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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 For the fiscal year ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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.)
209 Redwood Shores Parkway
Redwood City, California 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 628-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A 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 Class A common stock, $.01 par
value, held by non-affiliates of the Registrant on June 1, 2001 was
$6,054,430,726.
As of June 1, 2001 there were 136,323,266 shares of Registrant's Class A common
stock, $.01 par value, outstanding, and 6,250,000 shares of Registrant's Class B
common stock, $.01 par value, outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 2001 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 84 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 84.
ELECTRONIC ARTS INC.
2001 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4A. Executive Officers of the Registrant 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 74
PART III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial Owners and Management 75
Item 13. Certain Relationships and Related Transactions 75
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 76
Signatures 82
Exhibit Index 84
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 about circumstances that have
not yet occurred. All statements, trend analysis and other information contained
below relating to markets, our products and trends in revenue, as well as other
statements including words such as "anticipate", "believe" or "expect" and
statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks, and
actual events or our actual future results could differ materially from those
set forth in the forward-looking statements due to such risks and uncertainties.
We will not necessarily update this information if any forward-looking statement
later turns out to be inaccurate. Risks and uncertainties that may affect our
future results and performance include, but are not limited to, those discussed
under the heading "Risk Factors" on pages 37 to 43.
ITEM 1: BUSINESS
Overview
Electronic Arts was initially incorporated in California in 1982. In
September 1991, we were reincorporated under the laws of Delaware. Our principal
executive offices are located at 209 Redwood Shores Parkway, Redwood City,
California 94065 and our telephone number is (650) 628-1500.
We operate in two principal business segments globally:
o EA Core business segment: creation, marketing and distribution of
entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online, ongoing
management of subscriptions of online games and website advertising.
EA Core
We create, market and distribute interactive entertainment software for
a variety of hardware platforms. As of March 31, 2001, our business was
comprised of the following:
o Distribution of over 100 titles that we developed and/or published
under one of our brand names in North America, including older titles
marketed as "Classics".
o Distribution of localized versions of our products in the rest of the
world.
o Distribution of approximately 20 additional titles that were either
developed by other software publishers (that we refer to as Affiliated
Labels) in North America or titles we have assisted in the development
of with other software publishers (referred to as Co-Published titles).
o Distribution of over 4,000 Affiliated Label and Co-Published titles in
the rest of the world.
Since our inception, we have developed and are developing products for 41
different hardware platforms, including the following:
o IBM(R)PC and compatibles
o 32-bit Sony PlayStation(R)
o 32-bit Nintendo Game Boy Advance
o 64-bit Nintendo(R)64
o 128-bit Sony PlayStation 2
o 128-bit Microsoft Xbox(TM)
o 128-bit Nintendo GameCube(TM)
Our product development methods and organization are modeled on those used
in the entertainment industry. We also market our products with techniques
borrowed from other entertainment companies such as record producers, magazine
publishers and video distributors. Employees whom we call "producers", who are
responsible for the development of one or more products, oversee product
development and direct teams comprised of both our employees and outside
contractors. Our 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 we have contracts include: FIFA, NASCAR, John
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Madden, the National Basketball Association, the PGA TOUR, Tiger Woods, the
National Hockey League, Football Association Premier League, Formula One and
Warner Bros. We maintain development studios in California, Canada, United
Kingdom, Florida, Texas, Japan, Washington, Maryland, Australia and Nevada.
We invest in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools allow for more
cost-effective product development and the ability to more efficiently convert
products from one hardware platform to another. We have also made investments in
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.
We distribute our products and those of our Affiliated Labels primarily
by direct sales to retail chains and outlets in the United States and Europe. In
Japan and the Asia Pacific region, we distribute products both directly to
retailers and through third party distributors. Our products are available in
over 80,000 retail locations worldwide. In fiscal 2001, approximately 37% of our
net revenues were generated by international operations, compared to 40% in
fiscal 2000 and 42% in fiscal 1999.
EA.com
On March 22, 2000, the stockholders of Electronic Arts authorized the
issuance of a new series of common stock, designated as Class B common stock
("Tracking Stock"). The Tracking Stock is intended to reflect the performance of
Electronic Arts' online and e-Commerce division ("EA.com"). As a result of the
approval of the Tracking Stock Proposal, Electronic Arts' existing common stock
has been re-classified as Class A common stock ("Class A Stock") and that stock
reflects the performance of Electronic Arts' other businesses ("EA Core").
EA.com, a division of Electronic Arts, represents Electronic Arts'
online and e-Commerce business. EA.com develops, publishes and distributes
online interactive games. EA.com's business includes subscription revenues
collected for Internet game play on our websites, website advertising, sales of
packaged goods for Internet-only based games and sales of Electronic Arts games
sold through the EA.com web store. Electronic Arts began development of its
initial online product, Ultima Online, during fiscal year 1996. We shipped
Ultima Online during fiscal year 1998, and began development of our online
business during the same year. EA.com's websites include EA.com, individual
marketing sites for Electronic Arts' games or studios and the Games Channel on
America Online, which launched in the second half of calendar 2000. Our goal is
to be the leading online games site. To date, the majority of our subscription
revenues have been generated by Ultima Online, Ultima Online: The Second Age and
Ultima Renaissance (collectively referred to as Ultima Online) and our Worldplay
and Kesmai games. In addition, all of our packaged goods revenues for
online-only games have been generated by Ultima Online. The packaged good
product is sold through our traditional distribution channel to various
retailers. The Ultima Online product is then sold by the retail channel to the
end customer who must sign up for EA.com's online service to enjoy online play
on a month-to-month subscription basis. We also began generating advertising
revenues in October 2000 as a result of launching the EA.com site on the world
wide web and the AOL Games Channel.
Investments and Joint Ventures
Acquisitions
Pogo Corporation
On February 28, 2001, we acquired Pogo Corporation (now referred to as
"Pogo") for $43,333,000, including an initial investment of $42,000,000 and the
redemption of Pogo preferred stock of $1,333,000. The acquisition has been
accounted for under the purchase method. Pogo operates an ad-supported games
service that reaches a broad consumer market. Pogo's internet-based family games
focus on easy-to-play card, board and puzzle games. The Company has contributed
Pogo to EA.com. See note 14 of the Notes to the Consolidated Financial
Statements, included in item 8 hereof.
Kesmai Corporation
On February 7, 2000, we acquired Kesmai Corporation (now referred to as
"Kesmai") from News America Corporation ("News Corp") in exchange for
$22,500,000 in cash and approximately 206,000 shares of Electronic Arts'
existing Class A common stock valued at $8,650,000. The transaction was
accounted for under the purchase method. Kesmai(TM) is managed by EA.com and
specializes in the design and development of multiplayer games delivered
directly to consumers over the Internet and is a major provider of game content
to the Games Channel on the AOL service. The Company granted 5 percent of the
initial equity (Class B Stock) attributable to EA.com to News Corp in exchange
for the 206,000 shares noted above, adjusting the total common stock
consideration relating to the acquisition by $703,000 to $9,353,000. The Company
has contributed Kesmai to EA.com. See note 14 of the Notes to the Consolidated
Financial Statements, included in item 8 hereof.
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Westwood Studios
In September 1998, we completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studios
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The transaction was accounted for under the purchase
method. Westwood is best known for its successful PC franchises, Command and
Conquer and Lands of Lore. See note 14 of the Notes to the Consolidated
Financial Statements, included in item 8 hereof.
Other Business Combinations
Additionally, during fiscal 2000, we acquired two software development
companies. See note 14 of the Notes to Consolidated Financial Statements,
included in item 8 hereof.
Joint Ventures
In May 1998, Electronic Arts and Square Co., Ltd. ("Square"), a leading
developer and publisher of entertainment software in Japan, completed the
formation of two new joint ventures, in North America and Japan. In North
America, the companies formed Square Electronic Arts, LLC ("Square EA"), which
has exclusive publishing rights in North America for future interactive
entertainment PlayStation titles created by Square. We own a 30% minority
interest in this joint venture while Square owns 70%. Additionally, we have the
exclusive right to distribute in North America products published by this joint
venture.
In Japan, the companies established Electronic Arts Square KK ("EA
Square KK"), which localizes and publishes in Japan our properties originally
created in North America and Europe, as well as develops and publishes original
video games in Japan. We own a 70% majority interest, while Square owns 30%. See
note 14 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
Investments
We have made investments as part of our overall strategy and currently
hold minority equity interests in several companies. As of March 31, 2001, our
minority equity investments include investments in NovaLogic, Inc. and Firaxis
Software, Inc.
Market
Historically, no hardware platform or video game system has achieved
long-term dominance in the interactive entertainment market. In addition, the
installed base of multimedia-enabled home computers, including those with
Internet accessibility, has continued to grow as personal computer, or PC,
prices have declined and the quality and choices of software have increased
dramatically. We develop and publish products for multiple platforms, and this
diversification continues to be a cornerstone of our strategy.
The following table details select information on a sample of the
hardware platforms for which we have published titles:
- ------------------------ --------------------------------------------------------------- ------------------------ -------------
Video Game Console / Date Introduced Medium/
Manufacturer Platform Name in North America Product Base Technology
- ------------------------ --------------------------------------------------------------- ------------------------ -------------
Sega Genesis 1989 Cartridge 16-bit
Nintendo Super NES(TM) 1991 Cartridge 16-bit
Matsushita 3DO(TM)Interactive Multiplayer(TM) 1993 Compact Disk 32-bit
Sega Saturn 1995 Compact Disk 32-bit
Sony PlayStation 1995 Compact Disk 32-bit
Nintendo Nintendo 64 1996 Cartridge 64-bit
Sony PlayStation 2 2000 Digital Versatile Disk 128-bit
- ------------------------ --------------------------------------------------------------- ------------------------ -------------
Sony
Sony released the PlayStation 2 console in Japan in March 2000, in
North America in October 2000 and in Europe in November 2000. Compared to the
initial forecast for PlayStation 2 hardware shipments from Sony, there was a
significant shortage of PlayStation 2 hardware units during the year in North
America and Europe. According to Sony, this was due to component shortages which
limited the number of units that could be manufactured. The PlayStation 2
console is a 128-bit, Digital Versatile
5
Disk ("DVD") based system that is Internet and cable ready, as well as backward
compatible with the current PlayStation console software. We currently have
various products under development for the Sony PlayStation 2 console. See Risk
Factors - "New video game platforms create additional technical and business
model uncertainties".
Nintendo
Nintendo announced that it expects to release the Nintendo GameCube in
North America in November 2001. Nintendo GameCube will provide for games to be
delivered and played using a proprietary optical format.
Microsoft
Microsoft announced that it expects to release its first video game
system, Xbox(TM), in North America in November 2001.
New Entrants
New entrants into the interactive entertainment and multimedia
industries, such as cable television, telephone, and diversified media and
entertainment companies, in addition to a proliferation of new technologies,
such as online networks and the Internet, have increased the competition in our
markets. We are scheduled to release several online network gaming products
during fiscal 2002. See Risk Factors - "New video game platforms create
additional technical and business model uncertainties" and "The impact of
e-Commerce and online games on our business is not known ".
The early investment in products for the 32-bit market, including both
Compact Disk personal computer (or PC) and dedicated entertainment systems (that
we call video game systems or consoles), has been strategically important in
positioning us for the current generation of 128-bit machines. We believe that
such investment continues to be important. During the fiscal year 2001, the
video and computer games industry has experienced a platform transition from
32-bit and 64-bit CD-based consoles to the current generation 128-bit DVD-based
game consoles and related software. The transition to the current generation
systems was initiated by the launch of Sony's PlayStation 2 in fiscal 2001, and
continues with the anticipated launch in North America of the Nintendo GameCube
and Microsoft's Xbox in the Fall of calendar year 2001. As the market continues
to shift to the current generation systems, sales of current 32-bit and 64-bit
products have been declining and we expect a significant decline in fiscal 2002.
In addition, our revenues and earnings are dependent on our ability to meet our
product release schedule and our failure to meet those schedules could result in
revenues and earnings which fall short of analysts' expectations in any
individual quarter. See Risk Factors - "Product development schedules are
frequently unreliable and make predicting quarterly results difficult".
Online Games
According to the market research firm, International Data Corporation
("IDC"), online gamers (defined as individuals who have played online games
within the past year) are expected to grow to 74.7 million by 2004 up from 39.4
million in 2000. IDC expects total online gaming market revenue to grow to $1.7
billion by 2002. We believe the expected increases in online gaming will be
primarily attributable to the following factors:
o Increasing popularity of PC gaming;
o Growing interest in multiplayer games;
o Growth in the number of households with PCs and Internet connections;
o General growth in internet usage, including the number of users,
communities and increased frequency of use by consumers;
o Rapid innovation of new online entertainment experiences;
o Mass market adoption of broadband technologies; and
o Future introduction of online gaming capabilities for next-generation
consoles.
Competition
EA Core
See Risk Factors - "Our platform licensors are our chief competitors
and frequently control the manufacturing of our video game products".
EA.com
We believe EA.com faces substantial competition from a number of existing and
potential competitors including:
o Console & PC Game Publishers. Other game publishers including Sony
Computer Entertainment of America ("Sony"), Nintendo, Sega, Acclaim,
Havas, Microsoft, LucasArts, Interplay, Infogrames and Eidos, are each
developing individual online games and games with online components.
Currently, Sony (including the online divisions of Sony Entertainment)
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operates the Sony Station, a site that offers not only family-oriented
game shows, but also online game offerings, including the online game,
Everquest, a virtual world that directly competes with EA.com's Ultima
Online game. In addition, Sony has made public its intentions for
online connectivity via its next-generation console, the PlayStation 2,
though detailed plans have not been disclosed. In 2000, Sega introduced
SegaNet, an online gaming Internet subscription-based service optimized
for use with its Dreamcast video game console. However, Sega's
subsequent decision to discontinue the Dreamcast will impact this plan.
In 2001, Sega executives have made public statements about the
company's plans for supporting the online gaming functionality of
consoles produced by Sony and Microsoft. Each of these competitors may
compete with EA.com for advertising, subscription and e-Commerce sales.
o Portals. With respect to advertising and e-Commerce sales, EA.com will
also compete with general purpose consumer web sites such as Yahoo,
Excite, Lycos, and Microsoft Network. In addition, many of these
Internet portals offer gaming sites such as Yahoo Games Channel, Excite
Games Channel, Lycos' Gamesville, and Microsoft Gaming Zone. Although
most of the game areas of these portals have attained modest reach,
their key placement on powerful portals makes them potentially
significant competitors for gaming subscriptions as well.
o Family Oriented Game Sites. A number of sites such as Uproar.com,
Games.com and Shockwave.com, have driven significant amounts of traffic
to their sites by offering unique games and entertainment content. In
addition, several of the sites offer frequent prizes with easy to play
"gamettes". These sites are typically monetizing their traffic by
selling advertising.
o Aggregators. Aggregators, such as Microsoft Gaming Zone, provide an
aggregation of various types of online games, including aggregation of
games developed by independent third parties. While these sites have
been primarily focused on serving the gaming community, they have since
adjusted their strategy to include games, such as parlor games, that
reach a broader audience.
o Sports Sites. Sports content sites such as ESPN.com, Sportsline.com and
Foxsports.com typically feature fantasy league games and easy to play
sports "gamettes" in addition to their editorial content. Such fantasy
league games and sports "gamettes" typically appeal to the overall
sports fan, rather than the sports gamer. However, these sites have
significant financial and content resources at their disposal and will
provide competition for advertising and e-Commerce sales.
o Microsoft Gaming Zone ("MGZ"). Microsoft falls into a number of the
foregoing categories, as it is a portal, an aggregator, and a publisher
of PC Software Products, including game products. As such, Microsoft's
offerings are the closest parallel to the proposed offerings of EA.com.
MGZ currently offers both family games and games directed towards the
more serious gamer and, at the same time, has the opportunity to
leverage these experiences with games sold at retail. At present, MGZ
offers matchmaking for about 80 games and offers approximately 30
playable online games, which consist primarily of card and parlor
games. In addition, Microsoft could utilize this site in some way with
its forthcoming Xbox console to develop an online gaming service.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 2001, approximately 20% of our net revenues were derived from
sales of software for the PlayStation 2. We released 15 titles worldwide in
fiscal 2001 for the PlayStation 2. Key releases for the year included Madden NFL
2001, SSX, FIFA 2001, NBA Live 2001 and NHL 2001. Revenues were lower than
expected due to the shortage of PlayStation 2 hardware in the year resulting
from component shortages which limited the number of units that could be
manufactured, according to Sony. We expect Sony to correct these issues for the
next fiscal year, and expect revenues from PlayStation 2 products to grow in
fiscal 2002.
In fiscal 2001, approximately 23% of our net revenues were derived from
sales of software for the PlayStation compared to 41% in fiscal 2000. During
fiscal 2001, we released 17 PlayStation games compared to 30 in fiscal 2000. As
expected, PlayStation sales decreased for fiscal 2001 compared to the prior year
primarily attributable to releasing fewer games and to the PlayStation 2
platform transition. With the exception of Madden NFL, all of our franchises
experienced significant decreases from prior year release. Although our
PlayStation products are playable on the PlayStation 2 console, we expect sales
of current PlayStation products to continue to decline significantly in fiscal
2002. See Risk Factors - "Product development schedules are frequently
unreliable and make predicting quarterly results difficult".
Under the terms of a licensing agreement entered into with Sony
Computer Entertainment of America in July 1994 (the "Sony Agreement"), as
amended, we are authorized to develop and distribute CD-based software products
compatible with the PlayStation. Furthermore, under the terms of an additional
licensing agreement entered into with Sony Computer Entertainment of America as
of April 2000 (the "PlayStation 2 Agreement"), as amended, we are authorized to
develop and distribute DVD-based software products compatible with the
PlayStation 2. Pursuant to these agreements, we engage Sony to supply its
PlayStation and
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PlayStation 2 CD's and DVD's for distribution by us. Accordingly, we have
limited ability to control our supply of PlayStation and PlayStation 2 CD and
DVD products or the timing of their delivery. See Risk Factors - "Our platform
licensors are our chief competitors and frequently control the manufacturing of
our video game products".
Nintendo
During fiscal 2001, we released three titles for the N64(R) compared to
eight titles in fiscal 2000. In fiscal 2001, approximately 5% of our net
revenues were derived from the sale of N64 products compared to 8% in 2000. The
expected decrease in N64 revenues for the fiscal year, compared to the prior
fiscal year, was primarily due to fewer releases. The decrease was also due to
the weaker market for N64 products in the current year. With the expected
release of Nintendo GameCube in North America in November 2001, per Nintendo, we
expect revenues for N64 products to continue to decline significantly in fiscal
2002. The key release for the year was The World Is Not Enough.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture
our N64 cartridges for distribution by us. Accordingly, we have limited ability
to control our supply of N64 cartridges or the timing of their delivery. A
shortage of microchips or other factors outside our control could impair our
ability to obtain an adequate supply of cartridges. See Risk Factors - "Our
platform licensors are our chief competitors and frequently control the
manufacturing of our video game products".
Relationships with Internet Service Providers
America Online, Inc. ("AOL")
Our agreement with AOL establishes the basis for EA.com's creation of
game sites on the world wide web that are available to AOL subscribers via the
Games Channel on the AOL's flagship ISP service and to other consumers who use
other AOL portals (AOL.com, CompuServe, Netscape/Netcenter and ICQ). Users can
also access the EA.com website directly from the world wide web. EA.com is AOL's
exclusive provider of a broad aggregation of online games and programs and
manages all of the Games Channel content within AOL's flagship ISP service in
the United States and other AOL portals. Within any of the AOL properties, users
will be able to find a games channel or area which will provide the user access
to EA.com games. Through this agreement, EA.com has significantly expanded its
EA brand as a provider of online games. According to the April 2001 Media Metrix
reports, the total number of unique monthly visitors to the AOL branded
properties that will have access to the EA.com games site was 69 million. Via an
anchor tenant location, EA.com will also be a non-exclusive provider of games on
AOL's Digital City property, the leading branded local content network and
community guide on the AOL service and the Internet. For the terms of the AOL
agreement, see note 5 of the Notes to Consolidated Financial Statements,
included in item 8 hereof.
Products and Product Development
In fiscal 2001, we generated approximately 59% of our revenues from
products released during the year. See Risk Factors - "Product development
schedules are frequently unreliable and make predicting quarterly results
difficult". As of March 31, 2001, we were actively marketing over 100 titles,
comprising over 150 stock keeping units, or sku's, that were published by our
development divisions and subsidiaries, EA Studios. During fiscal 2001, we
introduced over 35 EA Studios titles, representing over 55 sku's, compared to 48
EA Studios titles, comprising over 69 sku's, in fiscal 2000.
The products published by EA Studios are designed and created by our
in-house designers and artists and by independent software developers
("independent artists"). We typically pay the independent artists royalties
based on the sales of the specific products, as defined in the related
independent artist agreements.
For fiscal 2001, 2000 and 1999, no title represented revenues greater
than 10% of our total fiscal 2001, 2000 and 1999 net revenues.
We publish products in a number of categories such as sports, action,
strategy, simulations, role playing and adventure, each of which is becoming
increasingly competitive. Our sports-related products, marketed under the EA
SPORTS(TM) brand name, accounted for a significant percentage of net revenues in
fiscal years 2001, 2000 and 1999. There can be no assurance that we will be able
to maintain our market share in the sports category.
The front line retail selling prices in North America of our products,
excluding older titles (marketed as "Classics"), typically range from $35.00 to
$55.00. "Classics" titles have retail selling prices that range from $10.00 to
$30.00. The retail selling prices of EA titles outside of North America vary
based on local market conditions.
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We currently develop or publish products for eight different hardware
platforms. In fiscal 2001, our product releases were predominantly for PC,
PlayStation, PlayStation 2, N64 and online Internet play. Our planned product
introductions for fiscal 2002 are for the PlayStation 2, PC, Xbox, Nintendo
GameCube, PlayStation, online Internet play, N64 and Game Boy Advance/Game Boy
Color. See Risk Factors - "Product development schedules are frequently
unreliable and make predicting quarterly results difficult" and "New video game
platforms create additional technical and business model uncertainties".
Our goal is to be the market leader on the next generation of video
game consoles. We are investing in the development of tools and technologies
associated with the introduction of the next generation video game console
platforms. We are also increasing the investment in the development of tools and
technologies for online Internet game play and wide-area network infrastructure.
Our goal is to be the leading provider of interactive entertainment on the
Internet. PlayStation has achieved significant market acceptance in all
geographic territories. However, as the PlayStation console market has reached
maturity, we expect sales of current PlayStation products to decline
significantly in fiscal 2002. Most of the console video game products will be
convertible for use on multiple advanced hardware systems. We had research and
development expenditures of $388.9 million in fiscal 2001, $262.0 million in
fiscal 2000, and $199.4 million in fiscal 1999. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult".
EA.com Web Site
Content. EA.com offers games within three broad categories of interest:
sports, family entertainment, and avid gaming. Each channel focuses on targeting
and serving its specific consumer group by:
o Offering engaging and accessible online games;
o Building a community in which consumers can interact with one another
via chat, bulletin boards, events, and match-making services for
multi-player games and other contests;
o Delivering innovative content that continually entertains; and
o Establishing a direct relationship with each audience member through
personalization and customization of user experiences.
In addition, the product offering of each broad category includes existing
Electronic Arts franchises adapted for game play on the Internet, as well as
additional original games for online play. EA.com's products are offered to
consumers within the appropriate "channels" on the site. The offerings
incorporate some or all of the following:
o Sports. EA.com currently leverages existing Electronic Arts'
franchises, such as PGA(R) Tour/Tiger Woods Golf(R), Knockout Kings(TM)
and Nascar Web Racing to develop a community of sports gamers. In
addition, EA.com will offer unique, original online sports gaming
experiences, sports game shows and support of existing EA packaged
goods products with services such as matchmaking, game updates, product
downloads and game tips.
o Family Entertainment. With the Pogo acquisition, the EA.com family
games offering has significantly expanded to consist of card games,
board games, casino games, lotto games, trivia games, puzzles, game
shows and other products with mass-market appeal. This channel
leverages prizes, tournaments, community and Pogo's strength in free,
familiar games to significantly increase EA.com's appeal to the broad
consumer market.
o Avid Gaming. The general gaming offering is directed at teens and
adults looking to participate in multi-player hard core games made up
of fantastic worlds, characters, adventures or activities -big or
small, real or imagined. This offering will feature immersive
experiences and sophisticated game play appealing to dedicated gamers,
as well as new forms of cutting-edge Internet entertainment. Currently,
this offering capitalizes on the success of our existing Ultima Online
product as well as Electronic Arts' existing packaged goods franchises,
such as Need for Speed Web Racing. Upcoming games which EA.com
anticipates will be released in fiscal 2002 include Majestic,
BattleTech, Motor City Online and Earth & Beyond.
