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UNITED STATES
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, 2002
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 ___
--
Indicate 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 4, 2002 was
$5,685,093,156.
As of June 4, 2002 there were 138,897,712 shares of Registrant's Class A common
stock, $.01 par value, outstanding, and 6,233,463 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 2002 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 93 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 93.
ELECTRONIC ARTS INC.
2002 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 51
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 83
PART III
Item 10. Directors and Executive Officers of the Registrant 84
Item 11. Executive Compensation 84
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 84
Item 13. Certain Relationships and Related Transactions 84
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 85
Signatures 91
Exhibit Index 93
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 45 to 50.
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:
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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, 2002, our business was
comprised of the following:
. Distribution of approximately 90 titles that we developed and/or
published under one of our brand names in North America, including
older titles marketed as "Classics".
. Distribution of localized versions of our products in the rest of the
world.
. Distribution of additional titles that were either developed by other
software publishers (that we refer to as Affiliated Labels) or titles
we have assisted in the development of with other software publishers
(referred to as Co-Published titles). In North America, we distributed
approximately 30 Affiliated Label and Co-Published titles.
. Of the titles shipped in fiscal 2002, there were 16 titles that sold
over one million units.
Since our inception, we have developed and are developing products for
42 different hardware platforms, including the following:
. IBM(R) PC and compatibles
. 32-bit Sony PlayStation(R)
. 32-bit Nintendo Game Boy(R) Advance and Game Boy Color
. 64-bit Nintendo(R) 64
. 128-bit Sony PlayStation 2
. 128-bit Microsoft Xbox(TM)
. 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 Madden,
National Basketball Association, PGA TOUR, Tiger Woods, National Hockey League,
Warner Bros. (Harry Potter),
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MGM/Danjaq (James Bond) and National Football League. We maintain development
studios in California, Canada, United Kingdom, Florida, Texas, Japan,
Washington, Virginia 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 both fiscal 2002 and
2001, approximately 37% of our net revenues were generated by international
operations, compared to 40% in fiscal 2000.
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 represents Electronic Arts' online and e-Commerce businesses.
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(TM), 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. We are the leading online games site in
terms of unique monthly visitors according to March 2002 Media Metrix results.
To date, the majority of our subscription revenues have been generated by Ultima
Online, Ultima Online: The Second Age, Ultima Renaissance, Ultima Online Third
Dawn and Ultima Online Lord Blackthorn's Revenge (collectively referred to as
Ultima Online) and Motor City Online. In addition, our packaged goods revenues
for online-only games have primarily been generated by these titles. The
packaged good product is sold through our traditional distribution channel to
various retailers. The end customer registers for EA.com's online service to
enjoy online play on a month-to-month subscription basis. In addition, EA.com
generates advertising revenues on the world wide web and the AOL Games Channel.
Investments and Joint Ventures
Acquisitions
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. 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. See Note 13 of the
Notes to 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. 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 13 of the Notes to Consolidated
Financial Statements, included in item 8 hereof.
Other Business Combinations
Additionally, during fiscal 2000, we acquired two software development
companies. See Note 13 of the Notes to Consolidated Financial Statements,
included in item 8 hereof.
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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 titles created by Square. We have the exclusive right to
distribute in North America products published by this joint venture. Either
party may terminate the existence of Square EA and the distribution agreement
effective March 31, 2003. We own a 30% minority interest in this joint venture
while Square owns 70%.
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 13 of the Notes to 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, 2002, 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
Proprietary Optical
Nintendo Nintendo GameCube 2001 Format 128-bit
Microsoft Xbox 2001 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. The PlayStation 2
console is a 128-bit, Digital Versatile 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 launched the Nintendo GameCube console in Japan in September
2001, North America in November 2001 and in Europe in May 2002. Nintendo
GameCube provides for games which are delivered and played using a proprietary
optical format. We currently have various products under development for the
Nintendo GameCube.
5
Microsoft
Microsoft launched the Xbox console in North America in November 2001,
in Japan in February 2002 and in Europe in March 2002. The Microsoft Xbox is a
128-bit DVD based system. We currently have various products under development
for the Microsoft Xbox.
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. Our new product releases in fiscal 2003 will be primarily for the
PlayStation 2, PC, Nintendo GameCube and Xbox. We are also scheduled to release
two online network gaming products during fiscal 2003. 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 years 2002 and
2001, the video and computer games industry has experienced a platform
transition from 32-bit CD-based and 64-bit cartridge-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 continued with the launches of the
Nintendo GameCube and Microsoft's Xbox in calendar year 2001. As the market
continues to shift to the current generation systems, sales of 32-bit and 64-bit
products have been declining and we expect a continued significant decline in
fiscal 2003. 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 March 2002 Media Metrix results, EA.com continues to
retain its position as the #1 gamesite in terms of unique monthly visitors with
over 13.3 million unique visitors for the month of March across all public and
AOL properties. In addition, EA.com comprised approximately 42% of all time
spent on Internet gamesites in March, totaling 4.6 billion minutes. We believe
the online gaming market will continue to grow due to the following factors:
. Increasing popularity of PC gaming;
. Growing interest in multiplayer games;
. Growth in the number of households with PCs and Internet connections;
. General growth in internet usage, including the number of users,
communities and increased frequency of use by consumers;
. Rapid innovation of new online entertainment experiences;
. Mass market adoption of broadband technologies; and
. 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:
. Console & PC Game Publishers. Other game publishers including Sony
Computer Entertainment of America ("Sony"), Nintendo, Sega,
Activision, THQ, Acclaim, Vivendi Universal, Microsoft, LucasArts,
Interplay, Infogrames and Eidos, are each developing individual online
games and games with online components. Currently, Flipside Inc., a
subsidiary of Vivendi Universal, operates Flipside Network, an online
game network that consists of Flipside.com, an online site that
targets unique users and advertisers with specific channel offerings,
including iWin.com, Uproar.com and Virtualvegas.com. Sony will launch
its online service later this year. PlayStation 2 owners will be
required to purchase a network adapter that will enable the console to
connect to the network. Microsoft's Xbox has built-in broadband
connectivity. Microsoft has announced its intentions to launch a
service called Xbox Live in the fall of 2002, an online gaming service
that will allow consumers for a monthly fee to play multi-player Xbox
games with each other. In 2002, Sega announced its intentions to
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develop games with online capabilities for the Nintendo GameCube,
PlayStation 2 and Xbox consoles. Each of these companies may compete
with EA.com for advertising, subscription and e-Commerce sales.
. Portals. With respect to advertising and e-Commerce sales, EA.com will
also compete with general purpose consumer web sites such as Yahoo,
Lycos, and Microsoft Network. In addition, many of these Internet
portals offer gaming sites such as Yahoo 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.
. Family Oriented Game Sites. A number of sites such as Station.com,
Uproar.com and iWin.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.
. 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.
. 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.
. 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 40 playable online games, which consist primarily of
card and parlor games.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 2002, approximately 28% of our net revenues were derived
from sales of software for the PlayStation 2 compared to 20% in fiscal 2001. We
released 18 titles worldwide in fiscal 2002 for the PlayStation 2 compared to 15
titles in fiscal 2001. Key releases for the year included Madden NFL(TM) 2002,
James Bond 007 in...Agent Under Fire(TM), FIFA 2002, NBA Street, NBA Live 2002,
NCAA Football 2002, SSX Tricky, NHL 2002 and NASCAR Thunder 2002. Revenues
increased for fiscal 2002 due to the higher installed base of PlayStation 2
hardware and more titles, including catalogue, available on the platform
compared to the prior year. We expect revenues from PlayStation 2 products to
continue to grow in fiscal 2003, but as revenues for these products increase, we
do not expect to maintain these growth rates.
In fiscal 2002, approximately 11% of our net revenues were derived
from sales of software for the PlayStation compared to 23% in fiscal 2001.
During fiscal 2002, we released five PlayStation games compared to 17 in fiscal
2001. As expected, PlayStation sales decreased for fiscal 2002 compared to the
prior year primarily attributable to releasing fewer games and to the
PlayStation 2 platform transition. Most of our franchises experienced
significant decreases from prior year releases. 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 2003. 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 manufacture its
PlayStation and PlayStation 2 CDs and DVDs for 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".
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Nintendo
In fiscal 2002, we released our first five Nintendo GameCube titles,
Madden NFL 2002, James Bond 007 in...Agent Under Fire, SSX Tricky, NBA Street
and FIFA Soccer 2002, following the platform's launch in Japan in September 2001
and in North America in November 2001.
During fiscal 2002, we released one title for the Nintendo 64
("N64(R)") compared to three titles in fiscal 2001. In fiscal 2002,
approximately 1% of our net revenues were derived from the sale of N64 products
compared to 5% in 2001. 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. We do not intend to release any new N64 products in fiscal 2003.
Microsoft
During fiscal 2002, following the launch of the Xbox platform in North
America in November 2001, in Japan in February 2002 and in Europe in March 2002,
we released our first ten Xbox titles. Titles released included Madden NFL 2002,
NBA Live 2002, James Bond 007 in...Agent Under Fire, NASCAR Thunder 2002, NHL
2002, Triple Play(TM) 2002, SSX Tricky, Knockout Kings 2002 and F1 2001.
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 March 2002 Media Metrix
Top 50 Web and Digital Media Properties report which combines unduplicated
home/work usage in the U.S., the total number of unique monthly visitors to the
AOL branded properties that will have access to the EA.com games site was 92
million. 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 2002, we generated approximately 61% of our revenues from EA
Studio products released during the year. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult". As of March 31, 2002, we were actively marketing
approximately 90 titles, comprising over 120 stock keeping units, or sku's, that
were published by our development divisions and subsidiaries, EA Studios. During
fiscal 2002, we introduced 32 EA Studios titles, representing 64 sku's, compared
to 35 EA Studios titles, comprising 55 sku's, in fiscal 2001. In fiscal 2002, we
had 16 titles that sold over one million units. In both fiscal 2001 and 2000, we
had 14 titles that sold over one million units.
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 2002, we had one title, Harry Potter and the Sorcerer's
Stone(TM), published on four different platforms, which represented
approximately 12% of our total fiscal 2002 net revenues. For fiscal 2001 and
2000, no title represented revenues greater than 10% of our total fiscal 2001
and 2000 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 2002, 2001 and 2000. 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 $30.00 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 2002, our product releases were for PlayStation 2, PC,
Xbox, PlayStation, Nintendo GameCube, Game Boy Advance, Game Boy Color, online
Internet play and N64. Our planned product introductions for fiscal 2003 are for
the PlayStation 2, PC, Nintendo GameCube, Xbox, PlayStation, Game Boy Advance,
online Internet play and 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. Our goal is to be the leading provider of interactive entertainment
on the Internet. We will invest in the development of tools and technologies
associated with the introduction of key online offerings in fiscal 2003.
PlayStation has achieved significant market acceptance in all geographic
territories. However, as the PlayStation console market has reached maturity, we
expect sales of PlayStation products to continue to decline significantly in
fiscal 2003. Most of the console video game products are convertible for use on
multiple advanced hardware systems. We had research and development expenditures
of $387.7 million in fiscal 2002, $388.9 million in fiscal 2001 and $262.0
million in fiscal 2000. See Risk Factors - "Product development schedules are
frequently unreliable and make predicting quarterly results difficult".
EA.com Web Site
Free Content. In fiscal 2002, EA.com eliminated its free games
offering under various "channels" on the site and redesigned the site to reflect
this change in strategy. As part of this redesign, EA.com eliminated the
majority of its games on the EA Games Channel and integrated its remaining
browser-based games with Pogo free games subsequent to the Pogo acquisition.
EA.com now offers free games on its site under the following three brands: Pogo
brand, EA Games brand, and EA Sports brand. The majority of the free games are
original games designed solely for online play while some of the product
offerings capitalize on existing Electronic Arts franchises adapted for game
play on the Internet. The product offerings within each brand incorporate some
or all of the following:
. Pogo. EA.com currently offers approximately 35 free games under this
brand. The games offering, geared towards family entertainment,
consists of card games, board games, casino games, word games, trivia
games, puzzles, Bingo, and other products with appeal. This category
leverages prizes, tournaments, community and Pogo's strength and
popularity in free, familiar games to significantly increase EA.com's
appeal to the broad consumer market.
. EA Games. EA.com currently offers 15 free games under this brand. The
EA Games offering consists of original arcade style games and other
original EA games designed solely for online play, such as Tank
Hunter, Bunny Luv and Meteor Madness.
. EA Sports. EA.com currently offers 10 free games under this brand.
Some of the games in this category leverage existing Electronic Arts'
franchises, such as Knockout Kings and Nascar Web Racing, to develop a
community of sports gamers. In addition, there are original games
designed solely for online play such as Pebble Beach Golf, Pro 3-Point
and It's Outta Here!
Paid Content. In addition to the free games, EA.com offers premium
pay-to-play persistent state world games on its website. In order to access
these premium games, the player must purchase a CD-ROM through retail stores or
through our online store which will entitle the consumer to one free month of
game play. Thereafter, the player must pay a monthly subscription fee in order
to continue playing. These persistent state world games are designed to target
the avid gamers: 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 features immersive experiences and
sophisticated game play appealing to dedicated gamers, as well as new forms of
cutting-edge Internet entertainment targeted to mass market gamers. Currently,
this offering capitalizes on the success of our existing Ultima Online product
as well as Motor City Online. EA.com expects to release Earth & Beyond and The
Sims Online(TM) in the future.
Each of the categories above focuses on targeting and serving its
specific consumer group by:
. Offering engaging and accessible online games;
. 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;
. Delivering innovative content that continually entertains; and
. Establishing a direct relationship with each audience member through
personalization and customization of user experiences.
9
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 and Maxis. 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 and NBA Street games.
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, 2002, we distributed approximately 30
Affiliated Label and Co-Published titles in North America. 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 13 of the Notes to 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. Either party may terminate the existence of Square EA and
the distribution agreement effective March 31, 2003. In fiscal 2002, Square EA
published Final Fantasy(R) X for the PlayStation 2, 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. We had sales to one customer, Wal-Mart Stores, Inc., which
represented 14% of total net revenues in fiscal 2002 and 12% in both fiscal 2001
and 2000.
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 may decide to provide
price protection under certain circumstances for our personal computer and video
game system products after we analyze: inventory remaining in the channel, the
rate of inventory sell through in the channel, and our remaining inventory on
hand. We maintain a policy of exchanging products or giving credits, but do not
give cash refunds. Moreover, the risk of product returns for our products on
mature platforms may increase as new hardware platforms, such as Xbox, Nintendo
GameCube and PlayStation 2, become more popular. 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
historical returns, current sell through of distributor and retailer inventory
of our products, current trends in the video game market and the overall
economy, changes in customer demand and acceptance of our products and other
related 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. 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 January 2002, one of our retail
customers, Kmart, declared bankruptcy. We have adequately reserved for our
exposure to Kmart. In addition, an increasing number of companies are competing
for access to these channels. 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
10
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
We operate in two principal business segments globally:
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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 and Note 18 of
the Notes to Consolidated Financial Statements, included in items 7 and 8
hereof.
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 18 of the Notes to Consolidated Financial Statements, included in item 8
hereof.
International net revenues increased by 29% to $631,431,000, or 37% of
consolidated fiscal 2002 net revenues, compared to $490,349,000 or 37% of
consolidated fiscal 2001 net revenues due to the following:
. Europe's net revenues increased 34% primarily due to higher PlayStation 2,
AL and PC sales, partially offset by the expected decrease of revenues from
Sony PlayStation. PlayStation 2 launched in November 2000. Consequently,
fiscal 2001 includes five months of revenues as compared to twelve months
of revenues from the PlayStation 2 in fiscal 2002, resulting in an 80%
increase in PlayStation 2 revenues in fiscal 2002 as compared to fiscal
2001.
. Asia Pacific's net revenues increased by 5% compared to the prior year
primarily due to higher PlayStation 2, Game Boy Color(R) and PC revenue,
partially offset by the expected decrease in PlayStation and Nintendo 64
sales, and an unfavorable exchange rate comparison of approximately 10%.
PlayStation 2 revenues increased by 46%, partially offset by a 34% decrease
in PlayStation revenues in fiscal 2002 as compared to fiscal 2001.
. Japan's net revenues increased by 11% compared to the prior year primarily
due to higher AL revenue and revenue generated from sales of PlayStation,
Nintendo GameCube and Xbox products, offset by the strong sales of our
first PlayStation 2 title, FIFA Soccer World Championship, in the prior
year and weakness in the Yen currency during fiscal 2002 resulting in a
rate decrease of approximately 14% from fiscal 2001. Also, Japan did not
benefit from our primary PlayStation 2 releases during the current fiscal
year, which have more appeal to the North American market. PlayStation 2
revenues decreased by 50% in fiscal 2002 as compared to fiscal 2001.
Though international revenues are expected to grow in fiscal 2003,
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 of content, consumer privacy and online delivery 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, Xbox and
Nintendo GameCube 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".
11
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. See Risk Factors - "Our
business is both seasonal and cyclical".
Employees
As of March 31, 2002, we employed approximately 3,500 people, of whom
over 1,400 were outside the United States. Of this amount, there were over 400
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 - "Because of the
competition for qualified technical, creative, marketing and other personnel, we
may not be able to attract and retain the personnel necessary for our
businesses".
12
Item 2: Properties
Our principal administrative, sales and marketing, research and
development, and support facility is located in Redwood City, California, 20
miles south of San Francisco.
