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EXCEL - IDEA: XBRL DOCUMENT - ELECTRONIC ARTS INC.Financial_Report.xls
EX-10.2 - OFFER LETTER FOR EMPLOYMENT AT ELECTRONIC ARTS INC. TO KEN MOSS, DATED JUNE 6 - ELECTRONIC ARTS INC.ex-102offerletterforemploy.htm
EX-15.1 - AWARENESS LETTER OF KPMG, LLP - ELECTRONIC ARTS INC.ex-151kpmgawarenessletter6.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - ELECTRONIC ARTS INC.ex-321sec906ceocert63014.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - ELECTRONIC ARTS INC.ex-322sec906cfocert63014.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - ELECTRONIC ARTS INC.ex-312sec302cfocert63014.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - ELECTRONIC ARTS INC.ex-311sec302ceocert63014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to            
Commission File No. 000-17948
ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)
 
Delaware
94-2838567
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
209 Redwood Shores Parkway
Redwood City, California
94065
(Address of principal executive offices)
(Zip Code)
(650) 628-1500
(Registrant’s telephone number, including area code)
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  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
Accelerated filer                   
¨
Non-accelerated filer
(Do not check if a smaller reporting company)
¨
Smaller reporting company 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  þ
As of July 31, 2014, there were 312,613,101 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

1


ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2014
Table of Contents
 
 
 
Page
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of June 30, 2014 and March 31, 2014
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2014 and 2013
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2014 and 2013
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 6.

2


PART I – FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements (Unaudited)
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS 

(Unaudited)
(In millions, except par value data)
June 30, 2014
 
March 31, 2014 (a)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,554

 
$
1,782

Short-term investments
762

 
583

Receivables, net of allowances of $177 and $186, respectively
219

 
327

Inventories
37

 
56

Deferred income taxes, net
58

 
74

Other current assets
300

 
316

Total current assets
2,930

 
3,138

Property and equipment, net
503

 
510

Goodwill
1,726

 
1,723

Acquisition-related intangibles, net
160

 
177

Deferred income taxes, net
15

 
28

Other assets
142

 
140

TOTAL ASSETS
$
5,476

 
$
5,716

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
69

 
$
119

Accrued and other current liabilities
666

 
781

Deferred net revenue (online-enabled games)
1,051

 
1,490

Total current liabilities
1,786

 
2,390

0.75% convertible senior notes due 2016, net
586

 
580

Income tax obligations
90

 
189

Deferred income taxes, net
85

 
18

Other liabilities
216

 
117

Total liabilities
2,763

 
3,294

Commitments and contingencies (See Note 13)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. 10 shares authorized

 

Common stock, $0.01 par value. 1,000 shares authorized; 313 and 311 shares issued and outstanding, respectively
3

 
3

Paid-in capital
2,285

 
2,353

Retained earnings
364

 
29

Accumulated other comprehensive income
61

 
37

Total stockholders’ equity
2,713

 
2,422

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,476

 
$
5,716

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
 
(a)
Derived from audited consolidated financial statements.

3


ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
Three Months Ended
June 30,
(In millions, except per share data)
2014
 
2013
Net revenue:
 
 
 
Product
$
757

 
$
543

Service and other
457

 
406

Total net revenue
1,214

 
949

Cost of revenue:
 
 
 
Product
252

 
130

Service and other
115

 
64

Total cost of revenue
367

 
194

Gross profit
847

 
755

Operating expenses:
 
 
 
Research and development
265

 
278

Marketing and sales
130

 
147

General and administrative
88

 
85

Acquisition-related contingent consideration
(1
)
 
7

Amortization of intangibles
3

 
4

Restructuring and other charges

 
1

Total operating expenses
485

 
522

Operating income
362

 
233

Interest and other income (expense), net
(8
)
 
(5
)
Income before provision for income taxes
354

 
228

Provision for income taxes
19

 
6

Net income
$
335

 
$
222

Net income per share:
 
 
 
Basic
$
1.07

 
$
0.73

Diluted
$
1.04

 
$
0.71

Number of shares used in computation:
 
 
 
Basic
313

 
304

Diluted
322

 
312

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


4


ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)
Three Months Ended
June 30,
(In millions)
2014
 
2013
Net income
$
335

 
$
222

Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized net gains and losses on available-for-sale securities

 
(1
)
Change in unrealized net gains and losses on derivative instruments
(1
)
 
(2
)
Reclassification adjustment for net realized losses on derivative instruments
5

 
2

Foreign currency translation adjustments
20

 
(12
)
Total other comprehensive income (loss), net of tax
24

 
(13
)
Total comprehensive income
$
359

 
$
209


See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


5



ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
(In millions)
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
335

 
$
222

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
56

 
56

Stock-based compensation
29

 
33

Acquisition-related contingent consideration
(1
)
 
7

Change in assets and liabilities:
 
 
 
Receivables, net
110

 
192

Inventories
19

 
1

Other assets
21

 
(30
)
Accounts payable
(43
)
 
(82
)
Accrued and other liabilities
(84
)
 
(195
)
Deferred income taxes, net
1

 
2

Deferred net revenue (online-enabled games)
(439
)
 
(454
)
Net cash provided by (used in) operating activities
4

 
(248
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(27
)
 
(29
)
Proceeds from maturities and sales of short-term investments
155

 
133

Purchase of short-term investments
(335
)
 
(101
)
Acquisition of subsidiaries, net of cash acquired

 
(5
)
Net cash used in investing activities
(207
)
 
(2
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of common stock
5

 
22

Excess tax benefit from stock-based compensation
12

 

Repurchase and retirement of common stock
(50
)
 

Acquisition-related contingent consideration payment

 
(1
)
Net cash provided by (used in) financing activities
(33
)
 
21

Effect of foreign exchange on cash and cash equivalents
8

 
(7
)
Decrease in cash and cash equivalents
(228
)
 
(236
)
Beginning cash and cash equivalents
1,782

 
1,292

Ending cash and cash equivalents
$
1,554

 
$
1,056

Supplemental cash flow information:
 
 
 
Cash paid during the period for income taxes, net
$
8

 
$
6

Non-cash investing activities:
 
 
 
