revenue, compared to $220,327,000, or
53% of total revenue in fiscal 1994. The Company released 17 new Genesis titles
in fiscal 1995 compared to 24 in fiscal 1994.
Net revenues derived from cartridge products for the Super NES were
$68,462,000, or 14% of total revenue, in fiscal 1995 compared to $89,602,000, or
21% of total revenue in fiscal 1994. The Company released six new titles for
the Super NES in fiscal 1995 compared to eight in fiscal 1994.
Net revenues from PC-CD products increased to $72,227,000 in fiscal 1995,
representing 15% of total net revenues, from $4,968,000, or 1% of total net
revenues in fiscal 1994. The Company released 30 PC-CD titles in fiscal 1995
compared to eight in fiscal 1994.
CD-Videogame products, primarily the 3DO Interactive Multiplayer, generated
net revenues of $27,230,000 in fiscal 1995, representing 6% of the total net
revenues compared to $8,676,000, or 2% of total net revenues in fiscal 1994.
The Company released eight of these titles in fiscal 1995 compared to seven in
fiscal 1994.
Net revenues from floppy-disk based products decreased to $26,631,000, or 5%
of the total in fiscal 1995, from $50,998,000, or 12 % in fiscal 1994. Results
reflected the rapid market shift from floppy-disk based personal computer
products to PC-CD products. In fiscal 1995, the Company released 14 floppy disk
titles, compared to 35 in fiscal 1994.
Licensing of EA Studio products generated $21,001,000 in fiscal 1995,
compared to $8,495,000 in fiscal 1994. The increase primarily resulted from the
licensing of the Company's Super NES products to a third party in Europe and
increased distribution of its products through OEMs.
Net revenues from shipments of Affiliated Label products in fiscal 1995
increased to $48,480,000 from $33,216,000 in fiscal 1994. The increase,
primarily attributable to higher net revenues for PC-CD products, was partially
offset by decreased net revenues derived from floppy-disk based computer
products. Affiliated Label PC-CD products represented 59% of total Affiliated
Label net revenues in fiscal 1995, compared to 32% in fiscal 1994.
Net revenues generated by hand-held cartridge and other products were
$15,844,000 for fiscal 1995 compared to $2,007,000 in fiscal 1994.
North American net revenue totaled $335,303,000 in fiscal 1995, representing
an increase of 7% over the $311,986,000 in net revenue generated in fiscal 1994.
The increase was primarily due to the significant increase in PC-CD and CD-
Videogame product sales. This increase was offset by the decreased volume of
sales in the mature 16-bit cartridge market in North America. International net
revenues increased 49% to $158,043,000 in fiscal 1995 from $106,303,000 in
fiscal 1994. The increase in international revenues was due primarily to the
sale of PC-CD products, together with increased licensing activities in Europe.
This was partially offset by reduced Super NES revenue in Europe and Japan.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Cost of goods sold $263,357,000 $224,606,000 17.3
As a percentage of
net revenues 53.4% 53.7%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1995 reflected the
higher margin associated with CD based products offset by the higher cartridge
costs on Genesis and Super NES products, which resulted from larger cartridge
configurations, as well as higher professional and celebrity royalties.
28
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING EXPENSES 1995 1994 % change
- --------------------------------------------------------------------------------
Marketing and sales $61,951,000 $46,847,000 32.2
As a percentage of net revenues 12.6% 11.2%
- --------------------------------------------------------------------------------
General and
administrative $29,308,000 $23,767,000 23.3
As a percentage of
net revenues 5.9% 5.7%
- --------------------------------------------------------------------------------
Research and
development $73,902,000 $62,570,000 18.1
As a percentage of
net revenues 15.0% 15.0%
- --------------------------------------------------------------------------------
The increase in marketing and sales expenses was primarily attributable to
increased television advertising oriented to the "hits-driven" 16-bit cartridge
business during the holiday season and increased cooperative advertising to
support the 16-bit cartridge market.
General and administrative expenses increased due to bad debts incurred in
the joint venture in Japan and legal costs associated with business development
activities in Europe.
The increase in research and development expenses was primarily due to the
increased number of products under development, higher average development costs
for CD based products than for cartridge products, continued investment in new
technologies for next generation systems and the acquisition of Bullfrog
Productions Ltd., a United Kingdom based development company. The Company
released a total of 86 new products in fiscal 1995 compared to 82 in fiscal
1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Operating income $64,828,000 $60,499,000 7.2
As a percentage
of net revenues 13.1% 14.5%
- --------------------------------------------------------------------------------
The increase in operating income in fiscal 1995 was primarily due to higher net
revenues, reduced by an increase in operating expenses.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $13,250,000 $3,782,000 250.3
As a percentage
of net revenues 2.7% 0.9%
- --------------------------------------------------------------------------------
Other income increased in fiscal 1995 over fiscal 1994 primarily due to a one-
time payment of $10,000,000 from Broderbund Software, Inc. ("Broderbund"),
offset by costs of $1,400,000 incurred by the Company, associated with the
termination of the merger agreement between the Company and Broderbund.
Additionally, interest income was higher in fiscal 1995 due to higher average
cash balances together with higher average interest rates.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Income taxes $24,980,000 $19,450,000 28.4
Effective tax rate 32.0% 30.3%
- --------------------------------------------------------------------------------
The effective tax rate for fiscal 1995 increased over the prior year primarily
due to the impact of the current year operating loss reported by Electronic Arts
Victor ("EAV").
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint
venture $2,620,000 $(94,000) N/M
As a percentage
of net revenues 0.5% -
- --------------------------------------------------------------------------------
Minority interest for fiscal 1995 represents VEI's pro rata share of net loss
from EAV's operations compared to pro-rata share of net income in fiscal 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995 1994 % change
- --------------------------------------------------------------------------------
Net income $55,718,000 $44,737,000 24.5
As a percentage
of net revenues 11.3% 10.7%
- --------------------------------------------------------------------------------
The increase in net income was due to the after-tax net gain of approximately
$5,800,000 from the one-time merger termination fee as well as higher revenues,
partially offset by higher operating expenses and the impact of the higher
effective tax rate.