In February of 1995, we entered into a build-to-suit lease with a
financial institution on our headquarter's facility in Redwood City, California,
which was extended in July of 2001 and runs through July of 2006. We accounted
for this arrangement as an operating lease in accordance with Statement of
Financial Accounting Standards No. 13 ("SFAS 13"), "Accounting for Leases", as
amended. Existing campus facilities developed in phase one comprise a total of
350,000 square feet and provide space for sales, marketing, administration and
research and development functions. We have an option to purchase the property
(land and facilities) for $145,000,000 or, at the end of the lease, to arrange
for (1) an additional extension of the lease or (2) sale of the property to a
third party with us retaining an obligation to the owner for the difference
between the sale price and the guaranteed residual value of up to $128,900,000
if the sales price is less than this amount, subject to certain provisions of
the lease.
In December 2000, we entered into a second build-to-suit lease with a
financial institution for a five year term from December 2000 to expand our
headquarter's facilities and develop adjacent property adding approximately
310,000 square feet to our campus. We expect to complete construction in June of
2002. We accounted for this arrangement as an operating lease in accordance with
SFAS 13, as amended. The facilities will provide space for marketing, sales and
research and development. We have an option to purchase the property for
$127,000,000 or, at the end of the lease, to arrange for (1) an extension of the
lease or (2) sale of the property to a third party with us retaining an
obligation to the owner for the difference between the sale price and the
guaranteed residual value of up to $118,800,000 if the sales price is less than
this amount, subject to certain provisions of the lease.
Lease rates are based upon the Commercial Paper Rate. The two lease
agreements described above require us to maintain certain financial covenants,
all of which we were in compliance with as of March 31, 2002.
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. 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, and a 5,000 sq. ft. development facility in Warrington, England.
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 15,678 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 11 of the Notes to 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, 2002.
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 52 Chairman and Chief
Executive Officer
Don A. Mattrick 38 President, Worldwide Studios
John S. Riccitiello 42 President and Chief
Operating Officer
William B. Gordon 52 Executive Vice President and
Chief Creative Officer
E. Stanton McKee, Jr. 57 Executive Vice President and
Chief Financial and
Administrative Officer
Nancy L. Smith 49 Executive Vice President and
General Manager, North
American Publishing
David L. Carbone 51 Senior Vice President, Finance
David Gardner 37 Senior Vice President, European
Publishing
Ruth A. Kennedy 47 Senior Vice President,
General Counsel and
Secretary
V. Paul Lee 37 Senior Vice President and Chief
Operating Officer,
Worldwide Studios
J. Russell Rueff, Jr. 40 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, 2000 through March 31,
2002. 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, 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
Fiscal Year Ended March 31, 2002:
(for Class A common stock)
First Quarter $63.04 $48.31
Second Quarter 60.60 44.50
Third Quarter 66.01 42.40
Fourth Quarter 62.95 51.16
There were approximately 1,800 holders of record of our Common Stock as of June
1, 2002. 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 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 1,724,675 $1,322,273 $ 1,420,011 $ 1,221,863 $908,852
Cost of goods sold 807,611 652,242 704,702 627,589 481,233
-------------------------------------------------------------------------------
Gross profit 917,064 670,031 715,309 594,274 427,619
Operating expenses:
Marketing and sales 241,109 185,336 188,611 163,407 128,308
General and administrative 107,059 104,041 92,418 76,219 57,838
Research and development 387,736 388,928 261,966 199,375 145,732
Amortization of intangibles 25,418 19,323 11,989 5,880 --
Charge for acquired in-process technology -- 2,719 6,539 44,115 1,500
Merger costs -- -- -- -- 10,792
Restructuring and asset impairment charges 20,303 -- -- -- --
-------------------------------------------------------------------------------
Total operating expenses 781,625 700,347 561,523 488,996 344,170
-------------------------------------------------------------------------------
Operating income (loss) 135,439 (30,316) 153,786 105,278 83,449
Interest and other income, net 12,848 16,886 16,028 13,180 24,811
-------------------------------------------------------------------------------
Income (loss) before provision for (benefit
from) income taxes and minority interest 148,287 (13,430) 169,814 118,458 108,260
Provision for (benefit from) income taxes 45,969 (4,163) 52,642 45,414 35,726
-------------------------------------------------------------------------------
Income (loss) before minority interest 102,318 (9,267) 117,172 73,044 72,534
Minority interest in consolidated joint
venture (809) (1,815) (421) (172) 28
-------------------------------------------------------------------------------
Net income (loss) $ 101,509/(a)/ $ (11,082)/(b)/ $ 116,751/(c)/ $ 72,872/(d)/ $ 72,562/(e)/
-------------------------------------------------------------------------------
Net income per share:
Basic N/A N/A $ 0.93 $ 0.60 $ 0.62
Diluted N/A N/A $ 0.88 $ 0.58 $ 0.60
Number of shares used in computation:
Basic N/A N/A 125,660 121,495 117,734
Diluted N/A N/A 132,742 126,545 121,917
Class A common stock:
Net income (loss):
Basic $ 124,256 $ 11,944 N/A N/A N/A
Diluted $ 101,509 $ (11,082) N/A N/A N/A
Net income (loss) per share:
Basic $ 0.91 $ 0.09 N/A N/A N/A
Diluted $ 0.71 $ (0.08) N/A N/A N/A
Number of shares used in computation:
Basic 136,832 131,404 N/A N/A N/A
Diluted 143,142 132,056 N/A N/A N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (22,747) $ (23,026) N/A N/A N/A
Net loss per share:
Basic $ (3.77) $ (3.83) N/A N/A N/A
Diluted $ (3.77) $ (3.83) N/A N/A N/A
Number of shares used in computation:
Basic 6,026 6,015 N/A N/A N/A
Diluted 6,026 6,015 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 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term
investments $ 796,936 $ 466,492 $ 339,804 $ 312,822 $ 374,560
Marketable securities 6,869 10,022 236 4,884 3,721
Working capital 699,561 478,701 440,021 333,256 408,098
Long-term investments - 8,400 8,400 18,400 24,200
Total assets 1,699,374 1,378,918 1,192,312 901,873 745,681
Total liabilities 452,982 340,026 265,302 236,209 181,713
Minority interest 3,098 4,545 3,617 2,733 -
Total stockholders' equity 1,243,294 1,034,347 923,393 662,931 563,968
Note:
(a) Net income includes restructuring and asset impairment charges of $14.0
million, net of taxes and goodwill amortization of $17.5 million, net
of taxes.
(b) Net loss includes 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.
(c) Net income includes 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.
(d) Net income includes 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.
(e) Net income includes 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 pro forma
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 45 to 50 of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical because
they are both important to the portrayal of our financial condition and results
of operations and their application places the most significant demands on
management's judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for
these critical accounting policies are described in the following paragraphs.
For all of these policies, management cautions that actual results may differ
materially from these estimates under different assumptions or conditions.
Sales allowances and bad debt reserves
We derive revenues from sales of our packaged goods product, subscriptions of
online service, sales of packaged goods through our online store and website
advertising. Product revenue is recognized net of an allowance for returns. We
also 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 may decide to provide price
protection under certain circumstances for our personal computer and video game
system products after we analyze: inventory remaining in the channel, the rate
of inventory sell through in the channel, and our remaining inventory on hand.
We maintain a policy of exchanging products or giving credits, but do not give
cash refunds.
We estimate potential future product returns, price protection and
stock-balancing programs related to current period product revenue. We analyze
historical returns, current sell through of distributor and retailer inventory
of our products, current trends in the video game market and the overall
economy, changes in customer demand and acceptance of our products and other
related factors when evaluating the adequacy of the sales returns and price
protection allowances. In addition, management monitors and manages 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. In the past,
actual returns have not generally exceeded our reserves. However, actual returns
in any future period are inherently uncertain as unsold products in the
distribution channels are exposed to rapid changes in consumer preferences,
market conditions or technological obsolescence due to new platforms, product
updates or competing products. For example, the risk of product returns for our
products on mature platforms may increase as new hardware platforms, such as
Xbox, Nintendo GameCube and PlayStation 2, become more popular. While management
believes it can make reliable estimates for these matters, if we changed our
assumptions and estimates, our returns reserves would change, which would impact
the net revenue we report. In addition, if actual returns were significantly
greater than the reserves we have established, the actual results would decrease
our reported revenue. Conversely, if actual returns were significantly less than
our reserves, this would increase our reported revenue.
Similarly, management must use significant judgment and make estimates in
connection with establishing allowances for doubtful accounts in any accounting
period. Management analyzes customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. Material differences may result in the amount and timing of
our bad debt expense for any period if management made different judgments or
utilized different estimates. If our customers experience financial difficulties
and are not able to meet their ongoing financial obligations to us, our results
of operations may be adversely impacted. For example, in January 2002, one of
our retail customers, Kmart, declared bankruptcy. We have adequately reserved
for our exposure to Kmart. Our distribution channels have been characterized by
change, including consolidations and financial difficulties of certain
distributors and retailers.
20
Our gross accounts receivable balance was $306,365,000 and our allowance for
product returns, pricing allowances and doubtful accounts was $115,870,000 as of
March 31, 2002. As of March 31, 2001, our gross accounts receivable balance was
$264,282,000 and our allowance for product returns, pricing allowances and
doubtful accounts was $89,833,000.
Prepaid royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
co-publishing and/or distribution affiliates and license fees paid to
celebrities, professional sports organizations and other organizations for use
of their trade name and content. 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. We evaluate the future realization of prepaid
royalties quarterly and charge to research and development expense any amounts
that we deem unlikely to be realized through product sales. We rely on
forecasted revenue to evaluate the future realization of prepaid royalties. If
actual revenues, or revised forecasted sales, fall below the initial forecasted
sales, the charge to research and development expense may be larger than
anticipated in any given quarter. Once the charge has been taken to research and
development expense, that amount will not be expensed in future quarters when
the product has shipped. The current portion of prepaid royalties, included in
other current assets, was $65,484,000 at March 31, 2002 and $46,264,000 at March
31, 2001. The long-term portion of prepaid royalties, included in other assets,
was $1,164,000 at March 31, 2002 and $9,664,000 at March 31, 2001.
Valuation of long-lived assets, including goodwill and other intangible assets
Under current accounting standards, we make judgments about the remaining useful
lives of goodwill, purchased intangible assets and other long-lived assets
whenever events or changes in circumstances indicate an other than temporary
impairment in the remaining value of the assets recorded on our balance sheet.
In order to judge the remaining useful life of an asset, management makes
various assumptions about the value of the asset in the future. This may include
assumptions about future prospects for the business that the asset relates to
and typically involves computations of the estimated future cash flows to be
generated by these businesses. Please refer to the Operations by Segment
discussion of the Management's Discussion and Analysis of Financial Condition
and Results of Operations for discussions of EA Core and EA.com. For our EA Core
division, our future net cash flows are primarily dependent on the sale of
products for play on proprietary video game platforms. The success of our
products is affected by the ability to accurately predict which platforms and
which products we develop will be successful. Also, our revenues and earnings
are dependent on our ability to meet our product release schedules. For our
EA.com division, the future net cash flows are dependent on the success of
online games. Offering games solely for online play is a substantial departure
from our traditional business of selling packaged software games. Because of our
inexperience in predicting usage patterns for our games, we may not be effective
in achieving success that may otherwise be attainable from offering our games
online. Due to these and other factors described in our Risk Factors, we may not
realize the future net cash flows necessary to recover our long-lived assets.
For example, our product Majestic(TM) and our Platinum offering, which contained
certain browser-based entertainment games, were launched with a monthly
subscription pricing model and obtained only limited commercial success.
Accordingly, we did not realize our projected cash flows and discontinued these
offerings as part of EA.com's restructuring plan.
Based on these judgments and assumptions, management determines whether we need
to take an impairment charge to reduce the value of the asset stated on our
balance sheet to reflect its estimated fair value. Judgments and assumptions
about future values and remaining useful lives are complex and often subjective.
They can be affected by a variety of factors, including but not limited to,
significant negative industry or economic trends, significant changes in the
manner or use of the acquired assets or the strategy of our overall business and
significant underperformance relative to expected historical or projected future
operating results. Although we believe the judgments and assumptions management
has made in the past have been reasonable and appropriate, there is nonetheless
a high degree of uncertainty and judgment involved. For example, as part of a
restructuring plan to reduce EA.com's workforce and consolidate facilities in
the fiscal year ended March 31, 2002, we recorded impairment charges to write
down certain of EA.com's depreciable assets and certain intangibles to their
estimated fair value and to write off certain assets which were abandoned. The
impairment charges were based on management's projections regarding the assets'
remaining useful lives and future values. The EA.com business is still in the
growing stages, therefore evaluating its business and prospects is more
difficult than would be the case for a more mature business. We continue to
encounter the risks and difficulties faced with launching a new business. We
continue to look for ways to streamline the business by consolidating systems
and reducing infrastructure costs. Different judgments and assumptions could
materially impact our reported financial results. More conservative assumptions
of the anticipated future benefits from these businesses would result in greater
impairment charges, which would decrease net income and result in lower asset
values on our balance sheet. Conversely, less conservative assumptions would
result in smaller impairment charges, higher net income and higher asset values.
Impairment charges on long-lived assets amounted to $12,818,000 for the fiscal
year ended March 31, 2002. There were no impairment charges on long-lived assets
for the years ended March 31, 2001 and 2000.
On April 1, 2002, we adopted Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", which supersedes
Accounting Principles Board Opinion No. 17 "Intangible Assets". As a result of
adopting this standard, we will continue to amortize finite-lived intangibles,
but will no longer amortize certain other intangible assets, most notably
goodwill
21
and acquired workforce, which had a net book value at March 31, 2002 of
$69,050,000. Amortization of goodwill and acquired workforce totaled
approximately $13,125,000 for fiscal 2002, approximately $9,182,000 for fiscal
2001 and approximately $6,411,000 for fiscal 2000. Based on intangible assets as
of March 31, 2002, we estimate that amortization of finite-lived intangibles
will total approximately $8,700,000 for fiscal 2003. Following adoption of SFAS
142, we will continue to evaluate whether any event has occurred which might
indicate that the carrying value of an intangible asset is not recoverable. In
addition, SFAS 142 requires that goodwill be subject to at least an annual
assessment for impairment by applying a fair value-based test.
Income taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our current tax exposures in each
jurisdiction including the impact, if any, of additional taxes resulting from
tax examinations as well as making judgments regarding the recoverability of
deferred tax assets. To the extent recovery of deferred tax assets is not likely
based on our estimation of future taxable income in each jurisdiction, a
valuation allowance is established. Tax exposures can involve complex issues and
may require an extended period to resolve. To determine the quarterly tax rate,
we are required to estimate full-year income and the related income tax expense
in each jurisdiction. The estimated effective tax rate is adjusted for the tax
related to significant unusual items. Changes in the geographic mix or estimated
level of annual pre-tax income can effect the overall effective tax rate.
RESULTS OF OPERATIONS
Comparison of Fiscal 2002 to 2001:
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, Xbox and
Nintendo GameCube, and handheld systems such as Game Boy Advance), 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 2002 and 2001 is summarized below (in thousands):
2002 2001 Increase % change
-------------------------------------------------------------------------------
North America $ 1,093,244 $ 831,924 $ 261,320 31.4 %
------------------------------------------------------------------------------
Europe 519,458 386,728 132,730 34.3 %
Asia Pacific 53,376 51,039 2,337 4.6 %
Japan 58,597 52,582 6,015 11.4 %
------------------------------------------------------------------------------
International 631,431 490,349 141,082 28.8 %
------------------------------------------------------------------------------
Consolidated Net Revenues $ 1,724,675 $1,322,273 $ 402,402 30.4 %
==============================================================================
North America Net Revenues
The increase in North America net revenues for fiscal 2002 compared to fiscal
2001 was primarily attributable to:
... A 111% increase in PlayStation 2 revenues for the year due to the shipment
of key titles such as Madden NFL 2002, James Bond 007 in ...Agent Under
Fire, NBA Street, NBA Live 2002 and SSX Tricky, a higher installed base of
hardware and a strong catalogue business. PlayStation 2 launched in
October 2000. Consequently, fiscal 2001 includes six months of revenues as
compared to twelve months of revenues for the PlayStation 2 in fiscal
2002.
... The launch of the Xbox platform in North America in November 2001, which
generated $73,609,000 in revenues from titles such as Madden NFL 2002, NBA
Live 2002, James Bond 007 in...Agent Under Fire, NASCAR Thunder 2002, NHL
2002 and SSX Tricky.
... The launch of Nintendo GameCube in North America in November 2001, which
generated $48,744,000 for the year from key titles such as Madden NFL
2002, James Bond 007 in...Agent Under Fire, SSX Tricky, NBA Street and FIFA
Soccer 2002.
22
... New revenues were generated by Game Boy Advance of $25,989,000 for the year
from key titles including Harry Potter and the Sorcerer's Stone, Madden NFL
and NHL 2002. Also, Game Boy Color generated new revenues of $16,870,000
for the year from titles such as Harry Potter and the Sorcerer's Stone,
Madden NFL 2002 and The World Is Not Enough.
... Advertising revenues increased by $31,849,000 for the twelve months ended
March 31, 2002 as we commenced generating advertising revenues immediately
following the launch of our gamesite on the world wide web in October 2000.
In addition, advertising revenues were generated from Pogo Corporation's
("Pogo") websites subsequent to the February 2001 acquisition.
... These increases were partially offset by the continued expected decreases
in Sony PlayStation and Nintendo 64 ("N64") revenues due to those declining
markets and fewer titles shipping compared to the same period in the prior
year.
International Net Revenues
The increase in international net revenues for fiscal 2002 compared to fiscal
2001 was attributable to the following:
... Europe's net revenues increased by 34% compared to the prior year primarily
due to higher PlayStation 2, AL and PC sales, partially offset by the
expected decrease of revenues from Sony PlayStation. PlayStation 2 launched
in November 2000. Consequently, fiscal 2001 includes five months of
revenues as compared to twelve months of revenues from the PlayStation 2 in
fiscal 2002, resulting in an 80% increase in PlayStation 2 revenues.
