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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended March
31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
___ to ___
Commission File No. 0-17948
ELECTRONIC ARTS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2838567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1450 FASHION ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 571-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE,
HELD BY NON-AFFILIATES OF THE REGISTRANT ON JUNE 3, 1997 WAS $1,305,458,993.
AS OF JUNE 3, 1997, THERE WERE 54,239,439 SHARES OF REGISTRANT'S COMMON STOCK,
$.01 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1997 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 56 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 56.
Page 1 of 56
ELECTRONIC ARTS INC.
1997 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 4A. Executive Officers of the Registrant 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49
Signatures 54
Exhibit Index 56
2
PART I
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS") CONTAINS FORWARD LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE
FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND
UNCERTAINTIES DISCUSSED IN "FACTORS AFFECTING FUTURE PERFORMANCE" BELOW AT PAGES
29 TO 31. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER
MATERIALLY FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND
UNCERTAINTIES.
ITEM 1: BUSINESS
OVERVIEW
Electronic Arts' predecessor was incorporated in California in 1982. In
September 1991, Electronic Arts was reincorporated under the laws of Delaware.
Unless otherwise indicated, the "Company" or "Electronic Arts," refers to
Electronic Arts Inc., a Delaware corporation, its California predecessor and its
wholly-owned and majority-owned subsidiaries. Electronic Arts' principal
executive offices are located at 1450 Fashion Island Boulevard, San Mateo,
California 94404. Its telephone number is (415) 571-7171.
Electronic Arts creates, markets and distributes interactive entertainment
software for a variety of hardware platforms. As of March 31, 1997, the Company
marketed approximately 117 titles developed and/or published under one of its
brand names, including older titles marketed as "Classics" or "Publisher's
Choice." The Company also distributed approximately 51 additional titles
developed by other software publishers ("Affiliated Labels") in North America
and over 1,000 Affiliated Label titles in the rest of the world. As of March 31,
1997, the Company had developed 53 titles that had each generated life-to-date
net revenues in excess of $10,000,000. Since its inception, the Company has
developed products for 36 different computer hardware platforms, including the
following: IBM PC-CD and compatibles, Amiga, 8-bit Nintendo Entertainment System
(the "NES"), 16-bit Sega Genesis video game system (the "Genesis"), 16-bit Super
Nintendo Entertainment System (the "SNES"), Sega CD-ROM (Compact Disc-Read Only
Memory) peripheral device, Macintosh CD, 3DO Interactive Multiplayer, the
PlayStation ("PlayStation"), the Sega Saturn ("Saturn") and the Nintendo 64
("N64"). The Company's fiscal 1997 product releases were primarily for PC-CD and
32-bit video game platforms and to a lesser degree 16-bit and N64 cartridge
products. As of March 31, 1997, the Company was developing products for 5
different hardware platforms.
3
The Company's product development methods and organization are modeled
on those used in the entertainment industry, and the Company markets its
products with techniques borrowed from other entertainment companies such as
record producers, magazine publishers and video distributors. Company employees
called "producers," who are each responsible for the development of one or more
products, oversee product development and direct teams comprised of both
Electronic Arts employees and outside contractors. Electronic Arts' designers
regularly work with celebrities and organizations in sports, entertainment and
other areas to develop products that provide gaming experiences that are as
realistic and interactive as possible. Celebrities and organizations with whom
the Company has had contracts include: FIFA, ROAD & TRACK, John Madden,
Shaquille O'Neal, the National Basketball Association, the PGA TOUR, the Pebble
Beach Company and the National Hockey League. The Company maintains development
studios in California, Canada, United Kingdom, Texas, Japan, Washington and
Maryland.
The Company invests 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. The Company has also made
investments in new facilities and equipment to facilitate the creation and
editing of digital forms of video and audio recordings and product development
efforts for new hardware platforms.
Additionally, the Company produces film, videotape and audio recordings to
include in its products. Two of the Company's subsidiaries, Electronic Arts
Productions Inc. (d/b/a Crocodile Productions) and Electronic Arts Productions
Ltd., have signed agreements with the Screen Actors Guild ("SAG") and American
Federation of Television and Radio Artists ("AFTRA") in the United States and
with British Actors Equity Association ("Equity") in the UK, respectively,
giving the Company access to a wide range of talent for use in Company-produced
film and video for inclusion in the Company's products. See Factors Affecting
-----------------
Future Performance - Film and Videotape at page 30.
- ---------------------------------------
Electronic Arts distributes its products and those of its Affiliated Labels
primarily by direct sales to retail chains and outlets in the United States and
Europe. In Japan and the South Asia Pacific region, the Company distributes
products both directly to retailers and through third party distributors. The
Company's products are available in over 52,000 retail locations worldwide. In
fiscal 1997, approximately 46% of the Company's net revenues were generated by
international operations, compared to 42% and 32% in fiscal 1996 and fiscal
1995, respectively.
4
INVESTMENTS AND JOINT VENTURES
Acquisitions
------------
On June 4, 1997, the Company entered into a definitive agreement to
merge with Maxis, Inc. ("Maxis"), a California-based interactive software
developer. Under the proposed transaction, approximately 4.1 million shares of
Electronic Arts' stock will be exchanged for all outstanding Maxis common stock.
The transaction, which is anticipated to be completed in the quarter ended
September 30, 1997, will be accounted for as a pooling of interests.
Investments
-----------
The Company has made investments as part of its overall strategy and
currently holds minority equity interests in several companies, including
NovaLogic, Inc., Tiburon Entertainment, Firaxis Software, Inc., Stormfront
Studios, Mpath Interactive, Accolade, Inc. and The 3DO Company ("3DO"). See
Factors Affecting Future Performance - Investment In Affiliates at page 31.
- ---------------------------------------------------------------
Joint Ventures
--------------
The Company has a majority interest in a joint venture corporation,
Electronic Arts Victor Inc. ("EAV") for the development and distribution of
entertainment software products in Japan as well as certain Asian countries. See
Note 10 of the Notes to the Consolidated Financial Statements, included in Item
8 hereof.
The Company and Capital Cities/ABC, Inc. formed a joint venture company in
December 1994, Creative Wonders, LLC (formerly ABC/EA Home Software, LLC), to
develop and publish children's edutainment and interactive entertainment titles
as well as reference products. The Company currently distributes Creative
Wonders' products as one of the Company's Affiliated Labels. See Note 10 of the
Notes to the Consolidated Financial Statements included in Item 8 hereof.
5
MARKET
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. This phenomenon has resulted
in the Company developing products at one time or another for 36 different
hardware platforms. Today, the competition in the market for hardware platforms
has intensified. In fiscal 1997, the hardware market completed the transition
from 16-bit video game platforms to next generation Sony and Sega 32-bit systems
and saw the introduction of the Nintendo 64-bit video game system. In addition,
the installed base of multimedia-enabled home computers has continued to grow as
prices have declined and the quality and choices of software have increased
dramatically . The Company develops and publishes products for multiple
platforms, and this diversification continues to be a cornerstone of the
Company's strategy.
Early generation computer systems for which interactive software products
were published such as the Apple II and the Commodore 64 were 8-bit
floppy-disk-based personal computers. Several years ago these systems were
eclipsed by more powerful personal computer systems based on 16-bit
microprocessors, such as the IBM PC and compatibles, the Commodore Amiga and the
Apple Macintosh. Current computer systems utilize 32-bit microprocessor
technology and typically run CD-ROM based products.
Video game systems have likewise changed significantly over time. In 1986
and 1987, Nintendo Co., Ltd. ("Nintendo") and Sega Enterprises, Ltd. ("Sega"),
respectively, introduced 8-bit video game systems that, compared to existing
general-purpose computer systems available at the time, were low in price, easy
to use and had more sophisticated audio-video capabilities. In late 1989, Sega
began shipping its Genesis system, a more powerful 16-bit video game system. In
August 1991, Nintendo introduced its 16-bit SNES video game system. In late
1992, Sega introduced the Sega CD-ROM drive as an add-on peripheral to its
Genesis system.
6
The interactive software industry has recently undergone another
significant change due in part to the introduction of new hardware platforms, as
well as remote and electronic delivery systems. The new generation of systems
are based on 32-bit and 64-bit microprocessors that incorporate dedicated
graphics chipsets. Many of these systems utilize CD-ROM drives. The Company
began development of 32-bit software products over five years ago by creating
the original software development system for the first of these advanced
products, the 3DO Interactive Multiplayer ("3DO"), which was introduced in
calendar year 1993. Sega and Sony each began distribution of their next
generation hardware systems (named the "Saturn" and "PlayStation," respectively)
in Japan during the quarter ended December 1994. Sega began limited shipment of
the Saturn in North America in May 1995 and Sony began shipping the PlayStation
in North America in September 1995.
In June 1996, Nintendo shipped the N64 in Japan and subsequently introduced
the system in North America in September 1996. The N64 is a cartridge-based
video game platform which uses a 64-bit microprocessor. Additionally, Matsushita
is developing a next generation hardware system based on the 64-bit M2
technology licensed from 3DO.
New entrants in the interactive entertainment and multimedia industries,
such as cable television, telephone and diversified media and entertainment
companies, and a proliferation of new technologies, such as on-line networks and
the Internet may increase the competition in the markets in which the Company
competes. The Company's new product releases in its 1998 fiscal year will be
primarily for the IBM PC-CD and compatibles and 32-bit video game platforms,
including the Sony PlayStation and the Sega Saturn. The Company is also
scheduled to release one N64 product and two on-line network gaming products
during fiscal 1998. See Factors Affecting Future Performance - The Industry and
-------------------------------------------------------
Competition at page 29.
- -----------
The early investment in products for the 32-bit market, including both
Compact Disk personal computer ("PC-CD") and CD-dedicated video game ("CD-video
game") platforms, has been strategically important in positioning the Company
for the current generation of 32-bit machines. The Company believes that such
investment continues to be important and will continue aggressive development
activities for 32-bit and 64-bit platforms. Although the PlayStation has
achieved significant market acceptance in all geographical territories, there
can be no assurance that its growth will continue at the present rates,
particularly with the introduction of N64 by Nintendo. The introduction and
market acceptance of the N64, particularly in North America, may adversely
impact the growth rate of the 32-bit CD-video game platforms. While the Company
has a broad range of products available, the Company will not ship products for
the N64 in any significant quantities until calendar year 1998. In addition, the
Company's revenues and earnings are dependent on its ability to meet its product
release schedule and its failure to meet those schedules could result in
revenues and earnings which fall short of analysts' expectations for the fiscal
year, and in particular the first quarter of fiscal 1998. See Factors Affecting
-----------------
Future Performance - Development and Platform Changes, respectively, at page
- ------------------------------------------------------
29.
7
COMPETITION
See Factors Affecting Future Performance - The Industry and Competition at
-------------------------------------------------------------------
page 29.
RELATIONSHIPS WITH SIGNIFICANT HARDWARE PLATFORM COMPANIES
Sony
----
In fiscal 1997, approximately 30% of the Company's net revenues were
derived from sales of software for the PlayStation compared to 9% in fiscal
1996. PlayStation products were first released during the second quarter of
fiscal 1996. During fiscal 1997, the Company released fourteen PlayStation games
compared to thirteen in fiscal 1996. Among these releases were Madden Football
---------------
'97, Soviet Strike, NBA Live '97, FIFA Soccer '97 and NHL '97. The volume of
- --- ------------- ------------ --------------- -------
sales of PlayStation products significantly increased in fiscal 1997 due to the
increase in the installed base of PlayStation consoles worldwide and the quality
and timely release of the Company's key franchise titles. Although revenues from
the sales of PlayStation products in fiscal 1998 are expected to continue to
grow, the Company does not expect to maintain these growth rates. See Factors
-------
Affecting Future Performance - Development at page 29.
- ------------------------------------------
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended, the
Company is authorized to develop and distribute CD-based software products
compatible with the PlayStation. Pursuant to the Sony Agreement, the
Company engages Sony to supply its PlayStation CDs for distribution by the
Company. Accordingly, the Company has limited ability to control its supply of
PlayStation CD products or the timing of their delivery. See Factors Affecting
-----------------
Future Performance - Hardware Companies at page 30.
- ---------------------------------------
In connection with the Company's purchases of Sony products to be
distributed in Japan, Sony of Japan requires cash deposits totaling one-third of
the purchase orders. At March 31, 1997, EAV had no outstanding deposits to Sony.
EAV utilizes a line of credit to fund these deposits and other operating needs.
At March 31, 1997, EAV had an outstanding balance on this line of approximately
$4,024,000.
Nintendo
--------
During the fourth quarter of fiscal 1997, the Company released one product
for the N64, FIFA Soccer 64. In fiscal 1997, approximately 3% of the Company's
--------------
net revenues were derived from the sale of N64 products. In March 1997, the
Company signed a licensing agreement with Nintendo (the "N64 Agreement") to
develop, publish and market certain sports products for the N64. Due to the
development time necessary for these products, the Company does not anticipate
shipping products for the N64 in any significant quantities until calendar year
1998.