29
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's working capital was $199,713,000 compared to
$168,742,000 at March 31, 1995. Cash and short-term investments decreased by
approximately $26,138,000 in fiscal 1996. The Company generated $6,930,000 of
cash from operations in fiscal 1996. In addition, $21,678,000 was provided
through the sale of equity securities under the Company's employee stock plans.
Reserves for bad debts and sales returns decreased from $33,567,000 at March
31, 1995 to $27,569,000 at March 31, 1996. Reserves have been charged for
returns of product and price protection credits issued for products sold in
prior periods. Management believes these reserves are adequate based on
historical experience and its current estimate of potential returns and
allowances.
During fiscal 1996 the Company invested approximately $25,000,000 relating to
computer hardware and software purchases required to support the Company's
development efforts and new management information systems worldwide.
The Company also invested $21,200,000 in the purchase of land and buildings
to expand its Texas-based development group.
Inventory levels at March 31, 1996 increased compared to March 31, 1995 to
support the Company's expanded international distribution network in Germany,
Spain, South Africa and Southeast Asia.
In March 1996, the Company made an additional $10,000,000 long-term investment
to enable it to take advantage of certain tax exemptions in its Puerto Rico
operation.
The Company's principal source of liquidity is $147,983,000 in cash and short-
term investments. Management believes the existing cash, cash equivalents,
short-term investments, marketable securities and cash generated from operations
will be sufficient to meet cash and investment requirements for the foreseeable
future.
30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of Independent Auditors', Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow below on pages 31 through 44.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic Arts
and subsidiaries as of March 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended March 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Arts and subsidiaries at March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
Palo Alto, California
May 2, 1996 KPMG Peat Marwick LLP
31
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $147,983 $174,121
Marketable securities 37,869 10,725
Receivables, less allowances of $27,569 and $33,567, respectively 73,075 56,389
Inventories 14,704 12,358
Prepaid royalties 14,519 8,318
Deferred income taxes - 3,142
Other current assets 12,188 6,707
----------------------------
Total current assets 300,338 271,760
Property and equipment, net 70,062 30,528
Prepaid royalties 11,030 6,633
Long-term investments 24,200 14,200
Investment in affiliates 15,952 13,397
Deferred income taxes - 77
Other assets 2,637 4,644
----------------------------
$424,219 $341,239
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $37,019 $ 34,247
Accrued liabilities 63,606 68,771
----------------------------
Total current liabilities 100,625 103,018
Minority interest in consolidated joint venture 1,277 1,148
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares - -
Common stock, $0.01 par value. Authorized 70,000,000 shares;
issued and outstanding 52,741,572 and 50,928,103 shares, respectively 527 509
Paid-in capital 108,078 77,144
Retained earnings 199,523 161,512
Unrealized appreciation (depreciation) of investments 16,266 (1,206)
Translation adjustment (2,077) (886)
----------------------------
Total stockholders' equity 322,317 237,073
----------------------------
$424,219 $341,239
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
32
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended March 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Net revenues $531,887 $493,346 $418,289
Cost of goods sold 273,594 263,357 224,606
--------------------------------------
Gross profit 258,293 229,989 193,683
Operating expenses:
Marketing and sales 72,928 61,951 46,847
General and administrative 32,207 29,308 23,767
Research and development 99,627 73,902 62,570
--------------------------------------
Total operating expenses 204,762 165,161 133,184
--------------------------------------
Operating income 53,531 64,828 60,499
Interest and other income, net 6,021 13,250 3,782
--------------------------------------
Income before provision for income taxes and minority interest 59,552 78,078 64,281
Provision for income taxes 18,759 24,980 19,450
--------------------------------------
Income before minority interest 40,793 53,098 44,831
Minority interest in consolidated joint venture (304) 2,620 (94)
--------------------------------------
Net income $ 40,489 $ 55,718 $ 44,737
--------------------------------------
--------------------------------------
Net income per share $ 0.75 $ 1.07 $ 0.86
--------------------------------------
--------------------------------------
Number of shares used in computation 54,163 52,297 52,286
--------------------------------------
--------------------------------------
See accompanying notes to consolidated financial statements.
33
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1996, 1995 and 1994 Common Stock
------------------
(In thousands) Unrealized
Appreciation
Paid-In Retained (Depreciation) Translation
Shares Amount Capital Earnings of Investments Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1993 48,502 $ 462 $49,770 $64,141 $ 0 $ (3,802) $110,571
Proceeds from sales of shares through
employee stock plans and other plans 1,472 15 9,845 9,860
Tax benefit related to stock options 6,062 6,062
Translation adjustment 948 948
Net income 44,737 44,737
---------------------------------------------------------------------------------
Balances at March 31, 1994 49,974 477 65,677 108,878 0 (2,854) 172,178
Proceeds from sales of shares through
employee stock plans and other plans 954 10 7,210 7,220
Tax benefit related to stock options 4,242 4,242
Adjustment effect of poolings on prior
periods 22 15 (1,698) (1,661)
Adjustment for change in Kingsoft, GmbH
fiscal year end (1,386) (1,386)
Unrealized loss on investments (1,206) (1,206)
Translation adjustment 1,968 1,968
Net income 55,718 55,718
---------------------------------------------------------------------------------
Balances at March 31, 1995 50,928 509 77,144 161,512 (1,206) (886) 237,073
Proceeds from sales of shares through
employee stock plans and other plans 1,814 17 21,661 21,678
Tax benefit related to stock options 9,170 9,170
Adjustment effect of immaterial pooling 1 103 (177) (73)
Adjustment for change in Manley &
Associates fiscal year end (2,301) (2,301)
Unrealized gain on investments 17,472 17,472
Translation adjustment (1,191) (1,191)
Net income 40,489 40,489
---------------------------------------------------------------------------------
Balances at March 31, 1996 52,742 $ 527 $108,078 $199,523 $ 16,266 $ (2,077) 322,317
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 40,489 $ 55,718 $ 44,737
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in consolidated joint venture 304 (2,620) 94
Depreciation and amortization 15,859 10,763 7,865
Loss (gain) on sale of fixed assets (2,044) 76 28
Gain on sale of marketable securities (4,879) - -
Deferred rent (87) 160 26
Adjustment for change in fiscal year end for pooled subsidiaries (2,301) (1,386) -
Change in assets and liabilities:
Receivables (16,686) 8,726 (38,733)
Inventories (2,346) (2,887) 2,887
Prepaid royalties (10,598) (5,120) (5,804)