... Asia Pacific's net revenues increased by 5% compared to the prior year
primarily due to higher PlayStation 2, Game Boy Color and PC revenue,
partially offset by the expected decrease in PlayStation and Nintendo 64
sales, and an unfavorable exchange rate comparison of approximately 10%.
PlayStation 2 revenues increased by 46%, partially offset by a 34% decrease
in PlayStation revenues in fiscal 2002 as compared to fiscal 2001.
... Japan's net revenues increased by 11% compared to the prior year primarily
due to higher AL revenue and revenue generated from sales of PlayStation,
Nintendo GameCube and Xbox products, offset by the strong sales of our
first PlayStation 2 title, FIFA Soccer World Championship, in the prior
year and weakness in the Yen currency during fiscal 2002 resulting in a
rate decrease of approximately 14% from fiscal 2001. Also, Japan did not
benefit from our primary PlayStation 2 releases during the current fiscal
year, which have more appeal to the North American market. PlayStation 2
revenues decreased by 50% in fiscal 2002 as compared to fiscal 2001.
Information about our worldwide net revenues by product line for fiscal 2002 and
2001 is presented below (in thousands):
Increase/
2002 2001 (Decrease) % change
------------------------------------------------------------------------
EA Studio:
- ----------
PlayStation 2 $ 482,882 $ 258,988 $ 223,894 86.4 %
PC 456,292 405,256 51,036 12.6 %
PlayStation 189,535 309,988 (120,453) (38.9 %)
Xbox 78,363 - 78,363 N/A
Nintendo GameCube 51,740 - 51,740 N/A
Game Boy Advance 43,653 - 43,653 N/A
Game Boy Color 38,026 - 38,026 N/A
Advertising 38,024 6,175 31,849 515.8 %
Online Subscriptions 30,940 28,878 2,062 7.1 %
License, OEM and Other 24,762 20,468 4,294 21.0 %
N64 18,152 67,044 (48,892) (72.9 %)
Online Packaged Goods 3,296 3,198 98 3.1 %
-----------------------------------------------------------------------
1,455,665 1,099,995 355,670 32.3 %
Affiliated Label: 269,010 222,278 46,732 21.0 %
- ----------------- -----------------------------------------------------------------------
Consolidated Net Revenues $ 1,724,675 $ 1,322,273 $ 402,402 30.4 %
=======================================================================
PlayStation 2 Product Net Revenues
Revenues increased for the twelve months ended March 31, 2002 due to the higher
installed base of PlayStation 2 hardware and more titles, including catalogue,
available on the platform compared to the same period last year. Major releases
for the fiscal year include titles such as Madden NFL 2002, James Bond 007 in
.....Agent Under Fire, FIFA 2002, NBA Street, NBA Live 2002, NCAA Football 2002,
SSX Tricky, NHL 2002 and NASCAR Thunder 2002. We released 18 PlayStation 2
titles in the current fiscal year compared to 15 in the same period last year.
We expect revenues from PlayStation 2 products to continue to grow in fiscal
2003, but as revenues for these products increase, we do not expect to maintain
these growth rates.
23
Personal Computer Product Net Revenues
The increase in sales of PC products for the twelve months ended March 31, 2002
compared to the same period last year was primarily due to the continued strong
sales of The Sims, which shipped over two years ago. Key current year releases
were Harry Potter and the Sorcerer's Stone, The Sims Hot Date Expansion Pack,
Medal of Honor: Allied Assault(TM), Command & Conquer Renegade(TM) and Madden
NFL 2002. We released 16 PC titles in the twelve months ended March 31, 2002
compared to 18 in the same period last year. The Sims continues to be the number
one PC title and has now sold over six million copies. Due to the sales of The
Sims in fiscal 2002, we expect revenues from PC products to be flat or lower in
fiscal 2003.
PlayStation Product Net Revenues
We released five PlayStation titles in the twelve months ended March 31, 2002
compared to 17 titles in the same period last year. As expected, PlayStation
sales decreased for the twelve months ended March 31, 2002 compared to the prior
year primarily attributable to the transition to next generation console systems
and fewer titles released for the product during the current year.
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 2003.
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 manufacture its PlayStation and
PlayStation 2 CDs and DVDs for 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.
Xbox Net Revenues
Following the launch of the Xbox platform in North America in November 2001, we
released our first ten Xbox titles during fiscal 2002. Titles released included
Madden NFL 2002, NBA Live 2002, James Bond 007 in ... Agent Under Fire, NASCAR
Thunder 2002, NHL 2002, Triple Play(TM) 2002, SSX Tricky, Knockout Kings 2002
and F1 2001.
Nintendo GameCube Net Revenues
We released our first five Nintendo GameCube titles, Madden NFL 2002, James Bond
007 in ...Agent Under Fire, SSX Tricky, NBA Street and FIFA Soccer 2002, during
fiscal 2002 following the platform's launch in Japan in September 2001 and in
North America in November 2001.
Game Boy Advance Net Revenues
We released our first three Game Boy Advance titles, Harry Potter and the
Sorcerer's Stone, Madden NFL 2002 and NHL 2002 during fiscal 2002.
Game Boy Color Net Revenues
We released three Game Boy Color titles, Harry Potter and the Sorcerer's Stone,
Madden NFL 2002 and The World is Not Enough during fiscal 2002.
Advertising Revenues
We commenced generating advertising revenues in the third quarter of fiscal year
2001 following the launch of our gamesite on the world wide web and the AOL
Games Channel in October 2000. In addition, we generated advertising revenue
from Pogo's websites subsequent to the purchase of Pogo in February 2001. As a
result of establishing our ad business in late fiscal 2001, we experienced
significant revenue growth in fiscal 2002. Due to this and continuing
uncertainties in the ad market, we will not be able to sustain the same annual
growth rate as experienced in fiscal 2002.
Online Subscription Net Revenues
The increase in online revenues for fiscal 2002 as compared to fiscal 2001 was
primarily attributable to the following:
... An increase in the number of paying customers for Ultima Online to 207,000
as of March 31, 2002 as compared to 203,000 as of March 31, 2001. This
increase was primarily due to the continued strong sales of Ultima Online
Third Dawn and the release of Ultima Online Lord Blackthorn's Revenge in
February 2002. In addition, the launch of Motor City Online in October
2001, which contributed $1,500,000 in subscription revenues for fiscal
2002.
24
... Offset by a decrease in subscription revenues of $5,000,000 for Gamestorm,
Kesmai Corporation ("Kesmai") and Worldplay online games (most of which were
transferred to our free service when the EA/AOL site went live in October
2000) in fiscal 2002 as compared to fiscal 2001.
License, OEM and Other Revenues
The increase in license, OEM and other revenues for the twelve months ended
March 31, 2002 was primarily due to a new OEM agreement with a customer in
Europe and higher revenues in North America.
Nintendo 64 Product Net Revenues
We released one N64 title in fiscal 2002 compared to three titles during fiscal
2001. The expected decrease in N64 revenues for the fiscal year, compared to the
prior fiscal year, was primarily due to the declining market for N64 products
and fewer titles released on this platform in the current fiscal year. We do not
intend to release any new N64 products in fiscal 2003.
Online Packaged Goods Net Revenues
Online Packaged Goods revenues for fiscal 2002 were slightly higher than fiscal
2001 primarily due to the release of Motor City Online in October 2001.
Affiliated Label Product Net Revenues
AL product sales increased for fiscal 2002 compared to the prior fiscal year
primarily due to strong sales of hit titles including Devil May Cry and Resident
Evil: Code Veronica resulting from new distribution deals with Capcom as well as
The Simpsons(TM) Road Rage in the current year. This was partially offset by
lower revenues from shipment of Square EA products due to fewer titles released
in fiscal 2002 compared to fiscal 2001.
Operations by Segment
Management considers EA.com to be a separate reportable segment. We operate in
two principal business segments globally (see Note 2 of the Notes to
Consolidated Financial Statements):
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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 represents Electronic Arts' online and e-Commerce businesses. 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. The
Consolidated Statements of Operations includes all revenues and costs directly
attributable to EA.com, including charges for shared facilities, functions and
services used by EA.com and provided by EA Core. Certain costs and expenses have
been allocated based on management's estimates of the cost of services provided
to EA.com by EA Core.
25
Information about our operations by segment for fiscal 2002 and 2001 is
presented below (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
-------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ----------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,647,502 $ 77,173 $ - $ 1,724,675
Group sales 4,016 - (4,016) /(a)/ -
-------------------------------------------------------------------------
Total net revenues 1,651,518 77,173 (4,016) 1,724,675
-------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 794,738 12,873 - 807,611
Group cost of goods sold - 4,016 (4,016) /(a)/ -
-------------------------------------------------------------------------
Total cost of goods sold 794,738 16,889 (4,016) 807,611
-------------------------------------------------------------------------
Gross profit 856,780 60,284 - 917,064
Operating expenses:
Marketing and sales 202,749 20,496 17,864 /(c)/ 241,109
General and administrative 96,919 10,140 - 107,059
Research and development 257,762 59,892 70,082 /(b)/ 387,736
Network development and support - 59,483 (59,483) /(b)/ -
Customer relationship management - 10,599 (10,599) /(b)/ -
Carriage fee - 17,864 (17,864) /(c)/ -
Amortization of intangibles 12,888 12,530 - 25,418
Restructuring and asset impairment charges - 20,303 - 20,303
-------------------------------------------------------------------------
Total operating expenses 570,318 211,307 - 781,625
-------------------------------------------------------------------------
Operating income (loss) 286,462 (151,023) - 135,439
Interest and other income (expense), net 13,472 (624) - 12,848
-------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 299,934 (151,647) - 148,287
Provision for income taxes 45,969 - - 45,969
-------------------------------------------------------------------------
Income (loss) before minority interest 253,965 (151,647) - 102,318
Minority interest in consolidated joint venture (809) - - (809)
-------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 253,156 $ (151,647) $ - $ 101,509
-------------------------------------------------------------------------
Allocation of retained interest (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
-------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 253,156 $ (151,647) $ - $ 101,509
Net loss related to retained interest in EA.com (128,900) 128,900 - -
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 124,256 $ (22,747) $ - $ 101,509
============================================================================================================================
26
- -------------------------------------------------------------------------------------------------------------------------
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 $ 142,422 $ (153,504) $ - $ (11,082)
EA.com
Net loss related to retained interest in EA.com (130,478) 130,478 - -
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11,944 $ (23,026) $ - $ (11,082)
=========================================================================================================================
(a) Represents elimination of intercompany sales of EA Core packaged goods
products to EA.com, and represents elimination of royalties paid to EA Core
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.
27
The following table shows our pro forma results reconciled to the Generally
Accepted Accounting Principles ("GAAP") Consolidated Statements of Operations.
Our pro forma results do not include unusual events or transactions, such as
restructuring and asset impairment costs and charge for acquired in-process
technology, and also excludes amortization of intangibles and non-cash stock
compensation charges. In addition, income taxes are allocated to EA Core and
EA.com at the consolidated effective tax rate (31%) on a pro rata basis. We
believe the disclosure of the pro forma net income (loss) and operating profit
(loss), which excludes the items noted in the table below, helps investors more
meaningfully evaluate the results of our ongoing operations. However, we urge
investors to carefully review the GAAP financial information included as part of
this Annual Report on Form 10-K and compare GAAP financial information with the
pro forma financial results disclosed in this Annual Report on Form 10-K.
(in thousands):
- --------------------------------------------------------------------------------
Reconciliation of GAAP to Pro
Forma net income (loss)
Fiscal Year Ended
------------------------------------------------------------------------------------------
March 31, 2002 March 31, 2001
-------------------------------------------- ------------------------------------------
EA Core Electronic EA Core Electronic
(excl. EA.com) EA.com Arts (excl. EA.com) EA.com Arts
------------------------------------------------------------------------------------------
Net income (loss) - GAAP $ 124,256 $ (22,747) $ 101,509 $ 11,944 $ (23,026) $ (11,082)
Net loss related to retained
interest in EA.com (note 1) 128,900 (128,900) - 130,478 (130,478) -
Pro forma allocation of income
taxes (note 2) (47,011) 47,011 - (47,586) 47,586 -
-------------------------------------------- ------------------------------------------
Pro forma net income (loss) 206,145 (104,636) 101,509 94,836 (105,918) (11,082)
Amortization of intangibles 12,888 12,530 25,418 12,829 6,494 19,323
Restructuring and asset impairment
charges - 20,303 20,303 - - -
Charge for acquired in-process
technology - - - - 2,719 2,719
Non-cash stock compensation for
non-employees (note 3) 2,677 422 3,099 2,479 228 2,707
Income tax effect on the above
items (4,825) (10,309) (15,134) (4,745) (2,927) (7,672)
-------------------------------------------- ------------------------------------------
Pro forma net income (loss)
excluding the items above $ 216,885 $ (81,690) $ 135,195 $ 105,399 $ (99,404) $ 5,995
============================================ ==========================================
- --------------------------------------------------------------------------------
1) EA Core maintains approximately 85% retained interest in EA.com and is
reflected in the Net income - GAAP for EA Core. The pro forma statements
exclude the retained interest allocation.
2) The provision for income taxes was allocated between EA Core and EA.com at
the worldwide effective tax rate (31%) based on each segment's pro rata
share of income or loss. The sum of tax provision for EA Core and EA.com is
the same as consolidated tax provision.
3) Total non-cash stock compensation charges are included in Research and
Development in GAAP financials, and excluded in the pro forma.
28
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
and other 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
royalties for use of EA and third party properties. Cost of goods sold for our
advertising business consists primarily of ad serving costs.
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 fee ("Carriage
Fee"), which began with the launch of EA.com in October 2000. The Carriage Fee
is being 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, customer
relationship management expenses associated with Electronic Arts' product and
online games and write-offs of prepaid royalties. 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. Research and development expenses also
include product development expenses incurred directly by EA.com.
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 direct expenses,
software licenses and maintenance, and network and management overhead.
Cost of Goods Sold
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$807,611,000 46.8% $652,242,000 49.3% 23.8%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues decreased in fiscal 2002 compared
to fiscal 2001 due to:
... Revenues from the Xbox and Nintendo GameCube with lower cost of goods sold
as a percentage of revenue.
... Higher mix of PlayStation 2 revenues in the current fiscal year.
... Higher advertising revenues with low cost of goods sold as a percentage of
revenue.
... Lower revenue on N64 products with high cost of goods sold as a percentage
of revenue.
... Higher AL margins due to a higher number of co-publishing titles with
lower cost of goods sold as a percentage of revenue.
... Higher average margins on PC products.
These items were partially offset by:
... Higher cost of goods sold as a percentage of revenues on the PlayStation
and PlayStation 2 products as compared to the prior year.
... Revenues from Nintendo Game Boy Advance and Game Boy Color with higher
cost of goods sold as a percentage of revenue.
... Lower mix of high margin PC revenues in the current fiscal year.
Marketing and Sales
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$241,109,000 14.0% $185,336,000 14.0% 30.1%
- --------------------------------------------------------------------------------
As a percent of revenue, marketing and sales expense in fiscal 2002 was
comparable to fiscal 2001 at 14%. Marketing and sales expenses for fiscal 2002
increased 30.1%, primarily attributed to:
29
... Higher marketing and advertising in North America and Europe for programs to
support Madden NFL 2002, James Bond 007 in...Agent Under Fire, SSX Tricky,
Harry Potter and the Sorcerer's Stone, FIFA Soccer 2002 and NBA Live 2002.
... Higher EA.com marketing and sales expenses due to increased consumer
promotions and advertising media placement costs to promote new game
offerings, particularly Majestic and Motor City Online, and higher
expenditures associated with selling advertising on both EA.com and Pogo's
gamesites.
... The amortization of the AOL Carriage Fee, which began with the launch of
EA.com in October 2000.
General and Administrative
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$107,059,000 6.2% $104,041,000 7.9% 2.9%
- --------------------------------------------------------------------------------
General and administrative expenses increased 2.9% for fiscal 2002, primarily
attributed to:
... $1,000,000 contribution to charity organizations providing support for the
September 11th tragedy.
... Increase in payroll and occupancy costs to support the increased growth in
North America.
... Increase in bad debt expense of $1,820,000 due to higher product sales.
Research and Development
- -----------------------------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- -----------------------------------------------------------------------------------------------------
Research and
development $317,654,000 18.4% $325,777,000 24.6% (2.5%)
Network development
and support 59,483,000 3.5% 51,794,000 3.9% 14.8%
Customer relationship
management 10,599,000 0.6% 11,357,000 0.9% (6.7%)
- -----------------------------------------------------------------------------------------------------
Total research and
development $387,736,000 22.5% $388,928,000 29.4% (0.3%)
- -----------------------------------------------------------------------------------------------------
Research and development expenses (excluding Network Development and Support and
Customer Relationship Management). Research and development expenses (excluding
Network Development and Support and Customer Relationship Management) decreased
in absolute dollars by 2.5% for fiscal 2002, primarily attributed to:
... Headcount reductions in EA.com in October 2001 (see Charge for Restructuring
and Impairment discussion below).
... Replacement of EA.com's free games channel with Pogo free games.
... Offset by increased payroll costs due to higher headcount in EA studios, net
of co-development arrangements.
... Offset by increased spending on EA.com online projects in development,
primarily The Sims Online and Earth & Beyond(TM).
We expect research and development spending to increase in fiscal 2003 due to an
increase in development spending for next generation console products including
the PlayStation 2, Xbox and Nintendo GameCube, as well as extending our
investment in the PC platform.
Network Development and Support. Network development and support expenses
increased in absolute dollars by 14.8% for fiscal 2002 primarily due to:
... Increased depreciation related to both hardware and internally developed
software that began when the site went live in October 2000.
... Increased headcount and network-related costs associated with Pogo.
... Partially offset by reduced consultant costs related to project and site
enhancements.
