|
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended March 31, 2004 | ||
| OR | ||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File No. 0-17948
94-2838567
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Redwood City, California
(Address of principal executive
offices)
94065
(Zip Code)
Registrant’s telephone number, including area code: (650) 628-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o
The aggregate market value of the Registrant’s Class A common stock, $0.01 par value, held by non-affiliates of the Registrant as of September 26, 2003, the last business day of the second fiscal quarter, was $9,651,465,712.
As of June 1, 2004 there were 302,693,698 shares of the Registrant’s Class A common stock, $0.01 par value, outstanding, and 200,130 shares of the Registrant’s Class B common stock, $0.01 par value, outstanding.
Documents Incorporated by Reference
Portions of the Registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
ELECTRONIC ARTS INC.
Table of Contents
PART I
This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Report are forward looking. We use words such as “anticipate”, “believe”, “expect”, “intend”, “estimate” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and are inherently uncertain and difficult to predict. Our actual results could differ materially. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed under the heading “Risk Factors”, beginning on page 46.
Item 1: Business
Overview
Electronic Arts develops, markets, publishes and
distributes interactive software games that are playable by
consumers on the following platforms:
We were initially incorporated in California in
1982. In September 1991, we were reincorporated under the laws
of Delaware. Our principal executive offices are located near
San Francisco, California at 209 Redwood Shores
Parkway, Redwood City, California 94065 and our telephone number
is (650) 628-1500.
One of our strengths is our ability to publish
interactive software games for multiple platforms. Our products,
designed to play on consoles and handhelds, are published under
license from the manufacturers of these platforms (for example,
Sony for the PlayStation and PlayStation 2, Microsoft for
the Xbox and Nintendo for the Nintendo GameCube and Game Boy
Advance) and we pay a fee to these console manufacturers for the
right to publish products on their platforms. We invest in the
creation of state-of-the-art software tools that we use in
product development and to convert products from one platform to
another. We also make important investments in facilities and
equipment that allow us to create and edit video and audio
recordings that are used in our games. Since our inception, we
have published games for over 43 different platforms.
Our product development methods and organization
are modeled on those used in other sectors of the entertainment
industry. Employees whom we call “producers” are
responsible for overseeing the development of one or more
products. The interactive software games that we develop and
publish are broken down into three major categories:
(1) EA studio products, (2) co-publishing
products, and (3) distribution products.
EA Studio Products
3
Co-publishing Products
Distribution Products
During fiscal 2004, we published 32 new
internally developed titles and co-published an additional 11
new titles. Of these titles, 27 sold over one million units
(aggregated across all platforms). In fiscal 2004, approximately
45 percent of our net revenue was generated by
international operations, compared to approximately
42 percent in fiscal 2003 and 37 percent in fiscal
2002.
Another strength of our business is that we have
developed many of our products to become franchise titles that
can be regularly iterated. For example, every year we release
new versions of most of our EA SPORTS titles. Likewise,
several of the EA GAMES and EA SPORTS BIG products
listed above are part of new or continuing product franchises.
We also release products called “expansion packs” for
PC titles that provide additional content (characters,
storylines, settings, missions) for games that we have
previously published. For example, we have published expansion
packs for
Battlefield 1942
, including
Battlefield
1942: The Road to Rome
and
Battlefield 1942: Secret
Weapons of WWII,
each of which expands the characters,
settings and gameplay of the original
Battlefield 1942
game. We consider titles that iterate, sequel or spawn
expansion packs to be franchise titles.
Method of Delivery
The console, PC and hand-held games that we
publish are made available to consumers on a disk (usually CD or
DVD format) or a cartridge that is packaged and typically sold
in retail stores and through our own online store. We refer to
these as packaged goods products. In North America and Europe,
our largest markets, these packaged goods products are sold
primarily to retailers that may be mass market retailers (such
as Wal-Mart), electronics specialty stores (such as Best Buy) or
game software specialty stores (such as Electronics Boutique).
We also maintain a smaller business where we license to
manufacturers of products in related industries (for example,
makers of personal computers or computer accessories) rights to
include certain of our products with the manufacturer’s
product or offer our products to consumers who have purchased
the manufacturer’s product. We call these combined products
“OEM bundles”.
There are three ways in which we publish games
that are playable online by consumers. First, we include online
capability features in certain of our PC and PlayStation 2
products and soon Xbox, which enable consumers to play against
one another via the Internet. We also publish games that are
playable only online. One type of these online-only games is
called “persistent state worlds” or massively
multiplayer online games and is server based. Consumers
experience these games as interactive virtual worlds where
thousands of other consumers can interact with one another.
Examples of our persistent state world products are
Ultima
Online
TM
and
The Sims Online.
These
persistent state world games are often sold to consumers in the
form of a CD or DVD that contains much of the software necessary
to play the game online. Other types of online-only games that
we publish are available on the World Wide Web and include card
games, puzzle games and word games (marketed under the
“Pogo” brand), all of which are made available to
consumers on our website, www.pogo.com, and on certain online
services provided by America Online, Inc.
4
Intellectual Property
Like other entertainment companies, our business
is based on the creation, acquisition, exploitation and
protection of intellectual property. Each of our products
embodies a number of separately protected intellectual
properties: our products are copyrighted both as software and as
audiovisual works; our product names are trademarks of ours or
others; and our products may contain voices and likenesses of
third parties or the musical compositions and performances of
third parties. Our products may also contain other content
licensed from third parties, such as trademarks, fictional
characters, storylines and software code.
We acquire intellectual property rights to
include in our products through license agreements such as those
with sports leagues and player associations, movie studios and
performing talent, music labels, music publishers and musicians.
These licenses are typically limited to use of the licensed
rights in products for specific time periods. In addition, our
products that play on videogame platforms such as the Sony
PlayStation 2 console include intellectual properties owned
by the platform company and licensed non-exclusively to us for
use. While we may have renewal rights for some licenses, our
business and the justification for the development of many of
our products is dependent on our ability to continue to obtain
the intellectual property rights from third parties at
reasonable rates.
Our products are susceptible to unauthorized
copying. Our primary protection against unauthorized use,
duplication and distribution of our products is copyright and
trademark. We typically own the copyright to the software code
as well as the brand or title name trademark under which our
products are marketed. We register our copyrights in the United
States, and register our significant trademarks in multiple
countries including the United States. In addition, console
manufacturers such as Sony typically incorporate security
devices in their consoles in an effort to prevent unlicensed use
of products.
Market
Historically, there have been multiple consoles
available in our business segment and vigorous competition
between console manufacturers. While Sony has for the past
several years been the clear leader (with its PlayStation and
PlayStation 2 consoles), Microsoft and Nintendo are large
and viable competitors, and PCs continue to be a strong
interactive game platform. We develop and publish products for
multiple platforms, and this diversification continues to be a
cornerstone of our strategy.
The following table details select information on
a sample of the console platforms for which we have published
titles:
We currently develop or publish products for ten
different hardware platforms. In fiscal 2004, our product
releases were for PlayStation 2, Xbox, Nintendo GameCube,
PlayStation, PC, Game Boy Advance, Nokia N-Gage and online
Internet play. Our planned product introductions for fiscal 2005
are for the PlayStation 2, Xbox, Nintendo GameCube,
PlayStation, PC, Game Boy Advance, Nokia N-Gage, Sony PSP,
Nintendo Dual Screen and online Internet play.
PlayStation 2.
Sony released the PlayStation 2 console in Japan in
March 2000, in North America in October 2000, and in
Europe in November 2000. The PlayStation 2 console is
a 128-bit, DVD-based system
5
Nintendo GameCube.
Nintendo launched the Nintendo GameCube console in Japan in
September 2001, North America in November 2001 and in
Europe in May 2002. The Nintendo GameCube plays games that
are manufactured on a proprietary optical disk. We have
published and are currently developing numerous products for the
Nintendo GameCube.
Xbox.
Microsoft
launched the Xbox console in North America in
November 2001, in Japan in February 2002 and in Europe
in March 2002. The Microsoft Xbox is a 128-bit, DVD-based
system that is Internet ready. We have published and are
currently developing numerous products for the Microsoft Xbox.
Our early investment in products designed for
play on 32-bit PCs and consoles (such as the PlayStation), has
been strategically important in positioning us for the current
generation of 128-bit machines. We believe that such investment
continues to be important. During fiscal years 2004, 2003 and
2002, the video and computer games industry experienced a
platform transition from 32-bit CD-based and 64-bit
cartridge-based consoles to the current generation of 128-bit,
DVD-based game consoles and related software. The transition to
the current generation systems was initiated by the launch of
Sony’s PlayStation 2 in fiscal 2001, and continued
with the launches of the Nintendo GameCube and Microsoft’s
Xbox in fiscal 2002. As consumers shifted to the current
generation systems, our sales of 32-bit and 64-bit products
declined, a trend we expect to continue in fiscal 2005.
Online Games.
The
online gaming component of our business is still in its early
stages. To date, we have had limited success in finding ways of
generating revenue and profits from online games, including
subscription fees, “pay-to-play” fees and advertising.
In addition, we have had limited experience with developing
optimal pricing strategies or predicting usage patterns for our
online games. In our history, we have launched five persistent
state world products with mixed results. While we have achieved
success with
Ultima Online
, our other persistent state
world products, most notably
The Sims Online
and
Earth & Beyond
TM
, have not met
our expectations. Since the beginning of fiscal 2003, we have
launched our free EA SPORTS and EA GAMES NATION online
offerings, which can be accessed through certain of our PC and
PlayStation 2 titles. In fiscal 2004, we launched Club
Pogo, a subscription service for Pogo, offering exclusive games
and premium features. We had over 300,000 paying subscribers as
of March 31, 2004, however, the subscription fees to date
have been immaterial. The continued growth of the online sector
of our industry will depend on the following key factors:
Competition
We consider ourselves to be part of the
entertainment industry. At the most fundamental level, our
products compete with other forms of entertainment, such as
motion pictures, television and music, for the leisure time and
discretionary spending of consumers. We believe that large
software companies and media companies are increasing their
focus in the interactive entertainment software market and, as a
result, stand to become more direct competitors. Several large
software companies and media companies (e.g., Microsoft and
Sony) are already established competitors in the software games
segment, and other diversified media/entertainment companies
(e.g., Time Warner and Disney) have announced their intent
to significantly expand their software game publishing efforts
in the future. Therefore, we believe that the software games
segment is best viewed as a segment of the overall entertainment
market.
6
The software games business is highly
competitive. It is characterized by the continuous introduction
of new titles and the development of new technologies. Our
competitors vary in size from very small companies with limited
resources to very large, diversified corporations with greater
financial and marketing resources than ours. Our business is
driven by hit titles, which requires us to invest significantly
in production and in marketing. Therefore, the availability of
significant financial resources has become a major competitive
factor in the software games segment, primarily as a result of
the costs associated with the development and marketing of game
software. Competition in the software games segment is also
based on product quality and features, timing of product
releases, brand-name recognition, access to distribution
channels, effectiveness of marketing and price.
In the software games segment, we compete with
Sony, Microsoft and Nintendo, each of which develop and publish
software for their respective console platforms. We also compete
with numerous companies which are, like us, licensed by the
console manufacturers to develop and publish software games that
operate on their consoles. These competitors include Acclaim
Entertainment, Activision, Capcom, Eidos, Infogrames, Koei,
Konami, Lucas Arts, Midway, Namco, Sega, Square Enix, Take-Two
Interactive, THQ, Ubi Soft and Vivendi Universal Games,
among others. As discussed above, diversified media companies
such as Time Warner and Disney have also indicated their intent
to significantly expand their software game publishing efforts
in the future. In addition to competing for product sales, we
face heavy competition from other software game companies to
obtain license agreements which allow us the right to use
intellectual property included in our products; and many of
these content licenses are controlled by the diversified media
companies, many of which intend to expand their software game
publishing divisions.
Finally, the market for our products is
characterized by significant price competition, and we regularly
face pricing pressures from our competitors. These pressures
have, from time to time, required us to reduce our prices on
certain products. Our experience has been that software game
prices tend to decline once a generation of consoles has been in
the market for a significant period of time due to the
increasing number of software titles competing for acceptance by
consumers and the anticipation of the next generation of
consoles.
Relationships with Significant Hardware
Platform Companies
Sony.
Under the
terms of a licensing agreement we entered into with Sony
Computer Entertainment of America, effective as of April 2000
and as subsequently amended, we are authorized to develop and
distribute DVD-based software products compatible with the
PlayStation 2. Pursuant to this agreement, we engage Sony
to supply PlayStation 2 DVDs for our products. Many of our
PlayStation 2 products released during fiscal 2004 include
the capability of online play. Customers who have an online
adaptor, which is manufactured and sold by Sony, for their
PlayStation 2 consoles, are able to play these products
online.