8
Under the terms of the N64 Agreement, the Company engages Nintendo to
manufacture its N64 cartridges for distribution by the Company. Accordingly, the
Company has limited ability to control its supply of N64 cartridges or the
timing of their delivery. A shortage of microchips or other factors outside the
control of the Company could impair the Company's ability to obtain an adequate
supply of cartridges.
In fiscal 1997, approximately 4% of the Company's net revenues were derived
from sales of software for the SNES platform compared to 12% in fiscal 1996. The
volume of sales of SNES products declined in fiscal 1997 as the market made the
transition from 16-bit cartridge based video game platforms to next generation
32-bit systems. The Company released three SNES games in fiscal 1997 compared to
five games in fiscal 1996. These releases were Madden Football '97, NBA Live '97
------------------- ------------
and FIFA Soccer '97. The Company does not expect to release any new SNES titles
---------------
in fiscal 1998.
Under the terms of its licensing agreement with Nintendo for SNES products,
the Company is authorized to develop, publish and market cartridge products for
the SNES. SNES cartridges distributed in North America and Europe are
manufactured by the Company in Puerto Rico. The Company is required to purchase
from Nintendo certain key components for production of these cartridges. A
shortage of these components or other factors outside the control of the Company
could impair the Company's ability to manufacture an adequate supply of
cartridges. The Company's SNES cartridges distributed in the rest of the world
are manufactured by Nintendo.
In connection with the Company's purchases of N64 and SNES cartridges for
distribution in North America, Nintendo requires the Company to provide
irrevocable letters of credit prior to Nintendo's acceptance of purchase orders
from the company for purchases of these cartridges. For purchases of N64
cartridges for distribution in Japan and Europe, and for SNES cartridges
distributed outside of North America and Europe, Nintendo requires the Company
to make cash deposits. Furthermore, Nintendo maintains a policy of not
accepting returns of either N64 or SNES cartridges. Because of these and other
factors, the carrying of an inventory of cartridges entails significant capital
and risk. See Factors Affecting Future Performance - Hardware Companies at page
---------------------------------------------------------
30.
9
Sega
----
In the fiscal year ended March 31, 1997, approximately 10% of the Company's
net revenue came from sales of Sega Genesis products compared to 26% in fiscal
1996. During fiscal 1997, the Company released six Genesis games compared to ten
in fiscal 1996. The volume of sales of Sega Genesis products declined
significantly in fiscal 1997 as the market made the transition from 16-bit
cartridge based video game platforms to next generation 32-bit systems. The
Company currently has planned only limited releases of Sega Genesis products in
fiscal 1998 and, accordingly, the volume of Genesis sales is expected to
continue to significantly decline in fiscal 1998.
Under the terms of a licensing agreement entered into with Sega in July
1992, as amended (the "16-bit Sega Agreement"), the Company is authorized to
develop and manufacture ROM-cartridge software products compatible with the Sega
Genesis system through December 1997 and to distribute those cartridges through
June 1998. Genesis cartridges are manufactured by the Company in Puerto Rico
under the 16-bit Sega Agreement. A shortage of components, or other factors
outside the control of the Company could impair the Company's ability to obtain
an adequate supply of cartridges.
In the fiscal year ended March 31, 1997, approximately 6% of the Company's
net revenue came from sales of Saturn products compared to 2% in fiscal 1996.
During fiscal 1997, the Company released twelve Saturn products compared with
four in fiscal 1996. Among these releases were Madden Football '97, Need for
------------------- --------
Speed and NHL '97. During the third quarter of fiscal 1996, the Company had its
- ----- -------
initial release of products for the Saturn.
Under the terms of a licensing agreement entered into with Sega in January
1995 (the "Sega Saturn Agreement"), the Company is authorized to develop and
distribute CD-based software products compatible with the Sega Saturn. Pursuant
to the Sega Saturn Agreement, the Company engages various third party
manufacturers approved by Sega to supply its Saturn CDs for distribution.
Accordingly, the Company has limited ability to control its supply of Saturn CD
products or the timing of their delivery.
PRODUCTS AND PRODUCT DEVELOPMENT
In fiscal 1997, the Company generated approximately three quarters of its
revenues from products released during the year. See Factors Affecting Future
------------------------
Performance - Products at page 29. As of March 31, 1997, the Company was
- ----------------------
actively marketing approximately 117 titles, comprising approximately 264 stock
keeping units ("sku's"), that were published by the Company's development
divisions and subsidiaries ("EA Studios"). During fiscal 1997, the Company
introduced over 31 EA Studios titles, representing over 63 sku's, compared to 22
EA Studio titles, comprising over 64 sku's, in fiscal 1996. From the inception
of the Company through March 31, 1997, the EA Studios organization had created
and published 53 titles that have each generated more than $10,000,000 in
life-to-date net revenues for the Company.
10
The products published by EA Studios are designed and created by its
in-house designers and artists and by independent software developers
("independent artists"). The Company typically pays the independent artists
royalties based on the sales of the specific products, as defined in the related
independent artist agreements.
For fiscal 1997, one title, Madden Football '97, published on five
-------------------
platforms, represented 11% of the total 1997 net revenues. For fiscal 1996, the
Company had one title, FIFA Soccer '96, published on six platforms, which
---------------
represented 11% of the total 1996 net revenues. No one title accounted for more
than 10% of the Company's net revenues for fiscal 1995.
The Company publishes products in a number of categories such as sports,
action and interactive movies, strategy, simulations, role playing and
adventure, each of which is becoming increasingly competitive. The Company's
sports-related products, marketed under the EA Sports brand name, accounted for
a significant percentage of net revenues in fiscal years 1997 and 1996. There
can be no assurance that the Company will be able to maintain its market share
in the sports category. See Factors Affecting Future Performance - The
------------------------------------------
Industry and Competition at page 29.
- ------------------------
The front line retail selling prices in North America of the Company's
products, excluding older titles (marketed as "Classics" and "Publisher's
Choice"), typically range from $40.00 to $70.00. "Classics" and "Publisher's
Choice" titles have retail selling prices that range from $10.00 to $15.00. The
retail selling prices of EA titles outside of North America vary based on local
market conditions.
The Company currently develops or publishes products for 5 different
hardware platforms and has from time to time developed and marketed products on
36 different and incompatible platforms in the past. In fiscal 1997, the Company
product introductions were predominantly for PC-CD, 32-bit video game platforms
and to a lesser degree 16-bit video game systems. The Company's planned product
introductions for fiscal 1998 are predominantly for PC-CD and 32-bit video game
systems. The Company will also release a limited number of products for the N64
and for on-line network play in fiscal 1998. See Factors Affecting Future
------------------------
Performance - Development and Platform Changes, respectively, at page 29.
- -----------------------------------------------
As compact discs have emerged as the preferred medium for interactive
entertainment, education, and information software, the Company continued its
investment in the development of CD-ROM tools and technologies in fiscal 1997
and currently has more than 37 products in development for new CD-ROM platforms,
including the IBM PC and compatibles, the PlayStation and the Saturn. Most of
these products will be convertible for use on multiple advanced hardware
systems. During the fiscal years 1997, 1996 and 1995, the Company had research
and development expenditures of $118.1 million, $99.6 million, and $73.9
million, respectively. See Factors Affecting Future Performance - Development at
--------------------------------------------------
page 29.
11
Additionally, the Company produces film and videotape to include in certain
products pursuant to agreements between certain of the company's subsidiaries
with SAG, AFTRA and Equity. With extensive use of video in some of the Company's
products, particularly its products in the interactive movie category, there can
be no assurance that the significantly higher sales levels required to make
these products profitable will be achieved. During fiscal 1997, the Company
released one product with significant video content and expects to release one
product with significant video content in fiscal 1998. In addition, the
Company's agreements with SAG and AFTRA expire in June 1997 and there can be no
assurances that the Company will be able to renegotiate favorable terms. See
Factors Affecting Future Performance - Film and Videotape at page 30.
- ---------------------------------------------------------
MARKETING AND DISTRIBUTION
The Company distributes both EA Studio products and products developed and
published by other software publishers known as "Affiliated Labels."
In most cases, Affiliated Label products are delivered to the Company as
completed products. As of March 31, 1997, the Company distributed 51 Affiliated
Label titles in North America and over 1,000 Affiliated Label titles in the
rest of the world. No single Affiliated Label has accounted for more than 10%
of the Company's net revenue in any of the last three fiscal years.
During fiscal 1997, the Company entered into a one year agreement with
Twentieth Century Fox Home Entertainment outside of North America and multi-year
agreements with Accolade, Inc. and DreamWorks Interactive in North America for
distribution of their products. Additionally, a significant affiliate was
acquired and discontinued distribution through the Company in the second quarter
of fiscal 1997.
The Company generated approximately 87% of its North American net revenues
from direct sales through a field sales organization of professionals and a
group of telephone sales representatives. The remaining 13% of its North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where the Company believes direct sales
would not be economical. The Company had no customers accounting for more than
10% of total net revenues for the years ended March 31, 1997, 1996 and 1995.
As discussed above, (See Market above) the video game business has become
------
increasingly "hits" driven, requiring significantly greater expenditures for
advertising, particularly for television advertising. There can be no assurance
that the Company will continue to produce "hit" products or that advertising
expenditures will increase sales sufficiently to recoup the advertising
expenditures.
12
The Company has stock-balancing programs for its personal computer products
that, under certain circumstances and up to a specified amount, allow for the
exchange of personal computer products by resellers. The Company also typically
provides for price protection for its personal computer and video game system
products that, under certain conditions, allows the reseller a price reduction
from the Company for unsold products. The Company maintains a policy of
exchanging products or giving credits, but does not give cash refunds. Moreover,
the risk of product returns may increase as new hardware platforms become more
popular or market factors force the Company to make changes in its distribution
system. The Company monitors and manages the volume of its sales to retailers
and distributors and their inventories as substantial overstocking in the
distribution channel can result in high returns or the requirement for
substantial price protection in subsequent periods. The Company believes that it
provides adequate reserves for returns and price protection which are based on
estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of the Company's products and other factors, and that its current
reserves will be sufficient to meet return and price protection requirements for
current in-channel inventory. However, there can be no assurance that actual
returns or price protection will not exceed the Company's reserves. See Factors
-------
Affecting Future Performance - Revenues and Expenses at page 30.
- ---------------------------------------------------------------
The Company also has a fulfillment group that sells product directly to
consumers through a toll-free number listed in advertising by the Company and
its Affiliated Labels. This group is also responsible for targeted direct mail
marketing and sells product upgrades, backups and accessories to registered
customers.
The distribution channels through which consumer software products are sold
have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The development of remote and
electronic delivery systems will create further changes. The bankruptcy or other
business difficulties of a distributor or retailer could render Electronic Arts'
accounts receivable from such entity uncollectible, which could have an adverse
effect on the operating results and financial condition of the Company. In the
quarter ended September 1996, the Company recorded $2,300,000 in bad debt
expenses related to potentially uncollectible receivables from a customer who
filed for bankruptcy. In addition, an increasing number of companies are
competing for access to these channels. Electronic Arts' arrangements with its
distributors and retailers may be terminated by either party at any time without
cause. Distributors and retailers often carry products that compete with those
of the Company. Retailers of Electronic Arts' products typically have a limited
amount of shelf space and promotional resources for which there is intense
competition. There can be no assurance that distributors and retailers will
continue to purchase Electronic Arts' products or provide Electronic Arts'
products with adequate levels of shelf space and promotional support.
13
INTERNATIONAL OPERATIONS
The Company has wholly owned subsidiaries in the United Kingdom, France,
Spain, Germany, Australia, Canada, South Africa, Singapore, Sweden and Puerto
Rico as well as a majority owned subsidiary in Japan. The amounts of net
revenues, operating profit and identifiable assets attributable to each of the
Company's geographic regions for each of the last three fiscal years are set
forth in Note 15 of the Notes to the Consolidated Financial Statements included
in Item 8 hereof. International net revenues increased by 28% to $289,239,000,
or 46% of consolidated 1997 net revenues, compared to $225,658,000, or 42% of
the 1996 total. The increase in international revenues was due to higher
worldwide sales of 32-bit CD-video game products and increased sales of PC-CD
and Affiliated Label products in Europe and South Asia Pacific. This was
partially offset by a decrease in 16-bit video game cartridge products. In
fiscal 1997, the Company continued its strategy to expand into emerging world
markets by opening offices in Malaysia, Beijing, Shanghai, Taiwan and Holland as
well as expanding its European distribution.
In fiscal 1997, net revenues from Europe increased by 42% to $223,930,000
compared to $157,999,000 in fiscal 1996. The increase in Europe was mainly
attributable to the expansion of distribution in the United Kingdom as well as
higher revenues generated by Kingsoft GmbH, EA France and the full year of
operations of EA Nordic and EA South Africa. The increase was due mainly to an
increase in net revenues derived from higher volume of PlayStation and PC-CD
products and Affiliated Label products offset by a decrease in 16-bit products.