Change in unrealized net gains (losses) on available-for-sale securities
$

 
$
(1
)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

6


ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We develop, market, publish and distribute game software content and services that can be played by consumers on a variety of platforms, including video game consoles (such as PlayStation 3 and 4 from Sony and Xbox 360 and Xbox One from Microsoft), personal computers (“PCs”), mobile phones and tablets. Our ability to deliver games and services across multiple platforms, through multiple distribution channels, and directly to consumers (online and wirelessly) has been, and will continue to be, a cornerstone of our product strategy. We have adopted new business models and alternative revenue streams (such as subscription, micro-transactions, and advertising) in connection with our online and wireless product and service offerings. Some of our games are based on our wholly-owned intellectual property (e.g., Battlefield, Mass Effect, Need for Speed, Dragon Age, The Sims, Bejeweled, and Plants vs. Zombies), and some of our games are based on content that we license from others (e.g., FIFA, Madden NFL and Star Wars). Our goal is to turn our intellectual properties into year-round businesses available on a range of platforms. Our products and services may be purchased through physical and online retailers, platform providers such as console manufacturers and mobile carriers via digital downloads, as well as directly through our own distribution platform, including online portals such as Origin.
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal years ending or ended, as the case may be, March 31, 2015 and 2014 contain 52 weeks each, and ends or ended, as the case may be, on March 28, 2015 and March 29, 2014, respectively. Our results of operations for the three months ended June 30, 2014 and 2013 contained 13 weeks each and ended on June 28, 2014 and June 29, 2013, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, as filed with the United States Securities and Exchange Commission (“SEC”) on May 21, 2014.
Change in Estimated Offering Period
Prior to July 1, 2013, for most sales, we estimated the offering period to be six months and recognized revenue over this period in the month after delivery. During the three months ended September 30, 2013, we completed our annual evaluation of the estimated offering period and noted that generally, consumers were playing our games online over a longer period of time. Based on this, we concluded that for physical software sales made after June 30, 2013, the estimated offering period should be increased to nine months, resulting in revenue being recognized over a longer period of time. This change in estimate resulted in an estimated increase to net revenue and net income of $105 million and an increase of $0.33 of diluted earnings per share for the three months ended June 30, 2014. The estimated offering period for digitally distributed software games is six months. We have not yet completed our fiscal year 2015 evaluation of our estimated offering period.
Recently Adopted Accounting Standards
On April 1, 2014, we adopted ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under the new accounting standard, an unrecognized tax benefit is required to be presented as a reduction to a deferred tax asset if the disallowance of the uncertain tax position would reduce an available tax loss or tax credit carryforward instead of resulting in a cash tax liability. The ASU applies prospectively to all unrecognized tax benefits that exist as of the adoption date. As a result of the adoption, we reduced: (a) noncurrent income tax obligations by $96 million; (b) current deferred income tax assets by $18 million; and (c) noncurrent deferred income tax assets by $11 million. We increased noncurrent deferred income tax liabilities by $67 million. As the new accounting standard only impacted presentation, it did not have an impact on the Company’s net financial position, results of operations, or cash flows.

7


Impact of Recently Issued Accounting Standards
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). The amendments of this ASU require that only the disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. The disclosure requirements will be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2014, and will require prospective application. Early adoption is permitted. We expect to adopt this new standard in the first quarter of fiscal year 2016. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments of this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU will be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2015. We expect to adopt this new standard in the first quarter of fiscal year 2017. We do not expect the adoption to have a material impact on our Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its Condensed Consolidated Financial Statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. We expect to adopt this new standard in the first quarter of fiscal year 2018.

(2) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

8


Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2014 and March 31, 2014, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions): 
 
 
 
Fair Value Measurements at Reporting Date Using
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
June 30,
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
202

 
$
202

 
$

 
$

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
378

 

 
378

 

 
Short-term investments
U.S. Treasury securities
195

 
195

 

 

 
Short-term investments
Commercial paper
131

 

 
131

 

 
Short-term investments and cash equivalents
U.S. agency securities
100

 

 
100

 

 
Short-term investments and cash equivalents
Deferred compensation plan assets (a)
9

 
9

 

 

 
Other assets
Foreign currency derivatives
5

 

 
5

 

 
Other current assets
Total assets at fair value
$
1,020

 
$
406

 
$
614

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
2

 
$

 
$

 
$
2

 
Accrued and other current 
liabilities
Foreign currency derivatives
7

 

 
7

 

 
Accrued and other current liabilities
Deferred compensation plan liabilities
9

 
9

 

 

 
Other liabilities
Total liabilities at fair value
$
18

 
$
9

 
$
7

 
$
2

 
 
 
 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2014
 
 
 
 
 
 
$
4

 
 
Change in fair value (c)
 
 
 
 
 
 
(1
)
 
 
Payments (d)
 
 
 
 
 
 
(1
)
 
 
Balance as of June 30, 2014
 
 
 
 
 
 
$
2

 
 


9


 
 
 
 
Fair Value Measurements at Reporting Date Using
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
March 31,
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
588

 
$
588

 
$

 
$

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
279

 

 
279

 

 
Short-term investments
Commercial paper
146

 

 
146

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
118

 
118

 

 

 
Short-term investments and cash equivalents
U.S. agency securities
89

 

 
89

 

 
Short-term investments and cash equivalents
Deferred compensation plan assets (a)
9

 
9

 

 

 
Other assets
Total assets at fair value
$
1,229

 
$
715

 
$
514

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
4

 
$

 
$

 
$
4

 
Accrued and other current 
liabilities and other liabilities
Foreign currency derivatives
6

 

 
6

 
$

 
Accrued and other current liabilities
Deferred compensation plan liabilities
9

 
9

 
$

 
$

 
Other liabilities
Total liabilities at fair value
$
19

 
$
9

 
$
6

 
$
4

 
 

 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2013
 
 
 
 
 
 
$
43

 
 
Change in fair value (c)
 
 
 
 
 
 
(35
)
 
 
Payment (d)
 
 
 
 
 
 
(4
)
 
 
Balance as of March 31, 2014
 
 
 
 
 
 
$
4

 
 

(a)
The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, for additional information regarding our Deferred Compensation Plan.

(b)
The contingent consideration as of June 30, 2014 represents the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of KlickNation Corporation (“KlickNation”) that is contingent upon the achievement of certain performance milestones. The contingent consideration as of March 31, 2014 represents the estimated fair value of the additional variable cash consideration payable in connection with our acquisitions of KlickNation and Chillingo Limited (“Chillingo”) that are contingent upon the achievement of certain performance milestones. We estimated the fair value of the acquisition-related contingent consideration payable using probability-weighted discounted cash flow models, and applied a discount rate that appropriately captures the risk associated with the obligation. The weighted average of the discount rates used during the three months ended June 30, 2014 was 13 percent. The weighted average of the discount rates used during the fiscal year 2014 was 18 percent. The significant unobservable input used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would result in a significantly higher or lower fair value measurement. At June 30, 2014 and March 31, 2014, the fair market value of acquisition-related contingent consideration totaled $2 million and $4 million, respectively, compared to a maximum potential payout of $3 million and $10 million, respectively.