In fiscal 2004, approximately 44 percent of
our net revenue was derived from sales of EA Studio
software for the PlayStation 2, compared to 37 percent
in fiscal 2003. We released 24 titles worldwide in fiscal 2004
for the PlayStation 2, compared to 19 titles in fiscal
2003. Our top five PlayStation 2 releases for the year were
Need for Speed Underground, Madden NFL 2004, Medal of Honor
Rising Sun, The Lord of the Rings; The Return of the King
and
FIFA Soccer 2004.
As expected, PlayStation product sales decreased
in fiscal 2004 primarily due to the transition to current
generation console systems. Although our PlayStation products
can be played on the PlayStation 2 console, we expect sales
of current PlayStation products to continue to decline in fiscal
2005.
Microsoft.
Under the
terms of a licensing agreement we entered into with Microsoft in
December 2000, as amended, we are authorized to develop and
distribute DVD-based software products compatible with the Xbox.
In May 2004, we announced that we would make many of our
games capable of being played online via Microsoft’s Xbox
Live service. Customers will be able to play these products
online once they have paid the Xbox Live subscription fee.
In fiscal 2004, approximately 13 percent of
our net revenue was derived from sales of EA Studio
software for the Xbox, compared to nine percent in fiscal 2003.
We released 21 titles worldwide in fiscal 2004 for the
7
Nintendo.
Under the
terms of a licensing agreement we entered into with Nintendo of
America, effective as of November 2001, we are authorized to
develop and distribute proprietary optical format disk products
compatible with the Nintendo GameCube. Pursuant to this
agreement, we engage Nintendo to supply Nintendo GameCube
proprietary optical format disk products for our products.
In fiscal 2004, approximately seven percent of
our net revenue was derived from sales of EA Studio
software for the Nintendo GameCube, compared to seven percent in
fiscal 2003. We released 19 titles worldwide in fiscal 2004
for the Nintendo GameCube, compared to 17 titles in fiscal
2003. Our top five Nintendo GameCube releases for the year were
Need for Speed Underground, The Lord of the Rings; The Return
of the King, Medal of Honor Rising Sun, Madden NFL 2004
and
James Bond 007: Everything or Nothing
.
Products and Product Development
In fiscal 2004, we generated approximately
69 percent of our net revenue from EA Studio-produced
products released during the year. During fiscal 2004, we
introduced 32 EA Studios titles, representing
97 stock keeping units, or SKUs, compared to
31 EA Studios titles, comprising 86 SKUs, in
fiscal 2003. In fiscal 2004, we had 27 titles that sold
over one million units (aggregated across all platforms). In
fiscal 2003, we had 22 titles and in fiscal 2002 we had
16 titles that sold over one million units (aggregated
across all platforms). A SKU is a version of a title designed
for play on a particular platform and intended for distribution
in a particular territory.
For fiscal 2004, no title represented more than
10 percent of our total fiscal 2004 net revenue. For
fiscal 2003, we had one title,
Harry Potter and the Chamber
of Secrets
TM
, published on seven different
platforms, which represented approximately 10 percent of
our total fiscal 2003 net revenue. For fiscal 2002,
Harry Potter and the Sorcerer’s Stone
TM
,
published on four different platforms, represented approximately
12 percent of our total fiscal 2002 net revenue.
The products produced by EA Studios are designed
and created by our employee designers and artists 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,
which payments are considered advances against subsequent
royalties based on the sales of the products. These terms are
typically set forth in written agreements entered into with the
independent artists and third-party developers.
We publish products in a number of categories
such as sports, action, strategy, simulations, role playing and
adventure, each of which is becoming increasingly competitive.
Our sports-related products, marketed under the EA SPORTS
brand name, accounted for a significant percentage of net
revenue in fiscal years 2004, 2003 and 2002. The sports category
is highly competitive, and there can be no assurance that we
will be able to maintain our historical success in this category
or that our licenses will be renewed.
The retail selling prices of our newly released
products in North America (excluding re-releases of older titles
marketed as “Classics”), typically range from $30.00
to $50.00. “Classics” titles have retail selling
prices that range from $10.00 to $20.00. The retail selling
prices of our titles outside of North America vary widely
depending on factors such as local market conditions.
Our goal is to maintain our position as a leading
publisher of games sold for play on the current generation of
128-bit video game consoles and to extend our success into the
next generation of consoles and technology. We will continue to
invest in tools and technologies designed to facilitate
development of our products for current generation platforms
while also investing in tools and technologies for the next
generation of consoles and technology. These investments are
recorded in research and development in our Consolidated
Statement of Operations. We had research and development
expenditures of $511 million in fiscal 2004,
$401 million in fiscal 2003 and $381 million in fiscal
2002.
8
EA.com Web Site
Paid Content.
In
addition to our free suite of games, we also offer two premium
pay-to-play services under the Pogo Brand:
Relationship with AOL
Persistent State World Games
We launched both
Earth & Beyond
and
The Sims Online
in fiscal 2003.
The Sims
Online
was expected to be our flagship online subscription
offering. Through March 31, 2004, however, the number of
units sold and
9
Our EA.com website offerings and persistent state
world games focus on targeting and serving consumers by:
Marketing and Distribution
We market the products produced by EA Studios
under the EA GAMES, EA SPORTS and EA SPORTS BIG
brands. Products marketed under the EA SPORTS brand
typically simulate professional and collegiate sports and
include franchises such as Madden NFL, FIFA Soccer and
NBA Live. Products marketed under the EA SPORTS BIG
brand typically feature extreme sports or modified traditional
sports and include such titles as
SSX 3, Def Jam
VENDETTA
and
NFL STREET.
Formerly known as Electronic Arts Distribution,
our EA Partners global business unit operates under a
variety of deal types and structures with the intent of
generating, leveraging and/or owning intellectual properties
conceived by third party developers, publishers or licensors
worldwide. Through EA Partners we provide direct
development expertise to our partners via an internal production
staff, while also making available our publishing resources to
provide sales, marketing and distribution services on a global
basis.
EA Partners currently has relationships with
DICE, Lionhead, Krome Studios, Black Hole Games, Free Radical
Design, Gas Powered Games, Castaway Entertainment and Eurocom
Developments, among others. EA Partners’ largest
co-publishing arrangement is with DICE, headquartered in
Stockholm, Sweden, in which we hold an equity interest. DICE is
the creator of the hit Battlefield series of online multiplayer
games, which include worldwide best-sellers
Battlefield
1942
and
Battlefield Vietnam
on the PC.
EA Partners also distributes finished goods
on behalf of other third-party publishers. These titles are
developed and manufactured by other publishers and delivered to
us as completed products, for which we provide distribution
services. Our distribution partners have included Square Enix,
Capcom, Namco, Koei and NovaLogic.
The interactive software game business has become
increasingly “hit” driven, requiring significantly
greater expenditures for marketing and advertising of our
products, particularly for television advertising. There can be
no assurance that we will continue to produce “hit”
titles, or that advertising for any product will increase sales
sufficiently to recoup those advertising expenses.
We generated approximately 95 percent of our
North American net revenue from direct sales to retailers
through a field sales organization of professionals and a group
of telephone sales representatives. The remaining 5 percent
of our North American sales were made through a limited number
of specialized and regional distributors and rack jobbers in
markets where we believe direct sales would not be economical.
We had direct sales to one customer, Wal-Mart Stores, Inc.,
which represented 13 percent of total net revenue in fiscal
2004, 12 percent in fiscal 2003, and 14 percent in
fiscal 2002.
Outside of North America, we derive revenues
primarily from direct sales to retailers. Our largest indirect
sales relationship is with Pinnacle in Europe. Sales of our
products through Pinnacle make up approximately 12 percent
of our total net revenue. We use Pinnacle to provide logistical
and collection services to our retail customers. Under the terms
of our agreement with Pinnacle, our products are held by
Pinnacle on consignment until shipment to the retailer. In
addition, we authorize returns from, or price protection to,
retailers and we are obliged to give Pinnacle the corresponding
credit. In a few of our smaller markets, we sell
10
In North America, we have stock-balancing
programs for our PC products, which allow for the exchange of PC
products by resellers under certain circumstances. In all of our
major geographical markets, we accept product returns on our PC
products and we may decide to accept product returns or provide
price protection under certain circumstances for our console
products after we analyze inventory remaining in the channel,
the rate of inventory sell-through in the channel, and our
remaining inventory on hand. It is our policy to exchange
products or give credits, rather than give cash refunds. We
actively monitor and manage the volume of our sales to retailers
and distributors and their inventories as substantial
overstocking in the distribution channel can result in high
returns or the requirement for substantial price protection in
subsequent periods.
The distribution channels through which our games
are sold have been characterized by change, including
consolidations and financial difficulties of certain
distributors and retailers. The bankruptcy or other business
difficulties of a distributor or retailer could render our
accounts receivable from such entity uncollectible, which could
have an adverse effect on our operating results and financial
condition. In addition, an increasing number of companies are
competing for access to our distribution channels. Our
arrangements with our distributors and retailers may be
terminated by either party at any time without cause.
Distributors and retailers often carry products that compete
with ours. Retailers of our products typically have a limited
amount of shelf space and promotional resources that they are
willing to devote to the software games category, and there is
intense competition for these resources. There can be no
assurance that distributors and retailers will continue to
purchase our products or provide our products with adequate
levels of shelf space and promotional support.
Inventory and Working Capital
Our management focuses considerable attention to
managing our inventories and other working-capital-related
items. We manage inventories by communicating with our customers
prior to the release of our products, and then using our
industry experience to forecast demand on a product-by-product
and territory-by-territory basis. We then place manufacturing
orders for our products that match this forecasted demand. We do
not maintain substantial inventories of our products because
(1) historically, a substantial portion of a particular
product sales occur within the first 60-90 days after the
product’s release, and (2) the lead times on re-orders
of our products are generally short, approximately two to three
weeks. Further, as discussed in “Marketing and
Distribution” and in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”,
we have practices in place with our customers (such as stock
balancing and price protection) that reduce product returns.
International Operations
We conduct business and have wholly-owned
subsidiaries throughout the world, including offices in
Australia, Austria, Brazil, Canada, China, the Czech Republic,
Denmark, England, Finland, France, Germany, Greece, Hungary,
Italy, Japan, the Netherlands, New Zealand, Norway, Poland,
Portugal, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Taiwan, and Thailand. International net revenue
increased by 29 percent to $1,348 million, or
45 percent of total net revenue in fiscal 2004, compared to
$1,047 million, or 42 percent of total net revenue in
fiscal 2003. Although we expect international revenue to grow in
fiscal 2005, we do not believe it will continue to grow at the
same rate as fiscal 2004.
The amounts of net revenue and identifiable
assets attributable to each of our geographic regions for each
of the last three fiscal years are set forth in Note 18 of
the Notes to Consolidated Financial Statements, included in
Item 8 hereof.
11
Manufacturing and Suppliers
The suppliers we use to manufacture our games can
be characterized in three types:
In many instances, we are able to acquire
materials on a volume-discount basis. We have multiple potential
sources of supply for most materials, except for the disk
component of our PlayStation, PlayStation 2 and Nintendo
GameCube disk products, as discussed in “Relationships with
Significant Hardware Platform Companies”. We also have
alternate sources for the manufacture and assembly of most of
our products. To date, we have not experienced any material
difficulties or delays in production of our software and related
documentation and packaging. However, a shortage of components,
manufacturing delays by Sony or Nintendo, or other factors
beyond our control could impair our ability to manufacture, or
have manufactured, our products.
Backlog
We typically ship orders immediately upon
receipt. To the extent that any backlog may or may not exist at
the end of a reporting period, it would be both coincidental and
an unreliable indicator of future results of any period.
Seasonality
Our business is highly seasonal. We typically
experience our highest revenue and profits in the holiday season
quarter ending in December and a seasonal low in revenue and
profits in the quarter ending in June. However, our results can
vary based on title release dates and shipment schedules.
Employees
As of March 31, 2004, we employed
approximately 4,800 people, of whom over 2,300 were outside
the United States. We believe that our ability to attract and
retain qualified employees is a critical factor in the
successful development of our products and that our future
success will depend, in large measure, on our ability to
continue to attract and retain qualified employees. To date, we
have been successful in recruiting and retaining sufficient
numbers of qualified personnel to conduct our business
successfully. We believe that our relationships with our
employees are strong. None of our employees are represented by a
union, guild or other collective bargaining organization.
12
Executive Officers
The following table sets forth information
regarding our executive officers, who are appointed by and serve
at the discretion of the Board of Directors:
Mr. Probst
has
been a director of Electronic Arts since January 1991 and
currently serves as Chairman and Chief Executive Officer. He was
elected as Chairman in July 1994. Mr. Probst has previously
served as President of Electronic Arts; as Senior Vice President
of EA Distribution, Electronic Arts’ distribution
division, from January 1987 to January 1991; and from September
1984, when he joined Electronic Arts, until December 1986,
served as Vice President of Sales. Mr. Probst holds a
B.S. degree from the University of Delaware.