The expense run rate has been reduced as a result of the restructuring. We do
not expect expenses to increase in fiscal 2003.
Customer Relationship Management. Customer relationship management expenses
decreased in absolute dollars by 6.7% for fiscal 2002 primarily due to headcount
reductions in EA.com that occurred in October 2001 as part of the restructuring
plan (see Charge for Restructuring and Impairment discussion below).
30
Amortization of Intangibles
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$25,418,000 1.5% $19,323,000 1.5% 31.5%
- --------------------------------------------------------------------------------
The amortization of intangibles results primarily from the acquisitions of
Westwood, Kesmai, DreamWorks Interactive, ABC Software, Pogo and other
acquisitions. Amortization of intangibles was $12,888,000 for EA Core and
$12,530,000 for EA.com for fiscal 2002. Amortization of intangibles was
$12,829,000 for EA Core and $6,494,000 for EA.com for fiscal 2001. The increase
in fiscal year 2002 for EA.com, compared to the prior year, was due to the
acquisition of Pogo in February 2001.
With the implementation of new accounting pronouncements (see Impact of Recently
Issued Accounting Standards on page 43) as of April 2002, we will continue to
amortize finite-lived intangibles, but will no longer amortize goodwill and
acquired workforce. Amortization of goodwill and acquired workforce totaled
approximately $13,125,000 for fiscal 2002 and approximately $9,182,000 for
fiscal 2001. Based on intangible assets as of March 31, 2002, we estimate that
amortization of finite-lived intangibles will total approximately $8,700,000 for
fiscal 2003. Following adoption of SFAS 142, we will continue to evaluate
whether any event has occurred which might indicate that the carrying value of
an intangible asset is not recoverable. In addition, SFAS 142 requires that
goodwill be subject to at least an annual assessment for impairment by applying
a fair value-based test. We are in the process of completing an evaluation for
impairment of goodwill in accordance with SFAS 142. We believe the
implementation of SFAS 142 will not have a material impact on our consolidated
financial statements.
Charge for Acquired In-Process Technology
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$ - N/A $2,719,000 0.2% (100.0%)
- --------------------------------------------------------------------------------
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. During fiscal 2002, all of these
development projects were completed and launched on Pogo gamesites. In
conjunction with the acquisition of Pogo, we accrued approximately $100,000
related to direct transaction and other related costs.
This charge was 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.
Charge for Restructuring and Impairment
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$20,303,000 1.2% $ - N/A N/M
- --------------------------------------------------------------------------------
During fiscal 2002, we announced a restructuring plan for EA.com to reduce its
workforce and consolidate facilities. These restructuring and resulting asset
impairment charges were necessary in order to focus on key online priorities and
reduce EA.com's operating cost structure. A pre-tax charge of $20,303,000 was
recorded in fiscal 2002, consisting of $4,173,000 for workforce reductions,
$3,312,000 for consolidation of facilities and other administrative charges and
$12,818,000 for the write-off of non-current assets as a direct result of the
restructuring. The pre-tax charge of $20,303,000 consisted of $6,836,000 in cash
outlays and $13,467,000 in non-cash charges related to the write-offs of
non-current assets and facilities. As of March 31, 2002, an aggregate of
$4,016,000 in cash had been paid out under the restructuring plan. Of the
remaining cash outlay of $2,820,000, $1,590,000 is expected to occur in fiscal
2003 while the remaining $1,230,000 related to future lease payments will occur
is fiscal years 2004 and beyond. Adjustments to the restructuring reserves will
be made in future periods, if necessary, based upon current events and
circumstances.
The restructuring plan resulted in the termination of approximately 270
personnel, or one third of EA.com's workforce, which affected all departments
across the organization. The estimated costs for consolidation of facilities are
comprised of contractual rental commitments under real estate leases for
unutilized office space offset by estimated future sub-lease income. Included in
these costs
31
are estimated costs to close offices or consolidate facilities in various
locations and costs to write off a portion of the assets from these facilities.
In addition, the restructuring efforts required an evaluation of asset
impairment in accordance with Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", to adjust these depreciable assets and
certain intangibles to their estimated fair value. Management evaluated the
impact of consolidating or abandoning certain EA.com technologies and processes
and reviewed the effect of changes to EA.com's subscription product offerings in
relation to EA.com's asset base. Impairment charges on long-lived assets
amounted to $12,818,000 and included $11,177,000 relating to consolidated or
abandoned technologies for the EA.com infrastructure and $1,641,000 of goodwill
and intangibles impairment charges relating to the EA.com's San Diego and Kesmai
studios. There are no assurances that the impairment factors evaluated by
management will not change in subsequent periods and accordingly, this could
result in additional impairment charges in future periods.
We will continue to evaluate the effectiveness of products, departments,
technology and processes and look for ways to consolidate and streamline EA.com
operations in an effort to further reduce operating expenses.
Interest and Other Income, Net
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$12,848,000 0.7% $16,886,000 1.3% (23.9%)
- --------------------------------------------------------------------------------
Interest and other income, net, decreased in absolute dollars by 23.9% primarily
due to lower interest income as a result of lower interest rates in the current
year and an increase in the cost of utilizing foreign exchange hedge contracts.
Income Taxes
- --------------------------------------------------------------------------------
Effective Effective
2002 tax rate 2001 tax rate % change
- --------------------------------------------------------------------------------
$45,969,000 31.0% $(4,163,000) 31.0% N/M
- --------------------------------------------------------------------------------
Our effective tax rate was 31.0% for fiscal 2002 and fiscal 2001. At March 31,
2002, we generated a federal income tax net operating loss. This loss will be
carried forward to future tax years. At March 31, 2001, we also generated a
federal income tax net operating loss. A substantial portion of this loss was
utilized in a carryback claim with the remainder being carried forward. The net
operating losses for both fiscal 2002 and fiscal 2001 resulted from losses from
EA.com's operations as well as stock option deductions. A valuation allowance
has not been established on these loss carryforwards 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)
- --------------------------------------------------------------------------------
% of net % of net
2002 revenues 2001 revenues % change
- --------------------------------------------------------------------------------
$101,509,000 5.9% $(11,082,000) (0.8%) N/M
- --------------------------------------------------------------------------------
In absolute dollars, reported net income (loss) increased in fiscal 2002
primarily related to higher net revenues, partially offset by higher expenses
compared to the same period last year. The increase in expenses was primarily
due to increases in marketing and advertising costs to support a higher number
of franchise titles. In addition, higher expenses were due to the charge for
restructuring and impairment in fiscal 2002.
We believe the disclosure of pro forma net income (loss) and operating profit
(loss), which does not include unusual events or transactions, such as
restructuring and asset impairment costs and charge for acquired in-process
technology, and also excludes amortization of intangibles and non-cash stock
compensation charges, helps investors more meaningfully evaluate the results of
our ongoing operations. However, we urge investors to carefully review the GAAP
financial information included as part of this Annual Report on Form 10-K and
compare GAAP financial information with the pro forma financial results
disclosed in this Annual Report on Form 10-K.
Pro forma net income, excluding the items noted above, was $135,195,000 for the
fiscal year ended March 31, 2002 and $5,995,000 for the fiscal year ended March
31, 2001. The increase in pro forma net income for the fiscal year ended March
31, 2002 was due to higher revenues and gross profits as compared to the same
periods last year. This was partially offset by an increase in marketing and
sales expenses to support programs for key titles shipped in the current year.
32
With the implementation of new accounting pronouncements relating to goodwill
and intangible assets (see Impact of Recently Issued Accounting Standards on
page 43) as of April 2002, we will continue to amortize finite-lived
intangibles, but will no longer amortize goodwill and acquired workforce.
Amortization of goodwill and acquired workforce totaled approximately
$13,125,000 for fiscal 2002 and approximately $9,182,000 for fiscal 2001. Based
on intangible assets as of March 31, 2002, we estimate that amortization of
finite-lived intangibles will total approximately $8,700,000 for fiscal 2003.
Following adoption of SFAS 142, we will continue to evaluate whether any event
has occurred which might indicate that the carrying value of an intangible asset
is not recoverable. In addition, SFAS 142 requires that goodwill be subject to
at least an annual assessment for impairment by applying a fair value-based
test. We are in the process of completing an evaluation for impairment of
goodwill in accordance with SFAS 142. We believe the implementation of SFAS 142
will not have a material impact on our consolidated financial statements.
Comparison of Fiscal 2001 to 2000:
Revenues
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:
... Expected declines in sales of PlayStation and 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 fiscal 2001 for both platforms.
... A 6% decrease in AL revenues primarily due to the acquisition of an
affiliate, DreamWorks Interactive, by us in the fourth quarter of fiscal
2000.
... Offset partially by the launch of PlayStation 2 platform in North America
which generated $171,034,000 in revenue for fiscal 2001 from titles such as
Madden NFL 2001, SSX, NBA Live 2001 and NHL 2001. PlayStation 2 revenues in
fiscal 2001 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.
... Offset by a 21% increase in PC revenues due to the shipment of key releases
including Command & Conquer Red Alert(TM) 2 and The Sims: Livin' Large and
continued strong catalog sales of The Sims in fiscal 2001.
International Net Revenues
The decrease in international net revenues for fiscal 2001 compared to fiscal
2000 was attributable to the following:
... 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
fiscal 2001, lower PC sales with fewer titles shipping in fiscal 2001, the
strong sales of Command & Conquer: Tiberian Sun(TM) for the PC in fiscal
2000, and weakness in the Euro currency. In addition, PlayStation revenues
decreased 43% due to fewer titles shipping during the console transition
period in fiscal 2001 with most franchise titles showing significant
decreases from fiscal 2000 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.
... Asia Pacific's net revenues decreased 4%, mainly due to the decrease in
PlayStation revenues as there were no significant new titles released in
fiscal 2001. This was offset by sales of PlayStation 2 titles such as SSX
and FIFA 2001.
... Offset by Japan's net revenues which increased 58% compared to fiscal 2000
primarily due to the shipment of PlayStation 2 titles such as FIFA Soccer
World Championship, FIFA 2001 and SSX in fiscal 2001.
33
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 $ 405,256 $ 395,522 $ 9,734 2.5 %
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 %
Online Packaged Goods 3,198 2,255 943 41.8 %
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 fiscal 2000. Key
fiscal 2001 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 continued to be the number one PC title.
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 fiscal 2000
primarily attributable to the PlayStation 2 platform transition. With the
exception of Madden NFL, all of our franchises experienced significant decreases
from fiscal 2000 releases.
PlayStation 2 Product Net Revenues
We released 15 titles worldwide in fiscal 2001 for the PlayStation 2. Key
releases for fiscal 2001 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 fiscal 2001 resulting from component shortages which limited the
number of units that could be manufactured, according to Sony.
Affiliated Label Product Net Revenues
The decrease in Affiliated Label net revenues for fiscal 2001 compared to fiscal
2000 was primarily due to the strong sales of Final Fantasy(R) VIII in fiscal
2000, our acquisition of DreamWorks Interactive, formerly an AL, in the fourth
quarter of fiscal 2000, 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 fiscal 2001, compared to
fiscal 2000, was primarily due to fewer releases. The decrease was also due to
the weaker market for N64 products in fiscal 2001. The key release for fiscal
2001 was The World Is Not Enough.
Online Net Revenues
The increase in online revenues for fiscal 2001 as compared to fiscal 2000 was
attributable to the following:
. 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.
. 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 in fiscal 2000 due to the Kesmai acquisition in the fourth
quarter of fiscal 2000.
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.
34
Advertising
Following the launch of EA.com on the worldwide web and the AOL Games Channel in
October 2000, 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 in February 2001.
Operations by Segment
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 $ 142,422 $ (153,504) $ - $ (11,082)
EA.com
Net loss related to retained interest in EA.com (130,478) 130,478 - -
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11,944 $ (23,026) $ - $ (11,082)
============================================================================================================================
35
- ----------------------------------------------------------------------------------------------------------------------
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 EA Core packaged goods
products to EA.com, and represents elimination of royalties paid to EA Core
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.
36
The following table shows our pro forma results reconciled to the GAAP
Consolidated Statements of Operations. Our pro forma results do not include
unusual events or transactions, such as restructuring and asset impairment costs
and charge for acquired in-process technology, and also excludes amortization of
intangibles and non-cash stock compensation charges. In addition, income taxes
are allocated to EA Core and EA.com at the consolidated effective tax rate (31%)
on a pro rata basis. We believe the disclosure of the pro forma net income
(loss) and operating profit (loss), which excludes the items noted in the table
below, helps investors more meaningfully evaluate the results of our ongoing
operations. However, we urge investors to carefully review the GAAP financial
information included as part of this Annual Report on Form 10-K and compare GAAP
financial information with the pro forma financial results disclosed in this
Annual Report on Form 10-K.
(in thousands):
- -------------------------------------------------------------------------------------------------------------------------
Reconciliation of GAAP to Pro
Forma net income (loss)
Fiscal Year Ended
----------------------------------------------------------------------------------------
March 31, 2001 March 31, 2000
------------------------------------------- ------------------------------------------
EA Core Electronic EA Core Electronic
(excl. EA.com) EA.com Arts (excl. EA.com) EA.com Arts
----------------------------------------------------------------------------------------
Net income (loss) - GAAP $ 11,944 $ (23,026) $ (11,082) $ 116,751 $ - $ 116,751
Net loss related to retained
interest in EA.com (note 1) 130,478 (130,478) - 54,590 (54,590) -
Pro forma allocation of income
taxes (note 2) (47,586) 47,586 - (16,923) 16,923 -
------------------------------------------- ------------------------------------------
Pro forma net income (loss) 94,836 (105,918) (11,082) 154,418 (37,667) 116,751
Amortization of intangibles 12,829 6,494 19,323 10,866 1,123 11,989
Charge for acquired in-process
technology - 2,719 2,719 2,670 3,869 6,539
Non-cash stock compensation
for non-employees (note 3) 2,479 228 2,707 736 - 736
Income tax effect on the above
items (4,745) (2,927) (7,672) (4,424) (1,548) (5,972)
------------------------------------------- ------------------------------------------
Pro forma net income (loss)
excluding the items above $ 105,399 $ (99,404) $ 5,995 $ 164,266 $ (34,223) $ 130,043
=========================================== ==========================================
1) EA Core maintains approximately 85% retained interest in EA.com and is
reflected in the Net income - GAAP for EA Core. The pro forma statements
exclude the retained interest allocation.
2) The provision for income taxes was allocated between EA Core and EA.com at
the worldwide effective tax rate (31%) based on each segment's pro rata
share of income or loss. The sum of tax provision for EA Core and EA.com is
the same as consolidated tax provision.
3) Total non-cash stock compensation charges are included in Research and
Development in GAAP financials, and excluded in the pro forma.
37
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
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$652,242,000 49.3% $704,702,000 49.6% (7.4%)
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues decreased in fiscal 2001 due to:
... An increase in sales of higher margin PC titles as a percentage of
revenues. Fiscal 2001 included sales on titles such as The Sims, Command &
Conquer Red Alert 2 and The Sims: Livin' Large.
... The introduction of higher margin PlayStation 2 products in fiscal 2001.
... A decrease in sales of lower margin AL and N64 titles.
... An increase in higher margin Online and Advertising revenue.
... 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 catalog products.
Marketing and Sales
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$185,336,000 14.0% $188,611,000 13.3% (1.7%)
- --------------------------------------------------------------------------------
Marketing and sales expenses for fiscal 2001 increased as a percentage of
revenue, primarily attributed to:
... 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.
... The amortization of the AOL Carriage Fee, which began with the launch of
EA.com in October 2000.
... Offset by lower television and print advertising in North America and
Europe due to fewer number of releases compared to fiscal 2000.
General and Administrative
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$104,041,000 7.9% $92,418,000 6.5% 12.6%
- --------------------------------------------------------------------------------
General and administrative expenses increased 12.6% for fiscal 2001, primarily
attributed to:
... The expansion of the EA.com staff and additional administrative-related
costs required to support the growth of the EA.com business.
... 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.
... Increase in depreciation expense for Europe due to the implementation of a
new transaction processing system.
Research and Development
- --------------------------------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------------------------------
Research and
development $325,777,000 24.6% $240,649,000 16.9% 35.4%
Network development
and support 51,794,000 3.9% 17,993,000 1.3% 187.9%
Customer relationship
management 11,357,000 0.9% 3,324,000 0.2% 241.7%
- --------------------------------------------------------------------------------------------------------
Total research and
development $388,928,000 29.4% $261,966,000 18.4% 48.5%
- --------------------------------------------------------------------------------------------------------
38
Research and Development (excluding Network Development and Support and Customer
Relationship Management). Research and development expenses (excluding Network
Development and Support and Customer Relationship Management) increased in
absolute dollars by 35.4% for fiscal 2001, primarily attributed to:
... 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.
... An increase in development spending for next generation console products
including development for the PlayStation 2 console, Xbox and Nintendo
GameCube.
... 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 fiscal 2000.
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 had 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 Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", associated with the
pre-launch network infrastructure build.
Customer Relationship Management. Customer relationship management increased due
to increased headcount-related costs associated with the formation of our
customer relationship management organization for the live game site.
Amortization of Intangibles
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$19,323,000 1.5% $11,989,000 0.8% 61.2%
- --------------------------------------------------------------------------------
The amortization of intangibles resulted 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.
Charge for Acquired In-Process Technology
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$2,719,000 0.2% $6,539,000 0.5% (58.4%)
- --------------------------------------------------------------------------------
Fiscal 2001:
In connection with the acquisition of Pogo in the fourth 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. During fiscal 2002, all of these
development projects were completed and launched on Pogo gamesites. In
conjunction with the acquisition of Pogo, we accrued approximately $100,000
related to direct transaction and other related costs.
Fiscal 2000:
... 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.
... In connection with the acquisitions of two development companies by EA
Core, made in the second and fourth 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.