Marketing and Distribution
Electronic Arts Distribution
We distribute EA Studio, Affiliated Label and Co-Published products.
We market our EA Studio products using the EA GAMES(TM), EA SPORTS(TM)
and EA SPORTS BIG(TM) brands. EA GAMES consists of our separate brands,
including Electronic Arts, Maxis, Bullfrog Productions and Westwood. EA SPORTS
brand simulates professional and collegiate sports and includes titles such as
Madden NFL, FIFA and NBA Live. EA SPORTS BIG brand simulates extreme sports such
as the SSX game.
Affiliated Label products are delivered to us as completed products.
Co-Published products are titles we have assisted in developing with other
software publishers. As of March 31, 2001, we distributed approximately 20
Affiliated Label and Co-
9
Published titles in North America and over 4,000 Affiliated Label and
Co-Published titles in the rest of the world. No single Affiliated Label
Publisher has accounted for more than 10% of our net revenues in any of the last
three fiscal years.
In May 1998, Electronic Arts and Square Co., Ltd. formed a new joint
venture in North America, creating Square Electronic Arts, LLC ("Square EA") as
discussed in note 14 of the Notes to the Consolidated Financial Statements,
included in item 8 hereof. In conjunction with the formation of this joint
venture, we have the exclusive right in North America to distribute products
published by this joint venture. In fiscal 2001, Square EA published Final
Fantasy 9 for the PlayStation, which was a top ten selling title for Electronic
Arts.
We generated approximately 95% of our North American net revenues from
direct sales to retailers through a field sales organization of professionals
and a group of telephone sales representatives. The remaining 5% of our North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where we believe direct sales would not
be economical. For each of the fiscal years ended March 31, 2001, 2000 and 1999,
we had sales to one customer, Wal-Mart Stores, Inc., which represented 12% of
total net revenues.
The video game and PC businesses have become increasingly "hits"
driven, requiring significantly greater expenditures for marketing and
advertising, particularly for television advertising. There can be no assurance
that we will continue to produce "hit" titles, or that advertising for any
product will increase sales sufficiently to recoup those advertising expenses.
We have stock-balancing programs for our personal computer products
that, under certain circumstances and up to a specified amount, allow for the
exchange of personal computer products by resellers. We also typically provide
for price protection for our personal computer and video game system products
that, under certain conditions, allows the reseller a price reduction from us
for unsold products. We maintain a policy of exchanging products or giving
credits, but do not give cash refunds. Moreover, the risk of product returns may
increase as new hardware platforms become more popular or market factors force
us to make changes in our distribution system. We monitor and manage the volume
of our 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. We believe
that we provide 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 our products and other factors. We believe our current reserves
will be sufficient to meet return and price protection requirements for current
in-channel inventory. However, there can be no assurance that actual returns or
price protection will not exceed our reserves.
Within the EA.com site, we offer visitors the opportunity to purchase
Electronic Arts software products directly from us. We utilize EA Core's
distribution network to fulfill consumers' online orders. We also have a
fulfillment group that sells product directly to consumers through a toll-free
number and through our websites listed in advertising by us and our Affiliated
Labels. This group is also responsible for targeted direct mail marketing and
sells product backups and accessories to registered customers.
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 our accounts
receivable from such entity uncollectible, which could have an adverse effect on
our operating results and financial condition. In addition, an increasing number
of companies are competing for access to these channels. In fiscal 2001, we
wrote off approximately $1,000,000 of a receivable as a result of the default of
payment from a customer in Europe. Our arrangements with our distributors and
retailers may be terminated by either party at any time without cause.
Distributors and retailers often carry products that compete with ours.
Retailers of our 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 our products
or provide our products with adequate levels of shelf space and promotional
support.
Segment Reporting
The series of common stock designated as Class B was approved to reflect the
performance of EA.com. Accordingly, management considers EA.com to be a separate
reportable segment. Prior period information has been restated to disclose this
separate segment. The Company operates in two principal business segments
globally:
o EA Core business segment: creation, marketing and distribution of
entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online, ongoing
management of subscriptions of online games and website advertising.
10
Please see the discussion regarding segment reporting in the MD&A and note 19 of
the Notes to the Consolidated Financial Statements.
International Operations
We have wholly owned subsidiaries throughout the world, including
offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South
Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. The amounts of
net revenues, operating profit and identifiable assets attributable to each of
our geographic regions for each of the last three fiscal years are set forth in
note 19 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
International net revenues decreased by 14% to $490,349,000, or 37% of
consolidated fiscal 2001 net revenues, compared to $573,374,000 or 40% of
consolidated fiscal 2000 net revenues due to the following:
o Europe's net revenues decreased 21% primarily due to the console
transition, lower Affiliated Label sales due to product release slips and
fewer hit titles released in the current year, lower PC sales with fewer
titles shipping in the period, the strong sales of Command & Conquer:
Tiberian Sun (TM) for the PC in the comparable prior year period, and
weakness in the Euro currency. In addition, PlayStation revenues decreased
43% due to fewer titles shipping during the console transition period with
most franchise titles showing significant decreases from the prior year
releases. PlayStation 2 revenues did not offset the decrease in PlayStation
revenues due to fewer hardware units reaching the market and the weighting
of titles specifically appropriate for the North American market rather
than the European market.
o Asia Pacific's net revenues decreased 4%, mainly due to the decrease in
PlayStation revenues as there were no significant new titles released in
the current year. This was offset by sales of PlayStation 2 titles such as
SSX and FIFA 2001.
o Offset by Japan's net revenues which increased 58% compared to the prior
year primarily due to the shipment of PlayStation 2 titles such as FIFA
World Soccer Championship, FIFA 2001 and SSX.
Though international revenues are expected to grow in fiscal 2002,
international revenues may not grow at as high a rate as in prior years. See
Risk Factors - "Our business, our products, and our distribution are subject to
increasing regulation in key territories" and "Foreign Sales and Currency
Fluctuations".
Manufacturing and Suppliers
Materials
In many instances, we are able to acquire materials on a
volume-discount basis. We have multiple potential sources of supply for most
materials, except with respect to our PlayStation, PlayStation 2 and N64
products, as previously mentioned. We also have alternate sources for the
manufacture and assembly of most of our products. To date, we have not
experienced any material difficulties or delays in production of our software
and related documentation and packaging. However, a shortage of components or
other factors beyond our control could impair our ability to manufacture, or
have manufactured, our products. See Risk Factors - "Our platform licensors are
our chief competitors and frequently control the manufacturing of our video game
products".
Backlog
We normally ship products within a few days after receipt of an order.
However, a backlog may occur for EA Studio and Affiliated Label products that
have been announced for release but not yet shipped. We do not consider backlog
to be an indicator of future performance.
Seasonality
Our business is highly seasonal. We typically experience our 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 our 2002 fiscal year,
and particularly in the June and September quarters, we expect these seasonal
trends to be magnified by general industry factors, including the current
platform transition, the concentration of our product releases in the second
half of fiscal 2002 and uncertain economic conditions in the United States. In
addition, we are continuing to invest significantly in our online operation,
EA.com. Accordingly, we expect significant operating losses in the first half of
fiscal 2002. See Risk Factors - "Platform transitions such as the one now
occurring typically
11
depress the market for video game software until new platforms achieve a wide
market acceptance" and "Our business is both seasonal and cyclical".
Employees
As of March 31, 2001, we employed approximately 3,500 people, of whom
over 1,400 were outside the United States. Of this amount, there were
approximately 700 EA.com full-time employees. We believe that our ability to
attract and retain qualified employees is an important factor in our growth and
development and that our future success will depend, in large measure, on our
ability to continue to attract and retain qualified employees. To date, we have
been successful in recruiting and retaining sufficient numbers of qualified
personnel to conduct our business successfully. See Risk Factors - "We face
intense competition for talent from competitors" and "Because of the intense
competition for qualified technical, creative, marketing and other personnel, we
may not be able to attract and retain the personnel necessary for our business".
12
ITEM 2: PROPERTIES
Our principal administrative, sales and marketing, research and
development, and support facility is located in two modern buildings in Redwood
City, California, 20 miles south of San Francisco. We moved into this facility
in October 1998. We presently occupy approximately 350,000 sq. ft. in these
buildings under an operating lease for the buildings and certain adjoining land
that will expire on December 1, 2001. Monthly lease payments vary based upon the
London InterBank Offered Rate. We have the option to purchase the property for
the unamortized financed balance at any time after the non-cancelable lease
term, or we may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. In April 1999,
we exercised our option to purchase a parcel of land under the lease and sold it
to a third party. The proceeds mitigated a portion of the occupancy costs for
this facility. Should we elect to terminate the lease, we will guarantee a
residual value of up to 85% of the unamortized value of the property. As part of
the agreement, we must also comply with certain financial covenants.
In December 2000, the Company entered into a second operating lease for
the construction and occupation of two buildings and a parking structure to be
constructed in Redwood City, California. The initial term of the lease is for a
period of five years from December 8, 2000. Monthly lease payments are based
upon the Commercial Paper Rate and 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.
Our North American distribution is supported by a newly centralized and
expanded warehouse facility in Louisville, Kentucky occupying 250,000 sq. ft.
The Hayward distribution center was closed in fiscal 2001 in conjunction with
the expansion of our Louisville, Kentucky facility. We also occupy sales offices
in the metropolitan areas of Toronto, Chicago, Dallas and New York.
In addition to our Redwood City development studio, we own a 206,000
sq. ft. development facility in Burnaby, British Columbia, Canada and rent a
33,000 sq. ft. facility in Seattle, Washington. The move to the new Canadian
offices was completed in June 1999. We also own a 173,500 sq. ft. development
facility in Austin, Texas, and lease development facilities in Walnut Creek, San
Francisco and Carlsbad, California, New York, New York and Charlottesville,
Virginia.
We own a 127,000 sq. ft. administrative, sales and development facility
in Chertsey, England, which our United Kingdom subsidiaries moved into in March
2000. In Europe, we also lease a distribution hub in Heerlen, Holland, as well
as sales and distribution facilities in Madrid, Spain and Sennwald, Switzerland.
Additionally, we have sales and administrative offices throughout Europe.
In Asia and the South Pacific, we maintain a 5,500 sq. ft. sales and
distribution facility in Gold Coast, Australia. We also have sales and
distribution facilities in New Zealand, Singapore, Thailand, Korea, South Africa
and Taiwan, and representative offices in Hong Kong and Beijing, China. We also
maintain a 27,000 sq. ft. sales and development office in Tokyo, Japan. See
notes 4 and 12 of the Notes to the Consolidated Financial Statements, included
in Item 8 hereof.
We believe that these facilities are adequate for our current needs. We
believe that suitable additional or substitute space will be available as needed
to accommodate our future needs.
13
ITEM 3: LEGAL PROCEEDINGS
We are 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 on our
consolidated financial condition or results of operations.
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, 2001.
14
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive
officers of Electronic Arts, who are chosen by and serve at the discretion of
the Board of Directors:
Name Age Position
---- --- --------
Lawrence F. Probst III 51 Chairman and Chief
Executive Officer
Don A. Mattrick 37 President, Worldwide Studios
John S. Riccitiello 41 President and Chief
Operating Officer
William B. Gordon 51 Executive Vice President and
Chief Creative Officer
E. Stanton McKee, Jr. 56 Executive Vice President and
Chief Financial and
Administrative Officer
Nancy L. Smith 48 Executive Vice President and
General Manager, North
American Publishing
David L. Carbone 50 Senior Vice President, Finance
David Gardner 36 Senior Vice President, European
Publishing
Ruth A. Kennedy 46 Senior Vice President,
General Counsel and
Secretary
V. Paul Lee 36 Senior Vice President and Chief
Operating Officer, Worldwide Studios
J. Russell Rueff, Jr. 39 Senior Vice President,
Human Resources
Mr. Probst has been a director of Electronic Arts since January 1991
and currently serves as Chairman and Chief Executive Officer. He was elected as
Chairman in July 1994. Mr. Probst has previously served as President of
Electronic Arts; as Senior Vice President of EA Distribution, Electronic Arts'
distribution division, from January 1987 to January 1991; and from September
1984, when he joined Electronic Arts, until December 1986, served as Vice
President of Sales. Mr. Probst holds a B.S. degree from the University of
Delaware.
Mr. Mattrick has served as President of Worldwide Studios since
September 1997. Prior to this, he served as Executive Vice President, North
American Studios, since October 1996. From July 1991 to October 1996, he served
as Senior Vice President, North American Studios, 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 us in 1991.
Mr. Riccitiello has served as President and Chief Operating Officer
since October 1997. Prior to joining Electronic Arts, Mr. Riccitiello served as
President and Chief Executive Officer of the worldwide bakery division at Sara
Lee Corporation. Before joining Sara Lee, he served as President and CEO of
Wilson Sporting Goods Co. and has also held executive management positions at
Haagen-Dazs, PepsiCo, Inc. and The Clorox Company. Mr. Riccitiello holds a
degree in Economics and Marketing from the University of California, Berkeley.
Mr. Gordon has served as Executive Vice President and Chief Creative
Officer since March 1998. Prior to this, he served as Executive Vice President,
Marketing since October 1995. From August 1993 to October 1995, he served as
Executive Vice President of EA Studios and as Senior Vice President of
Entertainment Production since February 1992. He also served as Senior Vice
President of Marketing, as General Manager of EA Studios, as Vice President of
Marketing, as Director of Advertising and as Vice President of our former
entertainment division while employed by us. Mr. Gordon holds a B.A. degree from
Yale University and an M.B.A. degree from Stanford University.
15
Mr. McKee joined Electronic Arts in March 1989 and is currently
Executive Vice President and Chief Financial and Administrative Officer. Prior
to October 1996, he served as Senior Vice President and Chief Financial and
Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford
University and is also a Certified Public Accountant.
Ms. Smith has served as Executive Vice President and General Manager,
North American Publishing since March 1998. Prior to this, she served as
Executive Vice President, North American Sales since October 1996. She
previously held the position of Senior Vice President of North American Sales
and Distribution from July 1993 to October 1996 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 Electronic Arts in 1984. Ms. Smith
holds a B.S. degree in management and organizational behavior from the
University of San Francisco.
Mr. Carbone has served as Senior Vice President, Finance since December
2000. Prior to this, he served as Vice President, Finance since February 1991.
He was elected Assistant Secretary of the Company in March 1991. Mr. Carbone
holds a B.S. degree in accounting from King's College and is a Certified Public
Accountant.
Mr. Gardner has served as Senior Vice President and Managing Director,
European Publishing since May 1999. Prior to this, he held several positions in
EA Europe, which he helped establish in 1987, including Director of European
Sales and Marketing and Managing Director of EA Europe. Mr. Gardner has also
held various positions at Electronic Arts in the sales, marketing and customer
support departments since joining the company in 1983.
Ms. Kennedy has been employed by Electronic Arts since February 1990.
She served as Corporate Counsel until March 1991 and is currently Senior Vice
President, General Counsel and Secretary. Prior to October 1996, she served as
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.
Mr. Lee has served as Senior Vice President and Chief Operating
Officer, Worldwide Studios since 1998. Prior to this, he served as General
Manager of EA Canada, Chief Operating Officer of EA Canada, Chief Financial
Officer of EA Sports and Vice President, Finance and Administration of EA
Canada. Mr. Lee was a principle of Distinctive Software Inc. until it was
acquired by EA in 1991. Mr. Lee holds a Bachelor of Commerce degree from the
University of British Columbia and is a Chartered Financial Analyst.
Mr. Rueff has served as Senior Vice President of Human Resources since
October 1998. Prior to joining Electronic Arts, Mr. Rueff held various positions
with the PepsiCo companies for over 10 years, including: Vice President,
International Human Resources; Vice President, Staffing and Resourcing at
Pepsi-Cola International; Vice President, Restaurant Human Resources for Pizza
Hut; and also various other management positions within the Frito-Lay Company.
Mr. Rueff holds a M.S. degree in Counseling and a B.A. degree in Radio and
Television from Purdue University in Indiana.
16
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock is traded on the Nasdaq National Market under the
symbol "ERTS". The following table sets forth the quarterly high and low closing
sales price per share of our Common Stock from April 1, 1999 through March 31,
2001. 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, 2000:
First Quarter $27.41 $22.82
Second Quarter 38.10 26.44
Third Quarter 60.47 33.22
Fourth Quarter 51.10 34.50
Fiscal Year Ended March 31, 2001:
(for Class A common stock, see note 2)
First Quarter $39.06 $26.59
Second Quarter 54.47 37.06
Third Quarter 55.38 35.19
Fourth Quarter 56.13 29.84
There were approximately 2,000 holders of record of our Common Stock as of June
1, 2001. In addition, we believe that a significant number of beneficial owners
of our Common Stock hold their shares in street names.
Dividend Policy
We have not paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
17
ITEM 6: SELECTED FINANCIAL DATA
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
Years Ended March 31, (In thousands, except per share data)
INCOME STATEMENT DATA 2001 2000 1999 1998 1997
- -------------------------------------------------- ------------ ----------- ---------- ----------- ----------
Net revenues $1,322,273 $1,420,011 $1,221,863 $908,852 $673,028
Cost of goods sold 652,242 704,702 627,589 481,233 328,943
------------ ----------- ---------- ------------ -----------
Gross profit 670,031 715,309 594,274 427,619 344,085
Operating expenses:
Marketing and sales 185,336 188,611 163,407 128,308 102,072
General and administrative 104,041 92,418 76,219 57,838 48,489
Research and development 388,928 261,966 199,375 145,732 130,755
Amortization of intangibles 19,323 11,989 5,880 - -
Charge for acquired in-process technology 2,719 6,539 44,115 1,500 -
Merger costs - - - 10,792 -
------------ ----------- ---------- ------------ -----------
Total operating expenses 700,347 561,523 488,996 344,170 281,316
------------ ----------- ---------- ------------ -----------
Operating income (loss) (30,316) 153,786 105,278 83,449 62,769
Interest and other income, net 16,886 16,028 13,180 24,811 13,279
------------ ----------- ---------- ------------ -----------
Income (loss) before provision for (benefit
from) income taxes and minority interest (13,430) 169,814 118,458 108,260 76,048
Provision for (benefit from) income taxes (4,163) 52,642 45,414 35,726 26,003
------------ ----------- ---------- ------------ -----------
Income (loss) before minority interest (9,267) 117,172 73,044 72,534 50,045
Minority interest in consolidated joint venture (1,815) (421) (172) 28 1,282
------------ ----------- ---------- ------------ -----------
Net income (loss) $ (11,082)(a) $ 116,751(b) $ 72,872(c) $ 72,562(d) $ 51,327
------------ ----------- ---------- ------------ -----------
Net income per share amounts:
Basic N/A $ 0.93(b) $ 0.60(c) $ 0.62(d) $ 0.45
Diluted N/A $ 0.88(b) $ 0.58(c) $ 0.60(d) $ 0.43
Number of shares used in computation:
Basic N/A 125,660 121,495 117,734 115,087
Diluted N/A 132,742 126,545 121,917 119,114
Class A common stock:
Net income (loss):
Basic $ 11,944 (a) N/A N/A N/A N/A
Diluted $ (11,082)(a) N/A N/A N/A N/A
Net income (loss) per share:
Basic $ 0.09 (a) N/A N/A N/A N/A
Diluted $ (0.08)(a) N/A N/A N/A N/A
Number of shares used in computation:
Basic 131,404 N/A N/A N/A N/A
Diluted 132,056 N/A N/A N/A N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (23,026)(a) N/A N/A N/A N/A
Net loss per share:
Basic $ (3.83)(a) N/A N/A N/A N/A
Diluted $ (3.83)(a) N/A N/A N/A N/A
Number of shares used in computation:
Basic 6,015 N/A N/A N/A N/A
Diluted 6,015 N/A N/A N/A N/A
- -------------------------------------------------- ------------ ----------- ---------- ------------ -----------
18
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA (Continued)
Years Ended March 31, (In thousands, except per share data)
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA AT FISCAL YEAR END 2001 2000 1999 1998 1997
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Cash, cash equivalents and short-term investments
$ 466,492 $ 339,804 $ 312,822 $ 374,560 $ 268,141
Marketable securities 10,022 236 4,884 3,721 5,548
Working capital 478,701 440,021 333,256 408,098 284,863
Long-term investments 8,400 8,400 18,400 24,200 34,478
Total assets 1,378,918 1,192,312 901,873 745,681 584,041
Total liabilities 340,026 265,302 236,209 181,713 136,237
Minority interest 4,545 3,617 2,733 -- 28
Total stockholders' equity 1,034,347 923,393 662,931 563,968 447,776
Note: The selected five-year financial data has been restated to reflect the
acquisition of Maxis, Inc. which was accounted for as a pooling of interest.
(a) Net income (loss) and net income (loss) per share include one-time
acquisition related charges of $1.9 million, net of taxes, incurred in
connection with the acquisition of Pogo Corporation made during the
year as well as goodwill amortization of $13.3 million, net of taxes.
(b) Net income and net income per share include one-time acquisition
related charges of $4.5 million, net of taxes, incurred in connection
with the acquisition of Kesmai and other business combinations made
during the year as well as goodwill amortization of $8.3 million, net
of taxes.
(c) Net income and net income per share include one-time acquisition
related charges of $37.5 million, net of taxes, incurred in connection
with the acquisition of Westwood Studios and other business
combinations made during the year as well as goodwill amortization of
$4.0 million, net of taxes.
(d) Net income and net income per share include one-time acquisition
related charges of $1.0 million, net of taxes, incurred in connection
with the acquisition of the remaining minority ownership interest in
Electronic Arts Victor, Inc. as well as merger costs of $7.2 million,
net of taxes, associated with the merger with Maxis, offset by a
one-time gain on sale of Creative Wonders, LLC in the amount of $8.5
million, net of taxes.
Please refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussions of EA Core and EA.com proforma financial
statements.
19
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", contains forward-looking statements about circumstances
that have not yet occurred. All statements, trend analysis and other information
contained below relating to markets, our products and trends in revenue, as well
as other statements including words such as "anticipate", "believe" or "expect"
and statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks and actual
events or our actual future results could differ materially from those set forth
in the forward-looking statements due to such risks and uncertainties. We will
not necessarily update information if any forward-looking statement later turns
out to be inaccurate. Risks and uncertainties that may affect our future results
and performance include, but are not limited to, those discussed under the
heading "Risk Factors" at pages 37 to 43 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of Fiscal 2001 to 2000:
Revenues
We derive revenues primarily from shipments of entertainment software, which
includes EA Studio products for dedicated entertainment systems (that we call
video game systems or consoles such as PlayStation, PlayStation 2 and Nintendo
64), EA Studio personal computer products (or PC), Co-Publishing products that
are co-published and distributed by us, and Affiliated Label (or AL) products
that are published by third parties and distributed by us. We also derive
revenues from licensing of EA Studio products and AL products through hardware
companies (or OEM), selling subscriptions on our online gaming service, selling
advertisements on our online web pages and selling our packaged goods through
our online store.
Information about our net revenues for North America and foreign areas for
fiscal 2001 and 2000 is summarized below (in thousands):
Increase/
2001 2000 (Decrease) % change
--------------------- ---------------------- ---------------- -----------------
North America $ 831,924 $ 846,637 $ (14,713) (1.7%)
--------------------- ---------------------- ---------------- -----------------
Europe 386,728 486,816 (100,088) (20.6%)
Asia Pacific 51,039 53,187 (2,148) (4.0%)
Japan 52,582 33,371 19,211 57.6%
--------------------- ---------------------- ---------------- -----------------
International 490,349 573,374 (83,025) (14.5%)
--------------------- ---------------------- ---------------- -----------------
Consolidated Net Revenues $1,322,273 $1,420,011 $ (97,738) (6.9%)
--------------------- ---------------------- ---------------- -----------------
North America Net Revenues
The decrease in North America net revenues for fiscal 2001 compared to fiscal
2000 was primarily attributable to:
o Expected declines in sales of PlayStation and Nintendo 64 ("N64") titles
due to the beginning of the transition to next generation consoles.