10


(c)
The change in fair value is reported as acquisition-related contingent consideration in our Condensed Consolidated Statements of Operations.

(d)
During the three months ended June 30, 2014, we made payments totaling $1 million to settle certain performance milestones achieved in connection with one of our acquisitions. During fiscal year 2014, we made payments totaling $4 million to settle certain performance milestones achieved in connection with two of our acquisitions.

(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of June 30, 2014 and March 31, 2014, our cash and cash equivalents were $1,554 million and $1,782 million, respectively. Cash equivalents were valued at their carrying amounts as they approximate fair value due to the short maturities of these financial instruments.
Short-Term Investments
Short-term investments consisted of the following as of June 30, 2014 and March 31, 2014 (in millions): 
 
As of June 30, 2014
 
As of March 31, 2014
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Corporate bonds
$
378

 
$

 
$

 
$
378

 
$
279

 
$

 
$

 
$
279

U.S. Treasury securities
195

 

 

 
195

 
114

 

 

 
114

Commercial paper
101

 

 

 
101

 
110

 

 

 
110

U.S. agency securities
88

 

 

 
88

 
80

 

 

 
80

Short-term investments
$
762

 
$

 
$

 
$
762

 
$
583

 
$

 
$

 
$
583

We evaluate our investments for impairment quarterly. Factors considered in the review of investments with an unrealized loss include the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process. Based on our review, we did not consider these investments to be other-than-temporarily impaired as of June 30, 2014 and March 31, 2014.
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of June 30, 2014 and March 31, 2014 (in millions): 
 
As of June 30, 2014
 
As of March 31, 2014
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments
 
 
 
 
 
 
 
Due in 1 year or less
$
338

 
$
338

 
$
318

 
$
318

Due in 1-2 years
223

 
223

 
156

 
156

Due in 2-3 years
195

 
195

 
104

 
104

Due in 3-4 years
6

 
6

 
5

 
5

Short-term investments
$
762

 
$
762

 
$
583

 
$
583


0.75% Convertible Senior Notes Due 2016
The following table summarizes the carrying value and fair value of our 0.75% Convertible Senior Notes due 2016 as of June 30, 2014 and March 31, 2014 (in millions): 
 
As of June 30, 2014
 
As of March 31, 2014
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
0.75% Convertible Senior Notes due 2016
$
586

 
$
801

 
$
580

 
$
731


11


The carrying value of the 0.75% Convertible Senior Notes due 2016 excludes the fair value of the equity conversion feature, which was classified as equity upon issuance, while the fair value is based on quoted market prices for the 0.75% Convertible Senior Notes due 2016, which includes the equity conversion feature. The fair value of the 0.75% Convertible Senior Notes due 2016 is classified as Level 2 within the fair value hierarchy. See Note 12 for additional information related to our 0.75% Convertible Senior Notes due 2016.
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets or accrued and other current liabilities, respectively, on our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward and option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, and Swedish Krona. In addition, we utilize foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately 3 months or less and are transacted near month-end. We do not use foreign currency option or foreign currency forward contracts for speculative or trading purposes.
Cash Flow Hedging Activities
Our foreign currency option and certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets or accrued and other liabilities on our Condensed Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income to interest and other income (expense), net, in our Condensed Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows:
 
As of June 30, 2014
 
As of March 31, 2014
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
98

 
2

 
2

 
179

 

 
3

Forward contracts to sell
311

 
1

 
5

 
363

 

 
2

The net impact of the effective portion of gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations for three months ended June 30, 2014 and 2013 was a loss of $5 million and $2 million, respectively. During the three months ended June 30, 2014 and 2013, we reclassified an immaterial amount of the ineffective portion of gains or losses resulting from changes in fair value into interest and other income (expense), net.

12


Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The fair value of our foreign currency forward contracts was measured using Level 2 inputs.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows:
 
As of June 30, 2014
 
As of March 31, 2014
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Forward contracts to purchase
$
111

 
$
2

 
$

 
$
140

 
$

 
$
1

Forward contracts to sell
$
252

 
$

 
$

 
$
232

 
$

 
$

The effect of foreign currency forward contracts not designated as hedging instruments in our Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and 2013 was immaterial, and is included in interest and other income (expense), net.


13


(5) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended June 30, 2014 and 2013 are as follows (in millions):
 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
Unrealized Gains (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balances as of March 31, 2014
$
(4
)
 
$
(10
)
 
$
51

 
$
37

Other comprehensive income before reclassifications

 
(1
)
 
20

 
19

Amounts reclassified from accumulated other comprehensive income

 
5

 

 
5

Net current-period other comprehensive income

 
4

 
20

 
24

Balance as of June 30, 2014
$
(4
)
 
$
(6
)
 
$
71

 
$
61


 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
Unrealized Gains (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balances as of March 31, 2013
$
(4
)
 
$

 
$
73

 
$
69

Other comprehensive loss before reclassifications
(1
)
 
(2
)
 
(12
)
 
(15
)
Amounts reclassified from accumulated other comprehensive income

 
2

 

 
2

Net current-period other comprehensive loss
(1
)
 

 
(12
)
 
(13
)
Balances as of June 30, 2013
$
(5
)
 
$

 
$
61

 
$
56

The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2014 and 2013 were as follows (in millions):
 
 
Amount Reclassified From Accumulated Other Comprehensive Income (loss)
Statement of Operations Classification
 
Three Months Ended
June 30, 2014
 
Three Months Ended
June 30, 2013
Net revenue
 
$
3

 
$
1

Research and development
 
2

 
1

Total amount reclassified, net of tax
 
$
5

 
$
2


(6) BUSINESS COMBINATIONS
During the three months ended June 30, 2014, there were no acquisitions. During the three months ended June 30, 2013, we completed one acquisition that did not have a significant impact on our Condensed Consolidated Financial Statements.
(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the three months ended June 30, 2014 are as follows (in millions):
 
As of
March 31, 2014
 
Activity
 
Effects of Foreign Currency Translation
 
As of
June 30, 2014
Goodwill
$
2,091

 
$

 
$
3

 
$
2,094

Accumulated impairment
(368
)
 

 

 
(368
)
Total
$
1,723

 
$

 
$
3

 
$
1,726

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. Goodwill is not amortized, but rather subject to at least an annual assessment for impairment by applying a fair value-based test. Our goodwill is fully attributed to our operating segment. See note 16 for additional information regarding our segment.