39
Interest and Other Income, Net
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$16,886,000 1.3% $16,028,000 1.1% 5.4%
- --------------------------------------------------------------------------------
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 fiscal 2001. Those gains were partially
offset by realized gains on sales of marketable securities in fiscal 2000.
Income Taxes
- --------------------------------------------------------------------------------
Effective Effective
2001 tax rate 2000 tax rate % change
- --------------------------------------------------------------------------------
$(4,163,000) 31.0% $52,642,000 31.0% (107.9%)
- --------------------------------------------------------------------------------
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 was utilized in a carryback claim with the remainder being
carried forward. A valuation allowance was not established on this loss
carryforward or other net deferred tax assets as we believed it was more likely
than not that the results of future operations would generate sufficient taxable
income to realize them.
Net Income (loss)
- --------------------------------------------------------------------------------
% of net % of net
2001 revenues 2000 revenues % change
- --------------------------------------------------------------------------------
$(11,082,000) (0.8%) $116,751,000 8.2% (109.5%)
- --------------------------------------------------------------------------------
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 fiscal 2000. 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.
40
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
EA Core and EA.com
As of March 31, 2002, our working capital was $699,561,000 compared to
$478,701,000 at March 31, 2001. Cash, cash equivalents and short-term
investments increased by $330,444,000 in fiscal 2002. We generated $284,971,000
of cash from operations, $98,840,000 of cash through the sale of equity
securities under our stock plans, offset by $51,518,000 of cash used in capital
expenditures during fiscal 2002.
Reserves for bad debts and sales returns increased from $89,833,000 at March
31, 2001 to $115,870,000 at March 31, 2002. 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 $796,936,000 in cash, cash equivalents
and short-term investments and $6,869,000 in marketable securities. We expect
that for the foreseeable future, our operating expenses will constitute a
significant use of our cash balances. 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. However, our ability to
maintain sufficient liquidity could be affected by various risks and
uncertainties, including but not limited to, those related to customer demand
and acceptance of titles on new platforms and new title versions on existing
platforms, our ability to collect our accounts receivable as they become due,
successfully achieving our product release schedules and attaining our
forecasted sales objectives, the impact of competition, the economic conditions
in the domestic and international markets, seasonality in operating results,
risks of product returns and the other risks listed in the "Risk Factors"
section.
EA.com
Included in the amounts above is the following for the EA.com business:
. With the exception of the proceeds from the sale of stock and warrant
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.
. During fiscal 2002, EA.com used $99,696,000 of cash in operations
(including payments to AOL of approximately $11,250,000), $13,112,000
in capital expenditures for computer equipment, network
infrastructure, internal use software and related third party
software, offset by $114,837,000 provided through the capital
contributions from Electronic Arts. As a result of the net operating
loss generated, we realized a tax benefit of approximately
$47,011,000.
. 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, excluding cash
received of $762,000, offset by $245,141,000 provided through the
capital contributions from Electronic Arts. As a result of the net
operating loss generated, we realized a tax benefit of approximately
$47,586,000.
Under the AOL agreement entered into in November 1999, EA.com is required to
pay $81,000,000 to AOL over the life of the five-year agreement. Of this amount,
$36,000,000 was paid upon signing the agreement with the remainder due in four
equal annual installments beginning with the first anniversary of the initial
payments. EA.com paid AOL $11,250,000 in both fiscal 2001 and 2002.
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.
41
Other Commitments
Advertising Commitments
We made a commitment to spend $15,000,000 in offline media advertisements
promoting our online games, including those on the AOL service, prior to March
31, 2005. As of March 31, 2002, we have spent approximately $3,500,000 against
this commitment.
On February 7, 2000, we acquired Kesmai from News America Corporation ("News
Corp") in exchange for $22,500,000 in cash and approximately 206,000 shares of
our existing common stock valued at $8,650,000. We agreed to spend $12,500,000
through the period ended June 1, 2002 in advertising with News Corp or any of
its affiliates. In addition, if certain conditions are met, including that a
qualified public offering of Class B common stock does not occur within
twenty-four months of News Corp's purchase of such shares and all of the Class B
outstanding shares have been converted to Class A common stock, then (1) News
Corp has the right to (i) exchange Class B common stock for approximately
206,000 shares of Class A common stock, and (ii) receive cash from Electronic
Arts in the amount of $9,650,000, and (2) we will agree to spend an additional
$11,675,000 in advertising with News Corp and its affiliates.
Lease Commitments
We lease certain of our current facilities and certain equipment under
non-cancelable capital and operating lease agreements. We are required to pay
property taxes, insurance and normal maintenance costs for certain of our
facilities and will be required to pay any increases over the base year of these
expenses on the remainder of our facilities.
In February of 1995, we entered into a build-to-suit lease with a financial
institution on our headquarter's facility in Redwood City, California, which was
extended in July of 2001 and runs through July of 2006. We accounted for this
arrangement as an operating lease in accordance with Statement of Financial
Accounting Standards No. 13 ("SFAS 13"), "Accounting for Leases", as amended.
Existing campus facilities developed in phase one comprise a total of 350,000
square feet and provide space for sales, marketing, administration and research
and development functions. We have an option to purchase the property (land and
facilities) for $145,000,000 or, at the end of the lease, to arrange for (1) an
additional extension of the lease or (2) sale of the property to a third party
with us retaining an obligation to the owner for the difference between the sale
price and the guaranteed residual value of up to $128,900,000 if the sales price
is less than this amount, subject to certain provisions of the lease.
In December 2000, we entered into a second build-to-suit lease with a
financial institution for a five year term from December 2000 to expand our
headquarter's facilities and develop adjacent property adding approximately
310,000 square feet to our campus. We expect to complete construction in June of
2002. We accounted for this arrangement as an operating lease in accordance with
SFAS 13, as amended. The facilities will provide space for marketing, sales and
research and development. We have an option to purchase the property for
$127,000,000 or, at the end of the lease, to arrange for (1) an extension of the
lease or (2) sale of the property to a third party with us retaining an
obligation to the owner for the difference between the sale price and the
guaranteed residual value of up to $118,800,000 if the sales price is less than
this amount, subject to certain provisions of the lease.
Lease rates are based upon the Commercial Paper Rate. The two lease
agreements described above require us to maintain certain financial covenants,
all of which we were in compliance with as of March 31, 2002.
Letters of Credit
In connection with our purchases of N64 cartridges and Nintendo GameCube
optical disks for distribution in North America, Nintendo requires us to provide
irrevocable letters of credit prior to Nintendo's acceptance of purchase orders
from us for purchases of these cartridges and optical disks. For purchases of
N64 cartridges and Nintendo GameCube optical disks for distribution in Japan and
Europe, Nintendo requires us to make cash deposits.
Development, Celebrity, League and Content Licenses: Payments and Commitments
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. Advance payments on these royalties are paid to independent artists
upon meeting deliverables as detailed in the contractual agreement. In addition,
certain celebrity, league and content license contracts contain minimum
guarantee payments and marketing commitments that are not dependent on any
deliverables. Celebrities and organizations with whom we have contracts include:
FIFA, NASCAR, John Madden, National Basketball Association, PGA TOUR, Tiger
Woods, National Hockey League, Formula One, Warner Bros. (Harry Potter),
MGM/Danjaq (James Bond) and National Football League. These minimum guarantee
payments and marketing commitments are included in the table below.
42
Summary of minimum contractual obligations and commercial commitments as of
March 31, 2002 (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial
Contractual Obligations Commitments
--------------------------------------------------------------- --------------------------
Bank and
Fiscal Year Ended Minimum Other Letters of
Ended March 31, Leases Advertising Guarantees AOL Marketing Guarantees Credit Total
------------------------------------------------------------------------------------------------------------
2003 $18,288 $14,000 $35,663 $11,250 $19,541 $1,050 $1,122 $100,914
2004 15,011 3,500 22,812 11,250 16,554 171 - 69,298
2005 11,354 4,500 15,137 - 11,159 171 - 42,321
2006 10,810 - 16,483 - 4,572 171 - 32,036
2007 9,122 - 3,145 - 3,571 170 - 16,008
Thereafter 11,609 - 2,260 - 3,571 170 - 17,610
- ---------------------------------------------------------------------------------------------------------------------------------
$76,194 $22,000 $95,500 $22,500 $58,968 $1,903 $1,122 $278,187
- ---------------------------------------------------------------------------------------------------------------------------------
Transactions with Related Parties
Square EA
In May 1998, we completed the formation of a new joint venture with Square
Co., Ltd. ("Square"), a leading developer and publisher of entertainment
software in 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, we
have the exclusive right to distribute in North America products published by
this joint venture. Either party may terminate the existence of Square EA and
the distribution agreement effective March 31, 2003. We own a 30% minority
interest in this joint venture while Square owns 70%. This joint venture is
accounted for under the equity method.
In March 2002, we announced a publishing and distribution partnership with
Square for Final Fantasy(R) X in Asia Pacific. The deal grants us the rights to
distribute Final Fantasy X International for the PlayStation 2 computer
entertainment system in Taiwan, Hong Kong, Singapore, Thailand, Malaysia and
Korea.
We generated $80,847,000 in net revenues from sales of Square EA products
in fiscal 2002, $106,586,000 in net revenues from sales of Square EA products in
fiscal 2001 and $83,657,000 in net revenues from sales of Square EA products in
fiscal 2000.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142,
"Goodwill and Other Intangible Assets", which supersedes Accounting Principles
Board Opinion No. 17 ("APB 17"), "Intangible Assets". SFAS 142 addresses the
accounting treatment for goodwill and other intangible assets acquired
individually or with a group of other assets upon their acquisition, but not
acquired in a business combination. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. With the adoption of SFAS 142,
goodwill is no longer subject to amortization over its estimated useful life;
rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Also, if the benefit of an intangible asset
is obtained through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged, an acquired
intangible asset should be separately recognized. The terms of SFAS 142 are
effective as of the beginning of the first quarter of the fiscal year beginning
after December 15, 2001. Certain provisions of SFAS 142 shall be applied to
goodwill and other acquired intangible assets for which the acquisition date is
after June 30, 2001. On April 1, 2002, we adopted SFAS 142. As a result of
adopting this standard, we will continue to amortize finite-lived intangibles,
but will no longer amortize certain other intangible assets, most notably
goodwill and acquired workforce, which had a net book value at March 31, 2002 of
$69,050,000. Amortization of goodwill and acquired workforce totaled
approximately $13,125,000 for fiscal 2002, approximately $9,182,000 for fiscal
2001 and approximately $6,411,000 for fiscal 2000. Based on intangible assets as
of March 31, 2002, we estimate that amortization of finite-lived intangibles
will total approximately $8,700,000 for fiscal 2003. Following adoption of SFAS
142, we will continue to evaluate whether any event has occurred which might
indicate that the carrying value of an intangible asset is not recoverable. In
addition, SFAS 142 requires that goodwill be subject to at least an annual
assessment for impairment by applying a fair value-based test. We are in the
process of completing an evaluation for impairment of goodwill in accordance
with SFAS 142. We believe the implementation of SFAS 142 will not have a
material impact on our consolidated financial statements.
43
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development or normal use of the asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS 143 to have
a material impact on our consolidated financial position or results of
operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and also supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. We are in the process of determining
the impact of this new accounting standard. We believe the implementation of
SFAS 144 will not have a material impact to our consolidated financial
statements.
44
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
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 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, EMPEROR: Battle for Dune for the
PC, which was expected to ship in fiscal 2001 was not released until the first
quarter of fiscal 2002 due to development delays. Also, James Bond 007
in...Agent Under Fire for the PS2, which was expected to ship in fiscal 2001,
released in October of 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.
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 fiscal 2002, these seasonal
trends were magnified by general industry factors, including the platform
transition, the fall 2001 launches of the Xbox and Nintendo GameCube in North
America and the economic slowdown in the United States and other territories.
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 have
been going through a platform transition during the last 18 months and are now
well into a new platform cycle. Sony shipped its PlayStation 2 console in Japan
in March 2000, in North America in October 2000 and in Europe in November 2000.
Nintendo launched the Nintendo GameCube console in Japan in September 2001,
North America in November 2001 and in Europe in May 2002. Microsoft launched the
Xbox console in North America in November 2001, in Japan in February 2002 and in
Europe in March 2002. Sales of our products for the N64 and Sony PlayStation
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
45
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 of Content, Consumer Privacy and Online Delivery 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 final publishing agreement with Nintendo for the Nintendo GameCube
platform and although we are currently operating under an understanding with
Nintendo, we cannot be assured that the final terms of the formal 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.
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 builds 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
46
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 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 revenue models, including subscription fees, "pay to play fees" and
advertising. We have limited experience with developing optimal pricing
strategies for online games. For example, our product Majestic and our Platinum
offering, which contained certain browser-based entertainment games, were
launched with a monthly subscription pricing model and obtained only limited
commercial success. Accordingly, we did not realize our projected cash flows and
discontinued these offerings as part of EA.com's restructuring plan. Similarly,
we have limited experience 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 goods games. 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. It is difficult to monitor 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.
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 continue to receive
substantial financing that is required to continue to build 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 Electronic Arts may
either be treated as a debt arrangement or would increase Electronic Arts'
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 incremental interest payments 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 Electronic
Arts.
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:
. use of the Internet does not continue to increase or increases more
slowly than expected,
. the infrastructure for the Internet does not effectively support
online game play,
. 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
47
. 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:
. outages and other delays resulting from the inadequate reliability of
the network infrastructure,
. slow development of enabling technologies and complementary products,
and
. limited availability and adoption by consumers 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.
To Become and Remain Competitive, EA.com Must Continually Develop New Content.
This Is Inherently Risky and Expensive.
EA.com's success depends on our ability to develop new products and
services for the EA.com site. Our agreement with AOL requires us to develop new
games for the EA.com site. We cannot assure you that products will be developed
on time, in a cost effective manner, or that they will be commercially
successful. Currently, the release of several products such as The Sims Online
and Earth & Beyond for which we expect to generate subscription revenue, have
been delayed due to longer than anticipated development schedules. Similarly,
the online product Majestic achieved only limited commercial success due in part
to the length of time it took to download the online software component.
Accordingly, we discontinued Majestic on May 1, 2002.
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. 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 subscription 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 competing products could cause
revenues from Ultima Online to decline. In addition, popularity of Ultima Online
could decline over time simply because of consumer preference for new game
experiences.
48
We Continue to Invest in Research and Development and Network Technology and
Operations for EA.com, and We Cannot Be Assured That We Will Achieve Revenues
That Support This Level of Spending
We have invested heavily, and expect to continue to invest, in research and
development and network technology and operations for our website and online
games. While we have reduced the overall level of spending for EA.com, we will
continue to invest in the technologies, tools and network infrastructure that
are necessary for us to launch and support our key products, Earth & Beyond and
The Sims Online. Accordingly, there are no assurances that the revenues from
these products will exceed the associated costs in order for EA.com to achieve
profitability. 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 continue to be necessary to engage in
significant developmental efforts both to adapt existing Electronic Arts 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
such as The Sims Online and Earth & Beyond have experienced 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, resulting in increased operating losses for EA.com.
We Are Heavily Dependent on a Few Internet Infrastructure Service Providers to
Host and Manage Our Servers at Co-Location Facilities and Our Operating Results
May Be Adversely Affected if We Must Change Service Providers
We are dependent on a few third party internet infrastructure service
providers to host and manage the majority of our servers that support our online
games. The performance of these service providers are outside of our control.
Many of the service providers in the internet infrastructure space require
substantial financial resources to build, maintain and manage co-location
facilities. To the extent that industry, economic, financial or competitive
factors influence the level of performance that we expect from service providers
we currently use for co-location space (bandwidth and rack), we may need to
re-locate our servers to another co-location facility which would increase our
expenses and may result in delays or reduced shipments of our online products,
thereby adversely impact our operating results.
GENERAL RISK FACTORS
Because of the 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 competitive, although current market conditions have
made it less difficult to attract and retain the employees we need. In the last
fiscal year, notwithstanding the downturn of the economy generally, competitive
recruiting efforts aimed at Electronic Arts' employees and executives continued.
Electronic Arts' leading position within the interactive entertainment industry
makes us a prime target for recruiting of executives and key creative talent to
assist in the consolidation that the interactive entertainment industry is
experiencing. In addition, the cost of real estate in the San Francisco Bay area
- - the location of our headquarters and largest studio remains relatively high,
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 fiscal years ended March 31, 2002 and 2001, international net
revenues comprised 37% 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
49
Japan and Asia Pacific revenues in fiscal 2002 were adversely impacted by a
devaluation of the Yen and Australian Dollar as compared to the prior year. The
devaluation had an adverse effect for the year on our net revenues 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 were adversely affected. Consequently, if
Microsoft or Nintendo do not ship the number of units planned for the Xbox and
Nintendo GameCube, our sales of these products may be adversely affected in
fiscal 2002.
The Current Legislative and Regulatory Environment Affecting Generally Accepted
Accounting Principles is Uncertain and Volatile, and Significant Changes in
Current Principles Could Affect Our Financial Statements Going Forward.
Recent actions and public comments from the SEC have focused on the
integrity of financial reporting generally. Similarly, Congress has considered a
variety of bills that could affect certain accounting principles. 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. While we do not anticipate
that such proposals will affect the actual conduct of our business and we
believe that our financial statements have been prepared in accordance with
generally accepted accounting principles, we cannot predict the impact of the
adoption of any such proposals on our financial statements going forward.
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. In addition, fluctuations may be
due to uncertainties in the securities markets in general. For example, during
the fiscal year ended March 31, 2001, the price per share of our Class A common
stock ranged from $26.59 to $56.13 and $42.40 to $66.01 during the fiscal year
ended March 31, 2002.