PlayStation net revenues decreased 49% and N64 net revenues decreased 46%
also due to fewer titles shipping in the current year for both platforms.
o A 6% decrease in AL revenues primarily due to the acquisition of an
affiliate, DreamWorks Interactive, by Electronic Arts in the fourth quarter
of the prior fiscal year.
o Offset partially by the launch of PlayStation 2 platform in North America
which generated $171,034,000 in revenue for the year from titles such as
Madden NFL 2001, SSX, NBA Live 2001 and NHL 2001. PlayStation 2 revenues
did not offset the decrease in PlayStation revenues due to a reduced number
of hardware units reaching the market due to hardware component shortages,
according to Sony.
o Offset by a 21% increase in PC revenues due to the shipment of key releases
including Command & Conquer: Red Alert 2 and The Sims: Livin' Large and
continued strong catalog sales of The Sims.
20
International Net Revenues
The decrease in international net revenues for fiscal 2001 compared to fiscal
2000 was attributable to the following:
o Europe's net revenues decreased 21% primarily due to the console
transition, lower AL sales due to product release slips and fewer hit
titles released in the current year, lower PC sales with fewer titles
shipping in the period, the strong sales of Command & Conquer: Tiberian
Sun(TM) for the PC in the comparable prior year period, and weakness in the
Euro currency. In addition, PlayStation revenues decreased 43% due to fewer
titles shipping during the console transition period with most franchise
titles showing significant decreases from the prior year releases.
PlayStation 2 revenues did not offset the decrease in PlayStation revenues
due to fewer hardware units reaching the market and the weighting of titles
specifically appropriate for the North American market rather than the
European market.
o Asia Pacific's net revenues decreased 4%, mainly due to the decrease in
PlayStation revenues as there were no significant new titles released in
the current year. This was offset by sales of PlayStation 2 titles such as
SSX and FIFA 2001.
o Offset by Japan's net revenues which increased 58% compared to the prior
year primarily due to the shipment of PlayStation 2 titles such as FIFA
Soccer World Championship, FIFA 2001 and SSX.
Information about our net revenues by product line for fiscal 2001 and 2000 is
presented below (in thousands):
Increase/
2001 2000 (Decrease) % change
------------------ -------------------- ----------------- --------------
EA Studio:
PC $ 408,454 $ 397,777 $ 10,677 2.7%
PlayStation 309,988 586,821 (276,833) (47.2%)
PlayStation 2 258,988 - 258,988 N/A
N64 67,044 120,415 (53,371) (44.3%)
Online Subscriptions 28,878 16,771 12,107 72.2%
License, OEM and Other 20,468 22,894 (2,426) (10.6%)
Advertising 6,175 - 6,175 N/A
------------------ -------------------- ----------------- --------------
1,099,995 1,144,678 (44,683) (3.9%)
Affiliated Label: 222,278 275,333 (53,055) (19.3%)
------------------ -------------------- ----------------- --------------
Consolidated Net Revenues $1,322,273 $1,420,011 $ (97,738) (6.9%)
------------------ -------------------- ----------------- --------------
Personal Computer Product Net Revenues
The increase in sales of PC products for fiscal 2001 was primarily attributable
to the continued strong sales of The Sims, which shipped in the prior year. Key
current year releases were Command & Conquer: Red Alert 2 and The Sims: Livin'
Large. We released 20 PC titles in fiscal 2001 compared to 31 titles in fiscal
2000. The Sims continues to be the number one PC title and has now sold over 4
million copies. Due to the sales of The Sims in fiscal 2001, we expect revenues
from PC products to be flat or lower in fiscal 2002.
PlayStation Product Net Revenues
We released 17 PlayStation titles in fiscal 2001 compared to 30 in fiscal 2000.
As expected, PlayStation sales decreased for fiscal 2001 compared to the prior
year primarily attributable to the PlayStation 2 platform transition and fewer
titles. With the exception of Madden NFL, all of our franchises experienced
significant decreases from the prior year release. Although our PlayStation
products are playable on the PlayStation 2 console, we expect sales of current
PlayStation products to continue to decline significantly in fiscal 2002.
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended, we are
authorized to develop and distribute CD-based software products compatible with
the PlayStation. Furthermore, under the terms of an additional licensing
agreement entered into with Sony Computer Entertainment of America as of April
2000 (the "PlayStation 2 Agreement"), as amended, we are authorized to develop
and distribute DVD-based software products compatible with the PlayStation 2.
Pursuant to these agreements, we engage Sony to supply its PlayStation and
PlayStation 2 CD's for distribution by us. Accordingly, we have limited ability
to control our supply of PlayStation and PlayStation 2 CD products or the timing
of their delivery.
21
PlayStation 2 Product Net Revenues
We released 15 titles worldwide in fiscal 2001 for the PlayStation 2. Key
releases for the year included Madden NFL 2001, SSX, FIFA 2001, NBA Live 2001
and NHL 2001. Revenue was lower than expected due to the shortage of PlayStation
2 hardware in the year resulting from component shortages which limited the
number of units that could be manufactured, according to Sony. We expect Sony to
correct these issues for the next fiscal year, and expect revenues from
PlayStation 2 products to grow in fiscal 2002.
Affiliated Label Product Net Revenues
The decrease in Affiliated Label net revenues for fiscal 2001 compared to the
prior fiscal year was primarily due to the strong sales of Final Fantasy(R) VIII
in the prior year, our acquisition of DreamWorks Interactive, formerly an AL, in
the fourth quarter of the prior year, fewer hit AL product releases and product
release slips in Europe.
N64 Product Net Revenues
We released three N64 titles in fiscal 2001 compared to eight titles during
fiscal 2000. The expected decrease in N64 revenues for the fiscal year, compared
to the prior fiscal year, was primarily due to fewer releases. The decrease was
also due to the weaker market for N64 products in the current year. With the
expected release of Nintendo GameCube in North America in November 2001, per
Nintendo, we expect revenues for N64 products to continue to decline
significantly in fiscal 2002. The key release for the year was The World Is Not
Enough.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture our N64
cartridges for distribution by us. Accordingly, we have little ability to
control our supply of N64 cartridges or the timing of their delivery. A shortage
of microchips or other factors outside our control could impair our ability to
obtain an adequate supply of cartridges.
Online Net Revenues
The increase in online revenues for fiscal 2001 as compared to fiscal 2000 was
attributable to the following:
o The average number of paying customers for Ultima Online increased to
approximately 200,000 for fiscal 2001 as compared to over 140,000 for
fiscal 2000. This increase was due to continued strong sales of Ultima
Online, the addition of new events and parties within the Ultima worlds
and the release of Ultima Online Renaissance in April 2000.
o We generated over $5,100,000 in subscription revenues for Kesmai and
Worldplay online games for fiscal 2001. These products were not part of
EA.com last year due to the Kesmai acquisition in the fourth quarter of
fiscal 2000. Revenues associated with these services will continue to
decrease as some of these products will be converted into our
advertising supported free offerings or incorporated in our bundled
subscription offerings.
License, OEM and Other Revenues
The decrease in license, OEM and other revenues for fiscal 2001 as compared to
fiscal 2000 was primarily a result of lower license revenue of certain titles on
the Game Boy platform.
Advertising
Following the launch of EA.com on the world wide web and the AOL Games Channel
in October, we began selling advertising on EA.com and AOL properties, including
the Slingo game. In addition, we generated advertising revenue from Pogo's
websites as a result of the purchase of Pogo Corporation (now referred to as
"Pogo") in February 2001.
Operations by Segment
The series of common stock designated as Class B (see note 2) was approved to
reflect the performance of EA.com. Accordingly, management considers EA.com to
be a separate reportable segment. Prior period information has been restated to
disclose this separate segment. We operate in two principal business segments
globally:
o Electronic Arts Core ("EA Core") business segment: creation, marketing
and distribution of entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online, ongoing
management of subscriptions of online games and website advertising.
EA.com, a division of Electronic Arts Inc., represents Electronic Arts' online
and e-Commerce businesses. EA.com's business includes subscription revenues
collected for Internet gameplay on our websites, website advertising, sales of
packaged goods for Internet-only based games and sales of Electronic Arts games
sold through the EA.com web store. The Consolidated Statement of Operations
includes all revenues and costs directly attributable to EA.com, including
charges for shared facilities, functions and
22
services used by EA.com and provided by Electronic Arts. Certain costs and
expenses have been allocated based on management's estimates of the cost of
services provided to EA.com by Electronic Arts.
Information about our operations by segment for fiscal 2001 and 2000 is
presented below (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,280,172 $ 42,101 $ - $1,322,273
Group sales 2,658 - (2,658) (a) -
------------------------------------------------------------------------
Total net revenues 1,282,830 42,101 (2,658) 1,322,273
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 640,239 12,003 - 652,242
Group cost of goods sold - 2,658 (2,658) (a) -
------------------------------------------------------------------------
Total cost of goods sold 640,239 14,661 (2,658) 652,242
------------------------------------------------------------------------
Gross profit 642,591 27,440 - 670,031
Operating expenses:
Marketing and sales 163,928 12,475 8,933 (c) 185,336
General and administrative 93,885 10,156 - 104,041
Research and development 248,534 77,243 63,151 (b) 388,928
Network development and support - 51,794 (51,794) (b) -
Customer relationship management - 11,357 (11,357) (b) -
Carriage fee - 8,933 (8,933) (c) -
Amortization of intangibles 12,829 6,494 - 19,323
Charge for acquired in-process technology - 2,719 - 2,719
------------------------------------------------------------------------
Total operating expenses 519,176 181,171 - 700,347
------------------------------------------------------------------------
Operating income (loss) 123,415 (153,731) - (30,316)
Interest and other income, net 16,659 227 - 16,886
------------------------------------------------------------------------
Income (loss) before benefit from income
taxes and minority interest 140,074 (153,504) - (13,430)
Benefit from income taxes (4,163) - - (4,163)
------------------------------------------------------------------------
Income (loss) before minority interest 144,237 (153,504) - (9,267)
Minority interest in consolidated joint venture (1,815) - - (1,815)
------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 142,422 $ (153,504) $ - $ (11,082)
------------------------------------------------------------------------
Allocation of retained interest (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 142,422 $(153,504) $ - $ (11,082)
Net loss related to retained interest in EA.com (130,478) 130,478 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11,944 $ (23,026) $ - $ (11,082)
===========================================================================================================================
23
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,399,093 $ 20,918 $ - $1,420,011
Group sales 2,014 - (2,014) (a) -
------------------------------------------------------------------------
Total net revenues 1,401,107 20,918 (2,014) 1,420,011
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 700,024 4,678 - 704,702
Group cost of goods sold - 2,014 (2,014) (a) -
------------------------------------------------------------------------
Total cost of goods sold 700,024 6,692 (2,014) 704,702
------------------------------------------------------------------------
Gross profit 701,083 14,226 - 715,309
Operating expenses:
Marketing and sales 185,714 2,897 - 188,611
General and administrative 87,513 4,905 - 92,418
Research and development 205,933 34,716 21,317 (b) 261,966
Network development and support - 17,993 (17,993) (b) -
Customer relationship management - 3,324 (3,324) (b) -
Amortization of intangibles 10,866 1,123 - 11,989
Charge for acquired in-process technology 2,670 3,869 - 6,539
------------------------------------------------------------------------
Total operating expenses 492,696 68,827 - 561,523
------------------------------------------------------------------------
Operating income (loss) 208,387 (54,601) - 153,786
Interest and other income, net 16,017 11 - 16,028
------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 224,404 (54,590) - 169,814
Provision for income taxes 52,642 - - 52,642
------------------------------------------------------------------------
Income (loss) before minority interest 171,762 (54,590) - 117,172
Minority interest in consolidated joint venture (421) - - (421)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 171,341 $(54,590) $ - $ 116,751
===========================================================================================================================
(a) Represents elimination of intercompany sales of Electronic Arts
packaged goods products to EA.com; and represents elimination of
royalties paid to Electronic Arts by EA.com for intellectual property
rights.
(b) Represents reclassification of Network Development and Support and
Customer Relationship Management to Research and Development.
(c) Represents reclassification of amortization of the Carriage fee to
Marketing and Sales.
24
The following table presents pro-forma results of operations allocating taxes
between EA Core and EA.com. Consolidated taxes have been allocated to EA Core
and EA.com on a pro rata basis based on the consolidated effective tax rates,
thereby giving EA.com the tax benefit of its losses which is utilized by the
consolidated group. Such tax benefit could not be recognized by EA.com on a
stand-alone basis. The sum of tax expense and tax benefit for EA Core and EA.com
is the same as consolidated tax expense and tax benefit. This presentation
represents how management analyzes each segment of the business (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $140,074 $(153,504) $ - $(13,430)
Provision for (benefit from) income taxes 43,423 (47,586) - (4,163)
------------------------------------------------------------------------
Income (loss) before minority interest 96,651 (105,918) - (9,267)
Minority interest in consolidated joint venture (1,815) - - (1,815)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 94,836 $(105,918) $ - $(11,082)
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $224,404 $ (54,590) $ - $169,814
Provision for (benefit from) income taxes 69,565 (16,923) - 52,642
------------------------------------------------------------------------
Income (loss) before minority interest 154,839 (37,667) - 117,172
Minority interest in consolidated joint venture (421) - - (421)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $154,418 $ (37,667) $ - $116,751
===========================================================================================================================
Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income
(Loss) for both EA Core and EA.com Segments
Cost of Goods Sold. Cost of goods sold for our packaged goods business consists
of actual product costs, royalties expense for celebrities, professional sports
organizations and independent software developers, manufacturing royalties,
expense for defective products and operations expense. Cost of goods sold for
our subscription business consists primarily of data center and bandwidth costs
associated with hosting our websites, credit card fees and intercompany
royalties for use of EA properties for subscription games.
Marketing and Sales. Marketing and sales expenses consist of personnel related
costs, advertising and marketing and promotional expenses. In addition,
marketing and sales includes the amortization of the AOL carriage and revenue
share fees (now referred to as "Carriage Fee"), which began with the launch of
EA.com in October. The Carriage Fee will be amortized straight line over the
term of the AOL agreement.
General and Administrative. General and administrative expenses consist of
personnel and related expenses of executive and administrative staff, fees for
professional services such as legal and accounting and allowances for bad debts.
Research and Development. Research and development expenses consist of personnel
related costs, consulting and equipment depreciation. In addition, research and
development includes customer relationship management expenses associated with
the supervision of online play and the operation of Ultima Online. EA.com has
research and development expenses incurred by Electronic Arts' studios
consisting of direct development costs and related overhead costs (facilities,
network and development management and supervision) in connection with the
development and production of EA.com online games.
Network Development and Support. Network development and support costs consist
of expenses associated with development of web content, depreciation on server
equipment to support online games, network infrastructure, software licenses and
maintenance, and network and management overhead.
25
Cost of Goods Sold. Cost of goods sold as a percentage of revenues decreased in
fiscal 2001 due to:
o An increase in sales of higher margin PC titles as a percentage of
revenues. The current year included sales on titles such as The Sims,
Command & Conquer: Red Alert 2 and The Sims: Livin' Large.
o The introduction of higher margin PlayStation 2 products in the current
year.
o A decrease in sales of lower margin AL and N64 titles.
o An increase in higher margin Online and Advertising revenue.
o Offset by a decrease in sales of PlayStation titles combined with the
decrease in average margins on PlayStation products due to a decrease
in the average sales price on front line and catalogue products.
Marketing and Sales. Marketing and sales expenses for fiscal 2001 increased as a
percentage of revenue, primarily attributed to:
o Higher EA.com marketing and sales expenses due to increased staff
required to support the live game site and advertising campaigns run on
the AOL service promoting the Games Channel. In future periods, EA.com
intends to further increase marketing and advertising spending in order
to promote our game site and the Games Channel on AOL.
o The amortization of the AOL carriage fee, which began with the launch
of EA.com in October of the current fiscal year.
o Offset by lower television and print advertising in North America and
Europe due to fewer number of releases compared to last year.
General and Administrative. General and administrative expenses increased 12.6%
for fiscal 2001, primarily attributed to:
o The expansion of the EA.com staff and additional administrative-related
costs required to support the growth of the EA.com business.
o Increase in bad debts due to a write off of a receivable as a result of
the default of payment from a customer in Europe for approximately
$1,000,000.
o Increase in depreciation expense for Europe due to the implementation
of a new transaction processing system.
Research and Development (excluding Network Development and Support). Research
and development expenses increased in absolute dollars by 38.2% for fiscal 2001,
primarily attributed to:
o Increase in research and development expenses by EA.com (including
expenses incurred by EA Core on behalf of EA.com) due to an increase in
the number of online projects in development and increased development
staff to support these products. The type of games that will be in
development will most likely increase in complexity and depth.
o An increase in development spending for next generation console
products including development for the PlayStation 2 console, Xbox and
Nintendo GameCube.
o The increase is also due to research and development expenses related
to the acquisition of DreamWorks Interactive, a software development
company, in the fourth quarter of the prior fiscal year.
o Increased headcount related costs associated with the formation of our
customer relationship management organization for the live game site.
We released a total of 55 new packaged goods products in fiscal 2001 compared to
69 new products in fiscal 2000. In addition, the EA.com website launched in
October 2000, and has over 80 live games.
Network Development and Support. The increase in network development and support
expenses was primarily due to increased spending for the network infrastructure,
and the Games Channel on the AOL service and the amortization of capitalized
costs as required under SOP 98-1 associated with the pre-launch network
infrastructure build. As a result, we expect network development and support
expenses to increase in absolute dollars in the future.
Charge for Acquired In-Process Technology.
Fiscal 2001:
In connection with the acquisition of Pogo in the fourth fiscal quarter of
fiscal 2001, we allocated and expensed $2,719,000 of the $43,333,000 purchase
price to acquired in-process technology. At the date of acquisition, this amount
was expensed as a non-recurring charge as the in-process technology had not yet
reached technological feasibility and had no alternative future uses. Pogo had
various projects in progress at the time of the acquisition. As of the
acquisition date, costs to complete Pogo projects acquired were expected to be
approximately $1,200,000 in future periods. We believe there have been no
significant changes to these estimates
26
as of March 31, 2001. We currently expect to complete the development of these
projects at various dates through fiscal 2002 and to publish the projects upon
completion. In conjunction with the acquisition of Pogo, we accrued
approximately $100,000 related to direct transaction and other related costs.
Fiscal 2000:
o In connection with the acquisition of Kesmai by EA.com in the fourth
quarter of fiscal 2000, we allocated and expensed $3,869,000 of the
purchase price to acquired in-process technology.
o In connection with the acquisitions of two development companies by EA
Core, made in the 2nd and 4th quarters of fiscal 2000, we allocated and
expensed $2,670,000 of the purchase price to acquired in-process
technology.
These charges were made after we concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
Amortization of Intangibles. The amortization of intangibles results primarily
from the acquisitions of Westwood, Kesmai, DreamWorks Interactive, ABC Software,
Pogo and other acquisitions. Amortization of intangibles was $12,829,000 for EA
Core and $6,494,000 for EA.com for fiscal 2001. Amortization of intangibles was
$10,866,000 for EA Core and $1,123,000 for EA.com for fiscal 2000.
Interest and Other Income, Net. Interest and other income, net, increased in
absolute dollars primarily due to higher interest income as a result of higher
average cash balances and investing in higher yielding taxable securities in the
current year. Those gains were partially offset by realized gains on sales of
marketable securities in the prior year.
Income Taxes. Our effective tax rate was 31.0% for fiscal 2001 and fiscal 2000.
At March 31, 2001, we generated a federal income tax net operating loss. A
substantial portion of this loss will be utilized in a carryback claim with the
remainder being carried forward. A valuation allowance has not been established
on this loss carryforward or other net deferred tax assets as we believe it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize them.
Net Income (loss). In absolute dollars, reported net income (loss) decreased in
fiscal 2001 primarily related to lower revenues as well as higher costs and
expenses compared to the same period last year. The decrease in revenues was
primarily due to the beginning of the transition period to next generation
console systems. The increase in expenses was primarily due to increases in
development of next generation console products in the Core business and the
investment in EA.com, including expenses to build network and online game
products and to launch our game sites in October 2000.
Excluding goodwill, non-cash compensation and one-time charges in the amount of
$17,077,000, net of taxes, for fiscal 2001, net income would have been
$5,995,000. Excluding goodwill, non-cash compensation and one-time charges in
the amount of $13,292,000, net of taxes, for fiscal 2000, net income would have
been $130,043,000.
27
Comparison of Fiscal 2000 to 1999:
Revenues
Information about our net revenues for North America and foreign areas for
fiscal 2000 and 1999 is summarized below (in thousands):
2000 1999 Increase % change
--------------------- ---------------------- ---------------- -----------------
North America $ 846,637 $ 704,998 $141,639 20.1 %
--------------------- ---------------------- ---------------- -----------------
Europe 486,816 436,772 50,044 11.5 %
Asia Pacific 53,187 46,725 6,462 13.8 %
Japan 33,371 33,368 3 0.0 %
--------------------- ---------------------- ---------------- -----------------
International 573,374 516,865 56,509 10.9 %
--------------------- ---------------------- ---------------- -----------------
Consolidated Net Revenues $1,420,011 $1,221,863 $198,148 16.2 %
--------------------- ---------------------- ---------------- -----------------
North America Net Revenues
The increase in North America net revenues for fiscal 2000 compared to fiscal
1999 was primarily attributable to:
o A 52% increase in PC revenues due to strong sales of Command & Conquer:
Tiberian Sun, SimCity 3000(TM), as well as the fourth quarter shipment
of The Sims in fiscal 2000.
o A 20% increase in PlayStation revenues due to more titles released
during fiscal 2000 including Madden NFL 2000, NBA Live 2000 and
Tomorrow Never Dies as compared to fiscal 1999.
o A 17% increase in AL revenues primarily due to the shipment of titles
published by Square EA offset by the loss of an affiliate, Accolade,
due to its acquisition by a third party in the first quarter of fiscal
2000.
o These increases were partially offset by an expected decline in sales
of N64 products.
International Net Revenues
The increase in international net revenues for fiscal 2000 compared to fiscal
1999 was attributable to the following:
o Europe's net revenues increased by 12% primarily due to an increase in
sales of PC titles including Command & Conquer: Tiberian Sun, Sim City
3000 and The Sims as well as an increase in PlayStation revenues due to
the success of FIFA 2000, Tomorrow Never Dies and F1 2000. These
increases were partially offset by an expected decline in sales of N64
products. Overall European revenues were adversely impacted by a
devaluation of the Euro in fiscal 2000 compared to fiscal 1999.
o Asia Pacific's net revenues increased 14% due to PC sales of Command &
Conquer: Tiberian Sun and SimCity 3000.
o Japan's net revenues were flat compared to fiscal 1999. PC and
Affiliated Label revenues increased, offset by a decrease in
PlayStation product sales primarily due to strong sales of FIFA: Road
to World Cup and World Cup 98 in fiscal 1999.
Information about our net revenues by product line for fiscal 2000 and 1999 is
presented below (in thousands):
Increase/
2000 1999 (Decrease) % change
------------------ -------------------- ----------------- --------------
EA Studio:
PlayStation $ 586,821 $ 519,830 $ 66,991 12.9%
PC 397,777 270,793 126,984 46.9%
N64 120,415 152,349 (31,934) (21.0%)
Online Subscriptions 16,771 12,570 4,201 33.4%
License, OEM and Other 22,894 18,216 4,678 25.7%
------------------ -------------------- ----------------- --------------
1,144,678 973,758 170,920 17.6%
Affiliated Label: 275,333 248,105 27,228 11.0%
------------------ -------------------- ----------------- --------------
Consolidated Net Revenues $1,420,011 $1,221,863 $198,148 16.2%
------------------ -------------------- ----------------- --------------
28
Personal Computer Product Net Revenues
We released 31 PC titles in fiscal 2000 compared to 29 PC titles in fiscal 1999.