14


Acquisition-related intangibles consisted of the following (in millions):
 
As of June 30, 2014
 
As of March 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Developed and core technology
$
531

 
$
(399
)
 
$
132

 
$
531

 
$
(385
)
 
$
146

Trade names and trademarks
130

 
(107
)
 
23

 
130

 
(105
)
 
25

Registered user base and other intangibles
87

 
(87
)
 

 
87

 
(87
)
 

Carrier contracts and related
85

 
(80
)
 
5

 
85

 
(79
)
 
6

Total
$
833

 
$
(673
)
 
$
160

 
$
833

 
$
(656
)
 
$
177

Amortization of intangibles for the three months ended June 30, 2014 and 2013 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
 
Three Months Ended
June 30,
 
2014
 
2013
Cost of service and other
$
10

 
$
6

Cost of product
4

 
9

Operating expenses
3

 
4

Total
$
17

 
$
19

Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from 2 to 14 years. As of June 30, 2014 and March 31, 2014, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 3.2 years and 3.4 years, respectively.
As of June 30, 2014, future amortization of acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions): 
Fiscal Year Ending March 31,
 
2015 (remaining nine months)
$
48

2016
53

2017
32

2018
12

2019
8

2020
6

Thereafter
1

Total
$
160


(8) RESTRUCTURING AND OTHER CHARGES
Restructuring and other restructuring plan-related information as of June 30, 2014 was as follows (in millions): 
 
 
Fiscal  2011
Restructuring
 
Other Restructurings and Reorganization
 
 
 
 
Other
 
Facilities-
related
 
Other
 
Total
Balances as of March 31, 2013
 
$
57

 
$
4

 
$
1

 
$
62

Charges to operations
 
(2
)
 
1

 

 
(1
)
Charges settled in cash
 
(8
)
 
(3
)
 

 
(11
)
Balances as of March 31, 2014
 
47

 
2

 
1

 
50

Charges to operations
 

 

 

 

Charges settled in cash
 
(7
)
 

 

 
(7
)
Balances as of June 30, 2014
 
$
40

 
$
2

 
$
1

 
$
43


15


Fiscal 2011 Restructuring
In fiscal year 2011, we announced a plan focused on the restructuring of certain licensing and developer agreements in an effort to improve the long-term profitability of our packaged goods business. Under this plan, we amended certain licensing and developer agreements. To a much lesser extent, as part of this restructuring we had workforce reductions and facilities closures through March 31, 2011. Substantially all of these exit activities were completed by March 31, 2011.
Since the inception of the fiscal 2011 restructuring plan through June 30, 2014, we have incurred charges of $172 million, consisting of (1) $129 million related to the amendment of certain licensing agreements and other intangible asset impairment costs, (2) $31 million related to the amendment of certain developer agreements, and (3) $12 million in employee-related expenses. The $40 million restructuring accrual as of June 30, 2014 is expected to be settled by December 2015. We do not expect to incur any additional restructuring charges under this plan.
Other Restructurings and Reorganization
We also engaged in various other restructurings and a reorganization based on management decisions made in fiscal years 2013 and 2009. We do not expect to incur any additional restructuring charges under these plans. The $3 million restructuring accrual as of June 30, 2014 related to our other restructuring plans is expected to be settled by April 2020.

(9) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract. Royalty liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the next 12 months.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment generally using undiscounted cash flows when impairment indicators exist. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
During the three months ended June 30, 2014, we recognized a loss of $122 million on a previously unrecognized licensed intellectual property commitment. During the three months ended June 30, 2013, we recognized impairment charges of $17 million on royalty-based assets. These losses were recognized in cost of revenue. The $122 million loss recognized during the three months ended June 30, 2014 relate to the termination of certain rights we previously had to use a licensor’s intellectual property. In addition, because the loss will be paid in installments through March 2022, our accrued loss was computed using the effective interest method. We currently estimate recognizing in future periods through March 2022, approximately $36 million for the accretion of interest expense related to this obligation. This interest expense will be included in cost of revenue in our Condensed Consolidated Statement of Operations.

16


The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions): 
 
As of
June 30, 2014
 
As of
March 31, 2014
Other current assets
$
76

 
$
97

Other assets
52

 
58

Royalty-related assets
$
128

 
$
155

At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts due to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions): 
 
As of
June 30, 2014
 
As of
March 31, 2014
Accrued royalties
$
114

 
$
73

Other accrued expenses

 
7

Other liabilities
153

 
53

Royalty-related liabilities
$
267

 
$
133

In addition, as of June 30, 2014, we were committed to pay approximately $1,092 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 13 for further information on our developer and licensor commitments.

(10) BALANCE SHEET DETAILS
Inventories
Inventories as of June 30, 2014 and March 31, 2014 consisted of (in millions): 

As of
June 30, 2014

As of
March 31, 2014
Finished goods
$
36


$
55

Raw materials and work in process
1


1

Inventories
$
37


$
56

Property and Equipment, Net
Property and equipment, net, as of June 30, 2014 and March 31, 2014 consisted of (in millions): 
 
As of
June 30, 2014
 
As of
March 31, 2014
Computer, equipment and software
$
736

 
$
718

Buildings
333

 
327

Leasehold improvements
134

 
129

Office equipment, furniture and fixtures
67

 
67

Land
63

 
63

Warehouse, equipment and other
9

 
10

Construction in progress
7

 
5

 
1,349

 
1,319

Less: accumulated depreciation
(846
)
 
(809
)
Property and equipment, net
$
503

 
$
510

During the three months ended June 30, 2014 and 2013, depreciation expense associated with property and equipment was $31 million and $30 million, respectively.

17


Accrued and Other Current Liabilities
Accrued and other current liabilities as of June 30, 2014 and March 31, 2014 consisted of (in millions): 
 
As of
June 30, 2014
 
As of
March 31, 2014
Other accrued expenses
$
270

 
$
328

Accrued compensation and benefits
168

 
259

Accrued royalties
114

 
73

Deferred net revenue (other)
114

 
121

Accrued and other current liabilities
$
666

 
$
781

Deferred net revenue (other) includes the deferral of subscription revenue, deferrals related to our Switzerland distribution business, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred Net Revenue (Online-Enabled Games)
Deferred net revenue (online-enabled games) was $1,051 million and $1,490 million as of June 30, 2014 and March 31, 2014, respectively. Deferred net revenue (online-enabled games) generally includes the unrecognized revenue from bundled sales of certain online-enabled games for which we do not have vendor-specific objective evidence of fair value (“VSOE”) for the obligation to provide unspecified updates. We recognize revenue from the sale of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginning in the month after shipment for physical games sold through retail and an estimated six-month period for digitally-distributed games. However, we expense the cost of revenue related to these transactions during the period in which the product is delivered (rather than on a deferred basis).