World Events
The terrorist attacks of September 11, 2001 in the Unites States, the
subsequent US military action, and the continuing concerns over potential
additional terrorist attacks against US interests and citizens pose serious
uncertainties in our business. Consumer spending, consumer preferences in
entertainment, and the securities markets generally may be affected on an
ongoing and unpredictable basis by these events, all of which may make
prediction of our results more difficult.
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.
50
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 Consolidated
Statement of Operations. At March 31, 2002, we had foreign exchange contracts,
all with maturities of less than three months to purchase and sell approximately
$226,330,000 in foreign currencies, primarily British Pounds, European Currency
Units ("Euro"), Canadian Dollars 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, 2002. 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 $131,622 1.4229 $ (52)
Euro 41,121 0.8749 179
Canadian
Dollar 16,986 1.5895 67
Japanese Yen 6,431 132.64 (5)
Swedish Krona 5,427 10.3189 43
Australian
Dollar 4,206 0.5258 (58)
South African
Rand 3,125 12.4801 (281)
Norwegian
Krone 2,262 8.8409 13
Danish Krone 2,001 8.4965 10
Swiss Franc 1,199 1.6680 10
- ---------------------------------------------------------------------
Total $214,380 $ (74)
- ---------------------------------------------------------------------
Foreign currency
to be purchased
under contract:
British Pound $ 11,950 1.4253 $ (207)
- ---------------------------------------------------------------------
Total $ 11,950 $ (207)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Grand total $226,330 $ (281)
- ---------------------------------------------------------------------
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, 2002,
our cash
51
equivalents, short-term and long-term investments included debt securities of
$662,359,000. 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, 2002:
=====================================================================
Average
Interest Rate Cost Fair Value
- ---------------------------------------------------------------------
(Dollars in thousands)
Cash equivalents/(1)/
Fixed rate 3.75% $ 10,141 $ 10,141
Variable rate 2.06% $408,108 $408,108
Short-term
investments/(1)(2)/
Fixed rate 3.61% $235,769 $235,710
Variable rate 6.35% $ 8,400 $ 8,653
- ---------------------------------------------------------------------
(1) See definition in Note 1 of the Notes to Consolidated Financial
Statements.
(2) Maturity dates for short-term investments range from 3 months to 31
months with call dates ranging from 3 months to 10 months.
52
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 53 through 82.
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, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
March 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
Mountain View, California KPMG LLP
May 3, 2002
53
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of March 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 796,936 $ 466,492
Marketable securities 6,869 10,022
Receivables, less allowances of $115,870 and $89,833, respectively 190,495 174,449
Inventories, net 23,780 15,686
Other current assets 134,463 152,078
-----------------------------
Total current assets 1,152,543 818,727
Property and equipment, net 308,827 337,199
Long-term investments - 8,400
Investment in affiliates 19,077 19,052
Goodwill and other intangibles, net 110,512 136,764
Other assets 108,415 58,776
-----------------------------
$1,699,374 $1,378,918
=============================
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 88,563 $ 73,061
Accrued and other liabilities 364,419 266,965
-----------------------------
Total current liabilities 452,982 340,026
Minority interest in consolidated joint venture 3,098 4,545
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 138,429,269 and 134,714,464 shares, respectively 1,384 1,347
Class B common stock, $0.01 par value. Authorized 100,000,000 shares;
issued and outstanding 6,233,413 and 6,250,000 shares, respectively 62 63
Paid-in capital 649,777 540,354
Retained earnings 606,795 505,286
Accumulated other comprehensive loss (14,724) (12,703)
-----------------------------
Total stockholders' equity 1,243,294 1,034,347
-----------------------------
$1,699,374 $1,378,918
=============================
See accompanying Notes to Consolidated Financial Statements.
54
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended March 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Net revenues $1,724,675 $1,322,273 $1,420,011
Cost of goods sold 807,611 652,242 704,702
------------------------------------------------
Gross profit 917,064 670,031 715,309
Operating expenses:
Marketing and sales 241,109 185,336 188,611
General and administrative 107,059 104,041 92,418
Research and development 387,736 388,928 261,966
Amortization of intangibles 25,418 19,323 11,989
Charge for acquired in-process technology - 2,719 6,539
Restructuring and asset impairment charges 20,303 - -
------------------------------------------------
Total operating expenses 781,625 700,347 561,523
------------------------------------------------
Operating income (loss) 135,439 (30,316) 153,786
Interest and other income, net 12,848 16,886 16,028
------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest 148,287 (13,430) 169,814
Provision for (benefit from) income taxes 45,969 (4,163) 52,642
------------------------------------------------
Income (loss) before minority interest 102,318 (9,267) 117,172
Minority interest in consolidated joint venture (809) (1,815) (421)
------------------------------------------------
Net income (loss) $ 101,509 $ (11,082) $ 116,751
================================================
Net income per share:
Basic N/A N/A $ 0.93
Diluted N/A N/A $ 0.88
Number of shares used in computation:
Basic N/A N/A 125,660
Diluted N/A N/A 132,742
Class A common stock:
Net income (loss):
Basic $ 124,256 $ 11,944 N/A
Diluted $ 101,509 $ (11,082) N/A
Net income (loss) per share:
Basic $ 0.91 $ 0.09 N/A
Diluted $ 0.71 $ (0.08) N/A
Number of shares used in computation:
Basic 136,832 131,404 N/A
Diluted 143,142 132,056 N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (22,747) $ (23,026) N/A
Net loss per share:
Basic $ (3.77) $ (3.83) N/A
Diluted $ (3.77) $ (3.83) N/A
Number of shares used in computation:
Basic 6,026 6,015 N/A
Diluted 6,026 6,015 N/A
See accompanying Notes to Consolidated Financial Statements, including segment
information in Note 18.
55
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 2002, 2001 and 2000
(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,
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
Net loss (11,082) (11,082)
Change in unrealized
appreciation of
investments, net 3,097 3,097
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
------------------------------------------------------------------------------------------------------------
56
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended March 31, 2002, 2001 and 2000
(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,
2001 134,714 1,347 6,250 63 540,354 505,286 (12,703) - - 1,034,347
Net income 101,509 101,509
Change in unrealized
depreciation of
investments, net (3,540) (3,540)
Reclassification
adjustment for
losses realized in
net income, net 66 66
Translation adjustment 1,453 1,453
----------
Comprehensive income 99,488
Proceeds from sales of
shares through stock
plans 3,995 40 - - 98,701 98,741
Sale of stock under
stock purchase
agreement 8 - 100 100
Purchase of treasury
stock (280) (11,922) (11,922)
Retirement of treasury
stock (280) (3) (11,919) 280 11,922 -
Other (25) (1) (1)
Tax benefit related to
stock options 22,541 22,541
---------------------------------------------------------------------------------------------------------
Balances at March 31,
2002 138,429 $1,384 6,233 $62 $649,777 $606,795 $(14,724) - $ - $1,243,294
=========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
57
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended March 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 101,509 $ (11,082) $ 116,751
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Minority interest in consolidated joint venture 809 1,815 421
Equity in net income of affiliates (2,999) (820) (1,138)
Gain on sale of affiliate (200) (214) (842)
Depreciation and amortization 110,901 78,601 46,725
Non-cash restructuring and asset impairment charges 13,399 - -
Loss on sale of fixed assets 331 1,992 31
(Gain) loss on marketable securities 96 - (7,528)
Bad debt expense 9,361 7,541 6,714
Charge for acquired in-process technology - 2,719 6,539
Tax benefit from exercise of stock options 22,541 25,750 32,563
Change in assets and liabilities, net of acquisitions:
Receivables (25,407) 53,775 (77,779)
Inventories (8,094) 7,300 (579)
Other assets (1,718) (4,238) (69,727)
Accounts payable 15,502 (27,476) 29,673
Accrued and other liabilities 90,996 91,356 (6,919)
Deferred income taxes (42,056) (33,080) 2,994
---------------------------------------------------
Net cash provided by operating activities 284,971 193,939 77,899
---------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 299 4,134 444
Proceeds from sales of marketable securities, net - - 8,598
Proceeds from sale of affiliate 570 - 8,842
Capital expenditures (51,518) (120,347) (134,884)
Investment in affiliates, net 2,919 1,662 (4,099)
Purchase of marketable securities - (2,479) -
Dividend to joint venture (2,481) - -
Change in short-term investments, net (190,342) 46,907 (13,860)
Acquisition of Pogo Corporation, net of cash acquired - (42,571) -
Acquisition of Kesmai - - (22,500)
Acquisition of other subsidiaries, net of cash acquired - - (22,096)
---------------------------------------------------
Net cash used in investing activities (240,553) (112,694) (179,555)
---------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sales of Class A shares through employee
stock plans and other plans 98,741 101,996 85,589
Proceeds from sales of Class B shares and stock warrants 99 632 20,000
Purchase of treasury shares (11,922) - -
---------------------------------------------------
Net cash provided by financing activities 86,918 102,628 105,589
---------------------------------------------------
Translation adjustment 1,678 (10,326) 124
---------------------------------------------------
Increase in cash and cash equivalents 133,014 173,547 4,057
Beginning cash and cash equivalents 419,812 246,265 242,208
---------------------------------------------------
Ending cash and cash equivalents 552,826 419,812 246,265
Short-term investments 244,110 46,680 93,539
---------------------------------------------------
Ending cash, cash equivalents and short-term investments $ 796,936 $ 466,492 $ 339,804
===================================================
Supplemental cash flow information:
Cash paid during the year for income taxes $ 9,955 $ 13,556 $ 15,525
===================================================
Non-cash investing activities:
Class B common stock issued in connection with the Kesmai acquisition $ - $ - $ 9,353
Change in unrealized appreciation (depreciation) of investments and
marketable securities $ (5,035) $ 4,488 $ (5,008)
===================================================
See accompanying Notes to Consolidated Financial Statements.
58
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002, 2001 and 2000
(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 2002 contain 52 weeks. The results of operations for fiscal 2001 and
2000 contain 53 and 52 weeks, respectively. 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", as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions",
which provide guidance on generally accepted accounting principles for
recognizing revenue on software transactions.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", 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
consolidated 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 to 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 of the Notes to Consolidated Financial Statements).
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 $23,291,000, $18,944,000 and
$21,704,000 for the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
(d) Sales Returns and Other Reserves
The Company estimates potential future product returns and price protection
related to current period product revenue. The Company analyzes historical
returns, current sell through of distributor and retailer inventory of the
Company's products, current trends in the video game market and the overall
economy, changes in customer demand and acceptance of the Company's products
and other related factors when evaluating the adequacy of the sales returns
and price protection allowances. In addition, the Company monitors and manages
the volume of sales to retailers and distributors and their inventories as
substantial overstocking in the distribution channel can result in high
59
returns or the requirement for substantial price protection in subsequent
periods.
Similarly, the Company must use significant judgment and make estimates in
connection with establishing allowances for doubtful accounts in any accounting
period. The Company analyzes customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts.
(e) Cash and Investments
Cash equivalents consist of highly liquid investments with insignificant rate
risk and with maturities of three months or less at the date of purchase.
Short-term investments include securities with maturities greater than three
months and less than one year, except for certain investments with stated
maturities greater than one year. 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 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities". 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.
(f) Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
co-publishing and/or distribution affiliates and license fees paid to
celebrities, professional sports organizations and other organizations for use
of their trade name and content. 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 research and development expense 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 $65,484,000 and $46,264,000 at
March 31, 2002 and 2001, respectively. The long-term portion of prepaid
royalties, included in other assets, was $1,164,000 and $9,664,000 at March 31,
2002 and 2001, respectively.
(g) 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 ("SFAS 86"), "Accounting for the Cost of Computer Software to be Sold,
Leased, or Otherwise Marketed", 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.
(h) Inventories
Inventories are stated at the lower of cost or market. Inventories at March 31,
2002 and 2001 consisted of:
- ---------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 1,025 $ 976
Finished goods 22,755 14,710
- ---------------------------------------------------------------
$23,780 $15,686
- ---------------------------------------------------------------
(i) 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. The Company has
adopted the provisions of Emerging Issues Task Force issue No. 01-09 ("EITF
01-09"), "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products". The adoption of EITF 01-09 did not have a
material impact in the Company's consolidated financial position or results of
operations. For the fiscal years ended March 31, 2002, 2001 and 2000,
advertising expenses totaled approximately $105,712,000, $75,429,000 and
$87,377,000, respectively.
(j) 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:
60
- ------------------------------------------------------------------
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 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 $121,002,000 at March 31,
2002, and are being depreciated on a straight-line basis over each project's
estimated useful life.
(k) Intangible Assets
Intangible assets net of accumulated amortization at March 31, 2002 and 2001, of
$110,512,000 and $136,764,000, 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, 2002, 2001 and 2000 was $25,418,000, $19,323,000
and $11,989,000, 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.
On April 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
supersedes Accounting Principles Board Opinion No. 17 "Intangible Assets". As a
result of adopting this standard, the Company will continue to amortize
finite-lived intangibles, but will no longer amortize certain other intangible
assets, most notably goodwill and acquired workforce, which had a net book value
at March 31, 2002 of $69,050,000. Amortization of goodwill and acquired
workforce totaled approximately $13,125,000 for fiscal 2002, approximately
$9,182,000 for fiscal 2001 and approximately 6,411,000 for fiscal 2000. Based on
intangible assets as of March 31, 2002, the Company estimates that amortization
of finite-lived intangibles will total approximately $8,700,000 for fiscal 2003.
Following adoption of SFAS 142, the Company will continue to evaluate whether
any event has occurred which might indicate that the carrying value of an
intangible asset is not recoverable. In addition, SFAS 142 requires that
goodwill be subject to at least an annual assessment for impairment by applying
a fair value-based test. The Company is in the process of completing an
evaluation for impairment of goodwill in accordance with SFAS 142. The Company
believes the implementation of SFAS 142 will not have a material impact on its
consolidated financial statements.
(l) 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. This may
include assumptions about future prospects for the business that the asset
relates to and typically involves computations of the estimated future cash
flows to be generated by these businesses. Based on these judgments and
assumptions, the Company determines whether it needs to take an impairment
charge to reduce the value of the asset stated on the balance sheet to reflect
its actual fair value. Judgments and assumptions about future values and
remaining useful lives are complex and often subjective. They can be affected by
a variety of factors, including but not limited to, significant negative
industry or economic trends, significant changes in the manner or the Company's
use of the acquired assets or the strategy of the Company's overall business and
significant underperformance relative to expected historical or projected future
operating results. 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.
In April 2002, the Company adopted Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company is in the process of determining
the impact of this new accounting standard. The Company believes the
implementation of SFAS 144 will not have a material impact to its consolidated
financial statements.
(m) 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. Deferred tax assets and liabilities are based on
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The Company records a valuation allowance to reduce tax
assets to an amount whose realization is more likely than not. The valuation
allowance is based on the Company's estimates of taxable income by
61
jurisdiction in which the Company operates and the period over which the
Company's deferred tax assets will be recoverable.
(n) 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 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 $412,000, $888,000 and
$1,781,000, for the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires us to recognize these
as either assets or liabilities on the balance sheet and measure them at fair
value. As described in Note 3 of the Notes to Consolidated Financial Statements,
gains and losses resulting from changes in fair value are accounted for
depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting. The adoption of this accounting standard did not
have a material impact on the Company's consolidated financial position or
results of operations.
(o) 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 of the Notes to Consolidated
Financial Statements). 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(In thousands, except for per share amounts):
- ------------------------------------------------------------------
Year Ended March 31, 2002
Class A Class A
common common
stock- stock- Class B
Basic Diluted common stock
- ------------------------------------------------------------------
Net income (loss)
before retained
interest in EA.com $ 253,156 $ 101,509 $ (151,647)
Net loss related to
retained interest in
EA.com (128,900) - 128,900
- ------------------------------------------------------------------
Net income (loss) $ 124,256 $ 101,509 $ (22,747)
- ------------------------------------------------------------------
Shares used to compute net
income (loss) per share:
Weighted-average
common shares 136,832 136,832 6,026
Dilutive stock
equivalents - 6,310 -
- ------------------------------------------------------------------
Dilutive potential
common shares 136,832 143,142 6,026
- ------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.91 N/A $ (3.77)
Diluted N/A $ 0.71 $ (3.77)
(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)
62
(In thousands, except for per share amounts):
- -----------------------------------------------------------------
Year Ended March 31, 2000
- -----------------------------------------------------------------
Net income $116,751
- -----------------------------------------------------------------
Shares used to compute net income per share:
Weighted-average common shares 125,660
Dilutive stock equivalents 7,082
- -----------------------------------------------------------------
Dilutive potential common shares 132,742
- -----------------------------------------------------------------
Net income per share:
Basic $ 0.93
Diluted $ 0.88
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 stock in the event that the initial public offering for Class B common
stock does not occur. Net income used for the calculation of Diluted EPS for
Class A common stock is $101,509,000 for the fiscal year ended March 31, 2002.
This net income 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, 2002 and
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
these periods, an additional 842,000 and 472,000 shares, respectively, would
have been added to diluted potential common shares for Class B common stock for
the twelve months ended March 31, 2002 and 2001.
Excluded from the above computation of weighted-average shares for Class A
diluted EPS for the fiscal years ended March 31, 2002, 2001 and 2000 were
options to purchase 1,515,000, 2,705,000 and 229,000 shares of common stock,
respectively, as the options' exercise price was greater than the average market
price of the common shares. Class B common stock, authorized on March 22, 2000,
was excluded from the Company's calculations of basic and diluted EPS for the
fiscal year ended March 31, 2000 because its impact on the calculations was
immaterial.
(p) 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 $4,811,000, $1,127,000 and $1,799,000 to the Plan in fiscal 2002,
fiscal 2001 and fiscal 2000, respectively.
(q) 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 ("APB
25"), "Accounting for Stock Issued to Employees" and Financial Accounting
Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation (an interpretation of APB Opinion No.
25)". The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation".