The worldwide increase in sales of PC revenues was primarily attributable to an
increase in sales in North America and Europe due to the success of Command &
Conquer: Tiberian Sun released in the second quarter of fiscal 2000 and
continued strong catalog sales of SimCity 3000 released in the fourth quarter of
fiscal 1999. Other key titles for fiscal 2000 include The Sims and FIFA 2000.
PlayStation Product Net Revenues
We released 30 new PlayStation titles in fiscal 2000 compared to 21 in fiscal
1999. The increase in PlayStation product sales was attributable to more titles
released in the current fiscal year compared to the same period last year. Key
releases for fiscal 2000 include FIFA 2000, Tomorrow Never Dies, Madden NFL
2000, NBA Live 2000 and Knockout Kings(TM) 2000.
Affiliated Label Product Net Revenues
AL product sales increased due to higher sales in North America. The increase in
Affiliated Label revenues was due to the distribution of titles by Square EA,
including Final Fantasy(R) VIII, partially offset by the termination of our
distribution agreement with Accolade, which was acquired by a third party.
N64 Product Net Revenues
The expected decrease in N64 revenues for fiscal 2000 compared to fiscal 1999
was due to the weak market for N64 products as well as strong comparisons of
World Cup 98 in fiscal 1999. We released eight titles in fiscal 2000, including
WCW(TM) Mayhem, compared to nine titles in fiscal 1999.
Online Subscription Revenues
Online subscription revenues are revenues collected for Internet game play on
our websites. The increase in online revenues for fiscal 2000 as compared to
fiscal 1999 was attributable to the following:
o The average number of paying customers for Ultima Online increased to
over 140,000 for fiscal 2000 as compared to over 105,000 in fiscal
1999.
o The increase in paying customers was due to continued strong sales of
Ultima Online, the addition of new events within the Ultima worlds and
the release of Ultima Online: The Second Age(TM) in October 1998.
Ultima Online: The Second Age added features including new worlds,
monsters and an in-game chat feature.
o We established servers for Ultima Online in Europe in June 1999 and in
Japan in October 1998. This local dial-in capability resulted in new
customers in those territories for the fiscal 2000, as compared to
fiscal 1999.
License, OEM and Other Revenues
The increase in license, OEM and other revenues was primarily due to the
following:
o License/OEM revenues increased due to the sales of Game Boy(R) Color
titles in fiscal 2000.
o Other revenues decreased primarily due to decreases in 32-bit products,
other than PlayStation, as we no longer publish games for those
platforms.
29
Operations by Segment
Information about our operations by segment for fiscal 2000 and 1999 is
presented below (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,399,093 $ 20,918 $ - $1,420,011
Group sales 2,014 - (2,014) (a) -
------------------------------------------------------------------------
Total net revenues 1,401,107 20,918 (2,014) 1,420,011
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 700,024 4,678 - 704,702
Group cost of goods sold - 2,014 (2,014) (a) -
------------------------------------------------------------------------
Total cost of goods sold 700,024 6,692 (2,014) 704,702
------------------------------------------------------------------------
Gross profit 701,083 14,226 - 715,309
Operating expenses:
Marketing and sales 185,714 2,897 - 188,611
General and administrative 87,513 4,905 - 92,418
Research and development 205,933 34,716 21,317 (b) 261,966
Network development and support - 17,993 (17,993) (b) -
Customer relationship management - 3,324 (3,324) (b) -
Amortization of intangibles 10,866 1,123 - 11,989
Charge for acquired in-process technology 2,670 3,869 - 6,539
------------------------------------------------------------------------
Total operating expenses 492,696 68,827 - 561,523
------------------------------------------------------------------------
Operating income (loss) 208,387 (54,601) - 153,786
Interest and other income, net 16,017 11 - 16,028
------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 224,404 (54,590) - 169,814
Provision for income taxes 52,642 - - 52,642
------------------------------------------------------------------------
Income (loss) before minority interest 171,762 (54,590) - 117,172
Minority interest in consolidated joint venture (421) - - (421)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 171,341 $(54,590) $ - $ 116,751
===========================================================================================================================
30
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,204,689 $17,174 $ - $1,221,863
Group sales 985 - (985) (a) -
------------------------------------------------------------------------
Total net revenues 1,205,674 17,174 (985) 1,221,863
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 624,252 3,337 - 627,589
Group cost of goods sold - 985 (985) (a) -
------------------------------------------------------------------------
Total cost of goods sold 624,252 4,322 (985) 627,589
------------------------------------------------------------------------
Gross profit 581,422 12,852 - 594,274
Operating expenses:
Marketing and sales 161,029 2,378 - 163,407
General and administrative 74,995 1,224 - 76,219
Research and development 181,245 8,050 10,080 (b) 199,375
Network development and support - 8,488 (8,488) (b) -
Customer relationship management - 1,592 (1,592) (b) -
Charge for acquired in-process technology 44,115 - - 44,115
Amortization of intangibles 5,880 - - 5,880
------------------------------------------------------------------------
Total operating expenses 467,264 21,732 - 488,996
------------------------------------------------------------------------
Operating income (loss) 114,158 (8,880) - 105,278
Interest and other income, net 13,180 - - 13,180
------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 127,338 (8,880) - 118,458
Provision for income taxes 45,414 - - 45,414
------------------------------------------------------------------------
Income (loss) before minority interest 81,924 (8,880) - 73,044
Minority interest in consolidated joint venture (172) - - (172)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 81,752 $ (8,880) $ - $ 72,872
===========================================================================================================================
(a) Represents elimination of intercompany sales of Electronic Arts
packaged goods products to EA.com; and represents elimination of
royalties paid to Electronic Arts by EA.com for intellectual property
rights.
(b) Represents reclassification of Network Development and Support and
Customer Relationship Management to Research and Development.
31
The following table presents pro-forma results of operations allocating taxes
between EA Core and EA.com. Consolidated taxes have been allocated to EA Core
and EA.com on a pro rata basis based on the consolidated effective tax rates,
thereby giving EA.com the tax benefit of its losses which is utilized by the
consolidated group. Such tax benefits could not be recognized by EA.com on a
stand-alone basis. The sum of tax expense and tax benefit for EA Core and EA.com
is the same as consolidated tax expense. This presentation represents how
management analyzes each segment of the business (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $224,404 $(54,590) $ - $169,814
Provision for (benefit from) income taxes 69,565 (16,923) - 52,642
------------------------------------------------------------------------
Income (loss) before minority interest 154,839 (37,667) - 117,172
Minority interest in consolidated joint venture (421) - - (421)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $154,418 $(37,667) $ - $116,751
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $127,338 $(8,880) $ - $118,458
Provision for (benefit from) income taxes 48,256 (2,842) - 45,414
------------------------------------------------------------------------
Income (loss) before minority interest 79,082 (6,038) - 73,044
Minority interest in consolidated joint venture (172) - - (172)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 78,910 $(6,038) $ - $ 72,872
===========================================================================================================================
Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income
for both EA Core and EA.com Segments
Cost of Goods Sold. Cost of goods sold as a percentage of revenues decreased in
fiscal 2000 due to:
o An increase in sales of higher margin PC titles as a percentage of
revenues.
o An increase in sales of higher margin AL co-published titles which make
up a greater amount of total AL revenues for fiscal 2000 as compared to
fiscal 1999.
o A decrease in sales of lower margin N64 titles.
o Higher average margin for PC sales due to higher percentage of revenues
from internally developed and Intellectual Property owned titles, such
as Command & Conquer: Tiberian Sun, SimCity 3000 and The Sims.
o Offset by a decrease, as a percentage of revenues, of PlayStation
products.
Marketing and Sales. Marketing and sales expenses increased in absolute dollars
by 15% primarily attributed to:
o Increased print, Internet and television advertising to support new
releases.
o Increased cooperative advertising associated with higher revenues in
North America and Europe as compared to the prior year.
o Additional headcount related to the continued expansion of our
worldwide distribution business.
General and Administrative. General and administrative expenses increased in
absolute dollars by 21% primarily due to:
o An increase in payroll and occupancy costs to support the increase in
growth in North America and Europe.
o Increased general and administrative spending for EA.com. EA.com
expanded its staff and incurred additional administrative related costs
required to support growth of the business.
32
Research and Development. The increase in absolute dollars by 28% for research
and development expenses (excluding Network Development and Support) was due to:
o Increased research and development spending due to the ongoing
investment in our online business. EA.com increased the number of
online projects in development and increased development staff.
o Additional headcount-related expenses attributable to the increased
in-house development capacity and a higher number of SKUs released in
fiscal 2000.
o An increase in development spending for next generation console
products including development for the PlayStation 2 console.
We released a total of 69 new products in fiscal 2000 compared to 59 in fiscal
1999.
Network Development and Support. The increase in network development and support
expenses was due to increased EA.com spending for network infrastructure in
preparation for new online products and the EA.com game site. In addition, we
incurred higher infrastructure costs related to increased server capacity for
Ultima Online, allowing EA.com to serve a higher number of active subscribers.
Charge for Acquired In-Process Technology.
Fiscal 2000:
o In connection with the acquisition of Kesmai by EA.com in the fourth
quarter of fiscal 2000, we allocated and expensed $3,869,000 of the
purchase price to acquired in-process technology. Kesmai had various
projects in progress at the time of the acquisition. As of the
acquisition date, costs to complete Kesmai projects acquired were
expected to be approximately $10,550,000 in future periods. During
fiscal 2001, some of these development projects were completed and
launched on the EA.com gamesites. In addition, as certain games are
completed, we expect resources to be redirected to ongoing live game
operations or to building the EA.com publishing platform. As a result,
we do not anticipate incurring significant future development costs in
relation to these projects after fiscal 2002. We believe there have
been no significant changes to these estimates. We currently expect to
complete the development of these projects at various dates through
fiscal 2002 and to publish the projects upon completion. In conjunction
with the merger of Kesmai, we accrued approximately $200,000 related to
direct transaction and other related costs.
o In connection with the acquisitions of two development companies by EA
Core, made in the 2nd and 4th quarters of fiscal 2000, we allocated and
expensed $2,670,000 of the purchase price to acquired in-process
technology.
Fiscal 1999:
o In connection with the acquisition of Westwood by EA Core in September
1998, we allocated and expensed $41,836,000 of the purchase price to
acquired in-process technology.
o Additionally, in connection with the acquisition of two software
development companies by EA Core, in the first quarter of fiscal 1999,
we incurred a total charge of $2,279,000 for acquired in-process
technology.
These charges were made after we concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
Amortization of Intangibles. The amortization of intangibles results primarily
from the acquisitions of Westwood, Kesmai, ABC Software and other acquisitions
made in fiscal 2000. Amortization of intangibles was $10,866,000 for EA Core and
$1,123,000 for EA.com in fiscal 2000. For fiscal 1999, amortization of
intangibles was $5,880,000 resulting from the acquisitions of Westwood and ABC
Software by EA Core.
Interest and Other Income, Net. Interest and other income, net, increased in
absolute dollars primarily due to realized gains on sales of marketable
securities and the sale of our interest in an affiliate. Those gains were
partially offset by a write-off of a note receivable from an affiliate in fiscal
2000 as well as a gain on sale of land recognized in fiscal 1999.
Income Taxes. Our effective tax rate was 31.0% for fiscal 2000 and 38.3% for
fiscal 1999. The effective tax rate was lower than the comparable prior year
period (excluding the effect of the one-time charges in the prior year)
primarily as a result of a higher portion of international income for fiscal
2000 subject to a lower foreign tax rate as compared to the prior year. Our
effective tax rate for fiscal 1999 was negatively affected as there was no tax
benefit recorded for a portion of the charges related to the acquired in-process
technology. Excluding the effect of these charges, the effective tax rate for
fiscal 1999 would have been 32.0%.
33
Net Income. In absolute dollars, reported net income increased by 60% primarily
related to higher revenues and gross profits as compared to fiscal 1999. The
increase was also due to significant one-time charges for acquired in-process
technology in fiscal 1999. This was partially offset by higher costs incurred by
EA.com for the development of online projects, the network infrastructure
development and higher infrastructure costs for Ultima Online and Ultima Online:
The Second Age. Excluding the one-time charges relating to acquired in-process
technology of $4,512,000, net of taxes, in fiscal 2000, net income would have
been $121,263,000. Excluding the one-time charges relating to acquired
in-process technology of $37,506,000, net of taxes in fiscal 1999, net income
would have been $110,378,000.
Excluding one-time charges related to acquired in-process technology and
goodwill amortization, net income would have been $129,535,000 for fiscal 2000.
Excluding one-time charges relating to acquired in-process technology and
goodwill amortization, net income would have been $114,376,000 for fiscal 1999.
34
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, our working capital was $478,701,000 compared to
$440,021,000 at March 31, 2000. Cash, cash equivalents and short-term
investments increased by $126,688,000 in fiscal 2001. We generated $193,939,000
of cash from operations, $102,628,000 of cash through the sale of equity
securities under our stock plans, offset by $120,347,000 of cash used in capital
expenditures in fiscal 2001. During fiscal 2001, we invested $43,333,000 in cash
for the acquisition of Pogo.
Reserves for bad debts and sales returns increased from $65,067,000 at March
31, 2000 to $89,833,000 at March 31, 2001. 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.
Our principal source of liquidity is $466,492,000 in cash, cash equivalents
and short-term investments and $10,022,000 in marketable securities. 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 on both a short-term and long-term basis.
Included in the amounts above is the following for the EA.com business:
o With the exception of the proceeds from the sale of stock to AOL in
fiscal 2000 in the amount of $20,000,000, to date, EA.com has been
funded solely by Electronic Arts. This funding has been accounted for
as capital contributions from Electronic Arts. Excess cash generated
from operations is transferred to Electronic Arts, and has been
accounted for as a return of capital. We anticipate these funding
procedures will continue in the near-term. However, Electronic Arts
may, at its discretion, provide funds to EA.com under a debt
arrangement, instead of treating such funding as a capital
contribution.
o During fiscal 2001, EA.com used $132,210,000 of cash in operations
(including payments to AOL of approximately $11,250,000), $68,887,000
in capital expenditures for computer equipment, network infrastructure,
internal use software and related third party software, $43,333,000 for
the acquisition of Pogo, gross of cash received of $762,000, offset by
$245,141,000 provided through capital contributions from Electronic
Arts. As a result of the net operating loss generated, we realized a
tax benefit of approximately $47,586,000.
o During fiscal 2000, EA.com used $68,329,000 of cash in operations
(including payments to AOL of approximately $36,000,000), $37,605,000
in capital expenditures for computer equipment, network infrastructure,
internal use software and related third party software, $1,499,000 for
an investment in a 3rd party developer, $32,539,000 for the acquisition
of Kesmai and another acquisition, offset by $140,410,000 provided
through capital contributions from Electronic Arts. As a result of the
net operating loss generated, we realized a tax benefit of
approximately $16,923,000.
EA.com is required to pay $50,000,000 to AOL as a carriage fee under the AOL
agreement. Of this amount, $25,000,000 was paid upon signing the agreement and
the remainder is due in four equal annual installments on the first four
anniversaries of the initial payment. During fiscal 2001, the Company paid AOL
the first annual carriage payment of $6,250,000. EA.com is also required to pay
to AOL $31,000,000 as an advance of a minimum guaranteed revenue share for
revenues generated by subscriptions and other certain commercial transactions on
the EA.com site. Of this amount, $11,000,000 was paid upon signing of the
agreement and the remainder is due in four equal annual installments on the
first anniversary of the initial payment. During fiscal 2001, the Company paid
AOL the first annual revenue share payment of $5,000,000.
EA.com also made a commitment to spend $15,000,000 in offline media
advertisements promoting our online games, including those on the AOL service,
during the term of the AOL agreement.
Future liquidity needs of EA.com will be met by Electronic Arts as Electronic
Arts intends to continue to fund the cash requirements of EA.com for the
foreseeable future.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No.
133" and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133" which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The terms
35
of SFAS 133 and SFAS 138 are effective as of the beginning of the first quarter
of the fiscal year beginning after June 15, 2000. The Company is determining the
effect of SFAS 133, 137 and 138 on its financial statements.
In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF
00-25"), "Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of the Vendor's Products", which states that
consideration from a vendor to a reseller of the vendor's products is presumed
to be a reduction of the selling prices of the vendor's products and, therefore,
should be characterized as a reduction of revenue when recognized in the
vendor's income statement. That presumption is overcome and the consideration
can be categorized as a cost incurred if, and to the extent that, a benefit is
or will be received from the recipient of the consideration. That benefit must
meet certain conditions described in EITF 00-25. The consensus should be applied
no later than in annual or interim financial statements for periods beginning
after December 15, 2001. The Company is currently evaluating the impact of this
consensus on its Statement of Operations.
- --------------------------------------------------------------------------------
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies (the
"legacy currency") and the one common legal currency known as the "Euro". From
January 1, 1999 through June 30, 2002 the countries will be able to use their
legacy currencies or the Euro to transact business. By July 1, 2002, at the
latest, the conversion to the Euro will be complete at which time the legacy
currencies will no longer be legal tender. The fixed conversion rates between
their existing currencies have eliminated exchange rate risk among the member
countries.
The conversion to the Euro has reduced the number of forward contracts that
we use to hedge the exchange rate risk. The forward contracts that were used to
hedge the individual legacy currencies have been replaced by a single Euro hedge
contract and the intercompany transactions among subsidiaries within the
European Union are no longer subject to exchange rate risk.
36
- --------------------------------------------------------------------------------
RISK FACTORS
Electronic Arts' business is subject to many risks and uncertainties
which may affect our future financial performance. Some of those important risks
and uncertainties which may cause our operating results to vary or which may
materially and adversely affect our operating results are as follows:
Risk Factors Relating to Our Core Business
Platform Transitions Such as the One Now Occurring Typically Depress the Market
for Video Game Software Until New Platforms Achieve a Wide Market Acceptance
When new video game platforms are announced or introduced into the market,
consumers typically reduce their purchases of video games for current platforms
in anticipation of new platforms being available. During that period, sales of
our video game products can be expected to slow or even decline until new
platforms have achieved a wide market and consumer acceptance. We are currently
in such a transition. Sony shipped its PlayStation 2 product in Japan, North
America and Europe in calendar year 2000. For the December quarter,
manufacturing shortages, resulting in the delay of a significant number of
shipments of PlayStation 2 units in North America and Europe, have adversely
affected our results of operations. In addition, Nintendo announced that its new
console system, Nintendo GameCube, will be released in calendar year 2001 in
Japan and North America and in calendar year 2002 in Europe. Microsoft announced
that its new console system, Xbox, will be released in calendar year 2001 in
North America and Japan and calendar year 2002 in Europe. Delays in the launch
or shortages of these platforms could also adversely affect our sales of
products for these platforms. Current sales of our products for the existing
PlayStation and Nintendo 64 platforms have been adversely affected (by the
pending introduction of new platforms). We expect this trend to continue until
one or more of these new consoles achieve a wide installed base of consumers.
New Video Game Platforms Create Additional Technical and Business Model
Uncertainties
Large portions of our revenues are derived from the sale of products for
play on proprietary video game platforms such as the Sony PlayStation. The
success of our products is significantly affected by acceptance of the new video
game hardware systems and the life span of older hardware platforms and our
ability to accurately predict which platforms will be most successful.
Sometimes we will spend development and marketing resources on products
designed for new video game systems that have not yet achieved large installed
bases or will continue product development for older hardware platforms that may
have shorter life cycles than we expected. Conversely, if we do not develop for
a platform that achieves significant market acceptance, or discontinue
development for a platform that has a longer life cycle than expected, our
revenue growth may be adversely affected.
For example, the Sega Dreamcast console launched in Japan in early 1999 and
in the United States in September of 1999. We have developed no products for
this platform. Had this platform achieved wide market acceptance, our revenue
growth would have been adversely affected. Similarly, we released a variety of
products for the new Sony platform, the PlayStation 2. The shortages of
PlayStation 2 units has adversely affected our results, and if that platform
does not achieve wide acceptance by consumers, we will have spent a
disproportionate amount of our resources for this platform. Similarly, we are
developing products for the Xbox and Nintendo GameCube. If these platforms do
not achieve wide commercial acceptance, our revenue growth will be adversely
impacted.
Product Development Schedules Are Frequently Unreliable and Make Predicting
Quarterly Results Difficult
Product development schedules, particularly for new hardware platforms and
high-end multimedia personal computers, or PCs, 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. For example, The World is Not Enough for the
PlayStation 2 and EMPEROR: Battle for Dune for the PC, which were expected to
ship in fiscal 2001 will not be released until fiscal 2002 due to development
delays. Additionally, development risks for CD-ROM and DVD 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. Our revenues and earnings are dependent on our ability to
meet our product release schedules, and our failure to meet those schedules
could result in revenues and earnings which fall short of analysts' expectations
for any individual quarter and the fiscal year.
37
Our Business Is Both Seasonal and Cyclical
Our business is highly seasonal with a significant percentage of our
revenues occurring in the December quarter. In our fiscal 2002, we expect these
seasonal trends to be magnified by general industry factors, including the
current platform transition, anticipated fall launches of the Xbox and Nintendo
GameCube in North America and the economic slowdown in the United States. In
addition, we are continuing to invest significantly in our online operation,
EA.com. Our business is also cyclical; video game platforms have historically
had a life cycle of four to six years, and decline as more advanced platforms
are being introduced. As one group of platforms is reaching the end of its cycle
and new platforms are emerging, buying patterns may change. Purchases of
products for older platforms may slow at a faster rate than sales of new
platforms. We are currently in such a platform transition. Sega introduced its
latest platform in calendar year 1999, and Sony shipped its PlayStation 2
console in Japan, North America and Europe in calendar year 2000. Nintendo
announced that its new console system, Nintendo GameCube, will be released in
calendar year 2001 in Japan and North America and in calendar year 2002 in
Europe. Microsoft announced that its new console system, Xbox, will be released
in calendar year 2001. Sales of our current products for the current Nintendo
and Sony platforms have already been adversely affected, and we expect this
trend to continue.
The Impact of e-Commerce and Online Games on Our Business Is Not Known
While we do not currently derive significant revenues from online sales of
our packaged products, we believe that such form of distribution will become a
more significant factor in our business in the future. E-Commerce is becoming an
increasingly popular method for conducting business with consumers. How that
form of distribution will affect the more traditional retail distribution, at
which we have historically had success, and over what time period, is uncertain.
In addition, we expect the number and popularity of online games to increase and
become a significant factor in the interactive games business generally. We do
not know how that increase generally, or the emerging business of EA.com
specifically, will affect the sales of packaged goods.
Our Business, Our Products, and Our Distribution Are Subject to Increasing
Regulation in Key Territories
Legislation is increasingly introduced which may affect the content of our
products and their distribution. For example, privacy rules in the United States
and Europe impose various restrictions on our web sites. Those rules vary by
territory while of course the Internet recognizes no geographical boundaries.
Other countries such as Germany have adopted laws regulating content transmitted
over the Internet that are stricter than current United States laws. In the
United States, in response to recent events, the federal and several state
governments are considering content restrictions on products such as those made
by us as well as restrictions on distribution of such products. Any one or more
of these factors could harm our business.
Our Platform Licensors Are Our Chief Competitors and Frequently Control the
Manufacturing of Our Video Game Products
Our agreements with hardware licensors, which are also our chief
competitors, typically give significant control to the licensor over the
approval and manufacturing of our products. This fact could, in certain
circumstances, leave us unable to get our products approved, manufactured and
shipped to customers. In most events, control of the approval and manufacturing
process by the platform licensors increases both our manufacturing lead times
and costs as compared to those we can achieve independently. For example, in
prior years, we experienced delays in obtaining approvals for and manufacturing
of PlayStation products which caused delays in shipping those products. The
potential for additional delay or refusal to approve or manufacture our products
continues with our platform licensors. Such occurrences would harm our business
and adversely affect our financial performance. Additionally, we have not
negotiated a publishing agreement with Nintendo for the Nintendo GameCube
platform and we do not know whether the terms of this agreement will be
favorable.