(11) INCOME TAXES
We estimate our annual effective tax rate at the end of each quarterly period, and we record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. In addition, jurisdictions with a projected loss for the year, jurisdictions with a year-to-date loss where no tax benefit can be recognized, and jurisdictions where we are unable to estimate an annual effective tax rate are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results, particularly in light of the economic environment. Therefore, cumulative losses weigh heavily in the overall assessment. Based on the assumptions and requirements noted above, we have recorded a valuation allowance against most of our U.S. deferred tax assets. In addition, we expect to provide a valuation allowance on future U.S. tax benefits until we can sustain a level of profitability or until other significant positive evidence arises that suggest that these benefits are more likely than not to be realized.

The provision for income taxes reported for the three months ended June 30, 2014 is based on our projected annual effective tax rate for fiscal year 2015, and also includes certain discrete items recorded during the period. Our effective tax rate for the three months ended June 30, 2014 was 5.4 percent as compared to 2.6 percent for the same period of fiscal year 2014. The effective tax rate for the three months ended June 30, 2014 and June 30, 2013 differs from the statutory rate of 35.0 percent primarily due to the utilization of U.S. deferred tax assets which were subject to a valuation allowance and non-U.S. profits subject to a reduced or zero tax rate. The effective tax rate for the three months ended June 30, 2014 differs from the same period in fiscal year 2014 primarily due to a discrete expense of $12 million recorded in the three months ended June 30, 2014 for excess tax benefits from stock-based compensation deductions allocated directly to contributed capital.

During the three months ended June 30, 2014, we recorded a net decrease of $1 million in gross unrecognized tax benefits. The total gross unrecognized tax benefits as of June 30, 2014 is $231 million. A portion of our unrecognized tax benefits will affect

18


our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of June 30, 2014, if recognized, approximately $81 million of the unrecognized tax benefits would affect our effective tax rate and approximately $150 million would result in adjustments to deferred tax assets with corresponding adjustments to the valuation allowance.

During the three months ended June 30, 2014, we recorded a net increase of $1 million for accrued interest and penalties related to tax positions taken on our tax returns. As of June 30, 2014, the combined amount of accrued interest and penalties related to uncertain tax positions included in income tax obligations on our Condensed Consolidated Balance Sheet was approximately $17 million.
We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions, including Canada, France, Germany, Switzerland and the United Kingdom. The IRS is currently examining our returns for fiscal years 2009 through 2011, and we remain subject to income tax examination by the IRS for fiscal years after 2011. We are also currently under income tax examination in the United Kingdom for fiscal years 2010 and 2012, in Germany for fiscal years 2008 through 2012, in Spain for fiscal years 2010 through 2013. We remain subject to income tax examination for several other jurisdictions including in Canada for fiscal years after 2005, in France for fiscal years after 2011, in Germany for fiscal years after 2012, in the United Kingdom for fiscal years 2011 and after 2012, and in Switzerland for fiscal years after 2007.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $11 million of unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

(12) FINANCING ARRANGEMENTS
0.75% Convertible Senior Notes Due 2016
In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the “Notes”). The Notes are senior unsecured obligations which pay interest semiannually in arrears at a rate of 0.75% per annum on January 15 and July 15 of each year, beginning on January 15, 2012 and will mature on July 15, 2016, unless purchased earlier or converted in accordance with their terms prior to such date. The Notes are senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Notes.

The Notes are convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.74 per share). Upon conversion of the Notes, holders will receive cash up to the principal amount of each Note, and any excess conversion value will be delivered in shares of our common stock. Prior to April 15, 2016, the Notes are convertible only if (1) the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 percent of the conversion price ($41.26 per share) on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of notes falls below 98 percent of the last reported sale price of our common stock multiplied by the conversion rate on each trading day; or (3) specified corporate transactions, including a change in control, occur. On or after April 15, 2016, a holder may convert any of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate is subject to customary anti-dilution adjustments (for example, certain dividend distributions or tender or exchange offer of our common stock), but will not be adjusted for any accrued and unpaid interest. The Notes are not redeemable prior to maturity except for specified corporate transactions and events of default, and no sinking fund is provided for the Notes. The Notes do not contain any financial covenants.
We separately account for the liability and equity components of the Notes. The carrying amount of the equity component representing the conversion option is equal to the fair value of the Convertible Note Hedge, as described below, which is a substantially identical instrument and was purchased on the same day as the Notes. The carrying amount of the liability component was determined by deducting the fair value of the equity component from the par value of the Notes as a whole, and represents the fair value of a similar liability that does not have an associated convertible feature. A liability of $525 million as of the date of issuance was recognized for the principal amount of the Notes representing the present value of the Notes’ cash flows using a discount rate of 4.54 percent. The excess of the principal amount of the liability component over its carrying

19


amount is amortized to interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for $15 million of issuance costs paid in July 2011 related to the Notes issuance, we allocated $13 million to the liability component and $2 million to the equity component. Debt issuance costs attributable to the liability component are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
The carrying values of the liability and equity components of the Notes are reflected in our Condensed Consolidated Balance Sheet as follows (in millions): 
  
As of
June 30, 2014
 
As of
March 31, 2014
Principal amount of Notes
$
633

 
$
633

Unamortized debt discount of the liability component
(47
)
 