(r) Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure 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, long-lived assets, deferred income taxes, warranty
provisions, and estimates regarding the recoverability of prepaid royalty
advances and inventories. Actual results could differ from those estimates.
(s) Reclassifications
Certain amounts have been reclassified to conform to fiscal 2002 presentation.
(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.
63
(3) FINANCIAL INSTRUMENTS
(a) Cash and Investments
- ----------------------------------------------------------------
As of March 31,
2002 2001
- ----------------------------------------------------------------
(in thousands)
Cash and cash equivalents:
Cash $134,577 $ 70,196
Money market funds 380,632 250,182
Municipal securities 27,189 91,879
Commercial paper 10,428 7,555
- ----------------------------------------------------------------
Cash and cash equivalents 552,826 419,812
- ----------------------------------------------------------------
Short-term investments:
Available-for-sale
U.S. Agency bonds 222,985 -
Corporate bonds 8,236 4,076
Municipal securities 4,489 42,604
Held-to-maturity
U.S. Treasury securities 8,400 -
- ----------------------------------------------------------------
Short-term investments 244,110 46,680
- ----------------------------------------------------------------
Cash, cash equivalents and short-
term investments $796,936 $466,492
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Long-term investments:
U.S. Treasury securities $ - $ 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, 2002 was $8,653,000
which included gross unrealized gains of $253,000. The fair value of
held-to-maturity securities at March 31, 2001 was $8,601,000 which included
gross unrealized gains of $201,000.
(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
(depreciation) reported as a separate component of accumulated other
comprehensive loss in stockholders' equity. Marketable securities had an
aggregate cost of $6,954,000 and $7,066,000 at March 31, 2002 and 2001,
respectively. At March 31, 2002, marketable securities included gross unrealized
losses of $85,000. At March 31, 2001, marketable securities included gross
unrealized gains of $2,956,000. There were no sales of marketable securities in
fiscal years 2002 and 2001.
(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 its
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.
Net Loss Recognized in Other Income Relating to Fair Value Hedging of the
Balance Sheet:
- ---------------------------------------------------------------
Year Ended March 31,
2002 2001
- ---------------------------------------------------------------
(in thousands)
Gain (loss) on foreign currency
assets and liabilities $ 991 $(26,104)
Gain (loss) on hedges of foreign
currency assets and liabilities (1,403) 25,216
- ---------------------------------------------------------------
Net loss recognized in other
income $ (412) $ (888)
- ---------------------------------------------------------------
The Company transacts business in various foreign currencies. At March 31, 2002,
the Company had foreign exchange contracts, all with maturities of less than
three months, to purchase and sell approximately $226,330,000 in foreign
currencies, primarily in British Pounds, European Currency Units ("Euros"),
Canadian Dollars, and other 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,
2002, fair value of these contracts is not significant. 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 the Company's efforts to manage
foreign exchange risk, there can be no assurances that it's hedging activities
will adequately protect against the risks associated with foreign currency
fluctuations.
(4) LEASE 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
64
increases over the base year of these expenses on the remainder of the Company's
facilities.
In February of 1995, the Company entered into a build-to-suit lease with a
financial institution on its headquarter's facility in Redwood City, California,
which was extended in July of 2001 and runs through July of 2006. The Company
accounted for this arrangement as an operating lease in accordance with
Statement of Financial Accounting Standards No. 13 ("SFAS 13"), "Accounting for
Leases", as amended. Existing campus facilities developed in phase one comprise
a total of 350,000 square feet and provide space for sales, marketing,
administration and research and development functions. The Company has an option
to purchase the property (land and facilities) for $145,000,000 or, at the end
of the lease, to arrange for (1) an additional extension of the lease or (2)
sale of the property to a third party with the Company retaining an obligation
to the owner for the difference between the sale price and the guaranteed
residual value of up to $128,900,000 if the sales price is less than this
amount, subject to certain provisions of the lease.
In December 2000, the Company entered into a second build-to-suit lease with a
financial institution for a five year term from December 2000 to expand its
headquarter's facilities and develop adjacent property adding approximately
310,000 square feet to its campus. The Company expects to complete construction
in June of 2002. The Company accounted for this arrangement as an operating
lease in accordance with SFAS 13, as amended. The facilities will provide space
for marketing, sales and research and development. The Company has an option to
purchase the property for $127,000,000 or, at the end of the lease, to arrange
for (1) an extension of the lease or (2) sale of the property to a third party
with the Company retaining an obligation to the owner for the difference between
the sale price and the guaranteed residual value of up to $118,800,000 if the
sales price is less than this amount, subject to certain provisions of the
lease.
Lease rates are based upon the Commercial Paper Rate. The two lease agreements
described above require the Company to maintain certain financial covenants, all
of which the Company was in compliance with as of March 31, 2002.
Total future minimum lease commitments as of March 31, 2002 are:
- ---------------------------------------------------------
Year Ended March 31, (in thousands)
2003 $18,288
2004 15,011
2005 11,354
2006 10,810
2007 9,122
Thereafter 11,609
- ---------------------------------------------------------
$76,194
- ---------------------------------------------------------
Total rent expense for all operating leases was $25,177,000, $27,526,000 and
$23,591,000, for the fiscal years ended March 31, 2002, 2001 and 2000,
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 to AOL $81,000,000 over the life of the five-year
agreement. Of this amount, $36,000,000 was paid upon signing the agreement with
the remainder due in four equal installments on the first four anniversaries of
the initial payment. The Company paid AOL $11,250,000 in both fiscal 2002 and
2001. The fair value of the payments made under the AOL agreement was determined
by an independent valuation and the resulting amounts are being amortized using
the straight-line method (beginning with the site launch) over the remaining
term of the five-year agreement. Advances of $38,597,000 and $41,462,000 are
included in other long-term assets as of March 31, 2002 and 2001, respectively.
The Company made a commitment to spend $15,000,000 in offline media
advertisements promoting their online games, including those on the AOL service,
prior to March 31, 2005. As of March 31, 2002, the Company has spent
approximately $3,500,000 against this commitment.
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 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, 2002, none of the AOL shares have been
exchanged for Class A common stock.
65
(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. For the
fiscal year ended March 31, 2002, the Company had receivable balances from one
customer which represented 13% of total gross accounts receivables. For the
fiscal years ended March 31, 2001 and 2000, there were no customers with
receivable balances greater than 10% of total gross accounts receivables.
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 or results of operations of the Company.
(8) PREFERRED STOCK
At March 31, 2002 and 2001, 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.
(9) TREASURY STOCK
In September 2001, the Board of Directors approved a plan to purchase up to two
million shares of the Company's Class A common stock. For the fiscal year ended
March 31, 2002, the Company repurchased 280,000 shares for approximately
$11,922,000 under the program. In February 2002, all of the 280,000 shares were
retired.
(10) 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. A new
Employee Stock Purchase Plan program was approved by the Board of Directors in
May 2000 and commenced in August 2000. In addition, the Company has a stock
purchase plan which was adopted without stockholder approval, the International
Employee Stock Purchase Plan. The International Employee Stock Purchase Plan was
adopted by the Board of Directors in June 1996 and amended in October 1998,
February 1999 and February 2002 and is in all material respects identical to the
Employee Stock Purchase Plan approved by the stockholders for US employees. In
fiscal 2002, 313,240 shares were purchased by the Company and distributed to
employees at prices ranging from $42.45 to $45.05. 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. The weighted average fair value of the fiscal 2002, fiscal 2001 and
fiscal 2000 awards was $18.88, $18.31 and $10.00, respectively. At March 31,
2002, the Company had 1,009,673 shares of Class A Common Stock reserved for
future issuance under the Plans.
(b) Stock Option Plans
The Company's 2000 Class A Equity Incentive Plan, 1995 Stock Option Plan, and
Directors' Plan ("Option Plans") provide options for employees, officers and
directors to purchase the 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.
At the Company's Annual Meeting of Stockholders, held on August 1, 2001, the
stockholders elected to amend the 2000 Class A Equity Incentive Plan to increase
by 6,000,000 the number of shares of the Company's Class A common stock reserved
for issuance under the Plan.
Under the Company's stock option plans, 246,000 shares were reissued from
treasury stock in fiscal 2000. No shares were distributed from reissued treasury
stock in fiscal 2002 or 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,
2002 there were 225,000 restricted shares issued under the Class B equity plan.
The options generally expire ten years from the date of grant and are generally
exercisable in monthly increments over 50
66
months. Class B common stock grants will generally vest over 50 months with 2%
vesting per month.
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. As
of March 31, 2002, there were 121,000 warrants outstanding under this program.
These warrants expire not later than five years from issuance.
The Company has an equity compensation stock plan which was adopted without
stockholder approval, the Celebrity and Artist Stock Option Plan. The Celebrity
and Artist Stock Option Plan was adopted by the Board of Directors in July 1994
and amended in May 1997, October 1997, September 1998 and July 1999. The terms
under this plan are substantially similar to the terms of the 2000 Class A
Equity Incentive Plan.
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock Based Compensation". 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 2002, 2001 and 2000 would have been:
Consolidated
(In thousands, except per share data)
- -----------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------
Net income (loss):
As reported $101,509 $(11,082) $116,751
Pro forma $ 27,913 $(69,350) $ 78,380
Earnings per share:
As reported - basic N/A N/A $ 0.93
Pro forma - basic N/A N/A $ 0.62
As reported - diluted N/A N/A $ 0.88
Pro forma - diluted N/A N/A $ 0.60
- -----------------------------------------------------------------
Class A Common Stock
(In thousands, except per share data)
- -----------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------
Net income (loss):
As reported - basic $124,256 $ 11,944 N/A
Pro forma - basic $ 51,505 $(45,493) N/A
As reported - diluted $101,509 $(11,082) N/A
Pro forma - diluted $ 27,913 $(69,350) N/A
Earnings (loss) per share:
As reported - basic $ 0.91 $ 0.09 N/A
Pro forma - basic $ 0.38 $ (0.35) N/A
As reported - diluted $ 0.71 $ (0.08) N/A
Pro forma - diluted $ 0.20 $ (0.53) 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 2002, 2001 and 2000 under the stock plans: risk-free
interest rates of 2.22% to 4.51% in 2002; 4.59% to 6.55% in 2001; and 4.93% to
6.54% in 2000; expected volatility of 72% in fiscal 2002, 74% in fiscal 2001 and
65% in fiscal 2000; expected lives of 2.25 years in fiscal 2002, 2.32 years in
fiscal 2001 and 2.29 years in fiscal 2000 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)
- -----------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------
Net loss:
As reported $(22,747) $(23,026) N/A
Pro forma $(23,592) $(23,857) N/A
Loss per share:
As reported - basic $ (3.77) $ (3.83) N/A
Pro forma - basic $ (3.92) $ (3.97) N/A
As reported - diluted $ (3.77) $ (3.83) N/A
Pro forma - diluted $ (3.92) $ (3.97) 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.
67
Additional information regarding options outstanding for Class A as of March 31,
2002 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 - $ 14.938 2,467,771 3.72 $11.88 2,460,911 $11.88
15.000 - 18.563 2,320,347 5.05 17.34 1,444,878 17.00
19.000 - 23.563 2,582,951 6.41 21.81 1,960,239 21.82
23.625 - 28.500 503,344 6.97 26.25 328,980 26.17
28.969 - 29.875 2,848,273 7.40 29.82 1,490,328 29.82
30.844 - 44.500 2,586,540 8.32 39.55 854,492 38.48
44.688 - 46.540 2,796,244 9.33 46.47 377,795 46.33
46.938 - 49.500 3,153,199 8.51 49.30 1,009,540 49.32
49.688 - 57.040 2,888,196 9.17 54.94 215,854 53.91
57.170 - 63.130 670,795 9.39 59.35 81,056 59.23
- -------------------------------------------------------------------------------------------------------------
$ 0.995 - $ 63.130 22,817,660 7.42 $35.51 10,224,073 $26.04
=============================================================================================================
Additional information regarding options outstanding for Class B as of March 31,
2002 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 2,611,719 8.00 $ 9.00 1,553,510 $ 9.00
10.000 65,275 8.34 10.00 27,952 10.00
12.000 1,484,171 8.96 12.00 425,937 12.00
- -------------------------------------------------------------------------------------------------------------
$ 9.000 - $ 12.000 4,161,165 8.35 $10.09 2,007,399 $ 9.65
=============================================================================================================
68
The following summarizes the activity under the Company's Class A stock option
plans during the fiscal years ended March 31, 2002, 2001 and 2000:
----------------------------------------------
Options Outstanding
----------------------------------------------
Weighted-Average
Shares Exercise Price
----------------------------------------------
Balance at March 31, 1999 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 (8,902,789 shares were
exercisable at a weighted average price of $20.55) 21,544,139 28.66
Granted 6,313,776 51.29
Canceled (1,358,690) 36.14
Exercised (3,681,565) 22.27
----------------------------------------------
Balance at March 31, 2002 22,817,660 $35.51
----------------------------------------------
Options available for grant at March 31, 2002 3,510,216
The following summarizes the activity under the Company's Class B stock option
plan during the fiscal years ended March 31, 2002 and 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 (21,990 shares were exercisable
at a weighted average price of $9.57) 5,106,482 9.68
Granted 977,983 12.00
Canceled (1,923,220) 9.99
Exercised (80) 9.00
----------------------------------------------
Balance at March 31, 2002 4,161,165 $10.09
----------------------------------------------
Options available for grant at March 31, 2002 2,363,755
69
(11) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2002 and 2001 consisted of:
- -----------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------
(in thousands)
Computer equipment and software $ 319,893 $ 310,147
Buildings 97,939 94,784
Land 44,911 44,721
Office equipment, furniture and
fixtures 31,915 32,569
Leasehold improvements 15,463 13,483
Warehouse equipment and other 5,396 4,319
- -----------------------------------------------------------------
515,517 500,023
Less accumulated depreciation and
amortization (206,690) (162,824)
- -----------------------------------------------------------------
$ 308,827 $ 337,199
- -----------------------------------------------------------------
Depreciation and amortization expenses associated with property and equipment
amounted to $67,619,000, $50,345,000 and $34,736,000 for the fiscal years ended
March 31, 2002, 2001 and 2000, respectively.
(12) ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities at March 31, 2002 and 2001 consisted of:
- -----------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------
(in thousands)
Accrued income taxes $ 94,444 $ 42,371
Accrued compensation and benefits 87,985 75,603
Accrued expenses 87,104 73,997
Accrued royalties 77,590 55,997
Deferred revenue 13,286 16,967
Warranty reserve 4,010 2,030
- ----------------------------------------------------------------
$364,419 $266,965
- ----------------------------------------------------------------
(13) 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. During fiscal 2002, all of these
development projects were completed and launched on Pogo gamesites. 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
- ---------------------------------------------------
70
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 its existing common
stock valued at $8,650,000. 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 also agreed to spend $12,500,000 through the period ended June 1,
2002 in advertising with News Corp or any of its affiliates. In addition, if
certain conditions are met, including that a qualified public offering of Class
B common stock does not occur within twenty-four months of News Corp's purchase
of such shares and all of the Class B outstanding shares have been converted to
Class A common stock, then (1) News Corp has the right to (i) exchange Class B
common stock for approximately 206,000 shares of Class A common stock, and (ii)
receive cash from Electronic Arts in the amount of $9,650,000, and (2) the
Company will agree to spend an additional $11,675,000 in advertising with News
Corp and its affiliates.
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.
As part of the restructuring plan announced in fiscal 2002 for EA.com, the
Company evaluated its intangibles for impairment in accordance with Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company assessed the recoverability of its intangibles by determining
whether the carrying amount of the assets was recoverable through estimated
future undiscounted net cash flows. The Company calculated the impairment loss
as the amount that the carrying value of the asset exceeded the discounted
future cash flows. The Company recorded in restructuring and asset impairment
charges a write-off of $1,014,000 related to certain other intangibles
associated with Kesmai. These intangibles had remaining lives ranging from 15 to
39 months.
Purchased in-process research and development includes the value of products in
the development stage that are not
71
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 2002 and fiscal 2001,
all of these development projects were completed and launched on the EA.com
gamesites. The resources were redirected to ongoing live game operations or to
building the EA.com publishing platform. As a result, the Company does not
anticipate incurring significant future development costs in relation to these
projects after fiscal 2002. 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, 1999 (in thousands, except per share data):
Year Ended
March 31, 2000
- -----------------------------------------------------------------
Net revenues $1,421,313
Net income $ 113,996
Net income per share - basic $ 0.91
Net income per share - diluted $ 0.86
Number of shares used in computation
- - basic 125,660
Number of shares used in computation
- - diluted 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.
(c) 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. Either party may terminate the
existence of Square EA and the distribution agreement effective March 31, 2003.
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.
(d) Other Business Combinations
Additionally, during the fiscal 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.
(14) INCOME TAXES
The Company's pretax income (loss) from operations for the fiscal years ended
March 31, 2002, 2001 and 2000 consisted of the following components:
- ----------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------
Domestic $ 17,020 $(27,166) $104,096
Foreign 131,267 13,736 65,718
- ----------------------------------------------------------------
Total pretax income
(loss) $148,287 $(13,430) $169,814
- ----------------------------------------------------------------
72
Income tax expense (benefit) for the fiscal years ended March 31, 2002, 2001 and
2000 consisted of:
====================================================================
(in thousands) Current Deferred Total
- --------------------------------------------------------------------
2002:
Federal $60,728 $(44,277) $ 16,451
State 1,048 (672) 376
Foreign 4,306 2,295 6,601
Charge in lieu of taxes
from employee stock
plans for Class A 22,541 - 22,541
- --------------------------------------------------------------------
$88,623 $(42,654) $ 45,969
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
The components of the net deferred tax assets as of March 31, 2002 and 2001
consist of:
====================================================================
(in thousands) 2002 2001
- --------------------------------------------------------------------
Deferred tax assets:
Accruals, reserves and other
expenses $ 53,891 $ 76,603
Net operating loss carryforwards 50,174 6,662
Tax credits 46,118 27,066
- --------------------------------------------------------------------
Total 150,183 110,331
- --------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (913) (1,189)
Prepaid royalty expenses (11,342) (44,678)
Fixed assets (35,266) (4,456)
- --------------------------------------------------------------------
Total (47,521) (50,323)
- --------------------------------------------------------------------
Net deferred tax asset $102,662 $ 60,008
- --------------------------------------------------------------------
At March 31, 2002, deferred tax assets of $38,597,000 and $64,065,000 were
included in other current assets and other assets, respectively.