Other assets (4,214) (11,306) 2,616
Accounts payable 2,772 (1,605) 2,081
Accrued liabilities (12,558) 6,475 21,173
Deferred income taxes 3,219 6,803 3,857
--------------------------------------
Net cash provided by operating activities 6,930 63,797 40,827
--------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 4,221 527 93
Proceeds from sale of marketable securities 5,273 - -
Capital expenditures (56,830) (16,503) (13,962)
Investment in affiliates (4,641) (472) -
Short-term investments (11,655) 5,700 (36,831)
Long-term investments (10,000) (14,200) -
Acquisition of DROsoft - (1,397) -
Acquisition of Vision Software (500) - -
Adjustment for effect of poolings on prior periods (73) (1,661) -
--------------------------------------
Net cash used in investing activities (74,205) (28,006) (50,700)
--------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of shares through employee stock
plans and other plans 21,678 7,220 9,860
Tax benefit from stock option exercises 9,170 4,242 6,062
--------------------------------------
Net cash provided by financing activities 30,848 11,462 15,922
--------------------------------------
Translation adjustment (1,191) 1,968 948
Minority interest on translation adjustment (175) 282 392
--------------------------------------
Increase (decrease) in cash and cash equivalents (37,793) 49,503 7,389
Beginning cash and cash equivalents 143,421 93,918 86,529
--------------------------------------
Ending cash and cash equivalents 105,628 143,421 93,918
Short-term investments 42,355 30,700 36,400
--------------------------------------
Ending cash and short-term investments $147,983 $ 174,121 $ 130,318
--------------------------------------
--------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 9,570 $ 6,390 $ 4,815
--------------------------------------
--------------------------------------
NON-CASH INVESTING ACTIVITIES:
Unrealized gain (loss) on investments $ 24,952 $ (1,206) $ -
Transfer of assets at net book value to affiliated company - 6,003 -
--------------------------------------
--------------------------------------
See accompanying notes to consolidated financial statements.
35
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Electronic Arts, Inc. and its wholly owned subsidiaries (the "Company") and its
majority owned subsidiary Electronic Arts Victor, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements of the Company follows:
(a) FISCAL YEAR
The Company's fiscal year is reported on a 52/53-week period that ends on the
Saturday nearest to March 31 in each year. The results of operations for fiscal
1996 contains 53 weeks. Since the results of an additional week are not
material, and for clarity of presentation herein, all fiscal periods are treated
as ending on a calendar month end.
(b) REVENUE RECOGNITION
Product Sales: Revenue is recognized when the product is shipped. Subject to
certain limitations, the Company permits customers to obtain exchanges within
certain specified periods, and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns and price
protection.
Software Licenses: For those agreements which provide the customers the
right to multiple copies in exchange for guaranteed amounts, revenue is
recognized at delivery of the product master or the first copy. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $27,018,000, $21,001,000 and
$8,495,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
(c) CASH AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid investments with maturities of three
months or less at the date of purchase. Short-term investments include
securities with maturities greater than three months and less than one year,
except for certain investments with stated maturities greater than one year.
The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, ("SFAS 115"). SFAS 115 requires that investments in equity
and debt securities be classified and accounted for in one of three categories.
The Company has classified short-term investments as "available-for-sale" and
applicable investments are stated at fair value which approximates cost. The
cost of securities sold is based upon the specific identification method.
(d) PREPAID ROYALTIES
Prepaid royalties represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of goods sold based on actual net product sales.
Management evaluates the future realization of prepaid royalties quarterly, and
charges to research and development expense any amounts that management deems
unlikely to be amortized at the contract royalty rate through product sales.
Royalty advances are classified as current and noncurrent assets based upon
estimated net product sales within the next year.
(e) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. No software
development costs have been capitalized to date as the impact on the financial
statements for all periods presented is immaterial.
(f) INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories at
March 31, 1996 and 1995 consisted of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 2,160 $ 2,799
Finished goods 12,544 9,559
- -------------------------------------------------------------------------------
$ 14,704 $ 12,358
- -------------------------------------------------------------------------------
(g) OUTSIDE PRODUCTION COSTS
The Company defers the outside production costs of the film content of its
products. Such costs are expensed as cost of goods sold based on actual net
product sales. Film costs deferred as of March 31, 1996 and 1995 were
$5,500,000, and $2,200,000, respectively.
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the declining balance method over the estimated
useful lives of the respective assets, which range from three to seven years.
The building is being depreciated using the straight line method over 20 years.
Amortization of leasehold improvements is computed using the declining balance
method over the lesser of the lease terms or the estimated useful lives of the
improvements.
36
(i) INTANGIBLE ASSETS
Intangible assets net of amortization at March 31, 1996 and 1995 of $1,752,000,
and $2,340,000 are included in other current and noncurrent assets and include
costs of obtaining product technology and noncompete covenants which are
amortized using the straight-line method over the lesser of their estimated
useful lives or the agreement terms, typically no more than five years, and
goodwill resulting from the purchase of DROSoft (now known as EA Spain) in
November 1994 and Vision Software in March 1996. Amortization expense for
fiscal years ended March 31, 1996, 1995 and 1994 was $740,000, $337,000, and
$318,000, respectively.
(j) INCOME TAXES
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
(k) FOREIGN CURRENCY TRANSLATION
For each of the Company's foreign subsidiaries the functional currency is its
local currency. Assets and liabilities of foreign operations are translated into
U.S. dollars using current exchange rates, and revenues and expenses are
translated into U.S. dollars using average exchange rates. The effects of
foreign currency translation adjustments are deferred and included as a
component of stockholders' equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Included in interest and other income in the statements of
income are foreign currency transaction gains of $433,000, $785,000, and
$1,418,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
(l) NET INCOME PER SHARE
Net income per share is based on the weighted average number of common stock and
common stock equivalents from stock options outstanding during the period.