Mr. Mattrick
has served as President of Worldwide
Studios since September 1997. From October 1996 until September
1997, he served as Executive Vice President, North American
Studios. 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 Electronic Arts in 1991.
Mr. Jenson
joined Electronic Arts in June 2002 as
Executive Vice President and Chief Financial and Administrative
Officer. Before joining Electronic Arts, he was the Senior Vice
President and Chief Financial Officer for Amazon.com from 1999
to 2002. From 1998 to 1999, he was the Chief Financial Officer
and Executive Vice President for Delta Air Lines. Prior to that,
he worked in several positions as part of the General Electric
Company. Most notably, he served as Chief Financial Officer and
Senior Vice President for the National Broadcasting Company, a
subsidiary of General Electric. Mr. Jenson earned his
Masters of Accountancy-Business Taxation, and B.S. in Accounting
from Brigham Young University.
Mr. Lee
has
served as Executive Vice President and Chief Operating Officer,
Worldwide Studios since August 2002. From 1998 to August 2002,
he was Senior Vice President and Chief Operating Officer,
Worldwide Studios. Prior to this, he served as General Manager
of EA Canada, Chief Operating Officer of EA Canada,
Chief Financial Officer of EA Sports and Vice President,
Finance and Administration of EA Canada. Mr. Lee was a
principal of Distinctive Software Inc. until it was acquired by
Electronic Arts in 1991. Mr. Lee holds a Bachelor of
Commerce degree from the University of British Columbia and is a
Chartered Financial Analyst.
13
Mr. McMillan
was named Executive Vice President of
Electronic Arts’ Worldwide Studios in June 2002. From
September 1999, he served as Senior Vice President, Worldwide
Studios. From 1991 to 1999, he held various senior positions
within Electronic Arts studios. Mr. McMillan was an
employee of Distinctive Software Inc. until it was acquired by
Electronic Arts in 1991. Mr. McMillan holds degrees in
Economics and Computer Science from Simon Fraser University.
Mr. Rueff
has
served as Executive Vice President of Human Resources and
Facilities since August 2002. From October 1998 to August 2002,
he served as Senior Vice President of Human Resources. Prior to
joining Electronic Arts, Mr. Rueff held various positions
with the PepsiCo companies for over 10 years,
including: Vice President, International Human Resources;
Vice President, Staffing and Resourcing at Pepsi-Cola
International; Vice President, Restaurant Human Resources for
Pizza Hut; and also various other management positions within
the Frito-Lay Company. Mr. Rueff holds a M.S. degree
in Counseling and a B.A. degree in Radio and Television
from Purdue University in Indiana.
Ms. Smith
has
served as Executive Vice President and General Manager, North
American Publishing since March 1998. From October 1996 to March
1998, Ms. Smith served as Executive Vice President, North
American Sales. She previously held the position of Senior Vice
President of North American Sales and Distribution from July
1993 to October 1996 and as Vice President of Sales from 1988 to
1993. Ms. Smith has also served as Western Regional Sales
Manager and National Sales Manager since she joined Electronic
Arts in 1984. Ms. Smith holds a B.S. degree in
management and organizational behavior from the University of
San Francisco.
Mr. Gardner
has
served as Senior Vice President, International Publishing since
April 2004. During fiscal 2004, Mr. Gardner took a leave of
absence from EA. He previously held the position of Senior Vice
President and Managing Director, European Publishing from May
1999 to April 2003. Prior to this, he held several positions in
EA Europe, which he helped establish in 1987, including
Director of European Sales and Marketing and Managing Director
of EA Europe. Mr. Gardner has also held various
positions at Electronic Arts in the sales, marketing and
customer support departments since joining the company in 1983.
Dr. Florin
has
served as Senior Vice President and Managing Director, European
Publishing since April 2003. Prior to this, he served as Vice
President, Managing Director for European countries since 2001.
From the time he joined Electronic Arts in 1996 to 2001, he was
the Managing Director for German speaking countries. Prior to
joining Electronic Arts, Dr. Florin held various positions
at BMG, the global music division of Bertelsmann AG, and
worked as a consultant with McKinsey. Dr. Florin holds
Masters and Ph.D. degrees in Economics from the University
of Augsburg, Germany.
Mr. Hachenburg
has served as Senior Vice President,
Global Online Publishing since November 2003. From April 2003 to
October 2003, Mr. Hachenburg served as Senior Vice
President, General Manager of Online Publishing and from October
2001 to March 2003, he served as Senior Vice President, General
Manager, EA.com. Prior to this, he served as Vice President and
Chief Operating Officer, EA.com from June 2001 to September 2001
and Vice President, Pogo President from March 2001 to May 2001.
Mr. Hachenburg served as President and Chief Executive
Officer, Pogo Corporation from December 1997 until it was
acquired by Electronic Arts in March of 2001.
Mr. Hachenburg holds a J.D. from Harvard Law School and a
B.S. degree in Electrical Engineering from the University of
Illinois.
Mr. Linzner
has
served as Senior Vice President, Business and Legal Affairs
since April 2004. From October 2002 to April 2004,
Mr. Linzner held the position of Senior Vice President of
Worldwide Business Affairs and from July 1999 to October 2002,
he held the position of Vice President of Worldwide Business
Affairs. Prior to joining Electronic Arts in July 1999,
Mr. Linzner served as outside litigation counsel to
Electronic Arts and several others in the videogame industry.
Mr. Linzner earned his J.D. from Boalt Hall at the
University of California, Berkeley, after graduating from
Brandeis University. He is a member of the Bar of the State of
California and is admitted to practice in the United States
Supreme Court, the Ninth Circuit Court of Appeals and several
United States District Courts.
14
Mr. Barker
has
served as Vice President and Chief Accounting Officer since June
2003. Prior to joining Electronic Arts, Mr. Barker was
employed at Sun Microsystems Inc., as Vice President and
Corporate Controller from October 2002 to June 2003 and
Assistant Corporate Controller from April 2000 to September
2002. Prior to that, he was an audit partner at Deloitte.
Mr. Barker graduated from the University of Notre Dame with
a B.A. degree in Accounting.
Investor Information
We file various reports with, or furnish them to,
the Securities and Exchange Commission (“SEC”),
including our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and
amendments to such reports. These reports are available free of
charge on the Investor Relations section of our website,
http://investor.ea.com
, as soon as reasonably practicable
after we electronically file the reports with, or furnish them
to, the SEC.
The charters of our Audit, Compensation, and
Nominating and Governance committees of our Board of Directors,
as well as our Global Code of Conduct (which includes code of
ethics provisions applicable to our directors, principal
executive officer, principal financial officer, principal
accounting officer, and other senior financial officers), are
available in the Investor Relations section of our website at
http://investor.ea.com
. We will post amendments to our
Global Code of Conduct in the Investor Relations section our
website. Copies of our charters and Global Code of Conduct are
available without charge by contacting our Investor Relations
department at (650) 628-1500.
Shareholders of record may hold their shares of
our Class A common stock in book-entry form. This
eliminates costs related to safekeeping or replacing paper stock
certificates. In addition, shareholders of record may request
electronic movement of book-entry shares between their account
with our stock transfer agent and their broker. Stock
certificates may be converted to book-entry shares at any time.
Questions regarding this service may be directed to our stock
transfer agent, Wells Fargo Bank, N.A., at 1-800-468-9716.
15
n
Home videogame machines (such as the Sony
PlayStation 2®, Microsoft Xbox®, Nintendo
GameCube
TM
and Sony PlayStation consoles),
n
Personal computers (PCs),
n
Hand-held game machines (such as the Game
Boy® Advance), and
n
Online, over the Internet and other proprietary
online networks.
n
EA SPORTS
TM
— examples
of some of our recent products published under the
EA SPORTS brand are
Madden NFL 2004
(professional
football),
NCAA®
Football 2004
(collegiate
football),
FIFA Soccer 2004
(professional soccer),
NBA
Live 2004
(professional basketball),
NHL®
2004
(professional hockey),
MVP
Baseball
TM
2004
(professional
baseball) and
NASCAR Thunder
TM
2004
(stock car racing),
n
EA GAMES
TM
— examples
of some of our recent products published under the EA GAMES
brand are
The Lord of the Rings
TM
;
The
Return of the King
TM
,
James Bond
007
TM
: Everything or
Table of Contents
Nothing
TM
,
The Sims
TM
Bustin’ Out, Need for
Speed
TM
Underground
and
Medal of
Honor
TM
Rising Sun
, and
n
EA SPORTS BIG
TM
—
examples of some of our recent products published under the
EA SPORTS BIG brand are
NFL STREET
(football),
SSX 3
(snowboarding),
Def Jam VENDETTA
(wrestling)
and
NBA STREET Vol. 2
(basketball).
Table of Contents
Video Game Console/
Date Introduced
Medium/
Manufacturer
Platform Name
in North America
Product Base
Technology
Genesis
1989
Cartridge
16-bit
Super NES
TM
1991
Cartridge
16-bit
3DO
TM
Interactive Multiplayer
TM
1993
Compact Disk
32-bit
Saturn
1995
Compact Disk
32-bit
PlayStation
1995
Compact Disk
32-bit
Nintendo 64
1996
Cartridge
64-bit
PlayStation 2
2000
Digital Versatile Disk
128-bit
Nintendo GameCube
2001
Proprietary Optical Format
128-bit
Xbox
2001
Digital Versatile Disk
128-bit
Table of Contents
n
Growing interest in multiplayer games,
n
Willingness by consumers to pay for online game
content,
n
Rapid innovation of new online entertainment
experiences,
n
Mass market adoption of broadband technologies,
n
Convergence of online capabilities in
next-generation consoles, and
n
Ability to create on-line products that appeal to
consumers in diverse global markets.
Table of Contents
Table of Contents
Table of Contents
n
Pogo.
We offered
approximately 43 free online games under the Pogo brand. Pogo
provides players a variety of free online games geared towards
family entertainment. The offerings include card games, board
games, casino games, word games, trivia games and puzzles. This
category leverages prizes, tournaments, community and
Pogo’s strength and popularity in free, familiar games to
significantly increase the appeal of our online games service to
the broad consumer market.
n
EA GAMES.
We
included online gameplay capability for five PC and five
PlayStation 2 titles. In addition, we provided 12 free
online games on our Pogo website under the EA GAMES brand.
The EA GAMES offering consists of original arcade-style
games and other original games designed solely for online play,
such as
Highstakes Pool, Command &
Conquer
TM
: Attack Copter, Tank Hunter
and
Need for Speed
.
n
EA SPORTS
and
EA SPORTS BIG.
We included online gameplay
capability for six PC and 12 PlayStation 2 titles. In
addition, we provide 17 free online games on our Pogo web
site under the EA SPORTS and EA SPORTS BIG brands. In
the EA SPORTS BIG category,
SSX Snowdreams
leverages the
EA SPORTS BIG franchise to form a community of sports
gamers. The EA SPORTS category consists of original games
designed solely for online play such as
Pebble Beach Golf,
Top Down Baseball, All-Star Football,
3
-Point Showdown
and
It’s Outta Here 2!
.
n
Club
Pogo
— our online game
subscription service. To join Club Pogo, players must register
and subscribe online. Players have the option of selecting a
monthly or annual subscription fee plan. When a player joins
Club Pogo, they have access to all of the games and content they
had on the free service, plus premium features and benefits,
such as additional member-exclusive games, ad-free gameplay, an
enhanced prize system and more. Club Pogo also provides a deeper
community experience through upgraded player profiles, weekly
game challenges and member badges.
n
Pogo-To-Go
—
our downloadable games offering. A one-time fee allows users to
download and own a version of their favorite Pogo game to play
offline. The Pogo-To-Go games include extra features like
exclusive game modes, bonus levels, high scores and enhanced
graphics and sounds. We currently offer
25 downloadable games under the Pogo-To-Go service
including, several original games, versions of popular free Pogo
games and several licensed titles. In addition, we offer these
downloadable game offerings at retail.
Table of Contents
n
Offering engaging and accessible online games,
n
Building a community in which consumers can
interact with one another via chat, bulletin boards, events and
match-making services for multi-player games and other contests,
n
Delivering innovative content that continually
entertains, and
n
Establishing a direct relationship with each
audience member through personalization and customization of
user experiences.
Table of Contents
Table of Contents
n
Manufacturing entities that press our game disks,
n
Entities that print our game instruction
booklets, and
n
Entities that package the disks and printed game
instruction booklets into the jewel cases and boxes for shipping
to customers.