(53
)
Net carrying amount of Notes
$
586

 
$
580

Equity component, net
$
105

 
$
105


As of June 30, 2014, the remaining life of the Notes is approximately 2.0 years.
Convertible Note Hedge and Warrants Issuance
In July 2011, we entered into privately negotiated convertible note hedge transactions (the “Convertible Note Hedge”) with certain counterparties to reduce the potential dilution with respect to our common stock upon conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock at a strike price of $31.74, which corresponds to the conversion price of the Notes and is equal to the number of shares of our common stock that notionally underlie the Notes. As of June 30, 2014, we have not purchased any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note Hedge, which was recorded as an equity transaction.
Separately, in July 2011 we also entered into privately negotiated warrant transactions with the certain counterparties whereby we sold to independent third parties warrants (the “Warrants”) to acquire, subject to customary anti-dilution adjustments that are substantially the same as the anti-dilution provisions contained in the Notes, up to 19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that notionally underlie the Notes), with a strike price of $41.14. The Warrants could have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeds $41.14 on or prior to the expiration date of the Warrants. We received proceeds of $65 million from the sale of the Warrants.
Effect of conversion on earning per share (“EPS”)
The Notes have no impact on diluted EPS until the average quarterly price of our common stock exceeds the conversion price of $31.74 per share. Prior to conversion, we will include the effect of the additional shares that may be issued if our common stock price exceeds $31.74 per share using the treasury stock method. If the average price of our common stock exceeds $41.14 per share for a quarterly period, we will also include the effect of the additional potential shares that may be issued related to the Warrants using the treasury stock method. Prior to conversion, the Convertible Note Hedge is not considered for purposes of the EPS calculation, as its effect would be anti-dilutive. Upon conversion, the Convertible Note Hedge is expected to offset the dilutive effect of the Notes when the stock price is above $31.74 per share. See Note 15 for additional information related to our EPS.
Credit Facility
On August 30, 2012, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. The credit facility terminates on February 29, 2016 and contains an option to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $250 million in additional commitments for revolving loans. Proceeds of loans made under the credit facility may be used for general corporate purposes.

The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our consolidated leverage ratio for the preceding fiscal quarter. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the

20


case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on February 29, 2016.

The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, dispose of all or substantially all assets and pay dividends or make distributions, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a capitalization ratio and maintain a minimum level of total liquidity and a minimum level of domestic liquidity.

The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, bankruptcy and insolvency defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the credit agreement, an obligation by any guarantors to repay the obligations in full and an increase in the applicable interest rate.

As of June 30, 2014, no amounts were outstanding under the credit facility. During the three months ended September 30, 2012, we paid $2 million of debt issuance costs in connection with obtaining this credit facility. These costs are deferred and are being amortized to interest expense over the 3.5 years term of the credit facility.   

The following table summarizes our interest expense recognized for the three months ended June 30, 2014 and 2013 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions): 
 
Three Months Ended
June 30,
 
2014
 
2013
Amortization of debt discount
$
(5
)
 
$
(5
)
Amortization of debt issuance costs
(1
)
 

Coupon interest expense
(1
)
 
(1
)
Other interest expense
(1
)
 
(1
)
Total interest expense
$
(8
)
 
$
(7
)

(13) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of June 30, 2014, we leased certain facilities, furniture and equipment under non-cancelable operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), and DFL Deutsche Fußball Liga GmbH (German Soccer League) (professional soccer); Dr. Ing. h.c. F. Porsche AG, Ferrari S.p.A. (Need For Speed and Real Racing games); National Basketball Association (professional basketball); PGA TOUR (professional golf); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties, PLAYERS Inc., and Red Bear Inc. (professional football); Collegiate Licensing Company (collegiate football); Zuffa, LLC (Ultimate Fighting Championship); ESPN (content in EA SPORTS games); Hasbro, Inc. (certain of Hasbro’s board game intellectual properties); Disney Interactive (Star Wars); and Fox Digital Entertainment, Inc. (The Simpsons). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.

21



The following table summarizes our minimum contractual obligations as of June 30, 2014 (in millions): 
 
 
 
Fiscal Years Ending March 31,
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Remaining
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
nine mos.)
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Unrecognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developer/licensor commitments
$
1,092

 
$
126

 
$
258

 
$
248

 
$
137

 
$
104

 
$
76

 
$
143

Marketing commitments
245

 
38

 
39

 
62

 
21

 
21

 
21

 
43

Operating leases
175

 
34

 
46

 
31

 
21

 
16

 
8

 
19

0.75% Convertible Senior Notes due 2016 interest (a)
12

 
5

 
5

 
2

 

 

 

 

Other purchase obligations
94

 
18

 
30

 
20

 
13

 
12

 
1

 

Total unrecognized commitments
1,618

 
221

 
378

 
363

 
192

 
153

 
106

 
205

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.75% Convertible Senior Notes due 2016 principal (a)
633

 

 

 
633

 

 

 

 

Licensing and lease obligations (b)
186

 
16

 
22

 
23

 
23

 
24

 
25

 
53

Total recognized commitments
819

 
16

 
22

 
656

 
23

 
24

 
25

 
53

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commitments
$
2,437

 
$
237

 
$
400

 
$
1,019

 
$
215

 
$
177

 
$
131

 
$
258

(a)
Included in the $12 million coupon interest on the 0.75% Convertible Senior Notes due 2016 is $2 million of accrued interest recognized as of June 30, 2014. We will be obligated to pay the $632.5 million principal amount of the 0.75% Convertible Senior Notes due 2016 in cash and any excess conversion value in shares of our common stock upon redemption of the Notes at maturity on July 15, 2016 or upon earlier redemption. The $632.5 million principal amount excludes $47 million of unamortized discount of the liability component. See Note 12 for additional information regarding our 0.75% Convertible Senior Notes due 2016.
(b)
See Note 8 for additional information regarding recognized commitments resulting from our restructuring plans. Lease commitments have not been reduced for approximately $7 million due in the future from third parties under non-cancelable sub-leases. See Note 9 for additional information regarding recognized obligations from our licensing-related commitments.
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of June 30, 2014; however, certain payment obligations may be accelerated depending on the performance of our operating results.
In addition to what is included in the table above, as of June 30, 2014, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $89 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Also, in addition to what is included in the table above as of June 30, 2014, in connection with our KlickNation acquisition, we may be required to pay an additional $3 million of cash consideration based upon the achievement of certain performance milestones through March 31, 2015. As of June 30, 2014, we have accrued $2 million of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value of the contingent consideration.