There is no significant difference between primary and fully diluted earnings
per share.
(m) EMPLOYEE BENEFITS
The Company has deferred savings and profit sharing plans for its employees.
The Profit Sharing Plan was terminated effective March 31, 1995 and all employee
account balances transferred to employees' accounts in the 401(k) Plan. There
were no contributions to the Profit Sharing Plan for the fiscal year ended March
31, 1995 compared to $615,000 for the fiscal year ended March 31, 1994.
The 401(k) Plan permits the Company to make discretionary contributions to
employees' accounts based on the Company's financial performance. In fiscal
1996, $279,000 was accrued for contributions to the Plan. No such contributions
were made during fiscal year 1995 and 1994.
(n) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121"). SFAS 121 requires that impairment losses to be recorded on long-
lived assets and certain identifiable intangibles when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. SFAS 121 also addresses the
accounting for long lived assets that are expected to be disposed of. The
Company will adopt SFAS 121 effective April 1, 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for the Stock-Based Compensation" ("SFAS 123"), which
establishes a fair value based method of accounting for stock based compensation
plans. The Company intends to continue to account for employee stock options
under APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123 is
effective for fiscal years beginning after December 15, 1995 and will require
certain additional disclosures in the fiscal 1997 financial statements.
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include provisions for doubtful accounts, sales returns and
allowances, warranty provisions, and estimates regarding the recoverability of
prepaid royalty advances and inventory. Actual results could differ from those
estimates.
(p) RECLASSIFICATIONS
Certain amounts have been reclassified to conform to fiscal 1996 presentation.
37
(2) CASH AND INVESTMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
(in thousands)
Cash and equivalents:
Cash $ 28,078 $ 21,023
Municipal securities 13,885 42,813
Money market funds 37,843 25,437
Commercial paper 25,822 54,148
- -------------------------------------------------------------------------------
Cash and equivalents 105,628 143,421
- -------------------------------------------------------------------------------
Short-term investments:
Commercial paper 2,805 -
Municipal securities 5,600 8,500
Money market preferreds 33,950 22,200
- -------------------------------------------------------------------------------
Short-term investments 42,355 30,700
- -------------------------------------------------------------------------------
Cash and short-term investments $147,983 $174,121
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Long-term investments $ 24,200 $ 14,200
- -------------------------------------------------------------------------------
Long-term investments are in the form of commercial notes with maturities of
five to eight years secured by U.S. Treasury Notes. Such investments enable the
Company to take advantage of certain tax incentives in its Puerto Rico operation
and are treated as held to maturity for financial reporting purposes.
(3) MARKETABLE SECURITIES
Marketable securities are comprised of equity securities. The Company has
accounted for investments in equity securities as "available-for-sale" and has
stated applicable investments at fair value, with net unrealized gains (losses)
reported as a separate component of stockholders' equity. Marketable
securities had an aggregate cost of $14,123,000 and $11,931,000 at March 31,
1996 and 1995, respectively. At March 31, 1996 marketable securities included
gross unrealized gains of $27,334,000 and gross unrealized losses of $3,588,000.
At March 31, 1995, there was a gross unrealized loss of $1,206,000.
At March 31, 1995, the Company owned 4,218,168 shares or approximately 18%
ownership interest in The 3DO Company ("3DO"). During Fiscal 1996, the Company
sold 982,500 shares of 3DO reducing its ownership interest to 3,235,668 shares
or approximately 12% of the outstanding shares of 3DO as of March 31, 1996.
Accordingly, the investment in 3DO was reclassified to Marketable Securities and
accounted for as "available-for-sale". At March 31, 1995, the Company's
ownership interest in 3DO was accounted for under the equity method and included
in "Investment in affiliates."
For the year ended March 31, 1996, the fair value of 3DO stock that was sold was
$9,783,000. The gross realized gains from these sales totaled $9,112,000.
There were no gains or losses from sales of marketable securities during 1995.
The gain on sale of investments is based on the specific identification method.
(4) COMMITMENTS
LEASE OBLIGATIONS
The Company leases its current facilities and certain equipment under non-
cancelable operating lease agreements. The Company is required to pay property
taxes, insurance and normal maintenance costs for certain of its facilities and
will be required to pay any increases over the base year of these expenses on
the remainder of the Company's facilities.
In February 1995, the Company entered into a master operating lease for
land and a building to be constructed in Redwood City, California. The initial
term of the lease is for a period of three years from the date of completion of
construction. Monthly lease payments are based upon the London Interbank
Offered Rate. The Company has the option to purchase the property for the
unamortized financed balance at any time after the non-cancelable lease term, or
it may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. Should the
Company elect to terminate the lease, it will guarantee a residual value of up
to 85% of the unamortized value of the property. As part of the agreement, the
Company must also comply with certain financial covenants.
Total future minimum lease commitments as of March 31, 1996 are:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Year Ending: (in thousands)
1997 $ 8,405
1998 7,780
1999 4,632
2000 1,174
2001 745
Thereafter 9,489
- -------------------------------------------------------------------------------
$ 32,225
- -------------------------------------------------------------------------------
Total rent expense for all operating leases was $7,631,000, $6,451,000, and
$5,558,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
The current portion of deferred rent of $823,000 and $736,000 at March 31,
1996 and 1995, respectively, represents the obligation accrued for rent,
calculated on the straight-line method over the lease term and is included in
accrued liabilities.
(5) MAJOR CUSTOMER
The Company had no sales to any one customer in excess of 10% of total net
revenues for the years ended March 31, 1996 and 1995. For the fiscal year ended
March 31, 1994, the Company had sales to one customer which represented 10.8% of
total net revenues.
38
(6) LITIGATION
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
(7) PREFERRED STOCK
At March 31, 1996 and 1995, the Company had 1,000,000 shares of Preferred Stock
authorized but unissued. The rights, preferences, and restrictions of the
Preferred Stock may be designated by the Board of Directors without further
action by the Company's stockholders.