Table of Contents
Name
Age
Position
54
Chairman and Chief Executive Officer
40
President, Worldwide Studios
47
Executive Vice President and Chief Financial and
Administrative Officer
39
Executive Vice President and Chief Operating
Officer, Worldwide Studios
41
Executive Vice President, Group Studio Head,
Worldwide Studios
42
Executive Vice President, Human
Resources & Facilities
51
Executive Vice President and General Manager,
North American Publishing
38
Senior Vice President, International Publishing
45
Senior Vice President and Managing Director,
European Publishing
38
Senior Vice President, Global Online Publishing
52
Senior Vice President, Business and Legal Affairs
37
Vice President and Chief Accounting Officer
Table of Contents
Table of Contents
Table of Contents
Item 2: Properties
We own or lease the following facilities. We believe that suitable additional or substitute space will be available as needed to accommodate our future needs.
Redwood City, California Headquarters Campus
In February 1995, we entered into a build-to-suit lease with a third party for our headquarters facility in Redwood City, California, which was refinanced with Keybank National Association in July 2001 and expires in July 2006. We accounted for this arrangement as an operating lease in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases” , as amended. Existing campus facilities developed in phase one comprise a total of 350,000 square feet and provide space for sales, marketing, administration and research and development functions. We have an option to purchase the property (land and facilities) for a maximum of $145.0 million or, at the end of the lease, to arrange for (i) an extension of the lease or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $128.9 million if the sales price is less than this amount, subject to certain provisions of the lease.
In December 2000, we entered into a second build-to-suit lease with Keybank National Association for a five-year term beginning December 2000 to expand our Redwood City, California headquarters facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. The facilities provide space for marketing, sales and research and development. We have an option to purchase the property for a maximum of $130.0 million or, at the end of the lease, to arrange for (i) an extension of the lease, or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $118.8 million if the sales price is less than this amount, subject to certain provisions of the lease.
Louisville, Kentucky Distribution Center
North American Development Studios
| n | We own a 206,000 sq. ft. product development studio facility in Burnaby, British Columbia, Canada, | |
| n | We own a 173,500 sq. ft. development facility in Austin, Texas that we are in the process of selling as part of a restructuring. Please see Note 6 of the Notes to Consolidated Financial Statements, included in Item 8 hereof, for a discussion of the restructuring charges, and | |
| n | We lease product development studio facilities in Los Angeles (243,000 sq. ft.), California, Maitland (92,000 sq. ft.), Florida, Vancouver (65,000 sq. ft.) and Burnaby (20,000 sq. ft.), British Columbia, Chicago (14,000 sq. ft.), Illinois, Montreal (10,000 sq. ft.), Quebec and Walnut Creek, California. Our Walnut Creek facility is included in our current restructuring, as discussed in Note 6 of Notes to Consolidated Financial Statements, included in Item 8 hereof. |
European Facilities
16
Asia Pacific and Japan Facilities
Item 3: Legal Proceedings
We are subject to pending claims and litigation.
Our management, after review and consultation with counsel,
considers that any liability from the disposition of such
lawsuits, individually or in the aggregate would not have a
material adverse effect upon our consolidated financial position
or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter ended March 31, 2004.
17
PART II
Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters
Our Class A common stock is traded on the
Nasdaq National Market under the symbol “ERTS”. The
following table sets forth the quarterly high and low price per
share of our Class A common stock from April 1, 2002
through March 31, 2004. Such prices represent prices
between dealers and do not include retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
Prices
High
Low
$
33.49
$
26.75
34.50
26.23
36.22
25.08
30.23
23.76
$
39.70
$
28.10
48.50
36.55
52.89
40.60
52.18
43.43
There were approximately 1,686 holders of record of our Class A common stock as of June 1, 2004. In addition, we believe that a significant number of beneficial owners of our Class A common stock hold their shares in street name. As of June 1, 2004, there were 12 holders of record of our Class B common stock. There is no established trading market for shares of our Class B common stock.
Dividend Policy
We have not paid any cash dividends and do not anticipate paying cash dividends in the foreseeable future.
18
Item 6: Selected Financial
Data
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
(In thousands, except per share data)
Year Ended March 31,
STATEMENTS OF OPERATIONS DATA
2004
2003
2002
2001
2000
$
2,957,141
$
2,482,244
$
1,724,675
$
1,322,273
$
1,420,011
1,102,950
1,072,802
814,783
664,991
710,974
1,854,191
1,409,442
909,892
657,282
709,037
370,468
332,453
241,109
185,336
188,611
184,825
130,859
107,059
104,041
92,418
510,858
400,990
380,564
376,179
255,694
2,735
7,482
25,418
19,323
11,989
—
—
—
2,719
6,539
9,708
15,102
7,485
—
—
—
66,329
12,818
—
—
1,078,594
953,215
774,453
687,598
555,251
775,597
456,227
135,439
(30,316
)
153,786
20,963
5,222
12,848
16,886
16,028
796,560
461,449
148,287
(13,430
)
169,814
219,268
143,049
45,969
(4,163
)
52,642
577,292
318,400
102,318
(9,267
)
117,172
—
(1,303
)
(809
)
(1,815
)
(421
)
$
577,292
$
317,097
$
101,509
$
(11,082
)
$
116,751
N/A
N/A
N/A
N/A
$
0.46
N/A
N/A
N/A
N/A
$
0.44
N/A
N/A
N/A
N/A
251,321
N/A
N/A
N/A
N/A
265,484
$
577,292
$
329,212
$
124,256
$
11,944
N/A
$
577,292
$
317,097
$
101,509
$
(11,082
)
N/A
$
1.95
$
1.17
$
0.45
$
0.05
N/A
$
1.87
$
1.08
$
0.35
$
(0.04
)
N/A
295,396
281,978
273,665
262,807
N/A
308,233
292,891
286,284
264,111
N/A
N/A
$
(12,115
)
$
(22,747
)
$
(23,026
)
N/A
N/A
$
(2.77
)
$
(3.77
)
$
(3.83
)
N/A
N/A
$
(2.77
)
$
(3.77
)
$
(3.83
)
N/A
N/A
4,368
6,026
6,015
N/A
N/A
4,368
6,026
6,015
N/A
| (1) | Results for fiscal 2004 and 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. See Note 5 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. |
19
(In thousands)
Year Ended March 31,
BALANCE SHEET DATA
2004
2003
2002
2001
2000
$
2,149,885
$
949,995
$
552,826
$
419,812
$
246,265
264,461
637,623
244,110
46,680
93,539
1,225
1,111
6,869
10,022
236
2,188,554
1,340,261
699,561
478,701
440,021
3,400,611
2,359,533
1,699,374
1,378,918
1,192,312
722,253
570,876
452,982
340,026
265,302
—
3,918
3,098
4,545
3,617
2,678,358
1,784,739
1,243,294
1,034,347
923,393
20
| Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
OVERVIEW
The following overview is a top-level discussion of our operating results as well as the trends and drivers of our business. Management believes that an understanding of these trends and drivers is important in order to understand our results for fiscal 2004, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-K, including in “Business”, the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” or the consolidated financial statements and related notes.
About Electronic Arts
We develop, market, publish and distribute interactive software games that are playable by consumers on home videogame machines (such as the Sony PlayStation 2®, Microsoft Xbox® and Nintendo GameCube TM consoles), personal computers, hand-held game machines (such as the Game Boy® Advance) and online, over the Internet and other proprietary online networks. Many of our games are based on content that we license from others (e.g., Madden NFL Football, Harry Potter TM and FIFA Soccer), and many of our games are based on our own wholly-owned intellectual property (e.g., The Sims TM , Medal of Honor TM ). Our goal is to develop titles which appeal to the mass markets and, as a result, we develop, market, publish and distribute our games in over 100 countries, often translating and localizing them for sale in non-English speaking countries. Our goal is to create software game “franchises” that allow us to publish new titles on a recurring basis that are based on the same property. Examples of this are the annual iterations of our sports-based franchises (e.g., NCAA Football and FIFA Soccer), titles based on long-lived movie properties (e.g., James Bond TM and Harry Potter) and wholly-owned properties that can be successfully sequeled (e.g., The Sims and Medal of Honor).
Overview of Fiscal 2004 Financial Results
Net revenue for fiscal 2004 was $2,957.1 million, up 19.1 percent as compared with $2,482.2 million for fiscal 2003. We had 27 platinum titles (over one million units sold) in fiscal 2004 as compared to 22 platinum titles in 2003. In fiscal 2004, six franchises sold more than five million units: The Sims, Need for Speed TM , Medal of Honor, FIFA Soccer, The Lord of the Rings TM and Madden NFL Football .
Net income for fiscal 2004 was $577.3 million, an 82.1 percent increase over fiscal 2003. Diluted earnings per share increased 73.1 percent to $1.87 as compared with $1.08 for fiscal 2003. The growth in earnings was primarily driven by higher sales volume and increased gross margin.
Operating cash flow was $669.3 million as compared with $714.5 million for fiscal 2003. The decline was primarily a result of the timing of sales during the fourth quarter.
Management’s Overview of Historical and Prospective Business Trends
Sales of “Hit” Titles. During fiscal 2004, sales of a number of “hit” titles contributed to our revenue growth, several of which were top sellers across a number of international markets. Our top-five-selling titles across all platforms worldwide in fiscal 2004 were Need for Speed TM Underground, Madden NFL 2004, The Lord of the Rings TM ; The Return of the King TM , Medal of Honor TM Rising Sun and FIFA Soccer 2004 . Hit titles are important to our financial performance because they benefit from overall economies of scale. We have developed, and it is our objective to continue to develop, many of our hit titles to become franchise titles that can be regularly iterated.
Increased Console Installed Base. As consumers purchase the current generation of consoles, either as first time buyers or by upgrading from a previous generation, the console installed base increases. As the installed base for a particular console increases, we are generally able to increase our unit volume; however, as consumers anticipate the next generation of consoles, unit volumes often decrease. In the U.S. and Europe,
21
Software Prices. As current generation console prices decrease, we expect more value-oriented consumers to become part of the interactive entertainment software market. We experienced this trend several years ago when prices were reduced on previous generation consoles (e.g., Sony PlayStation and Nintendo 64). We believe that hit titles will continue to be launched at premium price points and will maintain those premium price points longer than less popular games, however, as a result of a more value-oriented consumer base, and a greater number of software titles being published, we expect average software prices to gradually come down, which we expect to negatively impact our gross margin.
International Sales Growth. Our fiscal 2004 net revenue from international sales accounted for approximately 45 percent of our worldwide net revenue, up from 42 percent in fiscal 2003. Our fiscal 2004 increase in international net revenue was driven primarily by increased sales in Europe. In fiscal 2005, we anticipate that international net revenue will continue to increase as a percentage of our worldwide net revenue, although not at the same rate as in fiscal 2004, as we strengthen our presence in new territories and as the console installed base expands more rapidly outside of North America.
Foreign Exchange Impact. Given that a significant portion of our business is conducted internationally in foreign currency, fluctuations in currency prices can have a material impact on our results of operations. For example, the average exchange rate for one Euro, as compared to the U.S. dollar, increased from $0.99 in fiscal 2003 to $1.17 in fiscal 2004. We estimate that we had a total foreign exchange benefit on net revenue of approximately $156 million during fiscal 2004 as compared to fiscal 2003. Although we intend to continue to utilize foreign exchange forward and option contracts to either mitigate or hedge against some foreign currency exposures, we cannot predict the effect foreign currency fluctuations will have on us in fiscal 2005.
Increasing Cost of Titles. Hit titles have become increasingly more expensive to produce and market as the platforms on which they are played continue to advance technologically and consumers demand continual improvements in the overall gameplay experience. We expect this trend to continue as we require larger production teams to create our titles, the technology needed to develop titles becomes more complex, we continue to develop and expand the online gaming capabilities included in our products and we develop new methods to distribute our content via the Internet. Any increase in the cost of licensing third-party intellectual property used in our products would also make these products more expensive to publish.
Expansion of Studio Resources and Technology. During fiscal 2004, as part of our effort to more efficiently utilize our resources and technology, we expanded our studio facilities in Los Angeles and Vancouver, allowing us to consolidate several smaller studios and resources. In fiscal 2005, we expect to devote significant resources primarily to the expansion of our studios in North America and Europe. As we move through the life cycle of current generation consoles, we will devote increased resources to developing current generation titles, and increase spending associated with tools and technologies for the next generation of consoles. We expect to develop more titles internally as a result of our studio expansions. We expect these activities to increase our research and development expenses and decrease our third-party development costs, both as a percentage of net revenue. In addition, we expect the decrease in third-party development costs to positively impact our gross margin.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and
22
Sales Returns and Allowances and Bad Debt Reserves
We principally derive revenue from sales of packaged interactive software games designed for play on videogame platforms (such as the PlayStation 2, Xbox and Nintendo GameCube), PCs and hand-held game machines (such as the Nintendo Game Boy Advance). Product revenue is recognized net of sales allowances. We also have stock-balancing programs for our PC products, which allow for the exchange of PC products by resellers under certain circumstances. We may decide to provide price protection for both our personal computer and videogame system products. In making this determination, we evaluate inventory remaining in the channel, the rate of inventory sell-through in the channel, and our remaining inventory on hand. It is our general practice to exchange products or give credits, rather than give cash refunds.