The increase in European Affiliated Label revenues was, in part, due to a new
distribution agreement with Twentieth Century Fox Home Entertainment.
In fiscal 1997, Japan net revenues decreased by 19% to $37,237,000 compared
to $45,865,000 in fiscal 1996. The decrease in sales in Japan is attributable to
the soft demand for PC products and the delay in the introduction of products
relevant to the Japanese market. The decrease was partially offset by increased
sales of 32-bit products and a title for the N64. In fiscal 1997, net revenues
from South Asia Pacific increased by 29% to $28,072,000 compared to $21,794,000
in fiscal 1996. The increase in net revenues was due mainly to sales in new
markets, including China, Taiwan and New Zealand.
Though international revenues are expected to grow in fiscal 1998,
international revenues may not grow at as high a rate as in prior years.
14
MANUFACTURING
The Company's Genesis and SNES cartridge products are manufactured by the
Company in Puerto Rico under the terms of a manufacturing license agreement with
Sega and Nintendo, respectively. A portion of the Company's personal computer
CD-ROM products are also manufactured in Puerto Rico. The assembly of the final
packaged product is performed by outside organizations under the supervision of
the Company's operations organization. The manufacturing process for all
software involves the duplication of software code onto ROM chips, or CD,
printing of packaging and documentation, and assembly of the final packaged
product. Quality control tests are performed on all products by Company
employees, and the products are then warehoused and shipped to customers by the
Company.
In many instances, the Company is able to acquire materials on a
volume-discount basis. The Company has multiple potential sources of supply for
most materials. Except with respect to its PlayStation and N64 products, the
Company also has alternate sources for the manufacture and assembly of most of
its products. To date, the Company has not experienced any material difficulties
or delays in production of its software and related documentation and packaging.
However, a shortage of components or other factors beyond the control of the
Company could impair the Company's ability to manufacture, or have manufactured,
its products. See Factors Affecting Future Performance - Hardware Companies at
page 30. ---------------------------------------------------------
BACKLOG
The Company normally ships product within a few days after receipt of an
order. However, a backlog may occur for EA Studios and Affiliated Label products
that have been announced for release but not yet shipped. The Company does not
consider backlog to be an indicator of future performance.
SEASONALITY
The Company's business is highly seasonal. The Company typically
experiences its highest revenues and profits in the calendar year-end holiday
season and a seasonal low in revenues and profits in the quarter ending in June.
In its 1998 fiscal year, and particularly in the June and September quarters,
the Company expects these seasonal trends to be magnified by general economic
and industry factors.
15
EMPLOYEES
As of March 31, 1997, the Company employed approximately 1,700 people, of
whom over 900 were outside the United States. The Company believes that its
ability to attract and retain qualified employees is an important factor in its
growth and development and that its future success will depend, in large
measure, on its ability to continue to attract and retain qualified employees.
To date, the Company has been successful in recruiting and retaining sufficient
numbers of qualified personnel to conduct its business successfully. See Factors
-------
Affecting Future Performance - Employees at page 30.
- ----------------------------------------
16
ITEM 2: PROPERTIES
The Company's principal administrative, sales and marketing, research and
development, and support facility is located in four modern buildings in San
Mateo, California, 15 miles south of San Francisco. The Company presently
occupies approximately 196,000 sq. ft. in these buildings, under leases that
expire at various times between August 1998 and April 1999.
In addition, the Company leases and occupies a 54,000 sq. ft. facility used
as an office and warehouse in Hayward, California, and a 84,000 sq. ft.
warehouse facility in Louisville, Kentucky. The Company also occupies sales
offices in the metropolitan areas of Toronto, Chicago, Dallas and New York. The
Company also has a manufacturing facility in San Juan, Puerto Rico.
The Company's North American research and development activities are
supported by a 86,000 sq. ft. development facility in Burnaby, British
Columbia, Canada and a 29,000 sq. ft. facility in Seattle, Washington. The
Company also owns a 180,000 sq. ft. development facility in Austin, Texas and
leases a 5,000 sq. ft. development facility in Baltimore, Maryland.
The Company's United Kingdom subsidiary occupies administrative, sales, and
distribution facilities in Langley, England, under a long-term lease for a total
of 66,000 sq. ft. and a 22,000 sq. ft. development facility in Surrey, England.
In Europe, the Company also leases two administrative, sales and distribution
facilities in Germany, as well as sales and distribution facilities in Madrid,
Spain, Lyon, France, Stockholm, Sweden and Johannesberg, South Africa.
In Asia and the South Pacific, the Company maintains a 5,500 sq. ft. sales
and distribution facility in Brisbane, Australia. The Company also has sales and
distribution facilities in Singapore, Malaysia, Taiwan and New Zealand, and
representative offices in Beijing and Shanghai, China. The Company also
maintains a 27,000 sq. ft. sales and development office in Tokyo, Japan. See
Notes 3 and 8 to Notes to the Consolidated Financial Statements included in Item
8 hereof.
In February 1995, the Company entered into a master operating lease for
land and buildings to be constructed in Redwood City, California. The facility
is to be used as a corporate headquarters for EA. The above mentioned rental
space EA currently occupies in San Mateo, California is expected to be vacated
upon the completion of the new corporate headquarters. The square footage of the
new facilities is expected to be approximately 375,000. The Company expects
completion of these facilities in fiscal 1999.
The Company believes that these facilities are adequate for its current
needs. The Company believes that suitable additional or substitute space will be
available as needed to accommodate the Company's future needs.
17
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to a number of routine pending litigation matters.
Management, after review and consultation with counsel, considers that any
liability from the disposition of such matters would not have a material adverse
effect upon the financial condition or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1997.
18
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are chosen by and serve at the
discretion of the Board of Directors, are as follows:
Name Age Position
---- --- --------
Lawrence F. Probst III 47 Chairman of the Board of Directors
and Chief Executive Officer
William Bingham Gordon 47 Executive Vice President, Marketing
Mark S. Lewis 47 Executive Vice President, International
E. Stanton McKee, Jr. 52 Executive Vice President, Chief Financial
and Administrative Officer
Don A. Mattrick 33 Executive Vice President, North American Studios
Nancy L. Smith 44 Executive Vice President, North American Sales
and Distribution
Monty Finefrock 48 Senior Vice President, San Mateo Studios
Ruth A. Kennedy 42 Senior Vice President, General Counsel and
Secretary
David L. Carbone 46 Vice President, Finance
MR. PROBST has been a director of the Company since January 1991 and
currently serves as Chairman of the Board of Directors and Chief Executive
Officer. He was elected as Chairman in July 1994. Mr. Probst served as President
of Electronic Arts since December 1990, as Senior Vice President of EA
Distribution, the Company's distribution division, from January 1987 to January
1991, and from September 1984, when he joined the Company, until December 1986,
served as Vice President of Sales. Mr. Probst holds a B.S. degree from the
University of Delaware.
MR. GORDON has served as Executive Vice President, Marketing since October
1995. From August 1993 to October 1995, he served as Executive Vice President of
EA Studios. Prior to this, he served as Senior Vice President of Entertainment
Production since February 1992. From December 1989 to January 1992, he served as
the Senior Vice President of Marketing. He also served as General Manager of EA
Studios, as Vice President of Marketing, Director of Advertising and Vice
President of the Company's former entertainment division while employed by the
Company. Mr. Gordon holds a B.A. degree from Yale University and an M.B.A.
degree from Stanford University.
19
MR. LEWIS has served as Executive Vice President, International since
October 1996 and previously as Senior Vice President, International from July
1993 to October 1996. From August 1991 to July 1993, he served as President of
Electronic Arts, Ltd., a wholly owned subsidiary of the Company which serves the
European market from its base in Langley, England. He has also served as
Managing Director of Electronic Arts, Ltd., Director of European Publishing, and
as a Producer and Manager of Product Support and Acquisitions during his tenure
with the Company. He has been employed by the Company since 1984. Mr. Lewis is a
graduate of Yale University.
MR. MCKEE joined the Company 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.
MR. MATTRICK has 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 the Company in 1991.
MS. SMITH has 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 the Company
in 1984. Ms. Smith holds a B.S. degree in management and organizational behavior
from the University of San Francisco.
MR. FINEFROCK has served as Senior Vice President, San Mateo Studios since
October 1995. Prior to this he served as Senior Vice President and General
Manager of the EA Entertainment division since March 1994. From February 1992 to
March 1994, he served as Vice President of EA Studio Operations and Development.
From July 1989 to February 1992, Mr. Finefrock served as Vice President of
Studio Operations. Mr. Finefrock joined the Company in April 1983. He holds a
B.S. degree in Business Administration from the University of Redlands.
MS. KENNEDY has been employed by the Company 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.
20
MR. CARBONE has been with the Company since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Prior to joining the Company, Mr. Carbone served as Controller for
Magnetic Pulse, Inc., a privately held designer of tools for hydrocarbon
exploration, and was previously employed as Vice President of Finance for Vicom
Systems Inc., a supplier of high-end graphics and imaging systems, from August
1989 to February 1990. Mr. Carbone holds a B.S. degree in accounting from King's
College and is a Certified Public Accountant.
21
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Market under the symbol
"ERTS". The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock from April 1, 1995 through March 31, 1997.
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, 1996:
First Quarter $30.00 $20.13
Second Quarter 41.75 27.13
Third Quarter 38.75 23.13
Fourth Quarter 28.50 22.13
Fiscal Year Ended March 31, 1997:
First Quarter $34.50 $25.25
Second Quarter 39.13 24.75
Third Quarter 37.63 27.88
Fourth Quarter 36.13 26.25
There were approximately 1,995 holders of record of the Company's Common Stock
as of June 3, 1997. The Company believes that a significant number of beneficial
owners of its Common Stock hold their shares in street names.
DIVIDEND POLICY
The Company has not paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
22
ITEM 6: SELECTED FINANCIAL DATA
ELECTRONIC ARTS
SELECTED FIVE-YEAR FINANCIAL DATA
Year Ended March 31 (In thousands, except per share data)
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
- --------------------- -------- -------- -------- ---- ----
Net revenues $624,766 $531,887 $493,346 $418,289 $298,386
Cost of goods sold 312,044 273,594 263,357 224,606 160,578
-------- -------- -------- -------- --------
Gross profit 312,722 258,293 229,989 193,683 137,808
Operating expenses:
Marketing and sales 85,555 72,928 61,951 46,847 38,465
General and administrative 41,742 32,207 29,308 23,767 20,713
Research and development 118,103 99,627 73,902 62,570 37,451
-------- -------- -------- -------- --------
Total operating expenses 245,400 204,762 165,161 133,184 96,629
-------- -------- -------- -------- --------
Operating income 67,322 53,531 64,828 60,499 41,179
Interest and other income, net 11,639 6,021 13,250 3,782 2,537
-------- -------- -------- -------- --------
Income before provision for
income taxes and minority interest 78,961 59,552 78,078 64,281 43,716
Provision for income taxes 27,241 18,759 24,980 19,450 13,421
-------- -------- -------- -------- --------
Income before minority interest 51,720 40,793 53,098 44,831 30,295
Minority interest in consolidated
joint venture 1,282 (304) 2,620 (94) 563
-------- -------- -------- -------- --------
Net income $ 53,002 $ 40,489 $ 55,718 $ 44,737 $ 30,858
======== ======== ======== ======== ========
Net income per share $ 0.96 $ 0.75 $ 1.07 $ 0.86 $ 0.62
======== ======== ======== ======== ========
Number of shares used in computation 55,483 54,163 52,297 52,286 49,992
======== ======== ======== ======== ========
BALANCE SHEET DATA AT FISCAL YEAR END
- -------------------------------------
Cash and short-term investments $230,096 $147,983 $174,121 $130,318 $ 98,029
Marketable securities 5,548 37,869 10,725 11,931 --
Working capital 241,613 199,713 168,742 135,741 85,094
Long-term investments 24,200 24,200 14,200 -- --
Total assets 516,703 424,219 341,239 273,651 181,257
Total liabilities 127,430 100,625 103,018 97,988 67,687
Minority interest 28 1,277 1,148 3,485 2,999
Total stockholders' equity 389,245 322,317 237,073 172,178 110,571
23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition of
Results of Operations", contains forward looking statements regarding Electronic
Arts' ("the Company" or "EA") future performance that involve certain risks
including those discussed in "Factors Affecting Future Performance" at pages ___
of this Annual Report and under the same heading in the Company's Annual Report
on Form 10-K for the year ended March 31, 1997. Future results of the Company
may differ materially from any forward looking statement due to such risks.
RESULTS OF OPERATIONS
Comparison of Fiscal 1997 to 1996
1997 1996 % change
- ----------------------------------------------------------------------------
Net revenues $624,766,000 $531,887,000 17.5
- ----------------------------------------------------------------------------
The Company derives revenues from shipments of EA Studio Compact Disk ("CD")
products for dedicated entertainment systems ("CD-video game"), EA Studio CD
personal computer products ("PC-CD") (primarily entertainment software), EA
Studio cartridge products, licensing of EA Studio products, distribution of EA
Studio products through hardware companies ("OEMs") and shipments of Affiliated
Label CD products that are created by third parties.