(8) STOCK PLANS
(a) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions of up to 10% of their compensation to purchase
shares at 85% of the lower of the fair market value of the Common Stock on the
date of commencement of the offering or on the last day of the six-month
purchase period. The Plan commenced in September 1991. In fiscal 1996, 154,516
shares were purchased by employees at prices ranging from $15.09 to $21.57. In
fiscal 1995, 169,187 shares were purchased by employees at prices ranging from
$15.09 to $15.51 per share. In fiscal 1994, 164,456 shares were purchased by
employees at prices ranging from $11.37 to $21.46. At March 1996, the Company
had 313,234 shares of its Common Stock reserved for future issuance under the
Plan.
(b) STOCK OPTION PLANS
The Company's 1991 Stock Option Plan and Directors' Plan provide stock options
for employees, officers and independent contractors, and for directors,
respectively. Pursuant to these Option Plans, the Board of Directors may grant
non-qualified and incentive stock options to employees and officers and non-
qualified options to independent contractors and directors, at not less than the
fair market value on the date of grant. The Company's 1982 Stock Option Plan
("1982 Plan") expired in September 1992.
The options generally expire ten years from the date of grant and are
generally exercisable in monthly increments over 50 months.
At March 31, 1996, 3,301,613 shares of the outstanding options were
exercisable at prices ranging from $1.938 to $35.375.
At March 31, 1995, 3,497,818 shares of the outstanding options were
exercisable at prices ranging from $1.938 to $34.750.
At March 31, 1994, 2,145,214 shares of the outstanding options were
exercisable at prices ranging from $1.594 to $39.000.
39
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1996, 1995 and 1994:
------------------------------------------------------------
------------------------------------------------------------
Options --------------------------------------------
Available Options Outstanding
for Grant Shares Price Per Share
------------------------------------------------------------
Balance at March 31, 1993 1,115,308 7,144,482 $ 1.219 - 29.000
Additional authorized options 2,000,000 - -
Options: Granted (1,212,400) 1,212,400 24.250 - 39.000
Canceled - 1982 Plan - (93,802) 1.594 - 13.750
Canceled - other plans 375,805 (375,805) 4.469 - 34.750
Exercised - (1,306,478) 1.219 - 33.250
------------------------------------------------------------
Balance at March 31, 1994 2,278,713 6,580,797 $ 1.594 - 39.000
Additional authorized options 2,350,000 - -
Options: Granted (3,173,931) 3,173,931 13.500 - 25.750
Canceled - 1982 Plan - (54,115) 1.594 - 13.625
Canceled - other plans 1,541,503 (1,541,503) 4.469 - 39.000
Exercised - (810,673) 1.594 - 24.125
------------------------------------------------------------
Balance at March 31, 1995 2,996,285 7,348,437 $ 1.938 - 34.750
Additional authorized options 1,852,175 - -
Options: Granted (4,312,249) 4,312,249 22.250 - 37.875
Canceled - 1982 Plan - (4,480) 4.094 - 13.625
Canceled - other plans 2,316,692 (2,316,692) 4.469 - 37.875
Exercised - (1,658,953) 2.031 - 35.375
------------------------------------------------------------
Balance at March 31, 1996 2,852,903 7,680,561 $ 1.938 - 37.375
------------------------------------------------------------
------------------------------------------------------------
40
(9) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1996 and 1995 consisted of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
(in thousands)
Computer equipment $61,391 $36,123
Building 18,921 1,446
Office equipment, furniture and
fixtures 10,913 6,915
Leasehold improvements 7,594 6,365
Land 4,766 770
Warehouse equipment and other 5,227 3,043
- -------------------------------------------------------------------------------
108,812 54,662
Less accumulated depreciation and
amortization (38,750) (24,134)
- -------------------------------------------------------------------------------
$70,062 $30,528
- -------------------------------------------------------------------------------
Depreciation and amortization expenses associated with property and equipment
amounted to $15,119,000, $9,339,000, and $7,589,000 for the fiscal years ended
March 31, 1996, 1995 and 1994, respectively.
(10) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1996 and 1995 consisted of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
(in thousands)
Accrued expenses $18,203 $22,878
Accrued royalties 16,889 16,040
Accrued compensation and benefits 11,480 10,524
Accrued income taxes 10,477 16,069
Deferred income taxes 5,878 1,840
Deferred revenue 679 1,420
- -------------------------------------------------------------------------------
$63,606 $68,771
- -------------------------------------------------------------------------------
(11) JOINT VENTURES
(a) ELECTRONIC ARTS VICTOR, INC.
The Company has a majority interest in a joint venture corporation, Electronic
Arts Victor, Inc. ("EAV"), for the development and distribution of entertainment
software products in Japan as well as certain Asian countries. EAV is sixty-
five percent owned by the Company and thirty-five percent owned by Victor
Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical Industries,
Inc.) a wholly owned subsidiary of Victor Company of Japan, Limited. The
Company has consolidated 100% of the assets, liabilities and results of
operations for EAV. VEI's 35% interest in EAV and the profits or losses
therefrom has been reflected as "Minority interest in consolidated joint
venture" on the Company's Consolidated Financial Statements.
(b) CREATIVE WONDERS, INC.
In December 1994, the Company and Capital Cities/ABC, Inc. formed Creative
Wonders, Inc. (formerly ABC/EA Home Software, Inc.), a joint venture company, to
publish children's edutainment and interactive entertainment multimedia titles
as well as reference products for personal computers and new generation
entertainment machines. Each company has a 50% ownership interest in the joint
venture company. The investment is accounted for under the equity method. The
Company distributes interactive titles sold by the joint venture into the retail
channel.
(12) BUSINESS COMBINATIONS
ACQUISITION OF MANLEY & ASSOCIATES AND VISION SOFTWARE
In February 1996, the Company issued approximately 65,000 shares of common
stock in exchange for all of the outstanding common stock of Manley & Associates
("Manley"), an interactive software developer based in Seattle, Washington. The
acquisition has been accounted for under the pooling of interests method.