Proliferation and Assertion of Patents Poses Serious Risks to our Business
Many patents have been issued that may apply to widely used game
technologies. Additionally, many recently issued patents are now being asserted
against Internet implementations of existing games. Several such patents have
been asserted against us. Such claims can harm our business. We will incur
substantial expenses in evaluating and defending against such claims, regardless
of the merits of the claims. In the event that there is a determination that we
have infringed a third party patent, we could incur significant monetary
liability and be prevented from using the rights in the future.
38
Risk Factors Relating to Our Online Business
Because of EA.com's Limited Operating History, It Will Be Difficult To Evaluate
its Business and Prospects
EA.com's business is still in the developing stages, so evaluating its
business and prospects will be more difficult than would be the case for a more
mature business. We will continue to encounter the risks and difficulties faced
in launching a new business, and we may not achieve our goals or may be
compelled to change the manner in which we seek to develop the business. These
uncertainties as to the future operations of EA.com will increase the difficulty
we face in completing and pursuing the essential plans for the development of
the business and will also make it more difficult for our stockholders and
securities analysts to predict the operating results of this business.
EA.com Has a History of Losses and Expects To Continue To Incur Losses and May
Never Achieve Profitability
EA.com has incurred substantial losses to date, including the current
fiscal year. We expect EA.com to continue to incur losses as it develops its
business. EA.com will be required to maintain the significant support, service
and product enhancement demands of online users, and we cannot be certain that
EA.com will produce sufficient revenues from its operations to support these
costs. Even if profitability is achieved, EA.com may not be able to sustain it
over a period of time.
Our Agreements with America Online May Not Prove Successful to the Development
of EA.com's Business
We have a series of agreements with America Online ("AOL") for the
offering of our games for online play. These agreements require that we make
substantial guaranteed payments to AOL and that we commit our resources to the
pursuit of the online game opportunity. We cannot be assured that the
substantial costs associated with the AOL agreements will be justified by the
revenues generated from that relationship. In addition, restrictions included in
the AOL agreements limiting other channels we may develop for offering online
games may limit our ability to diversify our online distribution strategies. The
success for us of the AOL agreements will also be a result of AOL's performance
under the agreements, a factor over which we will have very little control.
We Have Very Limited Experience with Online Games and May Not Be Able To Operate
This Business Effectively
Offering games solely for online play is a substantial departure from our
traditional business of selling packaged software games. We have employed
various pricing models, including subscription fees, "pay to play fees" and
advertising. We have very little experience with developing optimal pricing
strategies for online games and no experience in "pay to play" pricing or in
securing advertising revenues for online services. Similarly, we are
inexperienced in predicting usage patterns for our games. Because of our
inexperience in this area, we may not be effective in achieving success that may
otherwise be attainable from offering our games online.
Online Games Have Risks That Are Not Associated with Our Traditional Business
Online games, particularly multiplayer games, pose risks to player
enjoyment that do not generally apply to packaged game sales. Players frequently
would not be acquainted with other players, which may adversely affect the
playing experience. Social issues raised by a player's conduct may impact the
experience for other players. We have not determined whether or how we might
monitor or proctor player behavior that impairs the game experience. In
addition, there are substantial technical challenges to be met both in the
introduction of our games online and in maintaining an effective game playing
environment over time. Also, hacking and spamming has become a serious problem
for online sites, and significant hacking and spamming could seriously interfere
with online game play. If these risks are not successfully controlled and
technical challenges resolved, potential customers for our games may be
unwilling to play in sufficient volume to allow us to attain or sustain
profitability.
We May Not Be Able To Obtain the Required Licenses To Offer Our Games Online
If we are unable to reach terms with certain licensors for our games, we
will not be able to offer certain of our games for online play. Many of
Electronic Arts' most popular games feature characters, trademarks, people or
concepts for which we have licenses from third parties. As an example, our EA
SPORTS products typically contain content licensed from a sports and players'
association. In certain instances, the terms of these licenses will not allow us
to offer the games for online play without negotiating an additional license. We
cannot be certain that the licensors will be amenable to a license for online
games involving their content or, even if they are, that we will be able to
reach terms with them for such use. We may be forced to agree to terms that
ultimately materially impair the economic value to us of the online game market.
39
Proliferation and Assertion of Patents Poses Serious Risks to the Business of
EA.com
Many patents have been issued that may apply to widely used Internet
technologies. Additionally, many recently issued patents are now being asserted
against Internet implementations of older technologies. Several such patents
have been asserted against us. Such claims can harm our business. We will incur
substantial expenses in evaluating and defending against such claims, regardless
of the merits of the claims. In the event that there is a determination that we
have infringed a third party patent, we could incur significant monetary
liability and be prevented from using the rights in the future.
Development of EA.com's Business Will Require Significant Capital, and We Cannot
Be Assured That It Will Be Available
EA.com will not be successful if it does not receive the very substantial
financing that will be required to develop its business. Electronic Arts has
agreed to provide a limited amount of funding to EA.com, but this financing
alone may not be sufficient for the development of EA.com's business. Any
additional funding that is obtained from EA may either be treated as a revolving
credit advance or would increase EA's retained interest in EA.com and
correspondingly decrease the interest of the holders of outstanding shares of
Class B common stock. The attraction of additional equity or debt financing for
EA.com from third parties may not be possible or may only be possible on terms
that result in significant dilution to Class A and Class B common stockholders
or interest or other costs and debt-related restrictions on the operation of the
business. To date, nearly all funding (except warrants and cash from revenues)
has been provided by EA.
If Use of the Internet Does Not Continue To Develop and Reliably Support the
Demands Placed on It by Electronic Commerce, EA.com's Business Will Be Harmed
EA.com's success depends upon growth in the use of the Internet as a medium
for playing games. The use of the Internet for sophisticated games like ours is
relatively new. Our business would be seriously harmed if:
o use of the Internet does not continue to increase or increases more
slowly than expected,
o the infrastructure for the Internet does not effectively support online
game play,
o concerns over the secure transmission of confidential information over
public networks inhibit the growth of the Internet as a means of
conducting commercial transactions, or
o government regulations regarding Internet content, privacy or other
conditions impede the effectiveness of the Internet to users.
Capacity Restraints May Restrict the Use of the Internet as a Forum for Game
Play, Resulting in Decreased Demand for Our Products
The Internet infrastructure may not be able to support the demands placed
on it by increased usage or the limited capacity of networks to transmit large
amounts of data. Other risks associated with commercial use of the Internet
could slow its growth, including:
o outages and other delays resulting from the inadequate reliability of
the network infrastructure,
o slow development of enabling technologies and complementary products,
and
o limited availability of cost-effective, high speed access.
Delays in the development or adoption of new equipment standards or
protocols required to handle increased levels of Internet activity, or increased
governmental regulation, would cause the Internet to fail to gain, or lose,
viability as a means of game playing. If these or any other factors cause use of
the Internet for commerce to slow or decline, the Internet may not prove viable
as a commercial marketplace. This, in turn, would result in decreased demand for
EA.com's products and services.
40
To Become and Remain Competitive, EA.com Must Continually Develop and Expand New
Content. This Is Inherently Risky and Expensive.
EA.com's success depends on our ability to develop products and services
for the EA.com site and our ability to continually expand the content on that
site. Our agreement with AOL requires us to develop new games under our
relationship with AOL. We cannot assure you that products will be developed on
time, in a cost effective manner, or that they will be successful.
We May Not Be Able To Respond to Rapid Technological Change
The market for Internet products and services is characterized by rapid
technological change and evolving industry standards. Both in completing the
design and implementation of our network infrastructure and thereafter, we will
be required to continually improve performance, features, reliability and
capacity of our network infrastructure. We cannot assure you that we will be
successful in responding rapidly or in a cost effective manner to such
developments.
Increasing Governmental Regulation of the Internet Could Limit the Market for
Our Products
As Internet commerce continues to evolve, we expect that federal, state and
foreign governments will adopt laws and regulations covering issues such as user
privacy, taxation of goods and services provided over the Internet, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in electronic commerce to liability, taxation or
other increased costs, any of which could limit the growth of electronic
commerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial medium. If enacted,
these laws and regulations could limit the market for EA.com's products.
Our Revenues Have Been Heavily Dependent on a Single Product and Would Be
Adversely Affected if That Product's Popularity Were To Decline
In the near term, EA.com's revenues to date have consisted primarily of
revenues from sales of our online product Ultima Online, and we would be
adversely affected if revenues from that product were to decline for any reason
and not be replaced. We expect the online game market to become increasingly
competitive, and it is possible that other producer's current or future games
could cause our revenue from Ultima Online to decline. In addition, popularity
of Ultima Online could decline over time simply because of consumer preference
for new game experiences.
We Invest Very Heavily in Research and Development and Network Technology and
Operations for EA.com, and We Cannot Be Assured That We Will Achieve Revenues
That Validate This Level of Spending
We have invested, and expect to continue to invest, very heavily in
research and development and network technology and operations for our website
and online games. We will need to expand EA.com's revenues substantially for it
to achieve profitability with these levels of expenditure being required, and we
may not be able to do so. If we cannot increase revenues to profitable levels,
the value of EA.com will be impaired. In order to develop the broad game
offerings that we envision for our online operations it will be necessary to
engage in significant developmental efforts both to adapt existing EA games to
the online format and to create new online games. Our agreements with AOL
require us to maintain a substantial commitment to online game development and
we cannot be assured that we will realize acceptable returns from this
investment.
Online Product Development Schedules Are Unreliable and Make Predicting
Quarterly Results Difficult
Online product development schedules, particularly for Internet based games
are difficult to predict because they involve creative processes, use of new
development tools, Internet latency issues, a learning process to better
understand Internet based game mechanics, and research and experimentation
associated with development for new online technologies. Additionally,
development risks for Internet based products can cause particular difficulties
in predicting quarterly results because of the challenges associated with game
testing, live Beta testing, integration into network servers and integration on
to the Games web site and may impact the release ("go live") dates of products
during a particular quarter. Several online products currently under development
are experiencing development delays and will be released later than planned. Our
revenues and operating costs are dependent on our ability to meet our product
"go live" schedules, and our failure to meet those schedules could result in
revenues falling short of analysts' expectations, with no corresponding decrease
in expenses, resulting in increased operating losses for EA.com.
41
General Risk Factors
Because of the Intense Competition for Qualified Technical, Creative, Marketing
and Other Personnel, We May Not Be Able To Attract and Retain the Personnel
Necessary for our Businesses
The market for technical, creative, marketing and other personnel essential
to the development of online businesses and management of our online and core
businesses continues to be extremely competitive, and we may not be able to
attract and retain the employees we need. In addition, the cost of real estate
in the San Francisco Bay area - the location of our headquarters and largest
studio has increased dramatically, and has made recruiting from other areas and
relocating employees to our headquarters more difficult. If we cannot
successfully recruit and retain the employees we need, our ability to develop
and manage our businesses will be impaired.
Foreign Sales and Currency Fluctuations
For the twelve months ended March 31, 2001 international net revenues
comprised 37% of total consolidated net revenues. For the fiscal year ended
March 31, 2000 international net revenues comprised 40% of total consolidated
net revenues. We expect foreign sales to continue to account for a significant
and growing portion of our revenues. Such sales are subject to unexpected
regulatory requirements, tariffs and other barriers. Additionally, foreign sales
are primarily made in local currencies which may fluctuate. While we hedge
against foreign currency fluctuations, we cannot control translation issues. For
example, our European revenues in fiscal 2001 were adversely impacted by a
devaluation of the Euro and British Pound as compared to the prior year. The
devaluation had an adverse effect for the year on our sales and net income. Any
of these factors may significantly harm our business.
Increased Difficulties in Forecasting Results
During platform transition periods, where the success of our products is
significantly impacted by the changing market for our products, forecasting our
revenues and earnings is more difficult than in more stable or rising product
markets. The demand for our products may decline during a transition faster than
we anticipate, negatively impacting both revenues and earnings. At launch, Sony
shipped only half of the number of PlayStation 2 units to retail in North
America than it had originally planned, and it shipped significantly fewer units
than planned at launch in Europe as well. Shortages were announced as being
caused by shortages of components for manufacturing. Due to these shortages, our
results of operations for fiscal 2001 have been adversely affected.
Consequently, depending on the number and the timing of units actually
available, these shortages may adversely impact our sales of PlayStation 2
products in fiscal 2002.
We cannot predict the impact of recent actions and comments by the Securities
and Exchange Commission (SEC) and FASB
Recent actions and comments from the SEC have focused on the integrity of
financial reporting. In addition, the FASB and other regulatory accounting
agencies have recently introduced several new or proposed accounting standards,
some of which represent a significant change from current industry practices.
For example, in December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements of
all public registrants. In response to numerous requests for interpretive
guidance of SAB 101, the effective date of the standard has been delayed twice.
SAB 101 became effective during the first quarter of fiscal 2001. SAB 101 did
not have a material effect on the underlying strength or weakness of our
consolidated business operations as measured by the dollar value of our product
shipments and cash flows.
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 our common stock in any given period. As a result of the
factors discussed in this report and other factors that may arise in the future,
the market price of our common stock historically has been, and we expect will
continue to be, subject to significant fluctuations over a short period of time.
These fluctuations may be due to factors specific to us, to changes in analysts'
earnings estimates, or to factors affecting the computer, software, Internet,
entertainment, media or electronics businesses or the securities markets in
general. For example, during fiscal year 2001, the price per share of our Class
A common stock ranged from $26.59 to $56.13.
42
Because of these and other factors affecting our 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.
43
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including the changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from changes in market rates and prices. Foreign exchange contracts used
to hedge foreign currency exposures and short-term investments are subject to
market risk. We do not consider our cash and cash equivalents to be subject to
interest rate risk due to their short maturities. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We utilize foreign exchange contracts to hedge foreign currency exposures of
underlying assets and liabilities, primarily certain intercompany receivables
that are denominated in foreign currencies, thereby, limiting our risk. Gains
and losses on foreign exchange contracts are reflected in the income statement.
At March 31, 2001, we had foreign exchange contracts, all with maturities of
less than nine months to purchase and sell approximately $279,415,000 in foreign
currencies, primarily British Pounds, European Currency Units ("Euro"), Canadian
Dollars, Japanese Yen and other currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate. The counterparties to these contracts are substantial and
creditworthy multinational commercial banks. The risks of counterparty
nonperformance associated with these contracts are not considered to be
material. Notwithstanding our efforts to manage foreign exchange risks, there
can be no assurances that our hedging activities will adequately protect us
against the risks associated with foreign currency fluctuations.
The following table below provides information about our foreign currency
forward exchange contracts at March 31, 2001. The information is provided in
U.S. dollar equivalents and presents the notional amount (forward amount), the
weighted average contractual foreign currency exchange rates and fair value.
- --------------------- ----------------- ------------ -----------------
Weighted-
Average
Contract Contract
Amount Rate Fair Value
- --------------------- ----------------- ------------ -----------------
(in thousands) (in thousands)
Foreign currency
to be sold under
contract:
British Pound $155,842 1.4483 $3,477
Euro 45,718 0.8792 120
Canadian Dollar 21,942 1.5267 687
Japanese Yen 11,854 119.7900 611
Swedish Krona 4,521 10.3969 7
South African Rand 4,312 8.1159 (56)
Norwegian Krone 1,518 9.2235 (8)
Australian Dollar 1,284 0.4937 21
Danish Krone 941 8.5009 -
- --------------------- ----------------- ------------ -----------------
Total $247,932 $4,859
- --------------------- ----------------- ------------ -----------------
Foreign currency
to be purchased
under contract:
British Pound $ 31,483 1.4160 $ (34)
- --------------------- ----------------- ------------ -----------------
Total $ 31,483 $ (34)
- --------------------- ----------------- ------------ -----------------
- --------------------- ----------------- ------------ -----------------
Grand total $279,415 $4,825
- --------------------- ----------------- ------------ -----------------
While the contract amounts provide one measurement of the volume of these
transactions, they do not represent the amount of our exposure to credit risk.
The amounts (arising from the possible inabilities of counterparties to meet the
terms of their contracts) are generally limited to the amounts, if any, by which
the counterparties' obligations exceed our obligations as these contracts can be
settled on a net basis at our option. We control credit risk through credit
approvals, limits and monitoring procedures.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We manage our interest rate risk by maintaining an
investment portfolio primarily consisting of debt instruments of high credit
quality and relatively short average maturities. We also manage our interest
rate risk by maintaining sufficient cash and cash equivalent balances such that
we are typically able to hold our investments to maturity. At March 31, 2001,
our cash equivalents, short-term and long-term investments included
44
debt securities of $404,696,000. Notwithstanding our efforts to manage interest
rate risks, there can be no assurances that we will be adequately protected
against the risks associated with interest rate fluctuations.
The table below presents the amounts and related weighted average interest rates
of our investment portfolio at March 31, 2001:
- ---------------------- ------------- ------------ -------------
Average
Interest Rate Cost Fair Value
- ---------------------- ------------- ------------ -------------
(Dollars in thousands)
Cash equivalents(1)
Fixed rate 5.16% $ 91,879 $ 91,879
Variable rate 5.12% $257,737 $257,737
Short-term
investments(1)(2)
Fixed rate 3.93% $ 46,346 $ 46,680
Variable rate 0.00% $ - $ -
Long-term
investments(1)
Fixed rate 0.00% $ - $ -
Variable rate 6.35% $ 8,400 $ 8,601
- ----------------------- ------------------ ------------ -------------
(1) See definition in note 1 of the Notes to the Consolidated Financial
Statements.
(2) Maturity dates for short-term investments range from 3 months to 16 months.
45
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 46 through 73.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic Arts
Inc. and subsidiaries as of March 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 Inc.
and subsidiaries as of March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
Mountain View, California KPMG LLP
May 4, 2001
46
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of March 31, 2001 2000
- --------------------------------------------------------------------------------- ----------- -----------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 466,492 $ 339,804
Marketable securities 10,022 236
Receivables, less allowances of $89,833 and $65,067, respectively 174,449 234,087
Inventories, net 15,686 22,986
Other current assets 152,078 108,210
----------- -----------
Total current assets 818,727 705,323
Property and equipment, net 337,199 285,466
Long-term investments 8,400 8,400
Investment in affiliates 19,052 22,601
Goodwill and other intangibles, net 136,764 117,236
Other assets 58,776 53,286
----------- -----------
$ 1,378,918 $ 1,192,312
=========== ===========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 73,061 $ 97,703
Accrued and other liabilities 266,965 167,599
----------- -----------
Total current liabilities 340,026 265,302
Minority interest in consolidated joint venture 4,545 3,617
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares -- --
Common stock
Class A common stock, $0.01 par value. Authorized 400,000,000 shares;
issued and outstanding 134,714,464 and 128,869,088 shares, respectively 1,347 1,288
Class B common stock, $0.01 par value. Authorized 100,000,000 shares;
Issued and outstanding 6,250,000 and 6,000,000 shares, respectively 63 60
Paid-in capital 540,354 412,038
Retained earnings 505,286 516,368
Accumulated other comprehensive loss (12,703) (6,361)
----------- -----------
Total stockholders' equity 1,034,347 923,393
----------- -----------
$ 1,378,918 $ 1,192,312
=========== ===========
See accompanying notes to consolidated financial statements.
47
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended March 31, 2001 2000 1999
- ------------------------------------------------------ ----------- ----------- -----------
Net revenues $ 1,322,273 $ 1,420,011 $ 1,221,863
Cost of goods sold 652,242 704,702 627,589
----------- ----------- -----------
Gross profit 670,031 715,309 594,274
Operating expenses:
Marketing and sales 185,336 188,611 163,407
General and administrative 104,041 92,418 76,219
Research and development 388,928 261,966 199,375
Amortization of intangibles 19,323 11,989 5,880
Charge for acquired in-process technology 2,719 6,539 44,115
----------- ----------- -----------
Total operating expenses 700,347 561,523 488,996
----------- ----------- -----------
Operating income (loss) (30,316) 153,786 105,278
Interest and other income, net 16,886 16,028 13,180
----------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes and minority interest (13,430) 169,814 118,458
Provision for (benefit from) income taxes (4,163) 52,642 45,414
----------- ----------- -----------
Income (loss) before minority interest (9,267) 117,172 73,044
Minority interest in consolidated joint venture (1,815) (421) (172)
----------- ----------- -----------
Net income (loss) $ (11,082) $ 116,751 $ 72,872
=========== =========== ===========
Net income per share:
Basic N/A $ 0.93 $ 0.60
Diluted N/A $ 0.88 $ 0.58
Number of shares used in computation:
Basic N/A 125,660 121,495
Diluted N/A 132,742 126,545
Class A common stock:
Net income (loss):
Basic $ 11,944 N/A N/A
Diluted $ (11,082) N/A N/A
Net income (loss) per share:
Basic $ 0.09 N/A N/A
Diluted $ (0.08) N/A N/A
Number of shares used in computation:
Basic 131,404 N/A N/A
Diluted 132,056 N/A N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (23,026) N/A N/A
Net loss per share:
Basic $ (3.83) N/A N/A
Diluted $ (3.83) N/A N/A
Number of shares used in computation:
Basic 6,015 N/A N/A
Diluted 6,015 N/A N/A
See accompanying notes to consolidated financial statements, including segment
information in note 19.
48
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 2001, 2000 and 1999
(In thousands)
Class A Class B Accumulated
Common Stock Common Stock Other Treasury Stock
------------------- ------------------ Paid-In Retained Comprehensive -------------------
Shares Amount Shares Amount Capital Earnings Loss Shares Amount Total
- ------------------------- -------- ---------- ------- ---------- --------- ----------- --------------- ------- --------- -----------
Balances at March 31,
1998 120,319 $1,203 - $ - $233,693 $330,540 $(1,468) - $ - $563,968
Net income 72,872 72,872
Change in unrealized
appreciation of
investments, net 2,533 2,533
Reclassification
adjustment for gains
realized in net
income, net (989) (989)
Translation adjustment (2,643) (2,643)
-----------
Comprehensive income
71,773
Proceeds from sales of
shares through stock
plans 2,265 23 27,779 (1,300) 200 4,075 30,577
Purchase of treasury
stock (446) (9,001) (9,001)
Tax benefit related to
stock options 5,614 5,614
-------- ---------- ------- ---------- --------- ----------- --------------- ------- --------- -----------
Balances at March 31,
1999 122,584 1,226 - - 267,086 402,112 (2,567) (246) (4,926) 662,931
Net income 116,751 116,751
Change in unrealized
appreciation of
investments, net 1,739 1,739
Reclassification
adjustment for gains
realized in net
income, net (5,194) (5,194)
Translation adjustment (339) (339)
-----------
Comprehensive income
112,957
Proceeds from sales of
shares through stock
plans 6,285 62 83,096 (2,495) 246 4,926 85,589
Issuance of Class B
common stock 6,000 60 27,993 28,053
Issuance of Class B
stock warrant 1,300 1,300
Tax benefit related to
stock options 32,563 32,563
-------- ---------- ------- ---------- --------- ----------- --------------- ------- --------- -----------
Balances at March 31,
2000 128,869 1,288 6,000 60 412,038 516,368 (6,361) - - 923,393
======== ========== ======= ========== ========= =========== =============== ======= ========= ===========
49
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended March 31, 2001, 2000 and 1999
(In thousands)
Class A Class B Accumulated
Common Stock Common Stock Other Treasury Stock
----------------------------------- Paid-In Retained Comprehensive --------------------
Shares Amount Shares Amount Capital Earnings Loss Shares Amount Total
- ------------------------- -------- -------- ------- -------- --------- ----------- -------------- --------- ---------- ------------
Balances at March 31,
2000 128,869 1,288 6,000 60 412,038 516,368 (6,361) - - 923,393
Net loss (11,082) (11,082)
Change in unrealized
appreciation of
investments, net 3,097 3,097
Reclassification
adjustment for gains
realized in net
income, net - -
Translation adjustment (9,439) (9,439)
------------
Comprehensive loss (17,424)
Proceeds from sales of
shares through stock
plans 5,845 59 101,937 101,996
Issuance of Class B
common stock 250 3 2,247 2,250
Notes receivable in
connection with
issuance of Class B
stock (1,618) (1,618)
Tax benefit related to
stock options 25,750 25,750
-------- -------- ------- -------- --------- ----------- -------------- --------- ---------- ------------
Balances at March 31,
2001 134,714 $1,347 6,250 $63 $540,354 $505,286 $(12,703) - $ - $1,034,347
======== ======== ======= ======== ======== =========== ============== ========= ========== ============
See accompanying notes to consolidated financial statements.