Total net revenues increased compared to the prior year due to an increase in
net revenues derived from a higher volume of CD-based products (CD-video games
and PC-CD), Affiliated Label products and a 64-bit video game cartridge product.
This was partially offset by a decrease in sales of 16-bit video game
cartridges.
Net revenues from 32-bit CD-video game products, including the PlayStation and
Saturn, were $223,693,000 in fiscal 1997, representing 36% of the total net
revenues compared to $76,523,000, or 14% of total net revenues in fiscal 1996.
The increase in sales of PlayStation and Saturn products was attributable to the
greater installed base of these 32-bit CD-video game consoles and more titles
published for these consoles by the Company.
Sales of PlayStation products in fiscal 1997 increased to $185,349,000, or 30%
of total revenue, compared to $50,491,000, or 9% of total revenue in fiscal
1996. The Company released 14 new PlayStation titles in fiscal 1997 compared to
13 in fiscal 1996.
Net revenues derived from the sales of other 32-bit products were $38,344,000
primarily from Saturn products in fiscal 1997 compared to $26,032,000, including
3DO and Saturn products, in fiscal 1996. The Company released 12 new Saturn
titles in fiscal 1997 compared to eight 3DO titles and four Saturn titles in
fiscal 1996. The Company produced no new games for 3DO in fiscal 1997 and does
not expect to release any new titles in fiscal 1998.
The Company expects revenues from 32-bit CD-video game products to continue to
grow in fiscal 1998, but as revenues for these products increase, the Company
does not expect to maintain these growth rates.
Net revenues from PC-CD products increased to $178,310,000 in fiscal 1997,
representing 29% of total net revenues, from $140,594,000, or 26% of total net
revenues in fiscal 1996. The Company released 25 PC-CD titles and two
supplemental data disks in fiscal 1997 compared to 22 titles in fiscal 1996. The
increase in sales of PC-CD products was attributable to the growth in the PC
market worldwide, growth in the sports category, the expansion of the Company's
direct distribution worldwide and more PC-CD titles published by the Company.
Net revenues generated by 16-bit video game cartridge-based products were
$89,160,000, or 14% of total revenues in fiscal 1997, compared to $202,599,000,
or 38% of net revenues in fiscal 1996. New generation 32-bit and 64-bit video
game consoles are replacing 16-bit video game systems. Accordingly, sales of
16-bit video game hardware and related software have significantly declined and
are expected to continue to do so in fiscal 1998. During fiscal 1997, the
Company released fewer titles for these platforms and does not expect to release
any new titles in fiscal 1998.
Sales of EA Studio Genesis cartridge products in fiscal 1997 declined to
$62,005,000, or 10% of total revenue, compared to $138,643,000, or 26% of total
revenue in fiscal 1996. The Company released six new Genesis titles in fiscal
1997 compared to 10 in fiscal 1996.
Net revenues derived from cartridge products for the Super Nintendo
Entertainment System ("Super NES") were $27,155,000, or 4% of total revenue, in
fiscal 1997 compared to $63,956,000, or 12% of total revenue in fiscal 1996. The
Company released three new titles for the Super NES in fiscal 1997 compared to
five in fiscal 1996.
Licensing of EA Studio products generated $22,095,000 in fiscal 1997, compared
to $27,018,000 in fiscal 1996. The decrease primarily resulted from lower volume
of distribution of the Company's products through OEMs in North America and
Japan.
Net revenues derived from N64 were $17,804,000. The Company released its first
N64 title during the fourth quarter of fiscal 1997.
24
Net revenues from shipments of Affiliated Label products in fiscal 1997
increased to $93,298,000 from $76,302,000 in fiscal 1996. The increase was due
to higher sales of Affiliated Label products in Europe and South Asia Pacific
related to an exclusive international distribution agreement with Twentieth
Century Fox Home Entertainment and other affiliates. This was partially offset
by a decrease in Affiliated Label net revenues in North America and Japan. The
decrease in North America was attributable to lower volume of revenue from two
exclusive distribution arrangements for certain PC entertainment and 3DO
products to key accounts on behalf of other third party publishers which began
in fiscal 1996 and the loss of a significant affiliate at the end of the second
quarter of fiscal 1997. The decrease in Japan was due to lower volume of sales
from existing affiliates.
The Company's revenues from floppy disk products, hand-held cartridge products
and products from the Sega 32X platform decreased to $406,000 in fiscal 1997
from $8,851,000 in fiscal 1996. Results reflect the now completed market shift
away from these products to CD-based products. The Company produced no new games
for these platforms in fiscal 1997 and does not expect to release any new titles
in fiscal 1998.
North American net revenues increased by 10% to $335,527,000 in fiscal 1997 as
compared to $306,229,000 in fiscal 1996. The increase was mainly attributable to
strong growth in 32-bit CD-video game and PC-CD systems partially offset by the
decline in 16-bit sales. Net revenues from sales of CD-video game and PC-CD
products increased $113,070,000 while sales of 16-bit cartridge products
decreased $82,493,000 in comparison to the prior year.
International net revenues increased by 28% to $289,239,000, or 46% of
consolidated 1997 net revenues, compared to $225,658,000, or 42% of the 1996
total. The increase in international revenues was due to higher worldwide sales
of 32-bit CD-video game products and increased sales of PC-CD and Affiliated
Label products in Europe and South Asia Pacific. This was partially offset by a
decrease in 16-bit video game cartridge products.
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Cost of goods sold $312,044,000 $273,594,000 14.1
As a percentage of net revenue 49.9% 51.4%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1997 reflects lower
product costs associated with CD-based products offset by higher professional,
celebrity and manufacturing royalties, higher distribution and manufacturing
expenses for the operations in Europe and North America and growth in the lower
margin distribution business.
================================================================================
OPERATING EXPENSES 1997 1996 % change
- --------------------------------------------------------------------------------
Marketing and sales $ 85,555,000 $72,928,000 17.3
As a percentage of net revenues 13.7% 13.7%
- --------------------------------------------------------------------------------
General and administrative $ 41,742,000 $32,207,000 29.6
As a percentage of net revenues 6.7% 6.1%
- --------------------------------------------------------------------------------
Research and development $118,103,000 $99,627,000 18.5
As a percentage of net revenues 18.9% 18.7%
- -------------------------------------------------------------------------------
The increase in marketing and sales expense was due to higher television
advertising expenses and higher co-op advertising expenses associated with
higher revenues. Additionally, marketing and sales expenses, along with general
and administrative expenses, increased due to additional headcount and higher
facility expenses related to the opening of new sales offices in international
markets. Increases in general and administrative expenses were also due to
implementation related costs for new management information systems in North
America and Europe. The increase in research and development expenses was
primarily due to higher average development costs for CD-based products than for
cartridge products and higher depreciation expense. The Company released a total
of 63 new products in fiscal 1997 compared to 64 in fiscal 1996. Total CD-based
new products released for fiscal 1997 were 53 compared to 47 in fiscal 1996.
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Operating income $67,322,000 $53,531,000 25.8
As a percentage of net revenues 10.8% 10.1%
- --------------------------------------------------------------------------------
The increase in operating income was primarily due to higher net revenues and
increased gross profit margins, partially offset by higher operating expenses.
25
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Interest and other income, net $11,639,000 $6,021,000 93.3
As a percentage of net revenues 1.9% 1.1%
- --------------------------------------------------------------------------------
The increase in other income was due to gains on sales of marketable securities
and higher interest income related to higher average cash balances. The fiscal
1996 balance also included write-offs of certain investments in affiliates.
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Income taxes $27,241,000 $18,759,000 45.2
Effective tax rate 34.5% 31.5%
- --------------------------------------------------------------------------------
The effective tax rate for fiscal 1997 increased over the prior year primarily
as a result of reported losses in Japan for which no tax benefit could be
currently realized.
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Minority interest in consolidated
joint venture $1,282,000 $(304,000) N/M
As a percentage of net revenues 0.2% (0.1%)
- --------------------------------------------------------------------------------
EAV is sixty-five percent owned by the Company and thirty-five percent owned by
Victor Entertainment Industries, Inc. ("VEI"), a wholly-owned subsidiary of
Victor Company of Japan, Limited. The fiscal 1997 minority interest represents
VEI's pro rata share of EAV's net loss for that period. Conversely, minority
interest for fiscal 1996 represents VEI's pro rata share of net income from
EAV's operations.
================================================================================
1997 1996 % change
- --------------------------------------------------------------------------------
Net income $53,002,000 $40,489,000 30.9
As a percentage of net revenues 8.5% 7.6%
- --------------------------------------------------------------------------------
The increase in net income was due to higher revenue and gross profit margins,
higher other income, partially offset by higher operating expenses.
RESULTS OF OPERATIONS
Comparison of Fiscal 1996 to 1995
1996 1995 % change
- --------------------------------------------------------------------------------
Net revenues $531,887,000 $493,346,000 7.8
- --------------------------------------------------------------------------------
Total fiscal 1996 net revenues increased compared to fiscal 1995 primarily due
to increased net revenues derived from a higher volume of CD-based products
(PC-CD and CD-video games), and Affiliated Label products. This was partially
offset by decreased sales of 16-bit Sega Genesis video game cartridges
("Genesis") and EA floppy disk products.
Net revenues generated by 16-bit video game cartridge-based products were
$202,599,000, or 38% of consolidated net revenues in fiscal 1996, compared to
$281,933,000, or 57% of net revenues in fiscal 1995. The mix of net revenue in
fiscal 1996 reflected the continued impact of the transition from the mature
16-bit cartridge-based market to the emerging CD- based market. As the 16-bit
market matured, sales of hardware and software declined. During fiscal 1996, the
Company released fewer titles for these platforms as compared to fiscal 1995.
Sales of EA Studio Genesis cartridge products in fiscal 1996 declined to
$138,643,000, or 26% of total revenue, compared to $213,471,000, or 43% of total
revenue in fiscal 1995. The Company released 10 new Genesis titles in fiscal
1996 compared to 17 in fiscal 1995.
Net revenues derived from cartridge products for the Super Nintendo
Entertainment System were $63,956,000, or 12% of total revenue, in fiscal 1996
compared to $68,462,000, or 14% of total revenue in fiscal 1995. The Company
released five new titles for the Super NES in fiscal 1996 compared to six in
fiscal 1995.
Net revenues from PC-CD products increased to $140,594,000 in fiscal 1996,
representing 26% of total net revenues, from $72,227,000, or 15% of total net
revenues in fiscal 1995. The Company released 22 PC-CD titles in fiscal 1996
compared to 30 in fiscal 1995.
CD-video game products, primarily the PlayStation in fiscal 1996 and the 3DO
Interactive Multiplayer in fiscal 1995, generated net revenues of $76,523,000 in
fiscal 1996, representing 14% of the total net revenues, compared to
$27,230,000, or 6% of total net revenues in fiscal 1995. The Company released 25
CD-video game titles in fiscal 1996 compared to eight in fiscal 1995.
Licensing of EA Studio products generated $27,018,000 in fiscal 1996, compared
to $21,001,000 in fiscal 1995. The increase primarily resulted from increased
distribution of EA's products through OEMs.
Net revenues from shipments of Affiliated Label products in fiscal 1996
increased to $76,302,000 from $48,480,000 in fiscal 1995. The increase was
primarily attributable to revenues from the exclusive distribution of certain PC
entertainment and 3DO products to key accounts on behalf of other third party
publishers which began in fiscal 1996. Additionally, the Company had increased
Affiliated Label net revenues in Japan and Europe due to higher sales from
several new and existing affiliates. Affiliated Label CD-based products
represented 96% of total Affiliated Label net revenues in fiscal 1996, compared
to 59% in fiscal 1995.
The Company's revenues from floppy disk products, hand-held cartridge products
and products from the Sega 32X platform decreased to $8,851,000, or 2% of the
total in 1996, from $42,475,000, or 9% in fiscal 1995. Results continued to
reflect the rapid market shift away from these products to CD-based products.
The Company produced no new games for
26
these platforms in fiscal 1996 compared to 14 floppy disk titles in fiscal 1995.
International net revenues increased by 43% to $225,658,000, or 42% of
consolidated 1996 net revenues, compared to $158,043,000, or 32% of the 1995
total. The increase in international revenues was attributable to higher
worldwide sales of CD-based products, primarily PC-CD and PlayStation together
with an increase in sales of Super NES products in Europe, which were licensed
in 1995. This was partially offset by a decrease in floppy disk and Genesis
products.
North American net revenues totaled $306,229,000 in fiscal 1996, representing a
decrease of 9% over the $335,303,000 generated in fiscal 1995. The decrease was
attributable to the decline in 16-bit cartridge revenues partially offset by the
increase in shipments of PC-CD products and CD-video games.
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Cost of goods sold $273,594,000 $263,357,000 3.9
As a percentage of net revenues 51.4% 53.4%
- -------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1996 reflected lower
product costs associated with CD-based products offset by higher production
costs for multimedia releases, higher professional and celebrity royalties,
higher distribution and manufacturing expenses for the operations in Europe and
growth in the lower margin distribution business.