Manley had a December 31 year end. Accordingly, the Company's financial
statements have been restated to include the accounts and operations of Manley
for the year ended December 31, 1995. Separate and combined results for the
Company and Manley for the twelve months ended March 31, 1996 are as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Year-Ended March 31, 1996
(in thousands)
- -------------------------------------------------------------------------------
Electronic
Arts Manley Adjustments Combined
- -------------------------------------------------------------------------------
Net
revenues $530,253 $2,628 ($994) $531,887
- -------------------------------------------------------------------------------
Net income $40,705 $88 ($304) $40,489
- -------------------------------------------------------------------------------
The adjustments impacting net income were the elimination of intercompany
revenues and royalties and the related impact on the provision for income taxes.
41
Effective March 31, 1996, Manley changed its fiscal year end from December 31 to
March 31. As a result, Manley's results of operations for the three months
ended March 31, 1996 are not reflected in the consolidated statements of income
but were charged directly to retained earnings. Manley's revenues, operating
loss and net loss for the three month period ending March 31, 1996 were $11,000,
$2,302,000 and $2,301,000, respectively.
In March 1996, the Company paid $500,000 to acquire Vision Software, an
independent distributor of entertainment software, headquartered in
Johannesburg, South Africa. The acquisition has been accounted for under the
purchase method. The $152,000 excess of the purchase price over the estimated
fair value of net assets acquired has been recorded as goodwill and is being
amortized over five years.
(13) INCOME TAXES
The Company's pretax income from operations for the fiscal years ended
March 31, 1996, 1995 and 1994 consisted of the following components:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Domestic $14,722 $41,330 $41,156
Foreign 44,830 36,748 23,125
- -------------------------------------------------------------------------------
Total pretax income $59,552 $78,078 $64,281
- -------------------------------------------------------------------------------
Income tax expense (benefit) for the fiscal years ended March 31, 1996, 1995 and
1994 consisted of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(in thousands) Current Deferred Total
- -------------------------------------------------------------------------------
1996:
Federal $(6,075) $2,094 $(3,981)
State (523) 395 (128)
Foreign 13,980 (282) 13,698
Charge in lieu of taxes
from employee stock plans 9,170 - 9,170
- -------------------------------------------------------------------------------
$16,552 $2,207 $18,759
- -------------------------------------------------------------------------------
1995:
Federal $ 3,676 $5,955 $9,631
State 353 2,688 3,041
Foreign 8,066 - 8,066
Charge in lieu of taxes
from employee stock plans 4,242 - 4,242
- -------------------------------------------------------------------------------
$16,337 $8,643 $24,980
- -------------------------------------------------------------------------------
1994:
Federal $ 2,597 $3,690 $6,287
State 140 167 307
Foreign 6,794 - 6,794
Charge in lieu of taxes
from employee stock plans 6,062 - 6,062
- -------------------------------------------------------------------------------
$15,593 $3,857 $19,450
- -------------------------------------------------------------------------------
The components of the net deferred tax assets as of March 31, 1996 and 1995
consist of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
Deferred tax assets:
Accruals, reserves and other expenses $23,415 $15,369
Federal and State loss carryforwards 1,553 -
Foreign loss and credit carryforwards 8,321 7,178
- -------------------------------------------------------------------------------
Total gross deferred tax assets 33,289 22,547
Less: valuation allowance (8,321) (7,178)
- -------------------------------------------------------------------------------
Net deferred tax assets 24,968 15,369
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (2,378) (2,527)
Prepaid royalty expenses (20,988) (11,463)
Unrealized gains on marketable securities (7,480) -
- -------------------------------------------------------------------------------
Total gross deferred tax liabilities (30,846) (13,990)
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) $(5,878) $ 1,379
- -------------------------------------------------------------------------------
The valuation allowance relates solely to the foreign loss and foreign credit
carryforwards, for which the utilization is uncertain in future periods.
At March 31, 1996, for Federal income tax purposes, the Company has a net
operating loss carryforward of approximately $3,000,000 which expires in the
year 2012. For California income tax purposes, as of March 31, 1996, the
Company has a net operating loss carryforward of approximately $5,000,000 which
expires in the year 2002.
42
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1996, 1995 and 1994 were as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 0.5 2.9 5.3
Differences between statutory
rate and foreign effective tax rate (3.0) (1.8) (0.4)
Foreign loss without tax benefit - 3.4 -
Research and development credits - (1.2) (4.5)
Tax exemptions on Puerto Rico operation (0.7) (5.0) (4.7)
Other (0.3) (1.3) (0.4)
- -------------------------------------------------------------------------------
31.5% 32.0% 30.3%
- -------------------------------------------------------------------------------
The Company does not provide for U.S. taxes on undistributed earnings of its
foreign subsidiaries. At March 31, 1996, the undistributed foreign earnings of
the foreign subsidiaries amounted to approximately $50,000,000. If these
earnings were distributed to the parent company, foreign tax credits available
under current law would substantially eliminate the resulting Federal tax
liability.
The Company's manufacturing subsidiary in Puerto Rico operates under a
Puerto Rican tax incentive program which grants the Company certain percentage
exemptions from Puerto Rican income, property and municipal taxes for a period
of 20 years from the date of the commencement of operations. The U.S. tax
benefit derived for the year-ended March 31, 1996, 1995 and 1994 was
approximately $411,000, $3,886,000 and $2,687,000, respectively. Long-term
reinvestment in Puerto Rico of the undistributed earnings of the Puerto Rico
subsidiary enables the Company to take advantage of certain tax incentives. In
addition, the Company has applied for an amendment to expand its exemption for
certain additional operations.
(14) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1996, 1995 and 1994
consisted of:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Interest income $ 6,444 $ 4,748 $ 3,042
Interest expense (141) (51) (52)
Merger-related fee - 8,600 -
Gain on sale of marketable securities 4,879 - -
Gain (loss) on sale of property and
equipment 2,044 (76) (28)
Impairment of investment in affiliates (4,700) - -
Equity in net loss of affiliates (1,746) - -
Other income (expense), net (759) 29 820
- -------------------------------------------------------------------------------
$ 6,021 $13,250 $3,782
- -------------------------------------------------------------------------------
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH, SHORT-TERM INVESTMENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES - the carrying amount approximates fair value because of the short
maturity of these instruments.