22


Legal Proceedings
We are a defendant in several actions that allege we misappropriated the likenesses of various college athletes in certain of our college-themed sports games.
We are defending a putative class action lawsuit brought by Ryan Hart, a former college football player, in the United States District Court for the District of New Jersey in June 2009, which alleges that we misappropriated his likeness in our college-themed football game. In September 2011, the district court granted our motion to dismiss the complaint. On May 21, 2013, the Third Circuit Court of Appeal reversed the district court's decision and remanded the case back to the district court.
The In re NCAA Student-Athlete Name & Likeness Licensing litigation pending in the United States District Court for the Northern District of California involves two groups of common claims brought by several different former collegiate student-athletes in 2009. These various actions were consolidated into one action in February 2010. The first group of claims is a class action against us, the NCAA and the Collegiate Licensing Company (CLC) alleging that our college-themed video games misappropriated the likenesses of collegiate student-athletes without their authorization. On July 31, 2013, the Ninth Circuit Court of Appeals affirmed the trial court’s denial of our motion to strike the complaint. The second group of claims is a federal antitrust class action against us, the NCAA and the CLC that challenges NCAA/CLC licensing practices and the NCAA By-Laws and regulations.
In September 2013, we reached an agreement to settle all actions brought by college athletes. On May 30, 2014, counsel for plaintiffs filed a motion for the court to approve the settlement of all actions. The court has not yet ruled on plaintiffs’ motion. We recognized a $30 million accrual during the second quarter of fiscal 2014 associated with the anticipated settlement. On November 4, 2013, the NCAA filed a complaint against the Company and CLC in the Superior Court of Fulton County, Georgia that alleged that the Company is contractually obligated to defend and indemnify the NCAA against claims asserted in In re NCAA Student-Athlete Name & Likeness Licensing concerning the alleged misappropriation of student-athletes’ publicity rights in EA’s collegiate video games. On June 9, 2014, the NCAA dismissed its complaint without prejudice.
On December 17, 2013, a purported shareholder class action lawsuit was filed in the United States District Court for the Northern District of California against the Company and certain of its officers by an individual purporting to represent a class of purchasers of EA common stock. A second purported shareholder class action lawsuit alleging substantially similar claims was subsequently filed in the same court. These lawsuits have been consolidated into one action. The lawsuits, which assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, allege, among other things, that the Company and certain of its officers issued materially false and misleading statements regarding the rollout of the Company’s Battlefield 4 game. The lawsuits seek unspecified damages, which have not been quantified. On June 9, 2014, we filed a motion asking the court to dismiss all claims. The court has not yet ruled on our motion.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.
(14)  STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Valuation Assumptions
We estimate the fair value of share-based payment awards on the date of grant. We recognize compensation costs for stock-based payment awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. For awards with only service conditions that have a graded vesting schedule, we recognize compensation costs on a straight-line basis over the requisite service period for the entire award.
We determine the fair value of our share-based payment awards as follows:

Restricted Stock Units, Restricted Stock, and Performance-Based Restricted Stock Units. The fair value of restricted stock units, restricted stock, and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant. Performance-based restricted stock units include grants made in connection with certain acquisitions.

Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determined using a Monte-Carlo simulation model. Key assumptions for

23


the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”), respectively, is determined using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends.
The determination of the fair value of market-based restricted stock units, stock options and ESPP is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes.
There were no ESPP shares issued during the three months ended June 30, 2014 and 2013. There were no significant stock options granted during the three months ended June 30, 2013.
The estimated assumptions used in the Black-Scholes valuation model to value our stock option grants were as follows:
 
Three Months Ended
June 30,
 
2014
Risk-free interest rate
1.1 - 1.8%

Expected volatility
37 - 40%

Weighted-average volatility
38
%
Expected term
4.5 years

Expected dividends
None

The estimated assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows: 
 
Three Months Ended
June 30,
 
2014
 
2013
Risk-free interest rate
0.9
%
 
0.4
%
Expected volatility
16 - 79%

 
16 - 58%

Weighted-average volatility
30
%
 
31
%
Expected dividends
None

 
None

Stock-Based Compensation Expense
Employee stock-based compensation expense recognized during the three months ended June 30, 2014 and 2013 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment to stock-based compensation expense will be recognized at that time.

The following table summarizes stock-based compensation expense resulting from stock options, restricted stock, restricted stock units, performance-based restricted stock units, market-based restricted stock units, and the ESPP included in our Condensed Consolidated Statements of Operations (in millions):
 
Three Months Ended June 30,
 
2014
 
2013
Research and development
$
16

 
$
20

Marketing and sales
4

 
7

General and administrative
9

 
$
6

Stock-based compensation expense
$
29

 
$
33

We did not recognize any benefit from income taxes related to our stock-based compensation expense recognized during the three months ended June 30, 2014 and 2013.

24


As of June 30, 2014, our total unrecognized compensation cost related to stock options was $20 million and is expected to be recognized over a weighted-average service period of 3.1 years. As of June 30, 2014, our total unrecognized compensation cost related to restricted stock and restricted stock units (collectively referred to as “restricted stock rights”) was $307 million and is expected to be recognized over a weighted-average service period of 1.9 years. Of the $307 million of unrecognized compensation cost, $19 million relates to market-based restricted stock units.
During the three months ended June 30, 2014, we recognized $12 million of tax expense for the excess tax benefits resulting from stock-based compensation deductions; this amount is allocated directly to contributed capital and reported in the financing activities on our Condensed Consolidated Statement of Cash Flows.
Stock Options
The following table summarizes our stock option activity for the fiscal year ended June 30, 2014: 
 
 
Options
(in thousands)
 
Weighted-
Average
Exercise Prices
 
Weighted-
Average
Remaining
Contractual
Term  (in years)
 
Aggregate
Intrinsic Value
(in millions)
Outstanding as of March 31, 2014
 
5,311

 
$
37.43

 
 
 
 
Granted
 
940

 
35.68

 
 
 
 
Exercised
 
(224
)
 
20.40

 
 
 
 
Forfeited, cancelled or expired
 
(141
)
 
51.58

 
 
 
 
Outstanding as of June 30, 2014
 
5,886

 
$
37.46

 
5.30
 
$
34

Vested and expected to vest
 
5,503

 
$
37.91

 
5.00
 
$
32

Exercisable as of June 30, 2014
 
3,853

 
$
41.32

 
5.08
 
$
22

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of June 30, 2014, which would have been received by the option holders had all the option holders exercised their options as of that date. The weighted-average grant date fair values of stock options granted during the three months ended June 30, 2014 was $12.00. We issue new common stock from our authorized shares upon the exercise of stock options.
Restricted Stock Rights
The following table summarizes our restricted stock rights activity, excluding performance-based restricted stock unit activity which is discussed below, for the fiscal year ended June 30, 2014: 
 
 
Restricted
Stock Rights
(in thousands)
 
Weighted-
Average Grant
Date Fair Values
Balance as of March 31, 2014
 
13,536

 
$
19.70

Granted
 
3,265

 
35.49

Vested
 
(4,211
)
 
19.40

Forfeited or cancelled
 
(442
)
 
20.50

Balance as of June 30, 2014
 
12,148

 
$
24.02


The weighted-average grant date fair values of restricted stock rights granted during the three months ended June 30, 2014 and 2013 were $35.49 and $22.31, respectively.