- --------------------------------------------------------------------------------
OPERATING EXPENSES 1996 1995 % change
- --------------------------------------------------------------------------------
Marketing and sales $72,928,000 $61,951,000 17.7
As a percentage of net revenues 13.7% 12.6%
- --------------------------------------------------------------------------------
General and administrative $32,207,000 $29,308,000 9.9
As a percentage of net revenues 6.1% 5.9%
- -------------------------------------------------------------------------------
Research and development $99,627,000 $73,902,000 34.8
As a percentage of net revenues 18.7% 15.0%
- -------------------------------------------------------------------------------
The increase in marketing and sales expenses was affected by higher trade show
expenses and higher co-op advertising expenses associated with higher revenues.
Additionally, marketing and sales expenses, along with general and
administrative expenses, increased due to additional headcount and higher
facility expenses related to the prior year acquisitions and the opening of new
sales offices in international markets. The increase in general and
administrative expenses was partially offset by a decrease in bad debt expenses
in Japan as compared to fiscal 1995.
The increase in research and development expenses was primarily due to
additional headcount relating to increased in-house development capacity, higher
average development costs for CD-based products than for cartridge products,
increased reserves against artist advances due to product delays, primarily on
CD-video game platforms, and the acquisition of Manley & Associates, a Seattle-
based development company in 1996. The Company released a total of 64 new
products in fiscal 1996 compared to 86 in fiscal 1995.
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Operating income $53,531,000 $64,828,000 (17.4)
As a percentage
of net revenues 10.1% 13.1%
- --------------------------------------------------------------------------------
The decrease in operating income was primarily due to higher operating expenses
partially offset by an increase in net revenues.
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Interest and other income, net $6,021,000 $13,250,000 (54.6)
As a percentage of net revenues 1.1% 2.7%
- --------------------------------------------------------------------------------
The decrease in other income was primarily due to a one-time payment of
$10,000,000 from Broderbund Software, Inc. ("Broderbund"), offset by costs of
$1,400,000 incurred by the Company, associated with the termination of the
merger agreement between the Company and Broderbund in fiscal 1995.
In fiscal 1996, the Company also had higher interest income related to higher
average cash balances and interest rates worldwide together with gains on the
sales of marketable securities and fixed assets. These gains were substantially
offset by losses and write-offs of certain investments in affiliates.
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Income taxes $18,759,000 $24,980,000 (24.9)
Effective tax rate 31.5% 32.0%
- --------------------------------------------------------------------------------
The effective tax rate for fiscal 1996 decreased over the prior year primarily
as a result of the fiscal 1995 impact of the operating loss reported by EAV and
the use of those losses to offset EAV's profits in 1996. Tax benefits from the
Company's Puerto Rico operations were lower in the current year as a result of
lower sales of cartridge products.
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint venture $(304,000) $2,620,000 N/M
As a percentage of net revenues (0.1%) 0.5%
- --------------------------------------------------------------------------------
Minority interest for fiscal 1996 represents VEI's pro rata share of net income
from EAV's operations. Conversely, the fiscal 1995 minority interest represents
VEI's pro rata share of EAV's net loss for that period.
27
================================================================================
1996 1995 % change
- --------------------------------------------------------------------------------
Net income $40,489,000 $55,718,000 (27.3)
As a percentage of net revenues 7.6% 11.3%
- ---------------------------------------------------------------------------
The decrease in net income was due to higher operating expenses partially
reduced by higher revenue combined with the prior year impact of the after-tax
net gain of approximately $5,800,000 from the one-time payment of a merger
termination fee.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's working capital was $241,613,000 compared to
$199,713,000 at March 31, 1996. Cash and short-term investments increased by
approximately $82,113,000 in fiscal 1997. The Company generated $80,641,000 of
cash from operations in fiscal 1997. In addition, $20,205,000 was provided
through the sale of equity securities under the Company's employee stock plans.
Reserves for bad debts and sales returns increased from $27,569,000 at
March 31, 1996 to $35,486,000 at March 31, 1997. Reserves have been charged for
returns of product and price protection credits issued for products sold in
prior periods. Management believes these reserves are adequate based on
historical experience and its current estimate of potential returns and
allowances.
During fiscal 1997 the Company invested approximately $36,000,000 primarily
in computer hardware and software purchases required to support the Company's
development efforts and new management information systems worldwide.
In connection with the Company's purchases of Sony products to be
distributed in Japan, Sony of Japan requires cash deposits totaling one-third of
purchase orders. Additionally, Nintendo of Japan requires cash deposits on all
orders of N64 cartridge products. EAV utilizes lines of credit to fund these
deposits for purchases of Sony and Nintendo products and for other operating
requirements. At March 31, 1997, EAV had approximately $4,024,000 outstanding on
this line.
The Company's principal source of liquidity is $230,096,000 in cash and
short-term investments. Management believes the existing cash, cash equivalents,
short-term investments, marketable securities and cash generated from operations
will be sufficient to meet cash and investment requirements for the foreseeable
future.
28
FACTORS AFFECTING FUTURE PERFORMANCE
FUTURE OPERATING RESULTS OF THE COMPANY DEPEND UPON MANY FACTORS AND ARE SUBJECT
TO VARIOUS RISKS AND UNCERTAINTIES. SOME OF THOSE IMPORTANT RISKS AND
UNCERTAINTIES WHICH MAY CAUSE THE COMPANY'S OPERATING RESULTS TO VARY OR WHICH
MAY MATERIALLY AND ADVERSELY AFFECT EA'S OPERATING RESULTS ARE AS FOLLOWS:
THE INDUSTRY AND COMPETITION. The interactive software business has historically
been a volatile and highly dynamic industry affected by changing technology,
limited hardware platform life cycles, hit products, competition, component
supplies, seasonality, consumer spending and other economic trends. The business
is also intensely competitive. A variety of companies offer products that
compete directly with one or more of the Company's products. These direct
competitors vary in size from very small companies to companies with financial,
managerial and technical resources comparable to or greater than those of the
Company. Typically, the Company's chief competitor on dedicated game platforms
is the hardware manufacturer/licensor itself, to which the Company must pay
royalties, and in the case of Sony and Nintendo, manufacturing charges. For
example, Sony has aggressively launched sports product lines that directly
compete with the Company's sports products on the PlayStation. In addition,
competition for creative talent has intensified, and the attraction and
retention of key personnel by the Company is increasingly difficult.
PRODUCTS. Interactive entertainment software products typically have life spans
of only 3 to 12 months. In addition, the market is crowded with a large number
of titles competing for limited shelf space at retail. The Company's future
success will depend in large part on its ability to develop and introduce new
competitive products on a timely basis and to get those products distributed
widely at retail. To compete successfully, new products must adapt to new
hardware platforms and emerging industry standards, provide additional
functionality and be successfully distributed in numerous changing worldwide
markets. If the Company were unable, due to resource constraints or
technological or other reasons, to successfully develop and distribute such
products in a timely manner, this inability would have a material adverse effect
on its operating results and financial condition.
DEVELOPMENT. Product development schedules, particularly for new hardware
platforms and high-end multimedia 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. CD-ROM products frequently include more content and are
more complex, time-consuming and costly to develop than 16-bit cartridge
products and, accordingly, cause additional development and scheduling risk. For
example, in fiscal year 1996 Madden Football 96 and NHL Hockey 96 for the
------------------ -------------
PlayStation did not ship at all due to significant delays in development that
made the delayed completion date untimely for these products. Likewise, Need for
--------
Speed II for PC-CD, a high margin product scheduled for shipment in March of
- --------
1997, did not ship until April of 1997 due to last minute development delays.
Dungeon Keeper, originally scheduled to ship in the quarter ended June 1996, is
- --------------
now expected to ship during the summer of 1997. In addition, development risks
for CD-ROM products can cause particular difficulties in predicting quarterly
results because brief manufacturing lead times allow finalizing products and
projected release dates late in a quarter. Manufacturing lead times during the
year for CD-based products have been as brief as one to three weeks; cartridge
products more typically have had a six to twelve week lead time for
manufacture.
PLATFORM CHANGES. A large portion of the Company's revenues are derived from the
sale of products designed to be played on proprietary video game platforms such
as the PlayStation, Sega Saturn, Super Nintendo Entertainment System, Sega
Genesis and the N64. The interdependent nature of the Company's business and
that of its hardware licensors brings significant risks to the Company's
business. The success of the Company's products is significantly affected by
market acceptance of the new video game hardware systems and the life span of
older hardware platforms, and the Company's ability to accurately predict these
factors with respect to each platform. In many cases, the Company will have
expended a large amount of development and marketing resources on products
designed for new video game systems (such as the new 32-bit systems) that have
not yet achieved large installed bases or will have continued product
development for older hardware platforms that may have shorter life cycles
than the Company expected. Conversely, if the Company does not choose to
develop for a platform that achieves significant market acceptance, or
discontinues development for a platform that has a longer life cycle than
expected, the Company's revenue growth may be adversely affected. For example,
the Company signed an agreement with Nintendo to develop and publish a line of
EA SPORTS products for the N64 in March of 1997, nearly seven months after
introduction of that platform in North America. Due to long development times
associated with this platform, the Company will not ship N64 products in
significant quantities until calendar year 1998.
The Company believes that investment in products for the 32-bit market,
including both PC-CD and CD-video game platforms (particularly the PlayStation)
has been strategically important in positioning the Company for the now
completed transition to 32 bit machines. The Company continues to believe that
such investment is important and will continue its aggressive development
activities for 32 bit platforms. Although the PlayStation has achieved
significant market acceptance in all geographic territories, there can be no
assurance that its growth will continue at the present rates, particularly with
the introduction of the N64 by Nintendo. The introduction and market acceptance
of the N64, particularly in North America, may adversely affect the growth rate
of the 32-bit CD-platforms. While the Company has a broad range of products
available and under development for the PlayStation and for PC-CD, the Company
will not ship products for the N64 in any significant quantities until calendar
year 1998.
29
HARDWARE COMPANIES. The Company's contracts with hardware licensors, which are
also some of the Company's chief competitors, often grant significant control to
the licensor over the manufacturing of the Company's products. This fact could,
in certain circumstances, leave the Company unable to get its products
manufactured and shipped to customers. In most events, control of the
manufacturing process by hardware companies increases both the manufacturing
lead times and the expense to the Company as compared to the lead times and
costs that the Company can achieve independently. In both fiscal 1996 and fiscal
1997, for example, the Company experienced delays in the manufacturing of
PlayStation products which caused delays in shipping those products. The results
of future periods may be affected by similar delays. Finally, the Company's
contracts with its hardware licensors often require the Company to take
significant risks in holding or prepaying for its inventory of products. In
particular, the Company's agreement with Nintendo for N64 products requires
prepayment of costly cartridge-based inventory, minimum orders and no rights of
return.
REVENUE AND EXPENSES. A substantial majority of the revenue of the Company in
any quarter typically results from orders received in that quarter and products
introduced in that quarter. The Company's expenses are based, in part, on
development of products to be released in the future. Certain overhead and
product development expenses do not vary directly in relation to revenues. This
trend is increasing as the Company increases the proportion of products
developed internally. As a result, the Company's quarterly results of operations
are difficult to predict, and small delays in product deliveries may cause
quarterly revenues, operating results and net income to fall significantly below
anticipated levels. The Company typically receives orders shortly before
shipments, making backlog an unreliable indicator of quarterly results. A
shortfall in shipments at the end of any particular quarter may cause the
results of that quarter to fall significantly short of anticipated levels.
FILM AND VIDEOTAPE. The Company produces film and videotape to include in
certain products pursuant to agreements between certain of the Company's
subsidiaries with SAG, AFTRA and Equity. However, the costs of video production
are significantly higher than for software production, and for products which
include a substantial amount of video such as certain interactive movies, the
costs of producing the video component is significantly higher than the cost of
developing the software component. Accordingly, more units of such products must
be sold to recoup the development and production costs. There can be no
assurance that these products which include significant film or videotape
components will be commercially successful enough to recoup development costs.
In addition, the Company's agreements with SAG and AFTRA expire during the
current calendar year, and there can be no assurance that the Company will be
able to renegotiate favorable terms.
GROSS MARGINS. Although gross margins for the Company's products as a whole have
increased over the last three fiscal years, there are no assurances that this
trend will continue in the future for several reasons. Professional and
celebrity royalties continue to increase. Also, while the costs of development
of new products for 32- and 64-bit systems have increased, overall costs of
goods are not declining. For products on platforms for which the Company is
required to purchase its goods from the hardware companies, the Company is
unable to achieve cost reductions through manufacturing efficiencies, and
royalties to hardware companies remain fixed or are increasing. As the Company
begins to ship N64 products in significant quantities, margins may further
decline due to the higher cost of goods associated with this cartridge-based
platform. Similarly, higher distribution expenses for operations in Europe and
North America and growth of the lower margin distribution business continue to
put pressure on margins. In addition, retailers continue to require significant
price protection for products, and with an increasing number of titles available
for advanced platforms, such requirements for price protection may increase.