MARKETABLE SECURITIES - fair value is based on quoted market prices.
43
(16) OPERATIONS BY GEOGRAPHIC AREAS
The Company operates in one industry segment. Information about the Company's
operations in the United States and foreign areas for the fiscal years ended
March 31, 1996, 1995 and 1994 is presented below:
North South Asia
(in thousands) America Europe Pacific Japan Eliminations Total
-----------------------------------------------------------------------------------
FISCAL 1996:
Net revenues from
unaffiliated customers $306,229 $157,999 $21,794 $45,865 $ - $531,887
Intersegment sales 49,975 9,801 54 100 (59,930) -
-----------------------------------------------------------------------------------
Total net revenues $356,204 $167,800 $21,848 $45,965 $ (59,930) $531,887
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Operating income $ 14,409 $ 33,126 $ 5,114 $ 882 $ - $ 53,531
Identifiable assets $309,308 $ 88,446 $ 8,469 $17,996 $ - $424,219
FISCAL 1995:
Net revenues from
unaffiliated customers $335,303 $112,907 $13,139 $31,997 $ - $493,346
Intersegment sales 55,444 3,850 101 34 (59,429) -
-----------------------------------------------------------------------------------
Total net revenues $390,747 $116,757 $13,240 $32,031 $ (59,429) $493,346
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Operating income (loss) $ 44,276 $ 25,997 $ 2,123 $ (7,568) $ - $ 64,828
Identifiable assets $272,577 $ 50,910 $ 6,268 $ 11,484 $ - $341,239
FISCAL 1994:
Net revenues from
unaffiliated customers $311,986 $71,105 $ 6,879 $ 28,319 $ - $418,289
Intersegment sales 35,508 2,855 51 - (38,414) -
-----------------------------------------------------------------------------------
Total net revenues $347,494 $73,960 $ 6,930 $ 28,319 $ (38,414) $418,289
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Operating income (loss) $ 47,883 $11,792 $ 994 $ (170) $ - $ 60,499
Identifiable assets $195,849 $47,801 $ 6,498 $ 23,503 $ - $273,651
44
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
During the Company's last two fiscal years, there have been no changes in
independent accountants nor disagreements with such accountants as to accounting
and financial disclosures of the type required to be disclosed in Item 9.
45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors who are nominated for re-election required
by Item 10 is incorporated herein by reference to the information in the
Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders
(the "Proxy Statement") under the caption "Proposal No. 1 - Election of
Directors." The information regarding executive officers required by Item 10 is
included in Item 4A hereof.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Director and Executive
Officer Compensation" specifically excluding the "Compensation Committee Report
on Executive Compensation," and "Stock Option Plan."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Certain Transactions."
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. INDEX TO FINANCIAL STATEMENTS. Page(s) in Form 10-K
Independent Auditors' Report 31
Consolidated Balance Sheets as of March 31, 1996
and 1995 32
Consolidated Statements of Income for the Years
Ended March 31, 1996, 1995 and 1994 33
Consolidated Statements of Stockholders' Equity
for the Years Ended March 31, 1996, 1995 and
1994 34
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1996, 1995 and 1994 35
Notes to Consolidated Financial Statements for the
Years Ended March 31, 1996, 1995 and 1994 36
2. FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule of Electronic Arts for the
years ended March 31, 1996, 1995 and 1994 are filed as part of this
report and should be read in conjunction with the Consolidated Financial
Statements of Electronic Arts.
Schedule II - Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the Consolidated
Financial Statements or the notes thereto.
3. EXHIBITS.
The following exhibits are filed as part of, or incorporated by
reference into, this report:
Number Exhibit Title
------ -------------
3.01 Registrant's Certificate of Incorporation, as amended to December
1, 1992. (1)
3.02 Registrant's Certificate of Amendment of Certificate of
Incorporation. (2)
3.03 Registrant's By-Laws, as amended to date. (3)
4.01 Specimen Certificate of Registrant's Common Stock. (4)
10.01 Registrant's 1982 Stock Option Plan, as amended to date, and
related documents. (5)(6)
10.02 Registrant's Directors Stock Option Plan and related documents.
(6)(7)
10.03 Description of Registrant's FY 1997 Executive Bonus Plan. (6)
10.04 Directors and Officers and Company Reimbursement Indemnity Policy
by and between Registrant and certain underwriters at Lloyd's,
London and Continental Insurance Company, dated June 20, 1992.
(8)
10.05 Lease by and between Registrant, Electronic Arts Limited and
Allied Dunbar Assurance PLC, dated June 24, 1987, for the
Registrant's U.K. facilities. (9)
47
Number Exhibit Title
------ -------------
10.06 Lease by and between Registrant and H.G.C. Associates, dated June
24, 1992, for the Registrant's warehouse and production
facilities. (10)
10.07 Lease Agreement by and between Registrant and 1450 Fashion Island
Boulevard Associates, L.P., dated March 22, 1991. (11)
10.08 Registrants' 1991 Stock Option Plan and related documents as
amended. (6)(12)
10.09 Form of Indemnity Agreement with Directors. (13)
10.10 Registrants' Employee Stock Purchase Plan and related documents
as amended. (6)(14)
10.11 Lease Agreement by and between Registrant and The Canada Life
Assurance Company, dated December 20, 1991, for the Registrant's
Canadian facilities. (15)
10.13 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated March 22, 1991.
(17)
10.14 Agreement between Registrant and Sega Enterprises, Ltd., dated
July 14, 1992. (18) (19)
10.15 Lease Agreement by and between Registrant and Century Centre II
Associates, dated July 27, 1992. (19)
10.16 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated October 1, 1992.
(19)
10.17 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 2, 1993. (19)
10.18 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 22, 1993. (19)
10.19 Directors and Officers and Company Reimbursement Indemnity Policy
by and between Registrant and certain underwriters at Lloyd's,
London and Continental Insurance Company, dated June 20, 1993.