At March 31, 2002, the Company had Federal net operating loss carryforwards of
approximately $127,000,000 for income tax reporting purposes, which expire in
2021 and 2022. The Company also had state net operating loss carryforwards of
approximately $177,000,000 for income tax reporting purposes, which expire
beginning in 2006.
The Company also has research and experimental tax credits aggregating
approximately $25,000,000 and $10,000,000 for federal and California purposes,
respectively. The federal credit carryforwards expire from 2006 to 2022. The
California credits carry over indefinitely until utilized. The Company also has
foreign tax credit carryforwards of approximately $10,500,000, which expire from
2003 to 2007.
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income (loss) before provision
for (benefit from) income taxes, for the years ended March 31, 2002, 2001 and
2000 were as follows:
====================================================================
2002 2001 2000
- --------------------------------------------------------------------
Statutory Federal tax rate 35.0% (35.0%) 35.0%
State taxes, net of Federal
benefit 1.5% (10.0%) 1.5%
Differences between statutory
rate and foreign effective tax
rate (3.0%) 20.2% (2.8%)
Research and development credits (3.4%) (4.7%) (1.7%)
Other 0.9% (1.5%) (1.0%)
- --------------------------------------------------------------------
31.0% (31.0%) 31.0%
- --------------------------------------------------------------------
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 $259,000,000 of undistributed earnings of its foreign
subsidiaries, since the Company intends to reinvest this amount in foreign
subsidiary operations indefinitely.
At March 31, 2002, 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 substantially prevailed with respect to the principal issues at the Tax
Court level. The time for the IRS to appeal has not yet expired. The Company
believes that additional liabilities, if any, that arise from the outcome of
this examination will not be material to the Company's consolidated financial
statements.
73
(15) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31,
2002, 2001 and 2000 consisted of:
=================================================================
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------
Interest income $16,691 $17,903 $13,744
Gain (loss) on disposition of
assets, net (131) (1,778) 8,339
Foreign currency losses (412) (888) (1,781)
Foreign currency cost of
hedging (3,032) - -
Equity in net gain of
affiliates 2,999 820 1,138
Other income (expense), net (3,267) 829 (5,412)
- -----------------------------------------------------------------
$12,848 $16,886 $16,028
- -----------------------------------------------------------------
(16) Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("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, 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)
Other
comprehensive
income (loss) 1,453 (3,474) (2,021)
- ------------------------------------------------------------------
Balance at March
31, 2002 $(14,166) $ (558) $(14,724)
- ------------------------------------------------------------------
Change in unrealized gains (losses) on investments, net are shown net of taxes
of $(1,561,000), $1,391,000 and $(1,553,000) in fiscal 2002, 2001 and 2000,
respectively.
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
(17) 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.
(18) SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information", 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.
The Company operates in two principal business segments globally:
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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.
74
Information about Electronic Arts business segments is presented below for the
fiscal years ended March 31, 2002, 2001 and 2000 (in thousands):
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
----------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- -------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,647,502 $ 77,173 $ - $1,724,675
Group sales 4,016 - (4,016)/(a)/ -
----------------------------------------------------------------------
Total net revenues 1,651,518 77,173 (4,016) 1,724,675
----------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 794,738 12,873 - 807,611
Group cost of goods sold - 4,016 (4,016)/(a)/ -
----------------------------------------------------------------------
Total cost of goods sold 794,738 16,889 (4,016) 807,611
----------------------------------------------------------------------
Gross profit 856,780 60,284 - 917,064
Operating expenses:
Marketing and sales 202,749 20,496 17,864 /(c)/ 241,109
General and administrative 96,919 10,140 - 107,059
Research and development 257,762 59,892 70,082 /(b)/ 387,736
Network development and support - 59,483 (59,483)/(b)/ -
Customer relationship management - 10,599 (10,599)/(b)/ -
Carriage fee - 17,864 (17,864)/(c)/ -
Amortization of intangibles 12,888 12,530 - 25,418
Restructuring and asset impairment charges - 20,303 - 20,303
----------------------------------------------------------------------
Total operating expenses 570,318 211,307 - 781,625
----------------------------------------------------------------------
Operating income (loss) 286,462 (151,023) - 135,439
Interest and other income (expense), net 13,472 (624) - 12,848
----------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 299,934 (151,647) - 148,287
Provision for income taxes 45,969 - - 45,969
----------------------------------------------------------------------
Income (loss) before minority interest 253,965 (151,647) - 102,318
Minority interest in consolidated joint venture (809) - - (809)
----------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 253,156 $ (151,647) $ - $ 101,509
=========================================================================================================================
Interest income $ 16,641 $ 50 $ - $ 16,691
Depreciation and amortization 51,673 59,228 - 110,901
Identifiable assets 1,529,422 169,952 - 1,699,374
Capital expenditures 38,406 13,112 - 51,518
75
- -------------------------------------------------------------------------------------------------------------------------
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 33,219 - 78,601
Identifiable assets 1,167,846 211,072 - 1,378,918
Capital expenditures 51,460 68,887 - 120,347
76
- -----------------------------------------------------------------------------------------------------------------------
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
(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.
77
Information about Electronic Arts' operations in the North America and foreign
areas for the fiscal years ended March 31, 2002, 2001 and 2000 is presented
below:
- ----------------------------------------------------------------------------------------------------------------------------------
Asia
(in thousands) Pacific
North (excluding
America Europe Japan) Japan Eliminations Total
----------------------------------------------------------------------------------------
Fiscal 2002
Net revenues from unaffiliated
customers $ 1,093,244 $ 519,458 $ 53,376 $ 58,597 $ - $ 1,724,675
Intercompany revenues 2,411 37,533 8,755 55 (48,754) -
---------------------------------------------------------------------------------------
Total net revenues 1,095,655 556,991 62,131 58,652 (48,754) 1,724,675
=======================================================================================
Operating income 8,328 121,058 2,277 3,401 375 135,439
Interest income 14,440 2,010 241 - - 16,691
Depreciation and amortization 95,395 13,768 1,091 647 - 110,901
Capital expenditures 39,259 10,350 1,038 871 - 51,518
Identifiable assets 1,325,939 333,825 21,435 18,175 - 1,699,374
Long-lived assets 348,120 158,500 4,469 4,428 - 515,517
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 71,501 6,510 275 315 - 78,601
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
Electronic Arts had sales to one customer which represented 14% of total net
revenues in fiscal 2002 and 12% of total net revenues in fiscal 2001 and 2000.
78
Information about Electronic Arts' net revenues by product line for the fiscal
years ended March 31, 2002, 2001 and 2000 is presented below (in thousands):
- -----------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------
PlayStation 2 $ 482,882 $ 258,988 $ -
PC 456,292 405,256 395,522
Affiliated label 269,010 222,278 275,333
PlayStation 189,535 309,988 586,821
Xbox 78,363 - -
Nintendo Gamecube 51,740 - -
Game Boy Advance 43,653 - -
Game Boy Color 38,026 - -
Advertising 38,024 6,175 -
Online Subscriptions 30,940 28,878 16,771
License, OEM and Other 24,762 20,468 22,894
N64 18,152 67,044 120,415
Online Packaged Goods 3,296 3,198 2,255
- -----------------------------------------------------------------------------
$1,724,675 $1,322,273 $1,420,011
- -----------------------------------------------------------------------------
79
(19) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In October 2001, the Company announced a restructuring plan for EA.com. The
restructuring initiatives involved strategic decisions to discontinue certain
product offerings and focus only on key online priorities that align with its
fiscal 2003 operational objectives. The workforce reduction resulted in the
termination of approximately 270 positions.
During fiscal 2002, the Company recorded restructuring charges of
$20,303,000, consisting of $4,173,000 for workforce reductions, $3,312,000
for consolidation of facilities and other administrative charges, and
$12,818,000 for the write-off of non-current assets and facilities. The
estimated costs for workforce reduction included severance charges for
terminated employees and costs for certain outplacement service contracts.
The consolidation of facilities resulted in the closure of EA.com's San Diego
studio and consolidation of its San Francisco and Virginia facilities. The
estimated costs for consolidation of facilities included contractual rental
commitments under real estate leases for unutilized office space offset by
estimated future sub-lease income, costs to close or consolidate facilities,
and costs to write off a portion of the assets from these facilities.
The Company recorded restructuring charges for EA.com in accordance with
Emerging Issues Task Force No. 94-03, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)", Emerging Issues Task Force No.
95-03, "Recognition of Liabilities in Connection with a Purchase Business
Combination", and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges". Adjustments to the restructuring reserves will be made
in future periods, if necessary, based upon current events and circumstances.
As part of the restructuring efforts, the Company assessed the remaining
useful lives of goodwill, purchased intangible assets and other long-lived
assets and tested the recoverability of its long-lived assets in accordance
with SFAS 121. Management evaluated the impact of consolidating or abandoning
certain EA.com technologies and processes and reviewed the effect of changes
to EA.com's subscription product offerings in relation to EA.com's asset
base. Based on computations of estimated future net cash flows attributable
to these assets and product offerings, it was determined that there was a
need to reduce the value of certain assets on our balance sheet to reflect
their estimated fair value. Impairment charges on long-lived assets amounted
to $12,818,000 and included $11,177,000 relating to consolidated or abandoned
technologies for the EA.com infrastructure and $1,641,000 of goodwill and
intangibles impairment charges relating to the EA.com's San Diego and Kesmai
studios. There are no assurances that the impairment factors evaluated by
management will not change in subsequent periods and accordingly, this could
result in additional impairment charges in future periods.
The pre-tax restructuring charge of $20,303,000 consisted of $6,836,000 in
cash outlays and $13,467,000 in non-cash charges related to the write-offs of
non-current assets and facilities. As of March 31, 2002, an aggregate of
$4,016,000 in cash had been paid out under the restructuring plan. Of the
remaining cash outlay of $2,820,000, $1,590,000 is expected to occur in
fiscal 2003 while the remaining $1,230,000 will occur in fiscal years 2004
and beyond.
The following table summarizes the activity in the accrued restructuring
account in fiscal 2002 (in thousands):
- -----------------------------------------------------------------------------------------------------------
Non-Current
Workforce Facilities Assets Total
- -----------------------------------------------------------------------------------------------------------
Charged to operations in fiscal 2002 $ 4,173 $ 3,312 $ 12,818 $ 20,303
Charges utilized in cash in fiscal 2002 (3,499) (517) - (4,016)
Charges utilized in non-cash in fiscal 2002 - (581) (12,818) (13,399)
---------------------------------------------------------
Accrual balance as of March 31, 2002 $ 674 $ 2,214 $ - $ 2,888
=========================================================
The restructuring accrual is included in accrued expenses in Note 12 of the
Notes to Consolidated Financial Statements.
80
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 2002
Consolidated
Net revenues $ 181,950 $ 240,156 $ 832,878 $ 469,691 $ 1,724,675
Operating income (loss) (68,378) (52,057) 188,501 67,373 135,439
Net income (loss) (45,254)/(a)/ (32,824)/(a)/ 132,292/(b)/ 47,295/(c)/ 101,509
Class A Stockholders
Net income (loss) per share - basic $ (0.29) $ (0.20) $ 1.01 $ 0.38 $ 0.91
Net income (loss) per share - diluted $ (0.33) $ (0.24) $ 0.92 $ 0.33 $ 0.71
Common stock price per share
High $ 63.04 $ 60.60 $ 66.01 $ 62.95 $ 66.01
Low $ 48.31 $ 44.50 $ 42.40 $ 51.16 $ 42.40
Class B Stockholders
Net loss per share - basic $ (0.98) $ (0.93) $ (1.11) $ (0.76) $ (3.77)
Net loss per share - diluted $ (0.98) $ (0.93) $ (1.11) $ (0.76) $ (3.77)
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 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)/(d)/ (38,909)/(e)/ 87,978/(d)/ (17,880)/(f)/ (11,082)
Class A Stockholders
Net income (loss) per share - basic $ (0.30) $ (0.27) $ 0.72 $ (0.07) $ 0.09
Net income (loss) per share - diluted $ (0.33) $ (0.30) $ 0.63 $ (0.13) $ (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/(g)/ 18,132/(g)/ 92,861/(g)/ 3,432/(h)/ 116,751
Net income per share - basic $ 0.02 $ 0.15 $ 0.73 $ 0.03 $ 0.93
Net income per share - diluted $ 0.02 $ 0.14 $ 0.69 $ 0.03 $ 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
(a) Net loss includes goodwill amortization of $4.5 million, net of taxes.
(b) Net income includes restructuring and asset impairment charges of $9.7
million, net of taxes, as well as goodwill amortization of $4.3 million,
net of taxes.
(c) Net income includes restructuring and asset impairment charges of $4.3
million, net of taxes, as well as goodwill amortization of $4.2 million,
net of taxes.
(d) Net income (loss) includes goodwill amortization of $3.2 million, net of
taxes.
81
(e) Net loss includes goodwill amortization of $3.3 million, net of taxes.
(f) Net loss includes 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.
(g) Net income includes goodwill amortization of $1.8 million, net of taxes.
(h) Net income includes 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.
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.
82
Item 9: Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
83
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 2002 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 and
Related Stockholder Matters
The information required by Item 12 is incorporated herein by reference to the
information in the Proxy Statement under the captions "Principal Stockholders"
and "Equity Compensation Plan Information".
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".
84
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 53
Consolidated Balance Sheets as of March 31, 2002
and 2001 54
Consolidated Statements of Operations for the Years Ended
March 31, 2002, 2001 and 2000 55
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 2002, 2001 and 2000 56
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2002, 2001 and 2000 58
Notes to Consolidated Financial Statements for the Years
Ended March 31, 2002, 2001 and 2000 59- 82
2. Financial Statement Schedule.
----------------------------
The following financial statement schedule of Electronic Arts for the
years ended March 31, 2002, 2001 and 2000 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. (35)
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 2003 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)
85
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)
86
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.
(36)
10.47 Residential Purchase Agreement by and between Registrant
and John Riccitiello, dated August 14, 2000. (36)
10.48 Office Service Agreement by and between Pogo.com Inc and
300 California Associates, LLC, dated September 17, 1999.
(36)
10.49 Office Lease Agreement by and between Pogo.com Inc and
Fifth Avenue LLC, dated May 5, 2000. (36)
10.50 Office Lease Agreement by and between Registrant and
California Plaza of Walnut Creek, Inc., dated February 1,
2001. (36)
10.51 Assignment and Assumption of Lease by and between
Registrant and Leap Wireless International, Inc., dated
January 29, 2002.
10.52 Amendment No. 2 to Lease Agreement by and between
Electronic Arts Redwood, Inc. and Flatirons Funding, LP
dated July 16, 2001.
87
10.53 Participation Agreement among Electronic Arts Redwood,
Inc., Electronic Arts, Inc., Flatirons Funding, LP, Selco
Service Corporation and Selco Redwood, LLC, Victory
Receivables Corporation, The Bank of Toyko-Mitsubishi,
Ltd., various Liquidity Banks and Tranche B Banks and
Keybank National Association dated July 16, 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)
------------------------------------------------------------------
(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.
88
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form
10-K.
(16) Not Used.
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form
10-K.
(18) Confidential treatment has been granted with respect to
certain portions of this document.
(19) Incorporated by reference to similarly numbered exhibits to
Registrants Annual Report on Form 10-K for the year ended
March 31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
(23) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1994 (the "1994 Form 10-K").
(25) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 (the "1995 Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(27) Incorporated by 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").
89
(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.
(35) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 2000 (the "2000 Form 10-K").
(36) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 2001 (the "2001 Form 10-K").
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
2002.
(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 92.
90
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, 2002
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 2002.
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/ Leonard S. Coleman Director
- ------------------------------------
(Leonard S. Coleman)
/s/ Gary M. Kusin Director
- ------------------------------------
(Gary M. Kusin)
/s/ Timothy J. Mott Director
- ------------------------------------
(Timothy J. Mott)
/s/ Linda J. Srere Director
- ------------------------------------
(Linda J. Srere)
91
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2002, 2001 and 2000
(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, 2002
Allowance for doubtful
accounts and returns $ 89,833 $ 183,847 $ (3,947) $ 153,863 $ 115,870
========= ========= ========= ========= =========
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
========= ========= ========= ========= =========
(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) and other reclassification adjustments.
92
ELECTRONIC ARTS INC.
2002 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.03 Description of Registrant's FY 2003 Executive Bonus Plan
10.51 Assignment and Assumption of Lease by and between Registrant and
Leap Wireless International, Inc., dated January 29, 2002.
10.52 Amendment No. 2 to Lease Agreement by and between Electronic Arts
Redwood, Inc. and Flatirons Funding, LP dated July 16, 2001.
10.53 Participation Agreement among Electronic Arts Redwood, Inc.,
Electronic Arts, Inc., Flatirons Funding, LP, Selco Service
Corporation and Selco Redwood, LLC, Victory Receivables Corporation,
The Bank of Toyko-Mitsubishi, Ltd., various Liquidity Banks and
Tranche B Banks and Keybank National Association dated July 16,
2001.
21.01 Subsidiaries of the Registrant
23.01 Consent of KPMG, LLP, Independent Auditors
- ----------
93