MARKETING AND DISTRIBUTION. Both the video game and PC businesses have become
increasingly "hits" driven. Additional marketing and advertising funds are
required to drive and support "hit" products, particularly television
advertising. There can be no assurance that the Company will continue to
produce "hit" titles, or that advertising for any product will increase sales
sufficiently to recoup those advertising expenses.
EMPLOYEES. Competition for employees in the interactive software business is
intense and increasing as competition in the industry increases. In the last
fiscal year, recruiting of the Company's employees generally, and its executive
officers in particular, has been intense. Large software and media companies
frequently offer significantly larger cash compensation than does the Company,
placing pressure on the Company's base salary and cash bonus compensation. Small
start-up companies such as those proliferating in the online business areas
offer significant potential equity gains which are difficult for more mature
companies like the Company to match without significant stockholder dilution.
While executive turnover has decreased in fiscal 1997 as compared to fiscal
1996, virtually all of the executives continue to experience intense recruiting
pressure. There can be no assurance that the Company will be able to continue to
attract and retain enough qualified employees in the future.
30
FOREIGN SALES AND CURRENCY FLUCTUATIONS. For the 1997 fiscal year, international
net revenues comprised 46% of total consolidated net revenues. The Company
expects foreign sales to continue to account for a significant and growing
portion of the Company's 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.
INVESTMENTS IN AFFILIATES. The Company has a number of equity investments in
affiliates, including small developers, such as Firaxis and Visual Concepts,
other publishers, such as NovaLogic, Inc. and Accolade, Inc., and new ventures
such as Mpath Interactive.
These companies are generally small and without significant financial resources.
Financial difficulties for any of these companies could cause a reduction in the
value of the Company's investment. For example, in fiscal 1996 the Company wrote
off its investment in SportsLab in its entirety.
FLUCTUATIONS IN STOCK PRICE. Due to analysts' expectations of continued growth
and other factors, any shortfall in earnings could have an immediate and
significant adverse effect on the trading price of the Company's Common Stock in
any given period. As a result of the factors discussed in this annual report and
other factors that may arise in the future, the market price of the Company's
Common Stock historically has been, and may continue to be subject to
significant fluctuations over a short period of time. These fluctuations may be
due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer, software, entertainment, media
or electronics industries or the securities markets in general. For example,
during the fiscal years 1997 and 1996 the price per share of the Company's
common stock ranged from $24.75 to $39.13 and from $20.13 to $41.75,
respectively.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
31
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow on pages 32 through 46.
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, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended March 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 at March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Palo Alto, California
May 1, 1997, except as to Note 14 which is as of June 4, 1997
32
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $230,096 $147,983
Marketable securities 5,548 37,869
Receivables, less allowances of $35,486 and $27,569, respectively 95,356 73,075
Inventories 15,847 14,704
Prepaid royalties 10,311 14,519
Deferred income taxes 3,010 --
Other current assets 8,875 12,188
-------- --------
Total current assets 369,043 300,338
Property and equipment, net 85,132 70,062
Prepaid royalties 9,351 11,030
Long-term investments 24,200 24,200
Investment in affiliates 25,657 15,952
Other assets 3,320 2,637
-------- --------
$516,703 $424,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,560 $ 37,019
Accrued liabilities 85,870 63,606
-------- --------
Total current liabilities 127,430 100,625
Minority interest in consolidated joint venture 28 1,277
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- --
Common stock, $0.01 par value. Authorized 70,000,000 shares;
issued and outstanding 54,163,398 and 52,741,572, respectively 542 527
Paid-in capital 135,510 108,078
Retained earnings 252,525 199,523
Unrealized appreciation of investments 2,593 16,266
Translation adjustment (1,925) (2,077)
-------- --------
Total stockholders' equity 389,245 322,317
-------- --------
$516,703 $424,219
======== ========
See accompanying notes to consolidated financial statements.
33
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended March 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 624,766 $ 531,887 $ 493,346
Cost of goods sold 312,044 273,594 263,357
--------- --------- ---------
Gross profit 312,722 258,293 229,989
Operating expenses:
Marketing and sales 85,555 72,928 61,951
General and administrative 41,742 32,207 29,308
Research and development 118,103 99,627 73,902
--------- --------- ---------
Total operating expenses 245,400 204,762 165,161
--------- --------- ---------
Operating income 67,322 53,531 64,828
Interest and other income, net 11,639 6,021 13,250
--------- --------- ---------
Income before provision for income taxes and
minority interest 78,961 59,552 78,078
Provision for income taxes 27,241 18,759 24,980
--------- --------- ---------
Income before minority interest 51,720 40,793 53,098
Minority interest in consolidated joint venture 1,282 (304) 2,620
--------- --------- ---------
Net income $ 53,002 $ 40,489 $ 55,718
========= ========= =========
Net income per share $ 0.96 $ 0.75 $ 1.07
========= ========= =========
Number of shares used in computation 55,483 54,163 52,297
========= ========= =========
See accompanying notes to consolidated financial statements.
34
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996 and 1995
(In thousands)
Common Stock Unrealized
---------------- Paid-In Retained Appreciation Translation
Shares Amount Capital Earnings of Investments Adjustment Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1994 49,974 $ 477 $ 65,677 $ 108,878 $ 0 $(2,854) $ 172,178
Proceeds from sales of shares through
employee stock plans and other plans 954 10 7,210 7,220
Tax benefit related to stock options 4,242 4,242
Adjustment effect of poolings on prior
periods 22 15 (1,698) (1,661)
Adjustment for change in Kingsoft, GmbH
fiscal year end (1,386) (1,386)
Unrealized (loss) on investments (1,206) (1,206)
Translation adjustment 1,968 1,968
Net income 55,718 55,718
------ ------ --------- --------- --------- ------- ---------
Balances at March 31, 1995 50,928 509 77,144 161,512 (1,206) (886) 237,073
Proceeds from sales of shares through
employee stock plans and other plans 1,814 17 21,661 21,678
Tax benefit related to stock options 9,170 9,170
Adjustment effect of immaterial pooling 1 103 (177) (73)
Adjustment for change in Manley & Associates
fiscal year end (2,301) (2,301)
Unrealized gain on investments 17,472 17,472
Translation adjustment (1,191) (1,191)
Net income 40,489 40,489
------ ------ --------- --------- --------- ------- ---------
Balances at March 31, 1996 52,742 527 108,078 199,523 16,266 (2,077) 322,317
Proceeds from sales of shares through
employee stock plans and other plans 1,421 15 20,190 20,205
Tax benefit related to stock options 7,242 7,242
Unrealized (loss) on investments (13,673) (13,673)
Translation adjustment 152 152
Net Income 53,002 53,002
------ ------ --------- --------- --------- ------- ---------
Balances at March 31, 1997 54,163 $ 542 $ 135,510 $ 252,525 $ 2,593 $ (1,925) $ 389,245
====== ====== ========= ========= ========= ======= =========
See accompanying notes to consolidated financial statements.
35
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31
--------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 53,002 $ 40,489 $ 55,718
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in consolidated joint venture (1,282) 304 (2,620)
Depreciation and amortization 21,461 15,859 10,763
Loss (gain) on sale of fixed assets 164 (2,044) 76
Equity in net loss of affiliates 1,566 1,746 --
Gain on sale of marketable securities (8,393) (4,879) --
Adjustment for change in fiscal year end for pooled subsidiaries -- (2,301) (1,386)
Change in assets and liabilities:
Receivables (22,281) (16,686) 8,726
Inventories (1,143) (2,346) (2,887)
Prepaid royalties 5,887 (10,598) (5,120)
Other assets 1,780 (4,214) (11,306)
Accounts payable 4,541 2,772 (1,605)
Accrued liabilities 24,765 (12,645) 6,635
Deferred income taxes 574 3,219 6,803
--------- --------- ---------
Net cash provided by operating activities 80,641 8,676 63,797
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 171 4,221 527
Proceeds from sale of marketable securities 21,152 5,273 --
Capital expenditures (36,212) (56,830) (16,503)
Investment in affiliates (11,271) (6,387) (472)
Short-term investments (62,132) (11,655) 5,700
Long-term investments -- (10,000) (14,200)
Acquisition of DROsoft -- -- (1,397)
Acquisition of Vision Software -- (500) --
Adjustment for effect of poolings on prior periods -- (73) (1,661)
--------- --------- ---------
Net cash used in investing activities (88,292) (75,951) (28,006)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from sales of shares through employee stock plans and other plans 20,205 21,678 7,220
Tax benefit from stock option exercises 7,242 9,170 4,242
--------- --------- ---------
Net cash provided by financing activities 27,447 30,848 11,462
--------- --------- ---------
Translation adjustment 152 (1,191) 1,968
Minority interest on translation adjustment 33 (175) 282
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 19,981 (37,793) 49,503
Beginning cash and cash equivalents 105,628 143,421 93,918
--------- --------- ---------
Ending cash and cash equivalents 125,609 105,628 143,421
Short-term investments 104,487 42,355 30,700
--------- --------- ---------
Ending cash and short-term investments $ 230,096 $ 147,983 $ 174,121
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 14,889 $ 9,570 $ 6,390
========= ========= =========
NON-CASH INVESTING ACTIVITIES:
Increase (decline) unrealized appreciation of investments ($ 19,562) $ 24,952 $ (1,206)
Transfer of assets at net book value to affiliated company -- -- 6,003
========= ========= =========
See accompanying notes to consolidated financial statements.
36
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the
accounts of Electronic Arts Inc. and its wholly-owned subsidiaries (the
"Company") and its majority owned subsidiary Electronic Arts Victor, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements of the Company follows:
(a) Fiscal Year
The Company's fiscal year is reported on a 52/53-week period that ends on the
Saturday nearest to March 31 in each year. The results of operations for fiscal
1997 and 1996 contain 52 and 53 weeks, respectively. Since the results of an
additional week are not material, and for clarity of presentation herein, all
fiscal periods are treated as ending on a calendar month end.
(b) Revenue Recognition
Product Sales: Revenue is recognized when the product is shipped. Subject to
certain limitations, the Company permits customers to obtain exchanges within
certain specified periods and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns and price
protection.
Software Licenses: For those agreements which provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenue is recognized at
delivery of the product master or the first copy. Per copy royalties on sales
that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $22,095,000, $27,018,000, and
$21,001,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
(c) 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, Accounting for Certain Investments in Debt and Equity
Securities, ("SFAS 115"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based on
current interest rates. The Company has classified short-term investments as
"available-for-sale" and applicable investments are stated at fair value which
approximates cost. The cost of securities sold is based upon the specific
identification method.
(d) Prepaid Royalties
Prepaid royalties represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of goods sold based on actual net product sales. Management
evaluates the future realization of prepaid royalties quarterly, and charges to
research and development expense any amounts that management deems unlikely to
be amortized at the contract royalty rate through product sales. Royalty
advances are classified as current and noncurrent assets based upon estimated
net product sales within the next year.
(e) Software Development Costs
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. No software
development costs have been capitalized to date as the impact on the financial
statements for all periods presented is immaterial.
(f) Inventories
Inventories are stated at the lower of cost or market. Inventories at March 31,
1997 and 1996 consisted of:
================================================================================
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 3,706 $ 2,160
Finished goods 12,141 12,544
- --------------------------------------------------------------------------------
$15,847 $14,704
- --------------------------------------------------------------------------------
(g) Outside Production Costs
The Company defers the outside production costs of the film content of its
products. Such costs are expensed as cost of goods sold based on actual net
product sales. Film costs deferred as of March 31, 1997 and 1996 were $926,000
and $5,500,000, respectively.
(h) Advertising costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and retailers is accrued when revenue is recognized. Cooperative advertising
credits are reimbursed when qualifying claims are submitted. For the fiscal
years ended
37
March 31, 1997, 1996 and 1995, advertising expenses totaled approximately
$34,263,000, $28,437,000 and $28,065,000, respectively.
(i) Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the declining balance method over the estimated
useful lives of the respective assets, which range from three to seven years.
Depreciation on new management information systems is computed using the
straight-line method over the estimated useful lives of the respective assets,
which range from four to seven years. Buildings are being depreciated using the
straight line method over 20 years. Amortization of leasehold improvements is
computed using the declining balance method over the lesser of the lease terms
or the estimated useful lives of the improvements.
(j) Intangible Assets
Intangible assets net of amortization at March 31, 1997 and 1996 of $1,115,000,
and $1,752,000, respectively, are included in other current and noncurrent
assets and include costs of obtaining product technology and noncompete
covenants which are amortized using the straight-line method over the lesser of
their estimated useful lives or the agreement terms, typically no more than five
years. Intangibles also include goodwill resulting from the purchase of DROSoft
(now known as EA Spain) in November 1994 and Vision Software in March 1996.
Amortization expense for fiscal years ended March 31, 1997, 1996 and 1995 was
$654,000, $740,000, and $337,000, respectively.