50
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended March 31, 2001 2000 1999
- ------------------------------------------------------------------------------- --------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ (11,082) $ 116,751 $ 72,872
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Minority interest in consolidated joint venture 1,815 421 172
Equity in net (income) loss of affiliates (820) (1,138) 155
Gain on sale of affiliate (214) (842) -
Depreciation and amortization 69,668 46,725 40,461
Carriage fee amortization 8,933 - -
Loss on sale of fixed assets 1,992 31 729
Gain on sale of marketable securities - (7,528) (1,454)
Provision for doubtful accounts 7,541 6,714 6,027
Charge for acquired in-process technology 2,719 6,539 44,115
Tax benefit from exercise of stock options 25,750 32,563 5,614
Change in assets and liabilities, net of acquisitions:
Receivables 53,775 (77,779) (11,702)
Inventories 7,300 (579) 1,282
Other assets (4,238) (69,727) (24,266)
Accounts payable (27,476) 29,673 1,622
Accrued and other liabilities 91,356 (6,919) 32,797
Deferred income taxes (33,080) 2,994 (12,042)
--------- --------- ---------
Net cash provided by operating activities 193,939 77,899 156,382
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 4,134 444 8,281
Proceeds from sales of marketable securities, net - 8,598 1,818
Proceeds from sale of affiliate - 8,842 -
Capital expenditures (120,347) (134,884) (115,820)
Investment in affiliates, net 1,662 (4,099) (5,478)
Purchase of marketable securities (2,479) - -
Proceeds from maturity of securities - - 17,306
Change in short-term investments, net 46,907 (13,860) 76,755
Acquisition of Pogo Corporation, net of cash acquired (42,571) - -
Acquisition of Westwood Studios, Inc. - - (122,688)
Acquisition of Kesmai - (22,500) -
Acquisition of other subsidiaries, net of cash acquired - (22,096) (11,805)
--------- --------- ---------
Net cash used in investing activities (112,694) (179,555) (151,631)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from sales of Class A shares through employee
stock plans and other plans 101,996 85,589 30,577
Proceeds from sales of Class B shares and stock warrants 632 20,000 -
Purchase of treasury shares - - (9,001)
Proceeds from minority interest investment in consolidated joint venture - - 2,109
--------- --------- ---------
Net cash provided by financing activities 102,628 105,589 23,685
--------- --------- ---------
Translation adjustment (10,326) 124 (2,191)
--------- --------- ---------
Increase in cash and cash equivalents 173,547 4,057 26,245
Beginning cash and cash equivalents 246,265 242,208 215,963
--------- --------- ---------
Ending cash and cash equivalents 419,812 246,265 242,208
Short-term investments 46,680 93,539 70,614
--------- --------- ---------
Ending cash, cash equivalents and short-term investments $ 466,492 $ 339,804 $ 312,822
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for income taxes $ 13,556 $ 15,525 $ 43,050
========= ========= =========
Non-cash investing activities:
Class B common stock issued in connection with the Kesmai acquisition $ - $ 9,353 $ -
Change in unrealized appreciation of investments and marketable securities $ 4,488 $ (5,008) $ 1,805
========= ========= =========
See accompanying notes to consolidated financial statements
51
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements of Electronic Arts Inc. and
its wholly-owned and majority-owned subsidiaries (the "Company") follows:
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) 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
2001 contain 53 weeks. The results of operations for fiscal 2000 and 1999
contain 52 weeks. For clarity of presentation herein, all fiscal periods are
treated as ending on a calendar month end.
(c) Revenue Recognition
The Company's revenue recognition policies are in compliance with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, With
Respect to Certain Transactions",which provide guidance on generally accepted
accounting principles for recognizing revenue on software transactions. SOP 97-2
requires that revenue recognized from software arrangements be allocated to each
element of the arrangement based on the relative fair values of the elements.
The Company has adopted the provisions of these SOPs as of April 1, 1998. The
adoption has, in certain circumstances, resulted in the deferral of certain
revenues associated with the Company's sales promotions and products with
multiple deliverable elements. Neither the changes in certain business practices
nor the deferral of certain revenues have resulted in a material impact on the
Company's operating results, financial position or cash flows for the fiscal
year ended March 31, 2001. Total deferred revenue at March 31, 2001 and 2000 was
$16,967,000, and $1,847,000, respectively.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition", which outlines
the basic criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The adoption of SAB 101 did
not have a material impact on the Company's financial position and results of
operations.
Product Sales: The Company recognizes revenue upon shipment of its packaged
goods products based on "FOB Shipping" terms. Under FOB Shipping terms, title
and risk of loss are transferred when the products are delivered to the
customer. In order to recognize revenue, the Company must not have any
continuing obligations and it must also be probable that the Company will
collect the accounts receivable. 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 recognized
net of an allowance for returns and price protection.
Online Subscription Revenues: Online subscription revenues are derived
principally from subscription revenues collected from customers for online play,
who are only contractually obligated for pay on a month-to-month basis. Prepaid
monthly subscription revenues, including revenues collected from credit card
sales as well as sales of Gametime subscription cards, are deferred and
subsequently recognized ratably over the period for which the hosting services
are provided.
Advertising Revenues: Advertising revenues are derived principally from the sale
of banner and in-game advertisements. Banner and in-game advertising is
typically generated from contracts in which either the Company or AOL provides a
minimum number of impressions over the term of the agreed upon commitment.
Revenue is recognized as the impressions are delivered, provided that no
significant obligations remain and collection of the related receivable is
probable. Advertising revenue generated on the AOL Games Channel is recorded net
of the applicable revenue share owed to AOL under the AOL agreement (see note
5).
Software Licenses: For those agreements which provide the customers the right to
multiple copies in exchange for guaranteed minimum royalty 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 $18,944,000, $21,704,000 and
$17,788,000 for the fiscal years ended March 31, 2001, 2000, and 1999,
respectively.
(d) Cash and Investments
Cash equivalents consist of highly liquid investments with insignificant rate
risk and with maturities of three months or
52
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. Long-term investments
consist of securities with 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"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based on
current interest rates. Management determines the appropriate classification of
its debt and equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Securities classified as held-to-maturity are
carried at amortized cost, which is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Debt securities, not classified as held-to-maturity, are classified as
available-for-sale and are stated at fair value. Securities sold are based on
the specific identification method.
(e) Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
original equipment manufacturer (OEM) fees and license fees paid to celebrities
and professional sports organizations for use of their trade name. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. Prepaid
royalties are expensed at the contractual or effective 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 the Statement of
Operations any amounts that management deems unlikely to be realized through
product sales. Royalty advances are classified as current and non-current assets
based upon estimated net product sales for the following year. The current
portion of prepaid royalties, included in other current assets, was $46,264,000
and $54,970,000 at March 31, 2001 and 2000, respectively. The long-term portion
of prepaid royalties, included in other assets, was $9,664,000 and $11,373,000
at March 31, 2001 and 2000, respectively.
(f) Software Development Costs
Research and development costs, which consist primarily of software development
costs, are expensed as incurred. Statement of Financial Accounting Standards No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed" ("SFAS 86"), provides for the capitalization of certain
software development costs incurred after technological feasibility of the
software is established or for development costs that have alternative future
uses. Under the Company's current practice of developing new products, the
technological feasibility of the underlying software is not established until
substantially all product development is complete, which generally includes the
development of a working model. The software development costs that have been
capitalized to date have been insignificant.
(g) Inventories
Inventories are stated at the lower of cost or market. Inventories at March 31,
2001 and 2000 consisted of:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 976 $ 920
Finished goods 14,710 22,066
- --------------------------------------------------------------------------------
$15,686 $22,986
- --------------------------------------------------------------------------------
(h) Advertising Costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and retailers is accrued when revenue is recognized. Cooperative advertising
credits are reimbursed when qualifying claims are submitted. For the fiscal
years ended March 31, 2001, 2000 and 1999, advertising expenses totaled
approximately $75,429,000, $87,377,000 and $72,437,000, respectively.
(i) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
accelerated and straight-line methods over the following useful lives:
- ----------------------------- ------------------------------------
Buildings 20 to 25 years
- ----------------------------- ------------------------------------
Computer equipment and
software 3 to 7 years
- ----------------------------- ------------------------------------
Furniture and equipment 3 to 7 years
- ----------------------------- ------------------------------------
Leasehold improvements Lesser of the lease terms or the
estimated useful lives of the
improvements
- ----------------------------- ------------------------------------
Under the provisions of Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", the Company
capitalizes costs associated with customized internal-use software systems that
have reached the application stage and meet recoverability tests. Such
capitalized costs include external direct costs utilized in developing or
obtaining the applications and payroll and payroll-related expenses for
employees who are directly associated with the applications. Capitalization of
such costs begins when the preliminary project stage is complete and ceases at
the point in which the project is substantially complete and ready for its
intended purpose. Capitalized costs associated with internal-use software
amounted to $74,684,000 at March 31, 2001, of which $60,754,000 is being
depreciated on a straight-line basis over each project's estimated useful life.
53
(j) Intangible Assets
Intangible assets net of accumulated amortization at March 31, 2001 and 2000, of
$136,764,000, and $117,236,000, respectively, include goodwill, 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 from two to twelve years. Amortization expense for
fiscal years ended March 31, 2001, 2000 and 1999 was $19,323,000, $11,989,000
and $5,880,000, respectively. The Company assesses the recoverability of
goodwill by determining whether the carried value of the assets may be recovered
through estimated future undiscounted net cash flows.
(k) Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, the Company recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Company records a valuation allowance to reduce tax
assets to an amount whose realization is more likely than not.
(l) 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 accumulated other comprehensive income (loss) in 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
operations are foreign currency transaction losses of $888,000, $1,781,000 and
$1,168,000, for the fiscal years ended March 31, 2001, 2000 and 1999,
respectively.
(m) Net Income (Loss) Per Share
The following summarizes the computations of Basic Earnings Per Share ("EPS")
and Diluted EPS. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method.
Net income (loss) per share was calculated on a consolidated basis until Class A
common stock and Class B common stock were created as a result of the approval
of the Tracking Stock Proposal (see note 2). Net income (loss) per share is
computed individually for Class A common stock and Class B common stock. Please
see the discussion regarding segment reporting in the MD&A.
(In thousands, except for per share amounts):
- ------------------------- ---------------------------------------
Year Ended March 31, 2001
Class A Class A
common common
stock- stock- Class B
Basic Diluted common stock
- ------------------------- ------------ ------------ -------------
Net income (loss)
before retained
interest in EA.com $142,422 $(11,082) $(153,504)
Net loss related to
retained interest in
EA.com (130,478) - 130,478
- ------------------------- ------------ ------------ -------------
Net income (loss) $ 11,944 $(11,082) $ (23,026)
- ------------------------- ------------ ------------ -------------
Shares used to compute
net income (loss)
per share:
Weighted-average
common shares 131,404 131,404 6,015
Dilutive stock
equivalents - 652 -
- ------------------------- ------------ ------------ -------------
Dilutive potential
common shares 131,404 132,056 6,015
- ------------------------- ------------ ------------ -------------
Net income (loss) per share:
Basic $0.09 N/A $(3.83)
Diluted N/A $(0.08) $(3.83)
(In thousands, except for per share amounts):
- ----------------------------- -------------------------
Years Ended March 31,
2000 1999
- ----------------------------- ------------ ------------
Net income $116,751 $72,872
- ----------------------------- ------------ ------------
Shares used to compute net
income per share:
Weighted-average
common shares 125,660 121,495
Dilutive stock equivalents
7,082 5,050
- ----------------------------- ------------ ------------
Dilutive potential common
shares 132,742 126,545
- ----------------------------- ------------ ------------
Net income per share:
Basic $0.93 $0.60
Diluted $0.88 $0.58
The Diluted EPS calculation for Class A common stock, presented above, includes
the potential dilution from the conversion of Class B common stock to Class A
common
54
stock in the event that the initial public offering for Class B common stock
does not occur. Net loss used for the calculation of Diluted EPS for Class A
common stock is $11,082,000 for the fiscal year ended March 31, 2001. This net
loss includes the remaining 15% interest in EA.com, which is directly
attributable to outstanding Class B shares owned by third parties, which would
be included in the Class A common stock EPS calculation in the event that the
initial public offering for Class B common stock does not occur.
Due to the net loss attributable for the twelve months ended March 31, 2001 on a
diluted basis to Class A Stockholders, stock options have been excluded from the
Diluted EPS calculation. Had net income been reported for this period, an
additional 5,971,000 shares would have been added to diluted potential common
shares for Class A common stock for the twelve months ended March 31, 2001.
Due to the net loss attributable for the twelve months ended March 31, 2001 on a
diluted basis to Class B Stockholders, stock options have been excluded from the
Diluted EPS calculation. Had net income been reported for this period, an
additional 472,000 shares would have been added to diluted potential common
shares for Class B common stock for the twelve months ended March 31, 2001.
Excluded from the above computation of weighted-average shares for Class A
diluted EPS for the fiscal years ended March 31, 2001, 2000 and 1999 were
options to purchase 2,705,000, 229,000 and 645,000 shares of common stock,
respectively, as the options' exercise price was greater than the average market
price of the common shares. For the fiscal year ended March 31, 2001, the
weighted-average exercise price of the respective options was $48.63. Class B
common stock, authorized on March 22, 2000, was excluded from the Company's
calculations of basic and diluted EPS because its impact on the calculations was
immaterial for the fiscal year ended March 31, 2000.
(n) Employee Benefits
The Company has a 401(k) Plan covering substantially all of its U.S. employees.
The 401(k) Plan permits the Company to make discretionary contributions to
employees' accounts based on the Company's financial performance. The Company
contributed $1,127,000, $1,799,000 and $2,092,000 to the Plan in fiscal 2001,
fiscal 2000 and fiscal 1999, respectively.
(o) Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and Financial Accounting
Standards Board issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation (an interpretation of APB Opinion No.
25)" ("FIN 44"). The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").
(p) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No.
133" and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133" which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The terms of SFAS 133 and SFAS 138 are effective as of the beginning
of the first quarter of the fiscal year beginning after June 15, 2000. The
Company is determining the effect of SFAS 133, 137 and 138 on its financial
statements.
In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF 00-25"),
"Accounting for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products", which states that consideration
from a vendor to a reseller of the vendor's products is presumed to be a
reduction of the selling prices of the vendor's products and, therefore, should
be characterized as a reduction of revenue when recognized in the vendor's
income statement. That presumption is overcome and the consideration can be
categorized as a cost incurred if, and to the extent that, a benefit is or will
be received from the recipient of the consideration. That benefit must meet
certain conditions described in EITF 00-25. The consensus should be applied no
later than in annual or interim financial statements for periods beginning after
December 15, 2001. The Company is currently evaluating the impact of this
consensus on its Statement of Operations.
(q) 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 inventories. Actual results could differ from those
estimates.
(r) Reclassifications
Certain amounts have been reclassified to conform to fiscal 2001 presentation.
55
(s) Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair value.
(2) TRACKING STOCK
On March 22, 2000, the stockholders of Electronic Arts authorized the issuance
of a new series of common stock, designated as Class B common stock ("Tracking
Stock"). The Tracking Stock is intended to reflect the performance of Electronic
Arts' online and e-Commerce division ("EA.com"). As a result of the approval of
the Tracking Stock Proposal, Electronic Arts' existing common stock has been
re-classified as Class A common stock ("Class A Stock") and that stock reflects
the performance of Electronic Arts' other businesses ("EA Core").
(3) FINANCIAL INSTRUMENTS
(a) Cash and Investments
- ------------------------------------- ---------------------------
As of March 31,
2001 2000
- ------------------------------------- ------------- -------------
(in thousands)
Cash and cash equivalents:
Cash $ 70,196 $153,436
Money market funds 250,182 11,503
Municipal securities 91,879 81,326
Commercial paper 7,555 -
- ------------------------------------- ------------- -------------
Cash and cash equivalents 419,812 246,265
- ------------------------------------- ------------- -------------
Short-term investments:
Available-for-sale
Municipal securities 42,604 76,513
Corporate bonds 4,076 3,013
U.S. Agency bonds - 4,013
Held-to-maturity
U.S. Treasury securities - 10,000
- ------------------------------------- ------------- -------------
Short-term investments 46,680 93,539
- ------------------------------------- ------------- -------------
Cash, cash equivalents and short-
term investments $466,492 $339,804
- ------------------------------------- ------------- -------------
- ------------------------------------- ------------- -------------
Long-term investments:
U.S. Treasury securities $ 8,400 $ 8,400
- ------------------------------------- ------------- -------------
Long-term and short-term held-to-maturity investments include commercial notes
with original maturities of five to eight years secured by U.S. Treasury Notes
which enable the Company to take advantage of certain tax incentives from its
Puerto Rico operation. These investments are treated as held-to-maturity for
financial reporting purposes.
The fair value of held-to-maturity securities at March 31, 2001 was $8,601,000
which included gross unrealized gains of $201,000. The fair value of
held-to-maturity securities at March 31, 2000 was $18,162,000 which included
gross unrealized losses of $238,000.
(b) 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 appreciation
reported as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity. Marketable securities had an aggregate cost of
$7,066,000 and $15,000 at March 31, 2001 and 2000, respectively. At March 31,
2001, marketable securities included gross unrealized gains of $2,956,000. At
March 31, 2000, marketable securities included gross unrealized gains of
$221,000.
There were no sales of marketable securities in fiscal year 2001. For the fiscal
year ended March 31, 2000, the fair value of marketable securities sold was
$8,604,000. The gross realized gains from these sales totaled $7,528,000. The
gain on sale of investments is based on the specific identification method.
(c) Foreign Currency Forward Exchange Contracts
The Company utilizes foreign exchange contracts to hedge foreign currency
exposures of underlying assets and liabilities, primarily certain intercompany
receivables that are denominated in foreign currencies, thereby limiting our
risk. The Company does not use forward exchange contracts for speculative or
trading purposes. The Company's accounting policies for these instruments are
based on the Company's designation of such instruments as hedging transactions.
The criteria the Company uses for designating an instrument as a hedge include
the instrument's effectiveness in risk reduction and one-to-one matching of
forward exchange contracts to underlying transactions. Gains and losses on
currency forward contracts that are designated and effective as hedges of
existing transactions are recognized in income in the same period as losses and
gains on the underlying transactions are recognized and generally offset. Gains
and losses on currency forward contracts that are designated and effective as
hedges of firm commitments are deferred and recognized in income in the same
period that the underlying transactions are settled. Gains and losses on any
instruments not meeting the above criteria would be recognized in income in the
current period. The Company transacts business in various foreign currencies. At
March 31, 2001, the Company had foreign exchange contracts, all with maturities
of less than
56
seven months, to purchase and sell approximately $279,415,000 in foreign
currencies, primarily in British Pounds, Euro, Canadian Dollars, Japanese Yen
and other European currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. At March 31,
2001, fair value of these contracts is $4,825,000. The counterparties to these
contracts are substantial and creditworthy multinational commercial banks. The
risks of counterparty nonperformance associated with these contracts are not
considered to be material. Notwithstanding our efforts to manage foreign
exchange risk, there can be no assurances that our hedging activities will
adequately protect us against the risks associated with foreign currency
fluctuations.
(4) COMMITMENTS
The Company leases certain of its current facilities and certain equipment under
non-cancelable capital and 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, as
subsequently amended, for the purchase of land and construction of three
buildings and a parking structure in Redwood City, California. The initial term
of the lease is for a period of three years from November 30, 1998. 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.
In December 2000, the Company entered into a second operating lease for the
construction and occupation of two buildings and a parking structure to be
constructed in Redwood City, California. The initial term of the lease is for a
period of five years from December 8, 2000. Monthly lease payments are based
upon the Commercial Paper Rate and 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, 2001 are:
- --------------------------------------- ------------------
Year Ended March 31, (in thousands)
2002 $20,905
2003 13,887
2004 10,542
2005 8,279
2006 7,874
Thereafter 16,526
- --------------------------------------- ------------------
$78,013
- --------------------------------------- ------------------
Total rent expense for all operating leases was $27,526,000, $23,591,000 and
$19,480,000, for the fiscal years ended March 31, 2001, 2000 and 1999,
respectively.
(5) AMERICA ONLINE, INC. ("AOL") AGREEMENT
In November 1999, Electronic Arts Inc., EA.com and AOL entered into a five year
agreement which establishes the basis for EA.com's production of a games site on
the world wide web that will be available to AOL subscribers and to users of
other branded AOL properties.
The Company is required to pay $50,000,000 to AOL as a carriage fee under the
AOL agreement. Of this amount, $25,000,000 was paid upon signing the agreement
and the remainder is due in four equal installments on the first four
anniversaries of the initial payment. During fiscal 2001, the Company paid AOL
the first annual carriage payment of $6,250,000. The Company is also required to
pay to AOL $31,000,000 as an advance of a minimum guaranteed revenue share for
revenues generated by subscriptions and other certain commercial transactions on
the EA.com site. Of this amount $11,000,000 was paid upon signing of the
agreement and the remainder is due in four equal annual installments on the
first anniversary of the initial payment. During fiscal 2001, the Company paid
AOL the first annual revenue share payment of $5,000,000. The fair value of the
payments made under the AOL agreement was determined by an independent valuation
and the resulting amounts are being amortized (beginning with the site launch)
over the remaining term of the five-year agreement. Advances of $41,462,000 and
$35,395,000 are included in other long-term assets as of March 31, 2001 and
2000, respectively.
The Company also committed to spend $15,000,000 in offline media advertisements
promoting its games on AOL during the term of the agreement.
Sale of Class B Common Stock and Warrant to AOL
In connection with the agreement with AOL, the Company sold shares of Class B
common stock to AOL (the "AOL
57
Shares") representing 10 percent of the initial equity value attributable to
EA.com valued at $18,700,000.
In addition to the AOL Shares, the Company sold AOL a warrant (the "AOL
Warrant") to purchase shares of Class B common stock representing an additional
5 percent of the initial equity value attributable to EA.com for $1,300,000. The
aggregate exercise price of the AOL Warrant will be $40,000,000. The AOL Warrant
expires at the latest at the fifth anniversary of its date of issuance, and
under certain conditions may expire at an earlier date.
AOL Exchange Rights
AOL may exchange their Class B common stock shares for a number of Class A
common stock based on the ratio of per share price paid by AOL for the Class B
stock relative to $41.89. As of March 31, 2001, none of the AOL shares have been
exchanged for Class A common stock.
(6) CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential credit losses are maintained.
Short-term investments are placed with high credit-quality financial
institutions or in short-duration high quality securities. The Company limits
the amount of credit exposure in any one institution or type of investment
instrument.
(7) 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.
(8) STOCK SPLIT
On August 14, 2000, the Company's Board of Directors authorized a two-for-one
stock split of its Class A common stock which was distributed on September 8,
2000 in the form of a stock dividend for shareholders of record at the close of
business on August 25, 2000. All authorized and outstanding share and per share
amounts of Class A common stock in the accompanying consolidated financial
statements for all periods have been restated to reflect the stock split.
(9) PREFERRED STOCK
At March 31, 2001 and 2000, the Company had 10,000,000 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.
(10) TREASURY STOCK
In February 1999, the Board of Directors approved a plan to purchase up to two
million shares of the Company's common stock. For the years ended March 31, 2001
and 2000, the Company did not repurchase shares. For the year ended March 31,
1999, the Company repurchased 446,000 shares for approximately $9,001,000 under
this program. For the fiscal year ended March 31, 2001, there were no shares
reissued under the Company's Stock Plans. For the fiscal year ended March 31,
2000, 246,000 shares were reissued under the Company's Stock Plans. For the
fiscal year ended March 31, 1999, 200,000 shares were reissued under the
Company's Stock Plans.
When treasury shares were reissued, any excess of the average acquisition cost
of the shares over the proceeds from reissuance was charged to retained
earnings.