We estimate potential future product returns, price protection and stock-balancing programs related to current-period product revenue. We analyze historical returns, current sell-through of distributor and retailer inventory of our products, current trends in the videogame market and the overall economy, changes in customer demand and acceptance of our products and other related factors when evaluating the adequacy of the sales returns and price protection allowances. In addition, management monitors and manages the volume of our sales to retailers and distributors and their inventories, as substantial overstocking in the distribution channel can result in high returns or substantial price protection requirements in subsequent periods. In the past, actual returns have not generally exceeded our reserves. However, actual returns and price protections may materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. For example, the risk of product returns for our products may increase as the PlayStation 2, Xbox and Nintendo GameCube consoles pass the midpoint of their lifecycle and an increasing number and aggregate amount of competitive products heighten pricing and competitive pressures. While management believes it can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates changed, our returns reserves would change, which would impact the net revenue we report. For example, if actual returns were significantly greater than the reserves we have established, our actual results would decrease our reported net revenue. Conversely, if actual returns were significantly less than our reserves, this would increase our reported net revenue.
Similarly, significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. We determine our allowance for doubtful accounts by evaluating customer creditworthiness in the context of current economic trends. Depending upon the overall economic climate and the financial condition of our customers, the amount and timing of our bad debt expense and cash collection could change significantly.
We cannot predict customer bankruptcies or an inability of any of our customers to meet their financial obligations to us. Therefore, our estimates could differ materially from actual results.
Royalties & Licenses
Our royalty expenses consist of payments to (1) co-publishing and/or distribution affiliates, (2) content licensors, and (3) independent software developers. Co-publishing and distribution royalties are payments made to third parties for delivery of product. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademark, copyright, 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.
23
Royalty-based payments made to content licensors and distribution affiliates that are paid in advance are generally capitalized as prepaid royalties and expensed to cost of goods sold at the greater of the contractual or effective royalty rate based on net product sales. With regard to payments made to independent software developers and co-publishing affiliates, we are generally subject to development risk prior to the general release of the product. Accordingly, payments that are due prior to completion of the product are generally expensed as research and development as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of goods sold at the higher of the contractual or effective royalty rate based on net product sales.
Each quarter, we also evaluate the future realization of any prepaid royalties as well as minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any impairments determined before the launch of a product are charged to research and development expense. Impairments determined post-launch are charged to cost of goods sold. In either case, we rely on estimated revenue to evaluate the future realization of prepaid royalties. If actual revenue, or revised sales estimates, fall below the initial sales estimate, then the actual charge taken may be greater in any given quarter than anticipated. As of March 31, 2004 we had $22.7 million of prepaid royalty assets and approximately $130.3 million in future obligations to our co-publishing and/or distribution affiliates and content licensors that could be impaired if our sales estimates changed.
Valuation of Long-Lived Assets
We evaluate both purchased intangible assets and other long-lived assets in order to determine if events or changes in circumstances indicate a potential impairment in value exists. This evaluation requires us to estimate, among other things, the remaining useful lives of the assets and future cash flows of the business. These evaluations and estimates require the use of judgment. Our actual results could differ materially from our current estimates.
Under current accounting standards, we make judgments about the remaining useful lives of purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate a potential impairment in the remaining value of the assets recorded on our consolidated balance sheet. In order to determine if a potential impairment has occurred, management makes various assumptions about the future value of the asset by evaluating future business prospects and estimated cash flows. Our future net cash flows are primarily dependent on the sale of products for play on proprietary videogame consoles, hand-held game machines and PCs (“platforms”). The success of our products is affected by our ability to accurately predict which platforms and which products we develop will be successful. Also, our revenue and earnings are dependent on our ability to meet our product release schedules. Due to product sales shortfalls, we may not realize the future net cash flows necessary to recover our long-lived assets, which may result in an impairment charge being recorded in the future. We recorded $0.5 million of impairment charges on long-lived assets during fiscal 2004, $66.3 million during fiscal 2003 and $12.8 million in fiscal 2002.
Income Taxes
In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our current tax exposures in each jurisdiction where we operate. These estimates involve complex issues, require extended periods of time to resolve, and require us to make judgments, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns. We are also required to make the determinations of the need to record deferred tax liabilities and the recoverability of deferred tax assets. A valuation allowance is established to the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction.
In addition, changes in our business, including the geographic mix of income, as well as changes in valuation allowances, the applicable accounting rules, the applicable tax laws and regulations and interpretations
24
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52/53-week period that ends on the final Saturday of March in each year. The results of operations for the fiscal years ended March 31, 2004, 2003 and 2002 each contain 52 weeks and ended on March 27, 2004, March 29, 2003 and March 30, 2002, respectively. For simplicity of presentation, all fiscal periods are treated as ending on a calendar month end.
On October 20, 2003, our Board of Directors authorized a two-for-one stock split of our Class A common stock which was distributed on November 17, 2003 in the form of a stock dividend for shareholders of record at the close of business on November 3, 2003. All issued and outstanding share and per-share amounts related to the Class A common stock have been restated to reflect the stock split for all periods presented.
Comparison of Fiscal 2004 to Fiscal 2003
Net Revenue
We principally derive net revenue from sales of packaged interactive software games designed for play on videogame consoles (such as the PlayStation 2, Xbox and Nintendo GameCube), PCs and hand-held game machines (such as the Nintendo Game Boy Advance). Additionally, in Europe and Asia we generate a significant portion of net revenue by marketing and selling third-party interactive software games through our established distribution network. We also derive net revenue from selling subscriptions to online games, programming third-party web sites, allowing other companies to manufacture and sell our products in conjunction with other products, and selling advertisements on our online web pages.
From a geographical perspective, our net revenue
for the fiscal years ended March 31, 2004 and 2003 was as
follows (in thousands):
Year Ended March 31,
Increase/
%
2004
2003
(Decrease)
Change
$
1,609,539
$
1,435,718
$
173,821
12.1
%
1,180,274
878,904
301,370
34.3
%
96,708
87,569
9,139
10.4
%
70,620
80,053
(9,433
)
(11.8
%)
1,347,602
1,046,526
301,076
28.8
%
$
2,957,141
$
2,482,244
$
474,897
19.1
%
North America
For fiscal 2004, net revenue in North America increased by 12.1 percent as compared to fiscal 2003. From a franchise perspective, the net revenue increase was primarily driven by higher sales of products released during the year ended March 31, 2004 in the following eight franchises: Need for Speed TM , NBA STREET, NFL STREET, Madden NFL, Def Jam TM , SSX, Tiger Woods/ PGA TOUR® and MVP Baseball TM . Increased sales in these franchises resulted in increased net revenue of $353.2 million for the year ended March 31, 2004 as compared to the year ended March 31, 2003. Increases in net revenue from these franchises were partially offset by (1) a decrease in our Harry Potter franchise, as the fiscal 2004 title, Harry Potter TM : Quidditch TM World Cup , had no associated movie release, while our fiscal 2003 product, Harry Potter and the Chamber of Secrets TM , was released in conjunction with the blockbuster movie of the same title, (2) the termination of our Square EA joint venture agreement, and (3) a decrease in net revenue in our
25
Europe
For fiscal 2004, net revenue in Europe increased by 34.3 percent as compared to fiscal 2003. We estimate foreign exchange rates (primarily the Euro and the British pound sterling) strengthened reported European net revenue by approximately $136 million or 15 percent for the year ended March 31, 2004. From a franchise perspective, the net revenue increase was primarily driven by higher sales of products released during the year ended March 31, 2004 in the following eleven franchises: Need for Speed, The Sims, FIFA Soccer, Lord of the Rings TM , Medal of Honor, Final Fantasy, SSX, Football Manager, Freedom Fighters, Tiger Woods/ PGA TOUR and Rugby. Increased sales in these franchises resulted in an increase in net revenue of $372.6 million for the year ended March 31, 2004 as compared to the year ended March 31, 2003. The increase was partially offset by (1) a decrease in our Harry Potter franchise, as the fiscal 2004 title, Harry Potter: Quidditch World Cup, had no associated movie release, while our fiscal 2003 product, Harry Potter and the Chamber of Secrets, was released in conjunction with the blockbuster movie of the same title, and (2) an expected decrease in sales of our World Cup franchise due to strong sales in the year ended March 31, 2003 in conjunction with the World Cup event and no similar event in the year ended March 31, 2004. Together, the two items noted above, reduced net revenue by $92.3 million for the year ended March 31, 2004 as compared to the year ended March 31, 2003.
Asia Pacific
For fiscal 2004, net revenue from sales in the Asia Pacific region, excluding Japan, increased by 10.4 percent as compared to fiscal 2003. The growth in net revenue was driven by the Need for Speed, The Sims and other franchises, partially offset by declines in the Harry Potter and World Cup franchises. We estimate foreign exchange rates strengthened reported Asia Pacific net revenue by approximately $15 million or 17 percent, for the year ended March 31, 2004. Excluding the effect of foreign exchange rates, we estimate that Asia Pacific net revenue decreased by approximately $6 million or 7 percent, for the year ended March 31, 2004.
Japan
For fiscal 2004, net revenue from sales in Japan decreased by 11.8 percent as compared to fiscal 2003 primarily due to declines in sales in the World Cup, Harry Potter and Final Fantasy franchises. In addition, we estimate that favorable changes in foreign exchange rates offset the decline in reported net revenue in Japan by approximately $6 million or 7 percent, for the year ended March 31, 2004.
26
Our worldwide net revenue by product line for
fiscal years 2004 and 2003 was as follows (in thousands):
Year Ended March 31,
Increase/
%
2004
2003
(Decrease)
Change
$
1,314,758
44.4
%
$
910,693
36.7
%
$
404,065
44.4
%
469,692
15.9
%
499,634
20.2
%
(29,942
)
(6.0
%)
384,320
13.0
%
219,378
8.8
%
164,942
75.2
%
199,893
6.8
%
176,656
7.1
%
23,237
13.2
%
77,305
2.6
%
79,093
3.2
%
(1,788
)
(2.3
%)
49,514
1.7
%
44,648
1.8
%
4,866
10.9
%
29,619
1.0
%
99,951
4.0
%
(70,332
)
(70.4
%)
2,525,101
85.4
%
2,030,053
81.8
%
495,048
24.4
%
398,221
13.5
%
375,759
15.1
%
22,462
6.0
%
33,819
1.1
%
76,432
3.1
%
(42,613
)
(55.8
%)
$
2,957,141
100.0
%
$
2,482,244
100.0
%
$
474,897
19.1
%
PlayStation 2
Net revenue from PlayStation 2 products increased from $910.7 million in fiscal 2003 to $1,314.8 million in fiscal 2004. As a percentage of total net revenue, sales of PlayStation 2 products increased by 7.7 percent in fiscal 2004. The increase in net revenue was primarily due to growth in the installed base and greater demand for our products.
PC
Net revenue from PC-based products decreased from $499.6 million in fiscal 2003 to $469.7 million in fiscal 2004. As a percentage of total net revenue, sales of PC products decreased by 4.3 percent in fiscal 2004. PC net revenue declined, largely due to declines of sales in the Harry Potter, World Cup and Bond franchises as discussed above, which were partially offset by an increase in sales of the Lord of the Rings franchise.
Xbox
Net revenue from Xbox products increased from $219.4 million in fiscal 2003 to $384.3 million in fiscal 2004. As a percentage of total net revenue, sales of Xbox products increased by 4.2 percent in fiscal 2004. The increase in net revenue was primarily due to growth in the installed base and greater demand for our products.
Nintendo GameCube
Net revenue from Nintendo GameCube products increased from $176.7 million in fiscal 2003 to $199.9 million in fiscal 2004. The increase in net revenue was primarily due to growth in the installed base of the Nintendo GameCube.
Subscription Services
In fiscal 2004, net revenue from subscription services products increased by $4.9 million to $49.5 million as compared to fiscal 2003. The increase in net revenue was primarily due to the number of users for Club Pogo (launched in July 2003) and Pogo Downloadables (launched in May 2003), partially offset by a decrease in
27
PlayStation
In fiscal 2004, net revenue from PlayStation products decreased by $70.3 million to $29.6 million as compared to fiscal 2003. We anticipated the decline in net revenue from PlayStation products as we continued to transition away from that platform. Although our PlayStation products are playable on the PlayStation 2 console, we expect sales of current PlayStation products to continue to decline in the future.