(k) Income Taxes
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
(l) Foreign Currency Translation
For each of the Company's foreign subsidiaries the functional currency is its
local currency. Assets and liabilities of foreign operations are translated into
U.S. dollars using current exchange rates, and revenues and expenses are
translated into U.S. dollars using average exchange rates. The effects of
foreign currency translation adjustments are deferred and included as a
component of stockholders' equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Included in interest and other income in the statements of
income are foreign currency transaction gains (losses) of ($1,024,000),
$433,000, and $785,000, for the fiscal years ended March 31, 1997, 1996 and
1995, respectively.
(m) Net Income Per Share
Net income per share is based on the weighted average number of common stock and
common stock equivalents from stock options outstanding during the period. There
is no significant difference between primary and fully diluted earnings per
share.
(n) Employee Benefits
The Company has a 401(k) Plan covering substantially all of its U.S. employees.
The 401(k) Plan permits the Company to make discretionary contributions to
employees' accounts based on the Company's financial performance. The Company
contributed $405,000 and $279,000 to the Plan in fiscal 1997 and fiscal 1996,
respectively.
(o) Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
(p) Impact of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121") effective for the fiscal year ended March
31, 1997. SFAS 121 requires that impairment losses be recorded on long-lived
assets and certain identifiable intangibles when indicators of impairment are
present and the undiscounted cash flows estimated by those assets are less than
the assets' carrying amounts. Adoption of this standard did not have a material
impact on the Company's consolidated financial statements.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") effective for the fiscal year ended March 31, 1997. SFAS 123
establishes a fair value method of accounting for stock-based employee
compensation plans. As allowed under provisions of SFAS 123, the Company has
chosen to continue the intrinsic value based method for stock-based employee
compensation plans and provide pro forma disclosures of net income and earnings
per share as if the accounting provisions of SFAS 123 had been adopted. As the
Company has elected to adopt only disclosure requirements of SFAS 123, such
adoption had no effect on the Company's consolidated net income or cash flows.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires dual presentation of basic earnings
per share ("EPS") and diluted EPS on the face of all statements of earnings
issued after December 15, 1997, for all entities with complex capital
structures.
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 including stock options, restricted stock awards, warrants, and
other convertible securities using the treasury stock method. The Company does
not anticipate the effect of the provisions of this new standard on earnings per
share to be material.
38
(q) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include provisions for doubtful accounts, sales returns and
allowances, warranty provisions, and estimates regarding the recoverability of
prepaid royalty advances and inventory. Actual results could differ from those
estimates.
(r) Reclassifications
Certain amounts have been reclassified to conform to fiscal 1997 presentation.
(2) FINANCIAL INSTRUMENTS
(a) Cash and Investments
========================================================================
MARCH 31,
1997 1996
- ------------------------------------------------------------------------
(in thousands)
Cash and equivalents:
Cash $58,564 $28,078
Municipal securities 31,940 13,885
Money market funds 35,105 37,843
Commercial paper - 25,822
- ------------------------------------------------------------------------
Cash and equivalents 125,609 105,628
- ------------------------------------------------------------------------
Short-term investments:
Commercial paper 17,315 2,805
Municipal securities 9,163 5,600
Money market preferreds 78,009 33,950
- ------------------------------------------------------------------------
Short-term investments 104,487 42,355
- ------------------------------------------------------------------------
Cash and short-term investments $230,096 $147,983
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Long-term investments $24,200 $ 24,200
- ------------------------------------------------------------------------
Long-term investments are in the form of commercial notes with maturities of
five to eight years secured by U.S. Treasury Notes. Such investments enable the
Company to take advantage of certain tax incentives in its Puerto Rico operation
and are treated as held to maturity for financial reporting purposes.
(b) Marketable Securities
Marketable securities are comprised of equity securities. The Company has
accounted for investments in equity securities as "available-for-sale" and has
stated applicable investments at fair value, with net unrealized appreciation
reported as a separate component of stockholders' equity. Marketable securities
had an aggregate cost of $1,559,000 and $14,123,000 at March 31, 1997 and 1996,
respectively. At March 31, 1997, marketable securities included gross unrealized
gains of $4,174,000 and gross unrealized losses of $185,000. At March 31, 1996
marketable securities included gross unrealized gains of $27,334,000 and gross
unrealized losses of $3,588,000.
At March 31, 1997, marketable securities included the Company's approximate 7%
ownership interest in The 3DO Company ("3DO"). During fiscal 1997, the Company
sold 1,220,000 shares of 3DO reducing its ownership interest to 2,013,668
shares. At March 31, 1996, the Company's ownership interest was approximately
12% of the outstanding shares of 3DO.
For the fiscal years ended March 31, 1997 and 1996, the fair value of 3DO stock
and other securities sold was $21,152,000 and $9,783,000, respectively. The
gross realized gains from these sales totaled $8,393,000 and $9,112,000 for
fiscal 1997 and 1996, respectively. There were no gains or losses from sales of
marketable securities during 1995. The gain on sale of investments is based on
the specific identification method.
(c) Foreign Currency Forward Exchange Contracts
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency market exposures of underlying assets, liabilities and other
obligations. 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
anticipated transactions, for which a firm commitment has been attained, are
deferred and recognized in income in the same period that the underlying
transactions are settled. Gains and losses on currency forward contracts that
are designated and effective as hedges of existing transactions are recognized
in income in the same period as losses and gains on the underlying transactions
are recognized and generally offset. Gains and losses on any instruments not
meeting the above criteria would be recognized in income in the current period.
The Company transacts business in various foreign currencies, including European
currencies. During fiscal 1997, the Company established hedging programs to
protect against exposure on certain intercompany receivables that are
denominated in foreign currencies through the use of foreign currency forward
exchange contracts. At March 31, 1997, the Company had foreign exchange
contracts, all having maturities of 90 days or less, to purchase and sell
approximately $27,549,000 in foreign currencies, primarily German Deutschmarks
and British Pounds.
The difference between the face value and market value of these contracts is not
significant. The counterparties to these contracts are substantial and credit
worthy multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be material.
39
(3) COMMITMENTS
Lease Obligations
The Company leases its current facilities and certain equipment under
non-cancelable operating lease agreements. The Company is required to pay
property taxes, insurance and normal maintenance costs for certain of its
facilities and will be required to pay any increases over the base year of these
expenses on the remainder of the Company's facilities.
In February 1995, the Company entered into a master operating lease for land and
a building to be constructed in Redwood City, California. The initial term of
the lease is for a period of three years from the earlier of the date of
completion of construction or December 1998. Monthly lease payments are based
upon the London Interbank Offered Rate. The Company has the option to purchase
the property for the unamortized financed balance at any time after the
non-cancelable lease term, or it may terminate the lease at any time after the
non-cancelable term by arranging a third party sale or by making a termination
payment. Should the Company elect to terminate the lease, it will guarantee a
residual value of up to 85% of the unamortized value of the property. As part of
the agreement, the Company must also comply with certain financial covenants.
Total future minimum lease commitments as of March 31, 1997 are:
=============================================================
Year Ending: (in thousands)
1998 $11,110
1999 7,647
2000 2,593
2001 1,570
2002 1,132
Thereafter 9,509
- -------------------------------------------------------------
$33,561
- -------------------------------------------------------------
Total rent expense for all operating leases was $10,158,000, $7,631,000, and
$6,451,000, for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
The current portion of deferred rent of $599,000 and $823,000 at March 31, 1997
and 1996, respectively, represents the obligation accrued for rent, calculated
on the straight-line method over the lease term and is included in accrued
liabilities.
(4) 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.
The Company had no sales to any one customer in excess of 10% of total net
revenues for the fiscal years ended March 31, 1997, 1996 and 1995.
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.
(5) LITIGATION
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
(6) PREFERRED STOCK
At March 31, 1997 and 1996, the Company had 1,000,000 shares of Preferred Stock
authorized but unissued. The rights, preferences, and restrictions of the
Preferred Stock may be designated by the Board of Directors without further
action by the Company's stockholders.
(7) STOCK PLANS
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions of up to 10% of their compensation to purchase
shares at 85% of the lower of the fair market value of the Common Stock on the
date of commencement of the offering or on the last day of the six-month
purchase period. The Plan commenced in September 1991. In fiscal 1997, 184,596
shares were purchased by the Company and distributed to employees at prices
ranging from $21.25 to $25.18. In fiscal 1996, 154,516 shares were purchased by
the Company and distributed to employees at prices ranging from $15.09 to
$21.57. In fiscal 1995, 169,187 shares were purchased by the Company and
distributed to employees at prices ranging from $15.09 to $15.51 per share. The
weighted average fair value of the fiscal 1997 and fiscal 1996 awards was
$10.413 and $8.813, respectively. At March 1997, the Company had 228,638 shares
of its Common Stock reserved for future issuance under the Plan.
(b) Stock Option Plans
The Company's 1991 Stock Option Plan and Directors' Plan ("Option Plans")
provide stock options for employees, officers and independent contractors, and
for directors, respectively. Pursuant to these Option Plans, the Board of
Directors may grant non-qualified and incentive stock options to employees and
officers and non-qualified options to independent contractors, and directors, at
not less than the fair market value on the date of grant.
The options generally expire ten years from the date of grant and are generally
exercisable in monthly increments over 50 months.
40
SFAS 123 requires the disclosure of pro forma net income and earnings per share
had the Company adopted the fair value method as of the beginning of fiscal
1996. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of options pricing models. These models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which characteristics significantly differ
from those of the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values.
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
used for grants made in 1997 and 1996 under the stock plans: risk-free interest
rates of 5.48% to 6.36% in 1997 and 5.12% to 6.25% in 1996; expected volatility
of 58% for both years; expected lives in both years of 2.42 years 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. Had
compensation cost for the Company's stock-based plans been determined on the
fair value at the grant date for awards consistent with the method of SFAS 123,
the Company's pro forma net income and net income per share for fiscal 1997 and
1996 would have been $39,805,000 ($0.73 per share) and $33,959,000 ($0.63 per
share) in fiscal 1997 and 1996, respectively.
Because SFAS 123 is applicable only to options granted subsequent to March 31,
1995, the impact of non-vested stock options granted prior to this date has been
excluded from the pro forma calculation. Accordingly, the fiscal 1997 and 1996
pro forma adjustments are not indicative of future period pro forma adjustments
as the pro forma effect will not be fully reflected until subsequent years.
41
Additional information regarding options outstanding as of March 31, 1997 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
- ------------------------- ---------- ----------- --------- ---------- -------
$ 0.720 - $ 4.469 841,483 3.94 $3.30 841,282 $3.30
6.250 - 13.500 1,084,505 6.50 13.18 775,466 13.07
13.625 - 18.000 1,182,384 6.20 16.06 948,389 15.71
18.125 - 23.000 528,172 7.81 19.77 228,314 19.81
23.500 - 23.500 1,422,608 8.94 23.50 301,440 23.50
23.750 - 29.750 719,361 8.28 26.13 270,558 26.56
29.875 - 29.875 1,263,984 9.43 29.88 149,983 29.88
30.000 - 38.625 900,637 8.83 32.99 173,306 32.68
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.720 - $ 38.625 7,943,134 7.60 $20.92 3,688,738 $15.38
===========================================================================================================================
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1997, 1996 and 1995:
--------------------------------
Options Outstanding
--------------------------------
Weighted Average
Shares Exercise Price
---------------------------------
Balance at March 31, 1994 6,580,797 $13.63
Granted 3,173,931 16.88
Canceled (1,595,618) 25.36
Exercised (810,673) 6.15
---------- ------
Balance at March 31, 1995 (3,497,818
shares were exercisable at a
weighted average price of $10.00) 7,348,437 13.31
Granted 4,312,249 28.25
Canceled (2,321,172) 30.18
Exercised (1,658,953) 11.30
---------- ------
Balance at March 31, 1996 (3,301,613
shares were exercisable at a
weighted average price of $11.84) 7,680,561 17.03
Granted 2,214,089 30.55
Canceled (714,286) 22.77
Exercised (1,237,230) 12.85
---------- ------
Balance at March 31, 1997 7,943,134 $20.92
========== ======
42
(8) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1997 and 1996 consisted of:
========================================================================
1997 1996
- ------------------------------------------------------------------------
(in thousands)
Computer equipment $87,077 $62,858
Buildings 21,590 18,921
Office equipment, furniture and
fixtures 15,389 11,765
Leasehold improvements 8,931 7,732
Land 6,475 4,766
Warehouse equipment and other 3,127 2,770
- ------------------------------------------------------------------------
142,589 108,812
Less accumulated depreciation and
amortization (57,457) (38,750)
- ------------------------------------------------------------------------
$85,132 $70,062
- ------------------------------------------------------------------------
Depreciation and amortization expenses associated with property and equipment
amounted to $20,807,000, $15,119,000, and $9,339,000, for the fiscal years ended
March 31, 1997, 1996 and 1995, respectively.