(11) STOCK PLANS
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan program 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 Class A
Common Stock on the date of commencement of the offering or on the last day of
the six-month purchase period. The program commenced in September 1991. In
fiscal 2001, 350,164 shares were purchased by the Company and distributed to
employees at prices ranging from $29.14 to $42.50. In fiscal 2000, 491,046
shares were purchased by the Company and distributed to employees at prices
ranging from $16.21 to $29.14. In fiscal 1999, 483,028 shares were purchased by
the Company and distributed to employees at prices ranging from $13.10 to
$18.30. The weighted average fair value of the fiscal 2001, fiscal 2000 and
fiscal 1999 awards was $18.31, $10.00 and $9.14, respectively. Under the
Employee Stock Purchase Plan 62,000 shares were distributed from reissued
treasury stock in fiscal 1999. No shares were distributed from reissued treasury
stock in fiscal 2001 or fiscal 2000. At March 31, 2001, the Company had
1,383,678 shares of Class A Common Stock reserved for future issuance under the
Plan.
(b) Stock Option Plans
The Company's 2000 Class A Equity Incentive Plan, 1991 Stock Option Plan, 1993
Stock Option Plan, 1995 Stock Option Plan, and Directors' Plan ("Option Plans")
provide options for employees, officers and directors to purchase the
58
Company's Class A common stock. 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 directors, at not less than the fair
market value on the date of grant.
Under the Company's stock option plans, 246,000 and 138,000 shares were reissued
from treasury stock in fiscal 2000 and 1999, respectively. No shares were
distributed from reissued treasury stock in fiscal 2001.
Together with the Tracking Stock Proposal, the stockholders approved the
Electronic Arts Inc. 2000 Class B Equity Incentive Plan. The Class B equity plan
allows the award of stock options or restricted stock for up to an aggregate of
6,000,000 shares of Class B common stock. The Class B plan includes a provision
for automatic option grants to the Company's outside directors. As of March 31,
2001 there were 250,000 restricted shares issued under the Class B equity plan.
In the fiscal year 2001, the Board of Directors approved the Key Partner Class B
Equity Incentive Program which allows for the issuance of warrants to key
business partners to purchase up to 750,000 shares of Class B common stock.
The options generally expire ten years from the date of grant and are generally
exercisable in monthly increments over 50 months. Class B common stock grants
will generally vest over 50 months with 2% vesting per month.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). Accordingly, no compensation expense has been recognized for options
granted under the Company's employee-based stock option plans. Had compensation
expense been determined based on the fair value at the grant dates for awards
under those plans in accordance with the provisions of SFAS 123, the Company's
pro forma net income (loss) and net income (loss) per share for fiscal 2001,
2000 and 1999 would have been:
Consolidated
(In thousands, except per share data)
- ---------------------------- ------------ ----------- -----------
2001 2000 1999
- ---------------------------- ------------ ----------- -----------
Net income (loss):
As reported $(11,082) $116,751 $72,872
Pro forma $(69,350) $ 78,380 $45,886
Earnings per share:
As reported - basic N/A $ 0.93 $ 0.60
Pro forma - basic N/A $ 0.62 $ 0.38
As reported - diluted N/A $ 0.88 $ 0.58
Pro forma - diluted N/A $ 0.60 $ 0.37
- ---------------------------- ------------ ----------- -----------
Class A Common Stock
(In thousands, except per share data)
- ---------------------------- ------------ ----------- -----------
2001 2000 1999
- ---------------------------- ------------ ----------- -----------
Net income (loss):
As reported - basic $ 11,944 N/A N/A
Pro forma - basic $(45,493) N/A N/A
As reported - diluted $(11,082) N/A N/A
Pro forma - diluted $(69,350) N/A N/A
Earnings (loss) per share:
As reported - basic $ 0.09 N/A N/A
Pro forma - basic $ (0.35) N/A N/A
As reported - diluted $ (0.08) N/A N/A
Pro forma - diluted $ (0.53) N/A N/A
- ---------------------------- ------------ ----------- -----------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
are used for grants made in 2001, 2000 and 1999 under the stock plans: risk-free
interest rates of 4.59% to 6.55% in 2001; 4.93% to 6.54% in 2000; and 4.39% to
5.55% in 1999; expected volatility of 74% in fiscal 2001, 65% in fiscal 2000,
and 59% in fiscal 1999; expected lives of 2.32 years in fiscal 2001, 2.29 years
in fiscal 2000 and 2.27 years in fiscal 1999 under the Option Plans and one year
for the Employee Stock Purchase Plan. No dividends are assumed in the expected
term. The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized when they occur.
Class B Common Stock
(In thousands, except per share data)
- ---------------------------- ----------- ----------- -----------
2001 2000 1999
- ---------------------------- ----------- ----------- -----------
Net loss:
As reported $(23,026) N/A N/A
Pro forma $(23,857) N/A N/A
Loss per share:
As reported - basic $ (3.83) N/A N/A
Pro forma - basic $ (3.97) N/A N/A
As reported - diluted $ (3.83) N/A N/A
Pro forma - diluted $ (3.97) N/A N/A
- ---------------------------- ----------- ----------- -----------
The fair value of each Class B option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The assumptions used were the same
as those for Class A.
59
Additional information regarding options outstanding for Class A as of March 31,
2001 is as follows:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
- ------------------------------------- ------------- -------------- ------------- -------------- --------------
$ 0.995 - $12.313 2,340,445 4.36 $10.12 2,240,889 $10.03
12.500 - 17.500 3,371,315 5.63 16.26 2,422,802 15.80
17.531 - 21.813 3,233,297 7.25 20.69 1,425,803 21.02
22.188 - 28.869 2,419,281 7.82 24.85 846,083 24.63
29.875 3,117,574 8.37 29.88 969,704 29.88
30.844 - 42.000 2,462,736 9.05 37.69 485,709 36.93
42.063 - 45.969 617,041 8.86 44.85 168,082 44.93
46.188 - 49.313 2,397,850 9.51 49.11 309,996 49.18
49.500 - 55.688 1,584,300 9.46 50.78 33,721 51.08
56.125 300 9.99 56.13 - -
- ------------------------------------- ------------- -------------- ------------- -------------- --------------
$ 0.995 - $56.125 21,544,139 7.58 $28.66 8,902,789 $20.55
===================================== ============= ============== ============= ============== ==============
Additional information regarding options outstanding for Class B as of March 31,
2001 is as follows:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
- ------------------------------------- ------------- -------------- ------------- -------------- --------------
$ 9.000 3,857,042 9.03 $ 9.00 17,790 $ 9.00
10.000 132,990 9.34 10.00 - -
12.000 1,116,450 9.66 12.00 4,200 12.00
- ------------------------------------- ------------- -------------- ------------- -------------- --------------
$ 9.000 - $12.000 5,106,482 9.18 $ 9.68 21,990 $ 9.57
===================================== ============= ============== ============= ============== ==============
60
The following summarizes the activity under the Company's Class A stock option
plans during the fiscal years ended March 31, 2001, 2000 and 1999:
-----------------------------------------------
Options Outstanding
-----------------------------------------------
Weighted-Average
Shares Exercise Price
--------------------- -------------------------
Balance at March 31, 1998 19,704,260 $12.88
Granted 6,294,432 22.09
Canceled (1,137,966) 17.37
Exercised (1,982,208) 11.37
--------------------- -------------------------
Balance at March 31, 1999 (10,188,150 shares were
exercisable at a weighted average price of $11.40) 22,878,518 15.33
Granted 7,815,952 31.92
Canceled (1,721,172) 21.68
Exercised (6,039,390) 12.42
--------------------- -------------------------
Balance at March 31, 2000 (8,907,324 shares were
exercisable at a weighted average price of $14.93) 22,933,908 21.30
Granted 5,851,961 46.05
Canceled (1,746,449) 15.71
Exercised (5,495,281) 31.15
--------------------- -------------------------
Balance at March 31, 2001 21,544,139 $28.66
--------------------- -------------------------
Options available for grant at March 31, 2001 3,049,149
The following summarizes the activity under the Company's Class B stock option
plan during the fiscal year ended March 31, 2001:
-----------------------------------------------
Options Outstanding
-----------------------------------------------
Weighted-Average
Shares Exercise Price
--------------------- -------------------------
Balance at March 31, 2000 - $ -
Granted 5,785,792 9.62
Canceled (429,310) 9.28
Exercised (250,000) 9.00
--------------------- -------------------------
Balance at March 31, 2001 5,106,482 $9.68
--------------------- -------------------------
Options available for grant at March 31, 2001 1,392,718
61
(12) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2001 and 2000 consisted of:
- ---------------------------------------- ------------ ------------
2001 2000
- ---------------------------------------- ------------ ------------
(in thousands)
Computer equipment and software $310,147 $213,815
Buildings 94,784 99,819
Land 44,721 51,686
Office equipment, furniture and
fixtures 32,569 25,210
Leasehold improvements 13,483 12,157
Warehouse equipment and other 4,319 3,914
- ---------------------------------------- ------------ ------------
500,023 406,601
Less accumulated depreciation and
amortization (162,824) (121,135)
- ---------------------------------------- ------------ ------------
$337,199 $285,466
- ---------------------------------------- ------------ ------------
Depreciation and amortization expenses associated with property and equipment
amounted to $50,345,000, $34,736,000 and $34,581,000, for the fiscal years ended
March 31, 2001, 2000 and 1999, respectively.
(13) ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities at March 31, 2001 and 2000 consisted of:
- --------------------------------------- ------------ ------------
2001 2000
- --------------------------------------- ------------ ------------
(in thousands)
Accrued compensation and benefits $ 75,603 $ 59,580
Accrued expenses 67,957 37,840
Accrued royalties 55,997 36,566
Accrued income taxes 42,371 22,682
Deferred revenue 16,967 1,847
Warranty reserve 8,070 8,886
Deferred income taxes - 198
- --------------------------------------- ------------ ------------
$266,965 $167,599
- --------------------------------------- ------------ ------------
(14) BUSINESS COMBINATIONS
(a) Pogo Corporation
On February 28, 2001, EA.com acquired Pogo Corporation (now referred to as
"Pogo") for $43,333,000, including an initial investment of $42,000,000 and the
redemption of Pogo preferred stock of $1,333,000. Pogo operates an ad-supported
games service that reaches a broad consumer market. Pogo's internet-based family
games focus on easy-to-play card, board and puzzle games.
The acquisition has been accounted for under the purchase method. The results of
operations of Pogo and the estimated fair market values of the acquired assets
and liabilities have been included in the consolidated financial statements from
the date of acquisition. The adjusted allocation of the excess purchase price
over the net tangible assets acquired was $40,516,000, of which, based on
management's estimates prepared in conjunction with a third party valuation
consultant, $2,719,000 was allocated to purchased in-process research and
development and $37,797,000 was allocated to other intangible assets. Amounts
allocated to other intangibles include goodwill of $16,927,000, existing
technology of $12,505,000, and other intangibles of $8,365,000. The allocation
of intangible assets is being amortized on a straight line basis over lives
ranging from three to seven years.
Purchased in-process research and development includes the value of products in
the development stage that are not considered to have reached technological
feasibility or to have alternative future use. Accordingly, this non-recurring
item was expensed in the Consolidated Statement of Operations upon consummation
of the acquisition. The non-recurring charge for in-process research and
development increased diluted loss per share by approximately $0.01 and $0.07 in
the fiscal year 2001 for Class A and Class B, respectively.
Pogo had various projects in progress at the time of the acquisition. As of the
acquisition date, costs to complete Pogo projects acquired were expected to be
approximately $1,200,000 in future periods. The Company believes there have been
no significant changes to these estimates as of March 31, 2001. The Company
currently expects to complete the development of these projects at various dates
through fiscal 2002 and to publish the projects upon completion. In conjunction
with the acquisition of Pogo, the Company accrued approximately $100,000 related
to direct transaction costs and other related costs.
The purchase price for the Pogo transaction was allocated to assets acquired and
liabilities assumed as set forth below (in thousands):
- ---------------------------------- -----------------
Current assets $ 3,048
Fixed assets 4,998
Other long-term assets 1,969
In-process technology 2,719
Goodwill and other intangibles
37,797
Liabilities (7,198)
- ---------------------------------- -----------------
Total cash paid $43,333
- ---------------------------------- -----------------
62
The following table reflects unaudited pro forma combined results of operations
of the Company and Pogo on the basis that the acquisition had taken place on
April 1, 1999 (in thousands, except per share data):
- -------------------------------- ---------------- ---------------
As Reported Pro Forma
- -------------------------------- ---------------- ---------------
Fiscal Year Ended March 31,
2001
Net revenues $1,322,273 $1,336,654
Class A common stock:
Net income (loss):
Basic $ 11,944 $ 475
Diluted $ (11,082) $ (26,292)
Net income (loss) per share:
Basic $ 0.09 $ 0.00
Diluted $ (0.08) $ (0.20)
Number of shares used in computation:
Basic 131,404 131,404
Diluted 132,056 132,056
Class B common stock:
Net loss, net of retained
interest in EA.com $ (23,026) $ (26,767)
Net loss per share:
Basic $ (3.83) $ (4.45)
Diluted $ (3.83) $ (4.45)
Number of shares used in computation:
Basic 6,015 6,015
Diluted 6,015 6,015
- -------------------------------- ---------------- ---------------
Fiscal Year Ended March 31,
2000
Net revenues $1,420,011 $1,422,340
Net income $ 116,751 $ 107,285
Net income per share:
Basic $ 0.93 $ 0.85
Diluted $ 0.88 $ 0.81
Number of shares used in computation:
Basic 125,660 125,660
Diluted 132,742 132,742
- -------------------------------- ---------------- ---------------
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 2000 or of future
operations of the combined companies under the ownership and management of the
Company.
(b) Kesmai
On February 7, 2000, the Company acquired Kesmai Corporation (now referred to as
"Kesmai") from News America Corporation ("News Corp") in exchange for
$22,500,000 in cash and approximately 206,000 shares of the Company's existing
common stock valued at $8,650,000. Kesmai(TM) specializes in the design and
development of multiplayer games delivered directly to consumers over the
Internet and is a major provider of game content to the Games Channel on the AOL
service. The Company granted 5 percent of the initial equity attributable to
EA.com to News Corp, adjusting the total common stock consideration relating to
the acquisition by $703,000 to $9,353,000. The Company has contributed Kesmai to
EA.com.
The Company is also committed to spend $5,000,000 in advertising with News Corp
or any of its affiliates.
If a qualified public offering of Class B common stock does not occur within
twenty-four months of News Corp's purchase of such shares, then News Corp has
the right to (1) exchange Class B common stock for approximately 206,000 shares
of Class A common stock, and (2) receive cash from Electronic Arts in the amount
of $9,650,000.
The acquisition has been accounted for under the purchase method. The results of
operations of Kesmai and the estimated fair market values of the acquired assets
and liabilities have been included in the consolidated financial statements from
the date of acquisition. The adjusted allocation of the excess purchase price
over the net tangible liabilities assumed was $32,815,000, of which, based on
management's estimates prepared in conjunction with a third party valuation
consultant, $3,869,000 was allocated to purchased in-process research and
development and $28,946,000 was allocated to other intangible assets. Amounts
allocated to other intangibles include goodwill of $18,932,000, existing
technology of $3,992,000, amounts attributed to a prior AOL agreement of
$3,131,000 and other intangibles of $2,891,000. The allocation of intangible
assets is being amortized over lives ranging from two to seven years.
Purchased in-process research and development includes the value of products in
the development stage that are not considered to have reached technological
feasibility or to have alternative future use. Accordingly, this non-recurring
item was expensed in the Consolidated Statement of Operations upon consummation
of the acquisition. The non-recurring charge for in-process research and
development reduced diluted earnings per share by $0.02 in the fiscal year 2000.
Kesmai had various projects in progress at the time of the acquisition. As of
the acquisition date, costs to complete Kesmai projects acquired were
approximately $10,550,000 in future periods. During fiscal 2001, some of these
development projects were completed and launched on the EA.com gamesites. In
addition, as certain games are completed, we expect resources to be redirected
to ongoing live game operations or to building the EA.com publishing platform.
As a result, we do not anticipate incurring
63
significant future development costs in relation to these projects after fiscal
2002. The Company believes there have been no significant changes to these
estimates as of March 31, 2001. The Company currently expects to complete the
development of these projects at various dates through fiscal 2002 and to
publish the projects upon completion. In conjunction with the acquisition of
Kesmai, the Company accrued approximately $200,000 related to direct transaction
costs and other related costs.
The purchase price for the Kesmai transaction was allocated to assets acquired
and liabilities assumed as set forth below (in thousands):
- ------------------------------------------ ---------------------
Current assets $ 605
Fixed assets (net of depreciation) 759
In-process technology 3,869
Goodwill and other intangibles 28,946
Liabilities (2,326)
- ------------------------------------------ ---------------------
Total cash and stock paid $31,853
- ------------------------------------------ ---------------------
The following table reflects unaudited pro forma combined results of operations
of the Company and Kesmai on the basis that the acquisition had taken place on
April 1, 1998 (in thousands, except per share data):
- ---------------------------------- -----------------------------
Years Ended March 31,
2000 1999
- ---------------------------------- --------------- -------------
Net revenues $1,421,313 $1,223,444
Net income $ 113,996 $ 64,237
Net income per share - basic $ 0.91 $ 0.53
Net income per share - diluted $ 0.86 $ 0.51
Number of shares used in
computation - basic 125,660 121,495
Number of shares used in
computation - diluted 132,742 126,545
- ---------------------------------- --------------- -------------
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1999 or of future
operations of the combined companies under the ownership and management of the
Company.
(c) Westwood Studios
In September 1998, the Company completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California - based Virgin Studio
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The adjusted allocation of the excess purchase price over
the net tangible liabilities assumed was $128,573,000 of which, based on
management's estimates prepared in conjunction with a third party valuation
consultant, $41,836,000 was allocated to purchased in-process research and
development and $86,737,000 was allocated to other intangible assets. Amounts
allocated to other intangibles include franchise trade names of $32,357,000,
existing technology of $6,510,000, workforces of $1,680,000 and other goodwill
of $46,190,000 and are being amortized over lives ranging from two to twelve
years. Purchased in-process research and development includes the value of
products in the development stage that are not considered to have reached
technological feasibility or to have alternative future use. Accordingly, this
non-recurring item was expensed in the Consolidated Statement of Operations upon
consummation of the acquisition. The non-recurring charge for in-process
research and development reduced diluted earnings per share by approximately
$0.30 in the fiscal year 1999. The results of the operations of Westwood and the
estimated fair value of assets acquired and liabilities assumed are included in
the Company's financial statements from the date of acquisition.
In conjunction with the merger of Westwood, the Company accrued approximately
$1,500,000 related to direct transaction costs and other related accruals. At
March 31, 2001, there were $500,000 in accruals remaining related to these
items.
In connection with the Westwood acquisition, the purchase price has been
allocated to the assets and liabilities assumed based upon the fair values on
the date of acquisition, as follows (in thousands):
- ---------------------------------------------- -------------------
Current assets $ 4,500
Property and equipment 3,257
In-process technology 41,836
Other intangible assets 86,737
Current liabilities (13,642)
- ---------------------------------------------- -------------------
Total purchase price $122,688
- ---------------------------------------------- -------------------
The following table reflects unaudited pro forma combined results of operations
of the Company and Westwood on the basis that the acquisition had taken place on
April 1, 1997 (in thousands, except per share data):
- ------------------------------------ ---------------
1999
- ------------------------------------ ---------------
Revenues $1,229,055
Net income $ 111,308
Net income per share - basic $ 0.92
Net income per share - diluted $ 0.88
Number of shares used in
computation - basic 121,495
Number of shares used in
computation - diluted 126,545
- ------------------------------------ ---------------
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1998 or at the beginning
of fiscal 1999 or of future operations of the combined companies under the
ownership and management of the Company.
64
(d) Square Co., Ltd.
In May 1998, the Company and Square Co., Ltd. ("Square"), a leading developer
and publisher of entertainment software in Japan, completed the formation of two
new joint ventures in North America and Japan. In North America, the companies
formed Square Electronic Arts, LLC ("Square EA"), which has exclusive publishing
rights in North America for future interactive entertainment titles created by
Square. Additionally, the Company has the exclusive right to distribute in North
America products published by this joint venture. The Company contributed
$3,000,000 and owns a 30% minority interest in this joint venture while Square
owns 70%. This joint venture is accounted for under the equity method.
In Japan, the companies established Electronic Arts Square KK ("EA Square KK"),
which will localize and publish in Japan the Company's properties originally
created in North America and Europe, as well as develop and publish original
video games in Japan. The Company contributed cash and has a 70% majority
ownership interest, while Square contributed cash and owns 30%. Accordingly, the
assets, liabilities and results of operations for EA Square KK are included in
the Company's Consolidated Balance Sheets and Results of Operations since June
1, 1998, the date of formation. Square's 30% interest in EA Square KK has been
reflected as "Minority interest in consolidated joint venture" on the Company's
Consolidated Financial Statements.
(e) Other Business Combinations
Additionally, during the year ended March 31, 2000, the Company acquired two
software development companies. In connection with these acquisitions, the
Company incurred a charge of $2,670,000 for acquired in-process technology. The
charge was made after the Company concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
(15) INCOME TAXES
The Company's pretax income (loss) from operations for the fiscal years ended
March 31, 2001, 2000 and 1999 consisted of the following components:
- ------------------------- ------------- ------------ ------------
(in thousands) 2001 2000 1999
- ------------------------- ------------- ------------ ------------
Domestic $(27,166) $104,096 $79,789
Foreign 13,736 65,718 38,669
- ------------------------- ------------- ------------ ------------
Total pretax income
(loss) $(13,430) $169,814 $118,458
- ------------------------- ------------- ------------ ------------
Income tax expense (benefit) for the fiscal years ended March 31, 2001, 2000 and
1999 consisted of:
- ------------------------------ ----------- ------------ ------------
(in thousands) Current Deferred Total
- ------------------------------ ----------- ------------ ------------
2001:
Federal $(4,233) $(19,975) $ (24,208)
State 582 (13,809) (13,227)
Foreign 6,981 541 7,522
Charge in lieu of taxes
from employee stock
plans for Class A 25,750 - 25,750
- ------------------------------ ----------- ------------ ------------
$29,080 $(33,243) $ (4,163)
- ------------------------------ ----------- ------------ ------------
2000:
Federal $ 2,766 $ 3,231 $ 5,997
State 299 859 1,158
Foreign 15,573 (2,649) 12,924
Charge in lieu of taxes
from employee stock
plans 32,563 - 32,563
- ------------------------------ ----------- ------------ ------------
$51,201 $ 1,441 $ 52,642
- ------------------------------ ----------- ------------ ------------
1999:
Federal $31,204 $(10,340) $ 20,864
State 4,401 (2,590) 1,811
Foreign 15,715 1,410 17,125
Charge in lieu of taxes
from employee stock
plans 5,614 - 5,614
- ------------------------------ ----------- ------------ ------------
$56,934 $(11,520) $ 45,414
- ------------------------------ ----------- ------------ ------------
The components of the net deferred tax assets as of March 31, 2001 and 2000
consist of:
- ---------------------------------------- ------------- --------------
(in thousands) 2001 2000
- ---------------------------------------- ------------- --------------
Deferred tax assets:
Accruals, reserves and other expenses $110,331 $70,131
- ---------------------------------------- ------------- --------------
Total 110,331 70,131
- ---------------------------------------- ------------- --------------
Deferred tax liabilities:
Undistributed earnings of DISC (1,189) (1,487)
Prepaid royalty expenses (44,678) (38,562)
Fixed assets (4,456) (3,249)
Unrealized gains on marketable
securities - (68)
- ---------------------------------------- ------------- --------------
Total (50,323) (43,366)
- ---------------------------------------- ------------- --------------
Net deferred tax asset $ 60,008 $26,765
- ---------------------------------------- ------------- --------------
At March 31, 2001, deferred tax assets of $57,082,000 and $2,926,000 were
included in other current assets and other assets, respectively.
65
At March 31, 2001, the Company had net Federal operating loss carryforwards of
approximately $19,000,000 for income tax reporting purposes, which expire in
2021.