(19)
10.20 Lease by and between Registrant and 1450 Fashion Island Boulevard
Associates, L.P., dated August 27, 1992 for additional space at
corporate headquarters. (10)
10.21 Lease by and between Registrant and Sowa Urban Development Co.,
Ltd. (Sowa Toshi Kaihatsu K.K.), dated October 1, 1992 for the
Registrant's Japan facilities. (10)
10.22 Lease by and between Registrant, Electronic Arts Limited and
Heron Slough Limited, dated June 12, 1992, for the Registrant's
U.K. facilities. (20)
10.23 Lease by and between Registrant and the Travelers Insurance
Company, dated April 14, 1993, for the Registrant's production
facilities. (21)
10.24 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated June 1, 1993.
(22)
10.25 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.26 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.27 Lease Agreement by and between Registrant and Arthur J. Rogers &
Co., dated January 14, 1994. (24)
10.28 Lease Agreement by and between Registrant and the Prudential
Insurance Company of America, dated January 10, 1994. (24)
10.29 Agreement for Lease between Flatirons Funding, LP and Electronic
Arts Redwood, Inc. dated February 14, 1995. (25)
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP
dated February 14, 1995. (25)
48
Number Exhibit Title
------ -------------
10.31 Lease Agreement by and between Registrant and Dixie Warehouse &
Cartage Co., dated April 10, 1995. (25)
10.32 Commercial Earnest Money Contract between Novell, Inc. and ORIGIN
Systems, Inc. dated April 13, 1995. (26)
10.33 First Amendment to Commercial Earnest Money Contract between
Novell, Inc. and ORIGIN Systems, Inc. dated June 1, 1995. (27)
10.34 Amendment No. 1 to Agreement between Registrant and Sega
Enterprises, Inc. effective December 31, 1995.
11.01 Computation of Per Share Earnings.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of
Independent Auditors.
---------
(1) Incorporated by reference to Exhibit 3.01 to Registrant's Current
Report on Form 8-K filed on October 16, 1991.
(2) Incorporated by reference to Exhibit 4.01 to Registrant's
Registration Statement on Form S-8 filed on December 1, 1992
(File No. 33-55212) (the "1992 Form S-8").
(3) Incorporated by reference to Exhibit 3.02 to Registrant's Current
Report on Form 8-K filed on October 16, 1991.
(4) Incorporated by reference to Exhibit 4.01 to Registrant's
Registration Statement on Form S-4 filed on March 3, 1994 (File
No. 33-75892).
(5) Incorporated by reference to Exhibit 4.03 to Post-Effective
Amendment No. 2 to Registrant's Registration Statement on Form
S-8 filed on November 6, 1991 (File No. 33-32616) ("S-8 Amendment
No. 2").
(6) Management contract or compensatory plan or arrangement.
(7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No. 2.
(8) Incorporated by reference to Exhibit 10.08 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1992 (the "1992
Form 10-K").
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's
Registration Statement on Form S-1 filed on September 20, 1989,
and all amendments thereto (File No. 33-30346) (the "Form S-1").
(10) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1991.
49
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's
Registration Statement on Form S-8 filed on July 29, 1993 (File
No. 33-66836) (the "1993 Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K.
(16) Not Used.
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K.
(18) Confidential treatment has been granted with respect to certain
portions of this document.
(19) Incorporated by reference to similarly numbered exhibits to
Registrants Annual Report on Form 10-K for the year ended March
31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
(23) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended March
31, 1994 (the "1994 Form 10-K").
(25) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended March
31, 1995 (the "1995 Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(27) Incorporated by references to Exhibit 10.02 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1996.
50
(c) EXHIBITS:
The Registrant hereby files as part of this Form 10-K the exhibits
listed in Item 14(a)3, as set forth above.
(d) FINANCIAL STATEMENT SCHEDULE:
The Registrant hereby files as part of this Form 10-K the financial
statement schedule listed in Item 14(a)2, as set forth on page 53.
51
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ELECTRONIC ARTS
By: /s/ Lawrence F. Probst III
---------------------------------
(Lawrence F. Probst III,
Chairman of the Board and Chief
Executive Officer)
Date:
June 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant in the capacities indicated and on the 27th of June 1996.
Name Title
---- -----
/s/ Lawrence F. Probst III Chairman of the Board
- --------------------------------- and Chief Executive Officer
(Lawrence F. Probst III)
/s/ E. Stanton McKee, Jr. Senior Vice President and Chief
- --------------------------------- Financial and Administrative Officer
(E. Stanton McKee, Jr.)
/s/ David L. Carbone Vice President Finance
- ---------------------------------
(David L. Carbone)
Directors:
/s/ M. Richard Asher Director
- -----------------------------------
(M. Richard Asher)
/s/ William J. Byron Director
- -----------------------------------
(William J. Byron)
/s/ Daniel H. Case III Director
- -----------------------------------
(Daniel H. Case III)
/s/ Gary M. Kusin Director
- -----------------------------------
(Gary M. Kusin)
/s/ Timothy J. Mott Director
- -----------------------------------
(Timothy J. Mott)
52
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts(1) Deductions of Period
- ----------- --------- -------- ----------- ---------- ---------
Year Ended March 31, 1996
Allowance for doubtful
accounts and returns $33,567 $45,346 $ (461) $50,883 $27,569
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Year Ended March 31, 1995
Allowance for doubtful
accounts and returns $29,113 $56,371 $ 2,540 $54,457 $33,567
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Year Ended March 31, 1994
Allowance for doubtful
accounts and returns $18,653 $31,539 $ 314 $21,393 $29,113
------- ------- ------- ------- -------
------- ------- ------- ------- -------
(1) Primarily the translation effect of using the average exchange rate for
expense items and the year-ended exchange rate for the balance sheet item
(allowance account).
53
ELECTRONIC ARTS INC.
1996 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
- ------ ------------- ----
10.03 Description of Registrant's FY 1997 Executive Bonus Plan. 55
10.34 Amendment No. 1 to Agreement between Registrant and Sega
Enterprises, Inc. effective December 31, 1995. 56
11.01 Computation of Per Share Earnings. 58
21.01 Subsidiaries of the Registrant. 59
23.01 Report on Financial Statement Schedule and Consent of
Independent Auditors. 60
- ----------
54