25




Performance-Based Restricted Stock Units
The following table summarizes our performance-based restricted stock unit activity for the fiscal year ended three months ended June 30, 2014: 
 
 
Performance-
Based Restricted
Stock Units
(in thousands)
 
Weighted-
Average Grant
Date Fair Values
Balance as of March 31, 2014
 
54

 
$
15.39

Vested
 
(49
)
 
15.39

Forfeited or cancelled
 
(5
)
 
15.39

Balance as of June 30, 2014
 

 
$

Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be received at vesting will range from zero percent to 200 percent of the target number of stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over a three year period. We present shares granted at 100 percent of target of the number of stock units that may potentially vest. The maximum number of common shares that could vest is approximately 0.4 million for market-based restricted stock units granted during the three months ended June 30, 2014. As of June 30, 2014, the maximum number of shares that could vest is approximately 1.3 million for market-based restricted stock units outstanding.
The following table summarizes our market-based restricted stock unit activity for the year ended June 30, 2014: 
 
 
Market-Based
Restricted  Stock
Units
(in thousands)
 
Weighted-
Average  Grant
Date Fair Value
Balance as of March 31, 2014
 
978

 
$
24.83

Granted
 
193

 
46.96

Vested
 
(671
)
 
21.45

Vested above target
 
192

 
16.80

Forfeited or cancelled
 
(29
)
 
33.70

Balance as of June 30, 2014
 
663

 
$
31.97

The weighted-average grant date fair values of market-based restricted stock units granted during the three months ended June 30, 2014 and 2013 were $46.96 and $29.52, respectively.
Stock Repurchase Program
In May 2014, a special committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $750 million of our common stock. This new stock repurchase program, which expires on May 31, 2016, supersedes and replaces the stock repurchase authorization approved by our Board of Directors in July 2012. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three months ended June 30, 2014, we repurchased approximately 1.4 million shares of our common stock for approximately $50 million.


26


(15) NET INCOME PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units, common stock through our ESPP, warrants, and other convertible securities using the treasury stock method.
 
Three Months Ended June 30,
(In millions, except per share amounts)
2014
 
2013
Net income
$
335

 
$
222

Shares used to compute net income per share:
 
 
 
Weighted-average common stock outstanding — basic
313

 
304

Dilutive potential common shares related to stock award plans and from assumed exercise of stock options
8

 
8

Dilutive potential common shares related to the Notes
1

 

Weighted-average common stock outstanding — diluted
322

 
312

Net income per share:
 
 
 
Basic
$
1.07

 
$
0.73

Diluted
$
1.04

 
$
0.71


For the three months ended June 30, 2014 and 2013, options to purchase, restricted stock units and restricted stock to be released in the amount of 4 million shares and 6 million shares of common stock, respectively, were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect.

For the three months ended June 30, 2013, potentially dilutive shares of common stock related to our 0.75% Convertible Senior Notes due 2016 issued during fiscal year 2012, which have a conversion price of $31.74 per share and the associated Warrants, which have a conversion price of $41.14 per share, were excluded from the computation of Diluted EPS as their inclusion would have had an antidilutive effect resulting from the conversion price. The associated Convertible Note Hedge was excluded from the computation of diluted shares as the impact is always considered antidilutive. See Note 12 for additional information related to our 0.75% Convertible Senior Notes due 2016 and related Convertible Note Hedge and Warrants.

(16) SEGMENT INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.
Prior to the third quarter of fiscal 2014, our “EA Labels” operating segment was comprised of our five labels: EA Games, EA SPORTS, Maxis, PopCap and All Play. Our CODM regularly reviewed the aggregated results of the five labels to assess overall performance and allocate resources.
In September 2013, we announced the appointment of a new Chief Executive Officer. Our new Chief Executive Officer subsequently made a number of changes to our internal organizational structure and the manner in which our operations are managed. In addition, we redefined our definition of segment profit for management reporting. Our CODM currently reviews total company operating results to assess overall performance and allocate resources.

27


The following table summarizes the financial performance of our current segment operating profit and a reconciliation to our consolidated operating income for the three months ended June 30, 2014 and 2013. Our current segment operating profit differs from the prior “EA Labels” segment profit primarily due to the inclusion of (1) our Switzerland distribution revenues and expenses and (2) certain corporate and other functional costs such as our Global Publishing and Marketing organization expenses, which were previously not allocated to the EA Labels. Prior periods below have been restated to reflect our current reporting segment structure (in millions): 
 
Three Months Ended June 30,
 
2014
 
2013
Segment:
 
 
 
Net revenue before revenue deferral
$
775

 
$
495

Depreciation
(31
)
 
(30
)
Other expenses
(659
)
 
(626
)
Segment operating profit
85

 
(161
)
Reconciliation to consolidated operating income:
 
 
 
Other:
 
 
 
Revenue deferral
(623
)
 
(355
)
Recognition of revenue deferral
1,062

 
809

Amortization of intangibles
(17
)
 
(19
)
Acquisition-related contingent consideration
1

 
(7
)
Restructuring and other charges

 
(1
)
Stock-based compensation
(29
)
 
(33
)
Loss on licensed intellectual property commitment
(122
)
 

Other expenses
5

 

Consolidated operating income
$
362

 
$
233


Our segment profit differs from consolidated operating income primarily due to the exclusion of (1) the deferral of certain net revenue related to online-enabled games (see Note 10 for additional information regarding deferred net revenue (online-enabled games)), (2) certain non-cash costs such as stock-based compensation, (3) acquisition-related expenses such as amortization of intangibles and acquisition-related contingent consideration, and (4) other significant non-recurring costs that may not be indicative of the company’s core business, operating results or future outlook. Our CODM reviews assets on a consolidated basis and not on a segment basis.
Information about our total net revenue by revenue composition for the three months ended June 30, 2014 and 2013 is presented below (in millions): 
 
Three Months Ended
June 30,
 
2014
 
2013
Packaged goods and other
$
678

 
$
467

Digital
536

 
482

Net revenue
$
1,214

 
$
949

Information about our operations in North America and internationally as of and for the three months ended June 30, 2014 and 2013 is presented below (in millions): 
 
Three Months Ended
June 30,
 
2014
 
2013
Net revenue from unaffiliated customers
 
 
 
North America
$
522

 
$
395

International
692

 
554

Net revenue
$
1,214

 
$
949

 

28


 
As of June 30,
 
2014
 
2013