(9) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1997 and 1996 consisted of:
========================================================================
1997 1996
- ------------------------------------------------------------------------
(in thousands)
Accrued expenses $19,105 $18,203
Accrued royalties 31,841 16,889
Accrued compensation and benefits 18,279 11,480
Accrued income taxes 12,611 10,477
Deferred income taxes 3,377 5,878
Deferred revenue 657 679
- ------------------------------------------------------------------------
$85,870 $63,606
- ------------------------------------------------------------------------
(10) JOINT VENTURES
(a) ELECTRONIC ARTS VICTOR, INC.
The Company has a majority interest in a joint venture corporation, Electronic
Arts Victor, Inc. ("EAV"), for the development and distribution of entertainment
software products in Japan as well as certain Asian countries. EAV is sixty-five
percent owned by the Company and thirty-five percent owned by Victor
Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical Industries,
Inc.) a wholly-owned subsidiary of Victor Company of Japan, Limited. The
Company has consolidated 100% of the assets, liabilities and results of
operations for EAV. VEI's 35% interest in EAV and the profits or losses
therefrom has been reflected as "Minority interest in consolidated joint
venture" on the Company's Consolidated Financial Statements.
(b) CREATIVE WONDERS, INC.
In December 1994, the Company and Capital Cities/ABC, Inc. formed Creative
Wonders, Inc. (formerly ABC/EA Home Software, Inc.), a joint venture company, to
publish children's edutainment and interactive entertainment multimedia titles
as well as reference products for personal computers and new generation
entertainment machines. Each company has a 50% ownership interest in the joint
venture company. The investment is accounted for under the equity method. The
Company distributes interactive titles sold by the joint venture into the retail
channel.
43
(11) INCOME TAXES
The Company's pretax income from operations for the fiscal years ended March 31,
1997, 1996 and 1995 consisted of the following components:
==========================================================================
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Domestic $30,527 $14,722 $41,330
Foreign 48,434 44,830 36,748
- --------------------------------------------------------------------------
Total pretax income $78,961 $59,552 $78,078
- --------------------------------------------------------------------------
Income tax expense (benefit) for the fiscal years ended March 31, 1997, 1996 and
1995 consisted of:
===========================================================================
(in thousands) Current Deferred Total
- ---------------------------------------------------------------------------
1997:
Federal $7,253 $(4,439) $2,814
State 848 (298) 550
Foreign 16,188 447 16,635
Charge in lieu of taxes
from employee stock plans 7,242 - 7,242
- ---------------------------------------------------------------------------
$31,531 $(4,290) $27,241
- ---------------------------------------------------------------------------
1996:
Federal $(6,075) $2,094 $(3,981)
State (523) 395 (128)
Foreign 13,980 (282) 13,698
Charge in lieu of taxes
from employee stock plans 9,170 - 9,170
- ---------------------------------------------------------------------------
$16,552 $2,207 $18,759
- ---------------------------------------------------------------------------
1995:
Federal $3,676 $5,955 $9,631
State 353 2,688 3,041
Foreign 8,066 - 8,066
Charge in lieu of taxes
from employee stock plans 4,242 - 4,242
- ---------------------------------------------------------------------------
$16,337 $8,643 $24,980
- ---------------------------------------------------------------------------
The components of the net deferred tax assets as of March 31, 1997 and 1996
consist of:
===========================================================================
(in thousands) 1997 1996
- ---------------------------------------------------------------------------
Deferred tax assets:
Accruals, reserves and other expenses $28,495 $23,415
Federal and State loss carryforwards - 1,553
Foreign loss and credit carryforwards 11,766 8,321
- ---------------------------------------------------------------------------
Total gross deferred tax assets 40,261 33,289
Less: valuation allowance (11,766) (8,321)
- ---------------------------------------------------------------------------
Net deferred tax assets 28,495 24,968
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (2,081) (2,378)
Prepaid royalty expenses (25,385) (20,988)
Unrealized gains on marketable
securities (1,396) (7,480)
- ---------------------------------------------------------------------------
Total gross deferred tax liabilities (28,862) (30,846)
- ---------------------------------------------------------------------------
Net deferred tax asset (liability) $(367) $(5,878)
- ---------------------------------------------------------------------------
The valuation allowance relates solely to the foreign loss and foreign credit
carryforwards, for which the utilization is uncertain in future periods.
At March 31, 1997, the Company had no net operating loss carryforwards for
Federal or State income tax purposes.
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1997, 1996 and 1995 were as follows:
============================================================================
1997 1996 1995
- ----------------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 0.9 0.5 2.9
Differences between statutory rate
and foreign effective tax rate (1.4) (3.0) (1.8)
Foreign loss without tax benefit 1.6 - 3.4
Research and development credits - - (1.2)
Tax exemptions on Puerto Rico
operation (0.8) (0.7) (5.0)
Other (0.8) (0.3) (1.3)
- ----------------------------------------------------------------------------
34.5% 31.5% 32.0%
- ----------------------------------------------------------------------------
The Company does not provide for U.S. taxes on undistributed earnings of its
foreign subsidiaries. At March 31, 1997, the undistributed foreign earnings of
the foreign subsidiaries amounted to approximately $76,000,000. If these
earnings were distributed to the parent company, foreign tax credits available
under current law would substantially eliminate the resulting Federal tax
liability.
The Company's manufacturing subsidiary in Puerto Rico operates under a
Puerto Rican tax incentive program which grants the Company certain percentage
exemptions from Puerto Rican income, property and municipal taxes for a period
of 20 years from the date of the commencement of operations. The U.S. tax
benefit derived for the years ended March 31, 1997, 1996 and 1995 was
approximately $600,000, $411,000, and $3,886,000, respectively. Long-term
reinvestment in Puerto Rico of the undistributed earnings of the Puerto Rico
subsidiary enables the Company to take advantage of certain tax incentives. In
addition, the Company has been granted an amendment to expand its exemption for
certain additional operations.
44
(12) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1997, 1996 and 1995
consisted of:
==========================================================================
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Interest income $ 8,059 $6,444 $ 4,748
Interest expense (66) (141) (51)
Merger-related fee - - 8,600
Gain on sale of marketable securities 8,393 4,879 -
Gain (loss) on sale of property and
equipment (164) 2,044 (76)
Impairment of investment in affiliates - (4,700) -
Foreign currency gains (losses) (1,024) 433 785
Equity in net loss of affiliates (1,566) (1,746) -
Other expense, net (1,993) (1,192) (756)
- --------------------------------------------------------------------------
$11,639 $6,021 $13,250
- --------------------------------------------------------------------------
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH, SHORT-TERM INVESTMENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES - the carrying amount approximates fair value because of the short
maturity of these instruments.
MARKETABLE SECURITIES - fair value is based on quoted market prices.
(14) SUBSEQUENT EVENT
On June 4, 1997, the Company entered into an agreement to merge with Maxis, Inc.
("Maxis"), a California-based interactive software developer. Under the proposed
transaction, approximately 4.1 million shares of Electronic Arts' stock will be
exchanged for all outstanding Maxis common stock. The transaction, which is
anticipated to be completed in the quarter ended September 30, 1997, will be
accounted for as a pooling of interests.
45
(15) OPERATIONS BY GEOGRAPHIC AREAS
The Company operates in one industry segment. Information about the Company's
operations in the North America and foreign areas for the fiscal years ended
March 31, 1997, 1996 and 1995 is presented below:
North South Asia
(in thousands) America Europe Pacific Japan Eliminations Total
- -------------- ------- ------ ------- ----- ------------ -----
FISCAL 1997:
Net revenues from unaffiliated
customers $335,527 $223,930 $ 28,072 $ 37,237 $ -- $624,766
Intersegment sales 54,530 6,938 603 122 (62,193) --
-------- -------- -------- -------- -------- --------
Total net revenues $390,057 $230,868 $ 28,675 $ 37,359 $(62,193) $624,766
======== ======== ======== ======== ======== ========
Operating income (loss) $ 23,437 $ 41,468 $ 5,652 $ (3,235) $ -- $ 67,322
Identifiable assets $368,878 $116,405 $ 12,820 $ 18,600 $ -- $516,703
FISCAL 1996:
Net revenues from unaffiliated
customers $306,229 $157,999 $ 21,794 $ 45,865 $ -- $531,887
Intersegment sales 49,975 9,801 54 100 (59,930) --
-------- -------- -------- -------- -------- --------
Total net revenues $356,204 $167,800 $ 21,848 $ 45,965 $(59,930) $531,887
======== ======== ======== ======== ======== ========
Operating income $ 14,409 $ 33,126 $ 5,114 $ 882 $ -- $ 53,531
Identifiable assets $309,308 $ 88,446 $ 8,469 $ 17,996 $ -- $424,219
FISCAL 1995:
Net revenues from unaffiliated
customers $335,303 $112,907 $ 13,139 $ 31,997 $ -- $493,346
Intersegment sales 55,444 3,850 101 34 (59,429) --
-------- -------- -------- -------- -------- --------
Total net revenues $390,747 $116,757 $ 13,240 $ 32,031 $(59,429) $493,346
======== ======== ======== ======== ======== ========
Operating income (loss) $ 44,276 $ 25,997 $ 2,123 $ (7,568) $ -- $ 64,828
Identifiable assets $272,577 $ 50,910 $ 6,268 $ 11,484 $ -- $341,239
46
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
During the Company's last two fiscal years, there have been no changes in
independent accountants nor disagreements with such accountants as to accounting
and financial disclosures of the type required to be disclosed in Item 9.
47
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors who are nominated for re-election required
by Item 10 is incorporated herein by reference to the information in the
Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders
(the "Proxy Statement") under the caption "Proposal No. 1 - Election of
Directors." The information regarding executive officers required by Item 10 is
included in Item 4A hereof.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Director and Executive
Officer Compensation" specifically excluding the "Compensation Committee Report
on Executive Compensation," and "Stock Option Plan."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Certain Transactions."
48
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 32
Consolidated Balance Sheets as of March 31, 1997
and 1996 33
Consolidated Statements of Income for the Years
Ended March 31, 1997, 1996 and 1995 34
Consolidated Statements of Stockholders' Equity
for the Years Ended March 31, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1997, 1996 and 1995 36
Notes to Consolidated Financial Statements for the
Years Ended March 31, 1997, 1996 and 1995 37-46
2. Financial Statement Schedule.
----------------------------
The following financial statement schedule of Electronic Arts for the years
ended March 31, 1997, 1996 and 1995 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)
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 1998 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)
49
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)
50
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.
10.37 Amended and Restated Agreement for Lease between Flatirons
Funding, LP and Electronic Arts Redwood Inc. dated March 7, 1997.
10.38 Amendment No. 1 to Lease Agreement between Electronic Arts
Redwood Inc. and Flatirons Funding, LP dated March 7, 1997.
11.01 Computation of Per Share Earnings.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of Independent
Auditors.
27 Financial Data Schedule.
_________
(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").
51
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's Registration
Statement on Form S-1 filed on September 20, 1989, and all amendments
thereto (File No. 33-30346) (the "Form S-1").
(10) Incorporated by reference to similarly numbered exhibits to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual Report on
Form 10-K for the year ended March 31, 1991.
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's Registration
Statement on Form S-8 filed on July 29, 1993 (File No. 33-66836) (the "1993
Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K.
(16) Not Used.
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K.
(18) Confidential treatment has been granted with respect to certain portions of
this document.
(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").
52
(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.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
(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
55.
53
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 19, 1997
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 19th of June 1997.
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 Vice President, Finance
- ----------------------------
(David L. Carbone)
Directors:
/s/ M. Richard Asher Director
- ----------------------------
(M. Richard Asher)
/s/ William J. Byron Director
- ----------------------------
(William J. Byron)
/s/ Daniel H. Case III Director
- ----------------------------
(Daniel H. Case III)
/s/ Gary M. Kusin Director
- ----------------------------
(Gary M. Kusin)
/s/ Timothy J. Mott Director
- ----------------------------
(Timothy J. Mott)
54
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(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, 1997
Allowance for doubtful
accounts and returns $27,569 $53,563 $2,240 $47,886 $35,486
======= ======= ====== ======= =======
Year Ended March 31, 1996
Allowance for doubtful
accounts and returns $33,567 $45,346 $ (461) $50,883 $27,569
======= ======= ====== ======= =======
Year Ended March 31, 1995
Allowance for doubtful
accounts and returns $29,113 $56,371 $2,540 $54,457 $33,567
======= ======= ====== ======= =======
(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).
55
ELECTRONIC ARTS INC.
1997 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
- ------ ------------- ----
10.03 Description of Registrant's FY 1998 Executive Bonus Plan
10.36 Amended and Restated Guaranty from Electronic Arts Inc.
to Flatirons Funding, LP dated March 7, 1997.
10.37 Amended and Restated Agreement for Lease between
Flatirons Funding, LP and Electronic Arts Redwood Inc.
dated March 7, 1997.
10.38 Amendment No. 1 to Lease Agreement between Electronic
Arts Redwood Inc. and Flatirons Funding, LP dated
March 7, 1997.
11.01 Computation of Per Share Earnings.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of
Independent Auditors.
27 Financial Data Schedule.
56