Co-Publishing and Distribution
In fiscal 2004, net revenue from co-publishing and distribution products increased by $22.5 million to $398.2 million as compared to fiscal 2003. The increase was due to a $74.5 million increase in Europe primarily from increased sales in the Final Fantasy, Freedom Fighters and Battlefield franchises, partially offset by a decline in the Kingdom Hearts franchise in North America. Although co-publishing and distribution net revenue increased, it declined as a percentage of net revenue.
Advertising, Programming, Licensing and Other
In fiscal 2004, net revenue from advertising, programming, licensing and other products decreased by $42.6 million to $33.8 million as compared to fiscal 2003. The decrease was a result of expected declines in our advertising and programming net revenue following our renegotiation of the terms of our relationship with AOL during the three months ended June 30, 2003 and an expected decline in our Game Boy Color net revenue as we transitioned away from that platform.
Operations by Segment
In March 2003, we consolidated the operations of the EA.com business segment into our core business. We now consider online capability and gameplay to be integral to our existing and future products. Accordingly, beginning April 1, 2003, we no longer manage our online products and services as a separate business segment, and we have consolidated the reporting related to our online products and services into reporting for the overall development and publication of our core products for all reporting periods ending after that date. We believe that this will better reflect the way in which our Chief Executive Officer (our chief operating decision maker) reviews and manages our business and reflects the importance of our online products and services relative to the rest of our business. Concurrently, we have also eliminated separate reporting for our Class B common stock for all reporting periods ending after April 1, 2003. Fiscal 2003 and 2002 have been restated to conform with our fiscal 2004 presentation. See Note 18 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.
Our view and reporting of business segments may change due to changes in underlying business facts and circumstances and the evolution of our reporting to our Chief Executive Officer.
Cost of Goods Sold
Cost of goods sold for our disk-based and cartridge-based products consists of (1) product costs, (2) certain royalty expenses for celebrities, professional sports and other organizations and independent software developers, (3) manufacturing royalties, net of volume discounts, (4) expenses for defective products, (5) write-off of post-launch prepaid royalty costs, and (6) operations expenses. Cost of goods sold for our online product subscription business consists primarily of data center and bandwidth costs associated with hosting our websites, credit card fees and royalties for use of third party properties. Cost of goods sold for our website advertising business primarily consists of ad serving costs.
28
Costs of goods sold for fiscal years 2004 and
2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
% Change
$1,102,950
37.3
%
$
1,072,802
43.2
%
2.8
%
In fiscal 2004, cost of goods sold as a percentage of net revenue decreased by 5.9 percentage points to 37.3 percent from 43.2 percent for fiscal 2003 primarily due to a 3.3 percent decrease in product costs and a 2.8 percent decrease in royalty rates.
The 3.3 percent decrease in product costs was primarily a result of:
| n | Lower co-publishing and distribution product costs, as a percentage of net revenue, due to a higher mix of co-publishing titles relative to distribution titles in fiscal 2004. Co-publishing titles generally have higher gross margins than distribution titles. Lower co-publishing and distribution costs, as a percentage of net revenue, increased total gross margin by 1.6 percent in fiscal 2004. | |
| n | Lower average manufacturing costs increased total gross margin by 1.0 percent in fiscal 2004. | |
| n | Lower period costs primarily due to improved inventory management in North America. Lower period costs increased total gross margin by 0.5 percent in fiscal 2004. |
The 2.8 percent decrease in royalty rates was primarily the result of:
| n | Decreased third-party development royalties primarily due to a higher mix of titles developed internally rather than externally in fiscal 2004. Significant titles that were developed internally in fiscal 2004 for which a comparable title had been developed externally in fiscal 2003 included James Bond 007: Everything or Nothing and The Lord of the Rings; The Return of the King. We estimate that lower development royalties increased gross margin by 1.9 percent, which was spread across multiple platforms. | |
| n | Lower license royalties, as a percentage of net revenue, as Need for Speed Underground , our highest grossing title of fiscal 2004, had a significantly lower license royalty rate than Harry Potter and the Chamber of Secrets, our highest grossing title of fiscal 2003. Lower license royalties, as a percentage of net revenue, increased total gross margin by 1.1 percent in fiscal 2004. |
We expect cost of goods sold as a percentage of net revenue to increase in fiscal 2005 as a result of (1) a gradual decrease in the average selling price due to the current-generation lifecycle, (2) overall product mix, and (3) higher license royalties as a percentage of net revenue.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs and advertising, marketing and promotional expenses, net of advertising expense reimbursements from third parties. In fiscal 2003, marketing and sales expense also included the amortization of the carriage fees payable for the distribution of our online games on AOL, which we are no longer required to pay. See Note 7 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.
Marketing and sales expenses for fiscal years
2004 and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$370,468
12.5
%
$
332,453
13.4
%
$
38,015
11.4
%
Marketing and sales expenses increased by 11.4 percent in fiscal 2004 as compared to fiscal 2003 primarily due to:
| n | An increase in our advertising, contract services and promotional expenses of $38.0 million as we incrementally increased our advertising campaigns to support the release of new titles. |
29
| n | A 13.6 percent increase in average headcount to further support the growth of our marketing and sales functions worldwide, which resulted in an increase to personnel-related costs of approximately $16.5 million. |
The increase in marketing and sales expenses was partially offset by the discontinuance of carriage fee payments to AOL, which resulted in a decrease of $17.9 million.
As a percentage of net revenue, marketing and
sales expenses declined from 13.4 percent in fiscal 2003 to
12.5 percent in fiscal 2004. Marketing and sales expenses
included vendor reimbursements for advertising expenses of
$44.8 million in fiscal 2004 and $28.2 million in
fiscal 2003.
General and Administrative
General and administrative expenses consist of
personnel and related expenses of executive and administrative
staff, fees for professional services such as legal and
accounting, and allowances for bad debts.
General and administrative expenses for fiscal
years 2004 and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$184,825
6.3
%
$
130,859
5.3
%
$
53,966
41.2
%
General and administrative expenses increased by 41.2 percent, or 1.0 percent of net revenue, in fiscal 2004 compared to fiscal 2003 primarily due to:
| n | An increase in depreciation expense of approximately $17.8 million primarily due to accelerated depreciation on equipment and software that are being replaced and to write-off assets that have been taken out of service. | |
| n | An increase of approximately 9 percent, or $14.8 million, in personnel-related costs to support the continued growth of our business. | |
| n | An increase in contributions of $8.5 million as we invest in our strategic university relationships. | |
| n | An increase of approximately $11.5 million in professional services. | |
| n | An increase of approximately $9.6 million in information technology and facilities expenses. |
The increase in general and administrative expenses was partially offset by a decrease in bad debt expense of $9.1 million, primarily as a result of collecting on accounts that we had previously deemed uncollectible.
Research and Development
Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, consulting, equipment depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online business include expenses incurred by our studios consisting of direct development costs and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with development of website content, network infrastructure direct expenses, software licenses and maintenance, and network and management overhead.
Research and development expenses for fiscal
years 2004 and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$510,858
17.3
%
$
400,990
16.1
%
$
109,868
27.4
%
Research and development expenses increased by 27.4 percent, or 1.2 percentage points of net revenue, in fiscal 2004 compared to fiscal 2003 primarily due to:
| n | Increases in personnel-related costs of $100.8 million of which approximately $64.3 million resulted from a 22.2 percent increase in average regular full-time employee headcount. |
30
| n | An overall increase in external development expenses of $23.4 million related to development of new products. |
The increase in research and development expenses was partially offset by a decrease in depreciation and other operating expenses due to asset impairments recognized in the third and fourth quarters of fiscal 2003.
We expected increased research and development
expenses in fiscal 2004 as we continued to support the global
growth of our research and development capabilities. In recent
quarters, we have developed a greater number of titles
internally. We expect increased research and development
spending to continue in fiscal 2005 due to the development of
next-generation tools and technologies and to a lesser extent,
increased spending on current-generation console products
including the PlayStation 2, Xbox and Nintendo GameCube, as
well as extending our investment in the development of games for
the PC.
Amortization of Intangibles
Amortization of intangibles for fiscal years 2004
and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$2,735
0.1
%
$
7,482
0.3
%
$
(4,747
)
(63.4
%)
Amortization of intangibles results primarily
from our acquisitions of Westwood, Kesmai, DreamWorks
Interactive, ABC Software, Pogo and other acquisitions. The
decline in amortization was a result of the impairment charges
taken in fiscal 2003.
Restructuring and Asset Impairment
Charges
Restructuring and asset impairment charges for
fiscal years 2004 and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
% Change
$
9,708
0.3
%
$
15,102
0.6
%
(35.7
%)
$
—
0.0
%
$
66,329
2.7
%
(100.0
%)
Fiscal 2004 Studio Restructuring
Fiscal 2003 Studio Restructuring
31
Additionally, during the fourth quarter of fiscal 2003, we approved a plan to consolidate the Los Angeles, California, Irvine, California and Las Vegas, Nevada, studios into one major game studio in Los Angeles. These measures were taken in order to maximize efficiencies and streamline the creative development process and operations of our studios. In connection with these consolidation activities, we recorded a total pre-tax restructuring charge of $5.1 million, including $1.6 million for the shutdown of facilities related to non-cancelable lease payments for permanently vacated properties and associated costs, $2.0 million for the write-off of abandoned equipment and leasehold improvements at facilities that were permanently vacated and $1.5 million for employee severance expenses related to involuntary terminations.
Fiscal 2003 Online Restructuring
During fiscal 2003, we recorded restructuring charges, including asset impairment, of $67.0 million, consisting of $1.8 million for workforce reductions, $2.3 million for consolidation of facilities and other administrative charges, and $62.9 million for the write-off of non-current assets. The estimated costs for workforce reduction included severance charges for terminated employees, costs for certain outplacement service contracts and costs associated with the tender offer to retire employee Class B options. The workforce reduction resulted in the termination of approximately 50 positions. The consolidation of facilities resulted in the closure of EA.com’s Chicago and Virginia facilities and an adjustment for the closure of EA.com’s San Diego studio in fiscal 2002. The estimated costs for consolidation of facilities and other administrative charges included contractual rental commitments under real estate leases for unutilized office space reduced by estimated future sub-lease income and costs to close the facilities.
As part of the restructuring efforts, we performed impairment tests under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” , to evaluate the recoverability of our long-lived assets and remaining finite-lived identifiable intangible assets utilized in the EA.com business. This test was performed in the fourth quarter of fiscal 2003 in conjunction with the overall valuation of the EA.com legal entity and its Class B common stock. In February 2003, our only outside holder of Class B common stock, AOL, exercised its right to exchange its Class B shares for shares of Class A common stock. In late December 2002, EA.com launched The Sims Online, an online game based on our “The Sims” line of PC games, which have sold over 20 million units worldwide. The Sims Online was expected to be EA.com’s flagship online subscription offering. As of March 31, 2003, the number of units sold and the number of subscribers for this product along with other EA.com revenue were significantly below our expectations. We considered these developments to be a triggering event under SFAS No. 144, which caused us to cancel most of our plans to develop similar online products that would have utilized long-lived assets associated with the EA.com business. Impairment charges on long-lived assets amounted to $62.9 million and included $24.9 million relating to impaired customized internal-use software systems for the EA.com infrastructure, $25.6 million for other long-lived assets and $12.4 million of finite-lived intangibles impairment charges relating to EA.com’s acquisitions of Kesmai Corporation and Pogo Corporation (now referred to as “Kesmai” and “Pogo”, respectively) studios. As of March 31, 2003, there were no finite-lived intangible balances remaining related to Kesmai and Pogo studios.
In conjunction with our annual policy to reassess the remaining useful lives of goodwill and certain indefinite-lived intangibles and test the recoverability of these long-lived assets in accordance with SFAS No. 142, our fair value based tests did not indicate an impairment of our recorded goodwill and certain indefinite-lived intangibles at the EA.com reporting unit level as of January 1, 2003. The remaining portion of Kesmai goodwill assets as of March 31, 2003 was $13.8 million. The remaining portion of Pogo goodwill assets as of March 31, 2003 was $15.9 million. There are no assurances that future impairment tests will not result in a charge to earnings and a corresponding write down of goodwill and certain indefinite-lived intangibles.