The Company also has research and experimental tax credits aggregating
approximately $15,000,000 and $11,000,000 for federal and California purposes,
respectively. The federal credit carryforwards expire in 2021. The California
credits carry over indefinitely until utilized.
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, 2001, 2000 and 1999 were as follows:
- ------------------------------------ ---------- --------- --------
2001 2000 1999
- ------------------------------------ ---------- --------- --------
Statutory Federal tax rate (35.0%) 35.0% 35.0%
State taxes, net of Federal benefit
(10.0%) 1.5% 1.5%
Differences between statutory rate
and foreign effective tax rate
20.2% (2.8%) (2.5%)
Research and development credits
(4.7%) (1.7%) (2.1%)
Nondeductible acquisition costs 0.0% 0.0% 7.4%
Other (1.5%) (1.0%) (1.0%)
- ------------------------------------ ---------- --------- --------
(31.0%) 31.0% 38.3%
- ------------------------------------ ---------- --------- --------
The Company provides for U.S. taxes on an insignificant portion of the
undistributed earnings of its foreign subsidiaries and does not provide taxes on
the remainder. The Company has not provided for Federal income tax on
approximately $170,000,000 of undistributed earnings of its foreign
subsidiaries, since the Company intends to reinvest this amount in foreign
subsidiary operations indefinitely.
At March 31, 2001, the Company believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the net deferred tax assets.
The Company's U.S. income tax returns for the years 1992 through 1995 have been
examined by the Internal Revenue Service (IRS). In 1998, the Company received a
notice of deficiencies from the IRS. These deficiencies relate primarily to
operations in Puerto Rico, which the Company is contesting in Tax Court. The
Company believes that any additional liabilities, if any, that arise from the
outcome of this examination will not be material to the Company's consolidated
financial statements.
(16) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 2001, 2000 and 1999
consisted of:
- -------------------------------- ---------- ---------- ----------
(in thousands) 2001 2000 1999
- -------------------------------- ---------- ---------- ----------
Interest income $17,903 $13,744 $12,625
Gain (loss) on disposition of
assets, net (1,778) 8,339 725
Foreign currency losses (888) (1,781) (1,168)
Equity in net gain (loss) of
affiliates 820 1,138 (155)
Other income (expense), net 829 (5,412) 1,153
- -------------------------------- ---------- ---------- ----------
$16,886 $16,028 $13,180
- -------------------------------- ---------- ---------- ----------
(17) Comprehensive Income
SFAS 130 requires classification of other comprehensive income in a financial
statement and display of other comprehensive income separately from retained
earnings and additional paid-in capital. Other comprehensive income includes
primarily foreign currency translation adjustments and unrealized gains (losses)
on investments.
The change in the components of comprehensive income, net of tax, is summarized
as follows (in thousands):
- --------------------- --------------- ------------- --------------
Foreign Unrealized Accumu-
Currency Gains lated Other
Translation (Losses) on Comprehen-
Adjustments Investments sive Loss
- --------------------- --------------- ------------- --------------
Balance at March
31, 1998 $(3,198) $1,730 $(1,468)
Other
comprehensive
income (loss) (2,643) 1,544 (1,099)
- --------------------- --------------- ------------- --------------
Balance at March
31, 1999 (5,841) 3,274 (2,567)
Other
comprehensive loss (339) (3,455) (3,794)
- --------------------- --------------- ------------- --------------
Balance at March
31, 2000 (6,180) (181) (6,361)
Other
comprehensive
income (loss) (9,439) 3,097 (6,342)
- --------------------- --------------- ------------- --------------
Balance at March
31, 2001 $(15,619) $2,916 $(12,703)
- --------------------- --------------- ------------- --------------
Change in unrealized gains (losses) on investments, net are shown net of taxes
of $1,391,000, $(1,553,000) and $727,000 in fiscal 2001, 2000 and 1999,
respectively.
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
66
(18) 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, cash equivalents, short-term investments, receivables, accounts payable
and accrued liabilities - the carrying amount approximates fair value because of
the short maturity of these instruments.
Long-term investments, investments classified as held-to-maturity and marketable
securities - fair value is based on quoted market prices.
(19) SEGMENT INFORMATION
SFAS 131 establishes standards for the reporting by public business enterprises
of information about product lines, geographic areas and major customers. The
method for determining what information to report is based on the way that
management organizes the operating segments within the Company for making
operational decisions and assessments of financial performance. The Company's
chief operating decision maker is considered to be the Company's Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
geographic region and by product lines for purposes of making operating
decisions and assessing financial performance.
As a result of the issuance of Class B common stock, which is intended to
reflect the performance of EA.com, management considers EA.com to be a separate
reportable segment. Accordingly, prior period information has been restated to
disclose separate segments. The Company operates in two principal business
segments globally:
o Electronic Arts core ("EA Core") business segment: creation, marketing
and distribution of entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online, ongoing
management of subscriptions of online games and website advertising.
Please see the discussion regarding segment reporting in the MD&A.
67
Information about Electronic Arts business segments is presented below for the
fiscal years ended March 31, 2001, 2000 and 1999 (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,280,172 $ 42,101 $ - $1,322,273
Group sales 2,658 - (2,658) (a) -
------------------------------------------------------------------------
Total net revenues 1,282,830 42,101 (2,658) 1,322,273
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 640,239 12,003 - 652,242
Group cost of goods sold - 2,658 (2,658) (a) -
------------------------------------------------------------------------
Total cost of goods sold 640,239 14,661 (2,658) 652,242
------------------------------------------------------------------------
Gross profit 642,591 27,440 - 670,031
Operating expenses:
Marketing and sales 163,928 12,475 8,933 (c) 185,336
General and administrative 93,885 10,156 - 104,041
Research and development 248,534 77,243 63,151 (b) 388,928
Network development and support - 51,794 (51,794) (b) -
Customer relationship management - 11,357 (11,357) (b) -
Carriage fee - 8,933 (8,933) (c) -
Amortization of intangibles 12,829 6,494 - 19,323
Charge for acquired in-process technology - 2,719 - 2,719
------------------------------------------------------------------------
Total operating expenses 519,176 181,171 - 700,347
------------------------------------------------------------------------
Operating income (loss) 123,415 (153,731) - (30,316)
Interest and other income, net 16,659 227 - 16,886
------------------------------------------------------------------------
Income (loss) before benefit from income
taxes and minority interest 140,074 (153,504) - (13,430)
Benefit from income taxes (4,163) - - (4,163)
------------------------------------------------------------------------
Income (loss) before minority interest 144,237 (153,504) - (9,267)
Minority interest in consolidated joint venture (1,815) - - (1,815)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 142,422 $(153,504) $ - $ (11,082)
===========================================================================================================================
Interest income $ 17,809 $ 94 $ - $ 17,903
Depreciation and amortization 45,382 24,286 - 69,668
Identifiable assets 1,167,846 211,072 - 1,378,918
Capital expenditures 51,460 68,887 - 120,347
68
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,399,093 $ 20,918 $ - $1,420,011
Group sales 2,014 - (2,014) (a) -
------------------------------------------------------------------------
Total net revenues 1,401,107 20,918 (2,014) 1,420,011
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 700,024 4,678 - 704,702
Group cost of goods sold - 2,014 (2,014) (a) -
------------------------------------------------------------------------
Total cost of goods sold 700,024 6,692 (2,014) 704,702
------------------------------------------------------------------------
Gross profit 701,083 14,226 - 715,309
Operating expenses:
Marketing and sales 185,714 2,897 - 188,611
General and administrative 87,513 4,905 - 92,418
Research and development 205,933 34,716 21,317 (b) 261,966
Network development and support - 17,993 (17,993) (b) -
Customer relationship management - 3,324 (3,324) (b) -
Amortization of intangibles 10,866 1,123 - 11,989
Charge for acquired in-process technology 2,670 3,869 - 6,539
------------------------------------------------------------------------
Total operating expenses 492,696 68,827 - 561,523
------------------------------------------------------------------------
Operating income (loss) 208,387 (54,601) - 153,786
Interest and other income, net 16,017 11 - 16,028
------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 224,404 (54,590) - 169,814
Provision for income taxes 52,642 - - 52,642
------------------------------------------------------------------------
Income (loss) before minority interest 171,762 (54,590) - 117,172
Minority interest in consolidated joint venture (421) - - (421)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 171,341 $(54,590) $ - $ 116,751
===========================================================================================================================
Interest income $ 13,733 $ 11 $ - $ 13,744
Depreciation and amortization 39,818 6,907 - 46,725
Identifiable assets 1,085,411 106,901 - 1,192,312
Capital expenditures 97,279 37,605 - 134,884
69
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,204,689 $17,174 $ - $1,221,863
Group sales 985 - (985) (a) -
------------------------------------------------------------------------
Total net revenues 1,205,674 17,174 (985) 1,221,863
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 624,252 3,337 - 627,589
Group cost of goods sold - 985 (985) (a) -
------------------------------------------------------------------------
Total cost of goods sold 624,252 4,322 (985) 627,589
------------------------------------------------------------------------
Gross profit 581,422 12,852 - 594,274
Operating expenses:
Marketing and sales 161,029 2,378 - 163,407
General and administrative 74,995 1,224 - 76,219
Research and development 181,245 8,050 10,080 (b) 199,375
Network development and support - 8,488 (8,488) (b) -
Customer relationship management - 1,592 (1,592) (b) -
Charge for acquired in-process technology 44,115 - - 44,115
Amortization of intangibles 5,880 - - 5,880
------------------------------------------------------------------------
Total operating expenses 467,264 21,732 - 488,996
------------------------------------------------------------------------
Operating income (loss) 114,158 (8,880) - 105,278
Interest and other income, net 13,180 - - 13,180
------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 127,338 (8,880) - 118,458
Provision for income taxes 45,414 - - 45,414
------------------------------------------------------------------------
Income (loss) before minority interest 81,924 (8,880) - 73,044
Minority interest in consolidated joint venture (172) - - (172)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 81,752 $(8,880) $ - $ 72,872
===========================================================================================================================
Interest income $ 12,625 $ - $ - $ 12,625
Depreciation and amortization 40,271 190 - 40,461
Identifiable assets 898,905 2,968 - 901,873
Capital expenditures 113,939 1,881 - 115,820
(a) Represents elimination of intercompany sales of Electronic Arts
packaged goods products to EA.com; and represents elimination of
royalties paid to Electronic Arts by EA.com for intellectual property
rights.
(b) Represents reclassification of Network Development and Support and
Customer Relationship Management to Research and Development.
(c) Represents reclassification of amortization of the Carriage fee to
Marketing and Sales.
70
Information about Electronic Arts' operations in the North America and foreign
areas for the fiscal years ended March 31, 2001, 2000 and 1999 is presented
below:
- ----------------------------------------- --------------- -------------- ------------- ------------ --------------- --------------
Asia
(in thousands) Pacific
North (excluding
America Europe Japan) Japan Eliminations Total
--------------- -------------- ------------- ------------ --------------- --------------
Fiscal 2001
Net revenues from unaffiliated
customers $ 831,924 $386,728 $51,039 $52,582 $ - $1,322,273
Intercompany revenues 11,915 30,996 13,040 3,802 (59,753) -
--------------- -------------- ------------- ------------ --------------- --------------
Total net revenues 843,839 417,724 64,079 56,384 (59,753) 1,322,273
=============== ============== ============= ============ =============== ==============
Operating income (loss) (31,996) (8,914) 2,962 7,437 195 (30,316)
Interest income 14,230 3,271 402 - - 17,903
Depreciation and amortization 62,568 6,510 275 315 - 69,668
Capital expenditures 103,048 15,535 1,104 660 - 120,347
Identifiable assets 1,034,625 300,196 20,364 23,733 - 1,378,918
Long-lived assets 334,398 154,832 3,807 3,806 - 496,843
Fiscal 2000
Net revenues from unaffiliated
customers $ 846,637 $486,816 $53,187 $33,371 $ - $1,420,011
Intercompany revenues 28,701 30,440 9,059 - (68,200) -
--------------- -------------- ------------- ------------ --------------- --------------
Total net revenues 875,338 517,256 62,246 33,371 (68,200) 1,420,011
=============== ============== ============= ============ =============== ==============
Operating income 101,919 50,828 1,498 1,921 (2,380) 153,786
Interest income 11,775 1,755 214 - - 13,744
Depreciation and amortization 35,114 9,968 473 1,170 - 46,725
Capital expenditures 78,298 54,379 1,447 760 - 134,884
Identifiable assets 734,626 418,034 18,019 21,633 - 1,192,312
Long-lived assets 244,845 154,475 3,306 3,975 - 406,601
Fiscal 1999
Net revenues from unaffiliated
customers $ 704,998 $436,772 $46,725 $33,368 $ - $1,221,863
Intercompany revenues 32,216 19,473 2,800 12 (54,501) -
--------------- -------------- ------------- ------------ --------------- --------------
Total net revenues 737,214 456,245 49,525 33,380 (54,501) 1,221,863
=============== ============== ============= ============ =============== ==============
Operating income 78,826 24,536 2,853 2,192 (3,129) 105,278
Interest income 9,931 2,551 143 - - 12,625
Depreciation and amortization 29,272 9,399 506 1,284 - 40,461
Capital expenditures 54,029 58,383 418 2,990 - 115,820
Identifiable assets 596,357 268,152 20,938 16,426 - 901,873
Long-lived assets 174,582 91,546 2,051 2,992 - 271,171
For the fiscal years ended March 31, 2001, 2000 and 1999, Electronic Arts had
sales to one customer which represented 12% of total net revenues in all three
years.
71
Information about Electronic Arts' net revenues by product line for the fiscal
years ended March 31, 2001, 2000 and 1999 is presented below (in thousands):
- -------------------------- ------------------ ----------------- ---------------
2001 2000 1999
- -------------------------- ------------------ ----------------- ---------------
PC $ 408,454 $ 397,777 $ 270,793
PlayStation 309,988 586,821 519,830
PlayStation 2 258,988 - -
Affiliated label 222,278 275,333 248,105
N64 67,044 120,415 152,349
Online Subscriptions 28,878 16,771 12,570
License, OEM and Other 20,468 22,894 18,216
Advertising 6,175 - -
- -------------------------- ------------------ ----------------- ---------------
$1,322,273 $1,420,011 $1,221,863
- -------------------------- ------------------ ----------------- ---------------
72
ELECTRONIC ARTS AND SUBSIDIARIES
QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
(In thousands, except per share data)
Quarter Ended
--------------------------------------------------------- Year
June 30 Sept. 30 Dec. 31 March 31 Ended
-------- -------- -------- -------- ----------
Fiscal 2001
Consolidated
Net revenues $154,799 $219,900 $640,319 $307,255 $1,322,273
Operating income (loss) (64,377) (60,154) 125,368 (31,153) (30,316)
Net income (loss) (42,271)(a) (38,909)(b) 87,978(a) (17,880)(c) (11,082)
Class A Stockholders
Net income (loss) per share - basic $ (0.30)(a) $ (0.27)(b) $ 0.72(a) $ (0.07)(c) $ 0.09
Net income (loss) per share - diluted $ (0.33)(a) $ (0.30)(b) $ 0.63(a) $ (0.13)(c) $ (0.08)
Common stock price per share
High $ 39.06 $ 54.47 $ 55.38 $ 56.13 $ 56.13
Low $ 26.59 $ 37.06 $ 35.19 $ 29.84 $ 26.59
Class B Stockholders
Net loss per share - basic $ (0.61) $ (0.67) $ (1.24) $ (1.31) $ (3.83)
Net loss per share - diluted $ (0.61) $ (0.67) $ (1.24) $ (1.31) $ (3.83)
Common stock price per share
High N/A N/A N/A N/A N/A
Low N/A N/A N/A N/A N/A
Fiscal 2000
Net revenues $186,120 $338,887 $600,691 $294,313 $1,420,011
Operating income (loss) (849) 23,697 129,536 1,402 153,786
Net income 2,326 (d) 18,132 (d) 92,861(d) 3,432 (e) 116,751
Net income per share - basic $ 0.02 (d) $ 0.15 (d) $ 0.73(d) $ 0.03 (e) $ 0.93
Net income per share - diluted $ 0.02 (d) $ 0.14 (d) $ 0.69(d) $ 0.03 (e) $ 0.88
Common stock price per share
High $ 27.41 $ 38.10 $ 60.47 $ 51.10 $ 60.47
Low $ 22.82 $ 26.44 $ 33.22 $ 34.50 $ 22.82
Fiscal 1999
Net revenues $178,221 $245,763 $520,155 $277,724 $1,221,863
Operating income (loss) 3,050 (29,545) 102,439 29,334 105,278
Net income (loss) 3,700 (f) (25,273)(g) 72,531(h) 21,914 (h) 72,872
Net income (loss) per share - basic $ 0.03 (f) $ (0.21)(g) $ 0.60(h) $ 0.18 (h) $ 0.60
Net income (loss) per share - diluted $ 0.03 (f) $ (0.20)(g) $ 0.57(h) $ 0.17 (h) $ 0.58
Common stock price per share
High $ 27.41 $ 27.78 $ 28.00 $ 26.10 $ 28.00
Low $ 20.82 $ 19.07 $ 16.94 $ 19.13 $ 16.94
(a) Net income (loss) and net income (loss) per share include goodwill
amortization of $3.2 million, net of taxes.
(b) Net loss and net loss per share include goodwill amortization of $3.3
million, net of taxes.
(c) Net loss and net loss per share include one-time acquisition related charges
of $1.9 million, net of taxes, incurred in connection with the acquisition of
Pogo as well as goodwill amortization of $3.6 million, net of taxes.
(d) Net income and net income per share include goodwill amortization of $1.8
million, net of taxes.
(e) Net income and net income per share include one-time acquisition related
charges of $4.5 million, net of taxes, incurred in connection with the
acquisition of Kesmai and other business combinations made during the quarter as
well as goodwill amortization of $2.9 million, net of taxes.
(f) Net income and net income per share include one-time acquisition related
charges of $1.6 million, net of taxes, incurred in connection with the
acquisition of two software development companies made during the quarter.
(g) Net income and net income per share include one-time acquisition related
charges of $35.9 million, net of taxes, incurred in connection with the
acquisition of Westwood Studios as well as goodwill amortization of $0.6
million, net of taxes.
(h) Net income and net income per share include goodwill amortization of $1.7
million, net of taxes.
The Company's common stock is traded in the over-the-counter market under the
Nasdaq Stock Market symbol ERTS. The closing prices for the common stock in the
table above represent the high and low closing prices as reported on the Nasdaq
National Market.
73
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
74
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors who are nominated for election required by
Item 10 is incorporated herein by reference to the information in our definitive
Proxy Statement for the 2001 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 "Compensation of Executive
Officers" specifically excluding the "Compensation Committee Report on Executive
Compensation".
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 "Principal Stockholders".
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."
75
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 46
Consolidated Balance Sheets as of March 31, 2001
and 2000 47
Consolidated Statements of Operations for the
Years Ended March 31, 2001, 2000 and 1999 48
Consolidated Statements of Stockholders' Equity
for the Years Ended March 31, 2001, 2000 and 1999 49
Consolidated Statements of Cash Flows for the
Years Ended March 31, 2001, 2000 and 1999 51
Notes to Consolidated Financial Statements for
the Years Ended March 31, 2001, 2000 and 1999 52- 73
2. Financial Statement Schedule.
The following financial statement schedule of Electronic Arts for the
years ended March 31, 2001, 2000 and 1999 is 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)
3.04 Amended and Restated Certificate of Incorporation of
Electronic Arts Inc.
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 2001 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)
76
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)
10.22 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)
77
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. (28)
10.35 Lease Agreement by and between Registrant and Don Mattrick
dated October 16, 1996. (29)
10.36 Amended and Restated Guaranty from Electronic Arts Inc. to
Flatirons Funding, LP dated March 7, 1997. (30)
10.37 Amended and Restated Agreement for Lease between Flatirons
Funding, LP and Electronic Arts Redwood Inc. dated March 7,
1997. (30)
10.38 Amendment No. 1 to Lease Agreement between Electronic Arts
Redwood Inc. and Flatirons Funding, LP dated March 7, 1997.
(30)
10.39 Employment Agreement by and between the Registrant and John
Riccitiello dated August 29, 1997. (31)
10.40 Lease Agreement by and between Registrant and John Riccitiello
dated August 29, 1997. (31)
10.41 Employment Agreement by and between Registrant and James
"Rusty" Russell Rueff, Jr. dated September 9, 1998. (32)
10.42 Lease Agreement by and between Registrant and Louisville
Commerce Realty Corporation, dated April 1, 1999. (32)
10.43 Option agreement, agreement of purchase and sale, and escrow
instructions for Zones 2 and 4, Electronic Arts Business Park,
Redwood Shores California, dated April 5, 1999. (32)
10.44 Lease Agreement by and between Registrant and Spieker
Properties, L.P., dated September 3, 1999. (33)
10.45 Master Lease and Deed of Trust by and between Registrant and
Selco Service Corporation, dated December 6, 2000. (34)
10.46 Amendment No. 1 to Amended and Restated Credit Agreement by
and among Flatirons Funding LP and The Dai-Ichi Kangyo Bank,
Limited, New York Branch, dated February 21, 2001.
10.47 Residential Purchase Agreement by and between Registrant and
John Riccitiello, dated August 14, 2000.
10.48 Office Service Agreement by and between Pogo.com Inc and 300
California Associates, LLC, dated September 17, 1999.
10.49 Office Lease Agreement by and between Pogo.com Inc and Fifth
Avenue LLC, dated May 5, 2000.
10.50 Office Lease Agreement by and between Registrant and
California Plaza of Walnut Creek, Inc., dated February 1,
2001.
21.01 Subsidiaries of the Registrant.
23.01 Consent of KPMG, LLP, Independent Auditors.
23.02 Consent of Ernst & Young LLP, Independent Auditors (32)
99.01 Report of Ernst & Young LLP, Independent Auditors (32)
- --------------------------------------------------------------------------------
78
(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.
(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.
79
(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 reference to Exhibit 10.02 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(28) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1996 (the "1996 Form 10-K").
(29) Incorporated by reference to Exhibit 10.35 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
(30) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1997 (the "1997 Form 10-K").
(31) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(32) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1999 (the "1999 Form 10-K").
(33) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
(34) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2000.
80
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
2001.
(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 83.
81
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 28, 2001
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 28th of June 2001.
Name Title
/s/ Lawrence F. Probst III Chairman of the Board
- ---------------------------------------- and Chief Executive Officer
(Lawrence F. Probst III)
/s/ E. Stanton McKee, Jr. Executive Vice President and Chief
- ---------------------------------------- Financial and Administrative Officer
(E. Stanton McKee, Jr.)
/s/ David L. Carbone Senior Vice President, Finance
- ---------------------------------------- (Principal Accounting Officer)
(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)
82
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2001, 2000 and 1999
(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, 2001
Allowance for doubtful
accounts and returns $ 65,067 $212,263 $ (3,126) $184,371 $ 89,833
======== ======== ======== ======== ========
Year Ended March 31, 2000
Allowance for doubtful
accounts and returns $ 72,850 $179,952 $ 39 $187,774 $ 65,067
======== ======== ======== ======== ========
Year Ended March 31, 1999
Allowance for doubtful
accounts and returns $ 51,575 $161,297 $ (369) $139,653 $ 72,850
======== ======== ======== ======== ========
(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).
83
ELECTRONIC ARTS INC.
2001 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.03 Description of Registrant's FY 2002 Executive Bonus Plan
10.46 Amendment No. 1 to Amended and Restated Credit Agreement by and among
Flatirons Funding LP and The Dai-Ichi Kangyo Bank, Limited, New York
Branch, dated February 21, 2001.
10.47 Residential Purchase Agreement by and between Registrant and John
Riccitiello, dated August 14, 2000.
10.48 Office Service Agreement by and between Pogo.com Inc and 300 California
Associates, LLC, dated September 17, 1999.
10.49 Office Lease Agreement by and between Pogo.com Inc and Fifth Avenue
LLC, dated May 5, 2000.
10.50 Office Lease Agreement by and between Registrant and California Plaza
of Walnut Creek, Inc., dated February 1, 2001.
21.01 Subsidiaries of the Registrant
23.01 Consent of KPMG, LLP, Independent Auditors
84