32
The following table reflects our unaudited pro
forma consolidated basic earnings per share for the fiscal years
ended 2003 and 2002 as if the consolidation of the operations of
our EA.com business segment into our core business had occurred
at the beginning of each of the periods presented (in thousands,
except per share data):
Year Ended March 31,
2003
2002
$
317,097
$
101,509
$
317,097
$
101,509
$
1.17
$
0.45
$
1.12
$
0.37
281,978
273,665
1,028
1,368
283,006
275,033
All restructuring charges recorded prior to December 31, 2002 were recorded in accordance with Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” , EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” , and Staff Accounting Bulletin (“SAB”) No. 100, “Restructuring and Impairment Charges” . All restructuring charges recorded subsequent to December 31, 2002 were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” . Adjustments to the restructuring reserves will be made in future periods, if necessary, based upon the then-current events and circumstances.
For further discussion on our restructurings and
asset impairment charges, please see Note 6 in our
Consolidated Financial Statements, included in item 8
hereof.
Interest and Other Income,
Net
Interest and other income, net, for fiscal years
2004 and 2003 (in thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$20,963
0.7
%
$
5,222
0.2
%
$
15,741
301.4
%
Interest and other income, net, in fiscal 2004 increased from fiscal 2003 primarily due to:
| n | Interest income increased $7.9 million in fiscal 2004 as a result of higher average cash balances in the current year. | |
| n | During the year ended March 31, 2003, we recorded $10.6 million for an other-than-temporary impairment of investments in affiliates, offset by income of $5.5 million recorded from our equity investment in Square EA, LLC. |
Income Taxes
Income taxes for fiscal years 2004 and 2003 (in thousands):
| March 31, | Effective | March 31, | Effective | |||||||||||||||
| 2004 | Tax Rate | 2003 | Tax Rate | % Change | ||||||||||||||
|
|
|
|
|
|
||||||||||||||
| $219,268 | 27.5 | % | $ | 143,049 | 31.0 | % | 53.3 | % | ||||||||||
33
Our effective income tax rate reflects tax benefits derived from significant operations outside the U.S., which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. The effective income tax rate was 27.5 percent for fiscal 2004 and 31.0 percent for fiscal 2003. The reduced effective income tax rate in fiscal 2004 primarily reflects the resolution of certain tax-related matters with the Internal Revenue Service in the fourth quarter of fiscal 2004, which lowered our income tax expense by $19.7 million and resulted in a 2.5 percent rate reduction and a change in the geographic mix of taxable income subject to lower tax rates.
We intend to indefinitely reinvest our international earnings outside the U.S. and, accordingly, have not provided U.S. taxes that would be incurred if such earnings were repatriated back to the U.S. Undistributed earnings of our foreign subsidiaries amounted to approximately $738.3 million at March 31, 2004.
We are currently projecting an effective income tax rate of approximately 29 percent for fiscal 2005. An effective income tax rate projection, which is inherently uncertain, is based on current tax law and current projections of the mix of income in various taxing jurisdictions and assumes no material changes in our business or the applicable tax or accounting rules.
Our actual effective income tax rates for fiscal 2005 and future periods can differ from the projected effective income tax rates due to a variety of factors, including changes in our business that were not taken into account in connection with our projection, a variation between the projected and actual mix of income between international and domestic operations, changes or interpretations to applicable tax laws and regulations, changes in the applicable accounting rules or our ability to realize deferred tax assets, or developments in tax audit matters with various tax authorities. For example, in the fourth quarter of fiscal 2004, we resolved certain tax-related matters with the Internal Revenue Service, which lowered our income tax expense by $19.7 million and resulted in a 2.5 percent rate reduction.
Finally, our projected effective income tax rate
for fiscal 2005 does not take into account a new election that
is available under the U.S. income tax rules regarding the
allocation between U.S. and foreign jurisdictions tax deductions
attributable to employee stock option compensation. If we take
advantage of this election, it could detrimentally affect our
effective income tax rate. We have not yet determined the impact
that the election would have on our reported results.
Net Income
Net income for fiscal years 2004 and 2003 (in
thousands):
March 31,
% of Net
March 31,
% of Net
2004
Revenue
2003
Revenue
$ Change
% Change
$577,292
19.5
%
$
317,097
12.8
%
$
260,195
82.1
%
Reported net income increased in fiscal 2004 compared to fiscal 2003 primarily due to the reasons discussed above. Although the dollar amount of our expenses increased in fiscal 2004 as compared to fiscal 2003, net income as a percentage of net revenue increased to 19.5 percent as compared to 12.8 percent in fiscal 2003 because expenses, including our cost of goods sold, grew at a slower rate than did our net revenue.
34
Comparison of Fiscal 2003 to Fiscal
2002
Net Revenue
From a geographical perspective, our net revenue
for the fiscal years ended March 31, 2003 and 2002 was as
follows (in thousands):
Year Ended March 31,
Increase/
%
2003
2002
(Decrease)
Change
$
1,435,718
$
1,093,244
$
342,474
31.3
%
878,904
519,458
359,446
69.2
%
87,569
53,376
34,193
64.1
%
80,053
58,597
21,456
36.6
%
1,046,526
631,431
415,095
65.7
%
$
2,482,244
$
1,724,675
$
757,569
43.9
%
North America
For fiscal 2003, net revenue in North America increased by 31.3 percent as compared to fiscal 2002. From a franchise perspective, the net revenue increase was primarily driven by sales of products released during the year ended March 31, 2003 in the following nine franchises: Medal of Honor, Lord of the Rings, Kingdom Hearts, The Sims, Need for Speed, Harry Potter, NCAA Football, Bond and Tiger Woods/ PGA TOUR. Increased sales in these franchises resulted in increased net revenue of $451.1 million for the year ended March 31, 2003 as compared to the year ended March 31, 2002. The increase was offset by decreases in net revenue in our Final Fantasy, SSX and NBA Street franchises as none of these franchises had products released during fiscal 2003. Together, decreased sales in these franchises reduced net revenue by $108.1 million for the year ended March 31, 2003 as compared to the year ended March 31, 2002.
Europe
For fiscal 2003, net revenue in Europe increased by 69.2 percent as compared to fiscal 2002. From a franchise perspective, the net revenue increase was primarily driven by sales of products released during the year ended March 31, 2003 in the following eleven franchises: Lord of the Rings, Medal of Honor, The Sims, FIFA Soccer, Bond, World Cup, Harry Potter, Need for Speed, Battlefield, SimCity TM and Tiger Woods/ PGA TOUR. Increased sales in these franchises resulted in increased net revenue of $345.6 million for the year ended March 31, 2003 as compared to the year ended March 31, 2002.
Asia Pacific
For fiscal 2003, net revenue from sales in the Asia Pacific region, excluding Japan, increased by 64.1 percent compared to the year ended March 31, 2002. Our net revenue from sales of products on the PlayStation 2 and Xbox platforms increased by $15.7 and $6.3 million, respectively, for the year ended March 31, 2003 primarily due to the higher installed base on both platforms and the fact that 20 Xbox titles were available in the Asia Pacific region in 2003 as compared to three in 2002. Sales of co-publishing and distribution titles increased $11.1 million primarily due to sales of Final Fantasy X and Battlefield 1942 in fiscal 2003.
Japan
For fiscal 2003, net revenue from sales in Japan increased by 36.6 percent compared to fiscal 2002. The increase was due primarily to the higher PlayStation 2 installed base and strong sales of PlayStation 2 titles, most notably Medal of Honor Frontline TM , 2002 FIFA World Cup and Project FIFA World Cup which generated an additional $15.7 million in net revenue in fiscal 2003. We also had an increase in revenues from co-publishing and distribution products of $11.0 million due in large part to sales of Final Fantasy 11. These increases were offset by a decrease in PlayStation revenue of $5.7 million.
35
Our worldwide net revenue by product line for
fiscal 2003 and 2002 was as follows (in thousands):
Year Ended March 31,
Increase/
%
2003
2002
(Decrease)
Change
$
910,693
36.7
%
$
482,882
28.0
%
$
427,811
88.6
%
499,634
20.2
%
456,292
26.5
%
43,342
9.5
%
219,378
8.8
%
78,363
4.5
%
141,015
180.0
%
176,656
7.1
%
51,740
3.0
%
124,916
241.4
%
79,093
3.2
%
43,653
2.5
%
35,440
81.2
%
44,648
1.8
%
34,236
2.0
%
10,412
30.4
%
99,951
4.0
%
189,535
11.0
%
(89,584
)
(47.3
%)
2,030,053
81.8
%
1,336,701
77.5
%
693,352
51.9
%
375,759
15.1
%
269,010
15.6
%
106,749
39.7
%
76,432
3.1
%
118,964
6.9
%
(42,532
)
(35.8
%)
$
2,482,244
100.0
%
$
1,724,675
100.0
%
$
757,569
43.9
%
PlayStation 2
Net revenue from sales of PlayStation 2 products increased from $482.9 million in fiscal 2002 to $910.7 million in fiscal 2003. As a percentage of total net revenue, sales of PlayStation 2 products increased by 8.7 percent in fiscal 2003. The increase in net revenue was primarily due to growth in the installed base and greater demand for our products. For example, in the U.S., the installed base for the PlayStation 2 increased approximately 115 percent, as compared to fiscal 2002, due in part to Sony’s hardware price cut in North America in May 2002.
PC
Net revenue from sales of titles for the PC increased in fiscal 2003 by 9.5 percent to $499.6 million as compared to $456.3 million in fiscal 2002. The increase was primarily due to strong sales of The Sims franchise titles, and the release of SimCity 4 TM , for a combined increase of $71.0 million, partially offset by lower net revenue from fiscal 2002 releases Black and White TM and Dune Emperor totaling $32.2 million. Although PC net revenue increased in fiscal 2003, PC net revenue declined as a percentage of net revenue as consumers migrated to console gameplay.
Xbox
Net revenue from sales of Xbox products increased from $78.4 million to $219.4 million, or 4.3 percent of net revenue, in fiscal 2003 as compared to fiscal 2002. The increase in net revenue was primarily due to growth in the installed base and greater demand for our products . The installed base increased in fiscal 2003 due to the launch of Xbox in the United States in November 2001 and in Europe in March 2002. In fiscal 2002, there was only a short period (five months in the United States and one month in Europe) during which the consoles were available as compared to twelve months in fiscal 2003. As a result, we were able to release Xbox products during all of fiscal 2003.
Nintendo GameCube
Net revenue from Nintendo GameCube products increased from $51.7 million to $176.7 million, or 4.1 percent of net revenue, in fiscal 2003 as compared to fiscal 2002. The increase in net revenue for fiscal 2003 was primarily due to growth in the installed base of the Nintendo GameCube, which was available in every
36
Game Boy Advance
Net revenue from sales of Game Boy Advance titles increased in fiscal 2003 by 81.2 percent to $79.1 million as compared to $43.7 million in fiscal 2002, primarily due to increased net revenue in the Lord of the Rings and Harry Potter franchises and the increased number of Game Boy Advance titles available in fiscal 2003. In fiscal 2003, we released seven titles on the Game Boy Advance platform compared to three in fiscal 2002.
PlayStation
In fiscal 2003, net revenue from PlayStation products decreased by $89.6 million to $100.0 million as compared to fiscal 2002. The decrease in net revenue was attributable to the market transition to newer generation console systems and our transition away from that platform.
Co-Publishing and Distribution
Net revenue from co-publishing products and distribution products increased 39.7 percent to $375.8 million in fiscal 2003 compared to $269.0 million in fiscal 2002 primarily due to strong sales of hit titles including Kingdom Hearts, 1503 A.D. The New World and higher Battlefield 1942 franchise net revenue.
Advertising, Programming, Licensing and Other
In fiscal 2003, net revenue from advertising,
programming, licensing and other products decreased by
$42.5 million to $76.4 million as compared to fiscal
2002. The decrease was primarily a result of an expected decline
in our Game Boy Color and Nintendo 64 net revenue as we
transitioned away from those platforms. In addition, revenue
derived from advertising on our online games sites decreased
16 percent in fiscal 2003 compared to the prior fiscal year
primarily due to $3.8 million in lower advertising revenue
generated from AOL and co-branded AOL online properties, and a
$1.8 million decrease in online advertising purchased by
online game companies that link their games sites to ours.
Cost of Goods Sold
Costs of goods sold for fiscal years 2003 and
2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
% Change
$1,072,802
43.2
%
$
814,783
47.2
%
31.7
%
In fiscal 2003, cost of goods sold as a percentage of net revenue decreased by 4.0 percent to 43.2 percent in fiscal 2003 from 47.2 percent in fiscal 2002 primarily due to:
| n | Higher PC margins resulting from (1) higher sales of wholly-owned intellectual properties such as SimCity 4 and Command & Conquer Generals, (2) lower developer royalties in general, and (3) higher average sales prices of our products. Higher PC margins increased our total gross margin by 1.7 percent. | |
| n | Higher margins on co-publishing and distribution products primarily due to a higher volume of co-publishing products, which have a higher gross margin than distribution products, released in fiscal 2003, such as Battlefield 1942, Ty the Tasmanian Tiger and The Simpsons Road Rage. Higher margins on co-publishing and distribution products contributed 0.9 percent to our total gross margin. | |
| n | Higher margins on PlayStation 2 products primarily due to volume discounts received from Sony and overall lower average manufacturing royalty rates, all of which contributed 0.8 percent to our total gross margin. |
37
Marketing and Sales
Marketing and sales expenses for fiscal years
2003 and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$332,453
13.4
%
$
241,109
14.0
%
$
91,344
37.9
%
Marketing and sales expenses increased by 37.9 percent in fiscal 2003 compared to fiscal 2002 primarily due to:
| n | Higher advertising spending of $46.1 million to support product releases on multiple platforms and across multiple territories including Madden NFL TM 2003 , NBA Live 2003 , The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets, The Sims franchise titles and The Sims Online. Overall, we released 86 SKUs in fiscal 2003 versus 64 SKUs in fiscal 2002. | |
| n | An increase in headcount and related expenses of $20.5 million to support the growth of our marketing and sales functions worldwide. |
As a percentage of net revenue, marketing and
sales expenses declined from 14.0 percent of net revenue in
fiscal 2002 to 13.4 percent of net revenue in fiscal 2003.
Marketing and sales includes vendor reimbursements for
advertising expenses of $28.2 million in fiscal 2003 and
$8.9 million in fiscal 2002.
General and Administrative
General and administrative expenses for fiscal
years 2003 and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$130,859
5.3
%
$
107,059
6.2
%
$
23,800
22.2
%
General and administrative expenses increased by 22.2 percent in fiscal 2003 compared to fiscal 2002 primarily due to an increase in payroll costs of $26.9 million to support the increased growth of these functions worldwide.
As a percentage of net revenue, general and
administrative expenses declined from 6.2 percent of net
revenue in fiscal 2002 to 5.3 percent of net revenue.
Research and Development
Research and development expenses for fiscal
years 2003 and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$400,990
16.1
%
$
380,564
22.0
%
$
20,426
5.4
%
Research and development expenses increased by 5.4 percent in fiscal 2003 compared to fiscal 2002 primarily due to additional headcount-related expenses, offset by lower advance write-offs and development spending on discontinued products in fiscal 2003.
As a percentage of revenue, research and
development expenses declined from 22.0 percent of net
revenue in fiscal 2002 to 16.1 percent of net revenue in
fiscal 2003. Research and development includes vendor
reimbursements for development expenses of $15.0 million in
fiscal 2003 and $17.0 million in fiscal 2002.
Amortization of Intangibles
Amortization of intangibles for fiscal years 2003
and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$7,482
0.3
%
$
25,418
1.5
%
$
(17,936
)
(70.6
%)
38
The decrease in amortization in fiscal 2003 of $17.9 million was primarily due to:
| n | Adoption of SFAS No. 142 in fiscal 2003, which required us to stop amortizing goodwill. For fiscal 2002, amortization of goodwill totaled $13.1 million. | |
| n | Certain identifiable intangible assets related to Westwood and DreamWorks were amortized in fiscal 2002, resulting in a decrease of $3.5 million. | |
| n | Impairment of Pogo and Kesmai finite-lived intangible assets as a result of the restructuring of the EA.com segment in fiscal 2003 and 2002, resulting in lower amortization expense of $2.9 million. |
In addition, we recorded intangible impairment
charges relating to our restructuring of the EA.com business
segment of $12.4 million in fiscal 2003 and
$1.6 million in fiscal 2002. For further information,
please see our discussion under “Restructuring and Asset
Impairment Charges” below.
Restructuring and Asset Impairment
Charges
Restructuring and asset impairment charges for
fiscal years 2003 and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
% Change
$
15,102
0.6
%
$
7,485
0.4
%
101.8
%
$
66,329
2.7
%
$
12,818
0.8
%
417.5
%
For a discussion of our Fiscal 2003 restructurings, please refer to “Comparison of Fiscal 2004 to Fiscal 2003” above.
Fiscal 2002 Restructuring
During fiscal 2002, we recorded restructuring charges of $20.3 million, consisting of $4.2 million for workforce reductions, $3.3 million for consolidation of facilities and other administrative charges, and $12.8 million for the write-off of non-current assets and facilities. The estimated costs for workforce reduction included severance charges for terminated employees and costs for certain outplacement service contracts. The consolidation of facilities resulted in the closure of EA.com’s San Diego studio and consolidation of its San Francisco and Virginia facilities. The estimated costs for consolidation of facilities included contractual rental commitments under real estate leases for unutilized office space offset by estimated future sub-lease income, costs to close or consolidate facilities, and costs to write off a portion of the assets from these facilities. Impairment charges on long-lived assets amounted to $12.8 million and included $11.2 million relating to abandoned technologies consisting of customized internal-use software systems for the EA.com infrastructure, $1.0 million of Kesmai intangibles impairment because associated products and services were discontinued and $0.6 million of goodwill charges relating to EA.com’s San Diego studio closure. The remaining portion of Kesmai assets as of March 31, 2002 was $15.9 million, consisting of $13.1 million of goodwill and $2.8 million of intangibles relating to Kesmai’s developed and core technology and acquired workforce.
For further discussion on our restructurings and
asset impairment charges, please see Note 6 in our
Consolidated Financial Statements, included in item 8 hereof.
Interest and Other Income,
Net
Interest and other income, net, for fiscal years
2003 and 2002 (in thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$5,222
0.2
%
$
12,848
0.7
%
$
(7,626
)
(59.4
%)
39
Interest and other income, net, in fiscal 2003
decreased from fiscal 2002 primarily due to an
other-than-temporary impairment of investments in affiliates of
$10.6 million in fiscal 2003, partially offset by higher
interest income in fiscal 2003 of $5.1 million, as a result
of higher average cash balances during the fiscal year.
Income Taxes
Income taxes for fiscal years 2003 and 2002 (in
thousands):
March 31,
Effective
March 31,
Effective
2003
Tax Rate
2002
Tax Rate
% Change
$143,049
31.0
%
$
45,969
31.0
%
211.2
%
Our effective tax rate was 31.0 percent for fiscal 2003 and fiscal 2002.
Net Income
Net income for fiscal years 2003 and 2002 (in
thousands):
March 31,
% of Net
March 31,
% of Net
2003
Revenue
2002
Revenue
$ Change
% Change
$317,097
12.8
%
$
101,509
5.9
%
$
215,588
212.4
%
Reported net income increased in fiscal 2003 compared to fiscal 2002 primarily due to the reasons discussed above. Although the dollar amount of expenses rose in fiscal 2003 versus fiscal 2002, net income as a percentage of net revenue increased to 12.8 percent versus 5.9 percent as expenses grew at a slower rate than did our net revenue.
Impact of Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” . This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements ,” addresses consolidation by business enterprises of variable interest entities (“VIEs”) that either (i) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (ii) are owned by equity investors who lack an essential characteristic of a controlling financial interest. This interpretation applies immediately to VIEs created after January 31, 2003. With regard to VIEs already in existence prior to February 1, 2003, the implementation of FIN 46 was delayed and currently applies to the first fiscal year or interim period beginning after December 15, 2003. FIN 46 requires disclosure of VIEs in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date (i) we will be the primary beneficiary of an existing VIE that will require consolidation, or (ii) we will hold a significant variable interest in, or have significant involvement with, an existing VIE. We adopted FIN 46 in the quarter ended December 31, 2003; however, it did not have a material impact on our consolidated financial position or results of operations.
In January 2003, the Emerging Issues Task Force reached consensus on Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables” . EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables requires that such deliverables be accounted for separately. EITF 00-21 allows for prospective adoption for arrangements entered into after June 15, 2003 or adoption via a cumulative effect of a change in accounting principle. We adopted EITF 00-21 in the quarter ended June 30, 2003; however, it did not have a material impact on our consolidated financial position or results of operations.
In March 2004, the Emerging Issues Task Force ratified the consensus reached on paragraphs 6 through 23 of Issue No. 03-01 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” . EITF 03-1 requires that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and SFAS No. 124,
40
In March 2004, the FASB, issued an exposure draft on the Proposed Statement of Financial Accounting Standards, “Share-Based Payment — an amendment of FASB Statements No. 123 and 95” . The proposed statement addresses the accounting for share-based payment transactions with employees and other third-parties. The proposed standard would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” , and generally would require that such transactions be accounted for using a fair-value-based method. If the final standard is approved as currently drafted in the exposure draft, it would have a material impact on the amount of earnings we report. Management has not yet determined the impact that the proposed statement will have on our business.
LIQUIDITY AND CAPITAL
RESOURCES
Year Ended
March 31,
March 31,
Increase/
2004
2003
(Decrease)
(In millions)
$
2,414
$
1,588
$
826
1
1
—
$
2,415
$
1,589
$
826
71.0
%
67.3
%
Year Ended
March 31,
March 31,
Increase/
2004
2003
(Decrease)
(In millions)
$
669
$
714
$
(45
)
288
(463
)
751
225
132
93
18
14
4
$
1,200
$
397
$
803
Changes in Cash Flow
Receivables, Net
41
Inventories
Other Current Assets
Accounts Payable
Accrued and Other Liabilities
Financial Condition
A portion of our cash is generated from operations domiciled in foreign tax jurisdictions (approximately $554.4 million as of March 31, 2004) that is designated as indefinitely reinvested in the respective tax jurisdiction. While we have no plans to repatriate these funds to the United States in the short-term, if we were required to do so to fund our operations in the United States, we would accrue and pay additional taxes in connection with their repatriation.
On January 8, 2004, we filed an amended registration statement on Form S-3 with the Securities and Exchange Commission. This registration statement, including the base prospectus contained therein, became effective on January 15, 2004 and uses a “shelf” registration process. This shelf registration statement allows us, at any time, to offer any combination of securities described in the prospectus in one or more offerings up to a total amount of $2.0 billion. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we will use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including for working capital, financing capital expenditures, research and development, marketing and distribution efforts and, if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.
Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, those related to customer demand and acceptance of our titles on new platforms and new
42
Contractual Obligations and Commercial Commitments
Letters of Credit
In August 2003, we provided an irrevocable standby letter of credit to 300 California Associates II, LLC in replacement of our security deposit for office space. The standby letter of credit guarantees performance of our obligations to pay our lease commitment up to $1.1 million. The standby letter of credit expires in December 2006. As of March 31, 2004, we did not have a payable balance on this standby letter of credit.
Development, Celebrity, League and Content Licenses: Payments and Commitments
43
The following table summarizes our minimum
contractual obligations and commercial commitments as of
March 31, 2004, and the effect we expect them to have on
our liquidity and cash flow in future periods (in thousands):
Commercial
Contractual Obligations
Commitments
Fiscal Year
Developer/
Bank and
Letters
Ended
Licensee
Other
of
March 31,
Leases(1)
Commitments
Marketing
Guarantees
Credit
Total
$
20,234
$
42,691
$
24,744
$
2,234
$
305
$
90,208
23,041
36,962
7,167
234
—
67,404
17,254
12,789
4,152
204
—
34,399
14,132
16,003
4,152
204
—
34,491
9,816
10,503
4,152
203
—
24,674
35,758
11,307
—
203
—
47,268
$
120,235
$
130,255
$
44,367
$
3,282
$
305
$
298,444
| (1) | See discussion on operating leases in the “Off-Balance Sheet Commitments” section herein and Note 10 in the Notes to Consolidated Financial Statements, included in Item 8 hereof, for additional information. |
The lease commitments disclosed above exclude commitments included in our restructuring activities for contractual rental commitments of $31.3 million under real estate leases for unutilized office space, offset by $18.4 million of estimated future sub-lease income. These amounts were expensed in the periods of the related restructuring and are included in our accrued liabilities reported on our Consolidated Balance Sheet as of March 31, 2004. Please see Note 6 in the Notes to Consolidated Financial Statements, included in Item 8 hereof, for additional information.
Transactions with Related Parties
Transactions with Executive Officers
In April 2002, we agreed to pay certain taxes incurred by Bruce McMillan, Executive Vice President, Group Studio General Manager, Worldwide Studios, arising from his temporary employment with us in the United Kingdom. Mr. McMillan agreed to reimburse us for those payments upon receipt of his corresponding tax refund from the Canadian taxing authorities. We subsequently paid approximately $168,704 and $32,931 in October 2002 and April 2003, respectively, to the UK Inland Revenue for taxes incurred by Mr. McMillan. In May 2003, Mr. McMillan became an executive officer of Electronic Arts. As of January 22, 2004, Mr. McMillan had repaid us the entire amount of the tax payments we made on his behalf.
OFF-BALANCE SHEET COMMITMENTS
Lease Commitments
In February 1995, we entered into a build-to-suit lease with a third party for our headquarters facility in Redwood City, California, which was refinanced with Keybank National Association in July 2001 and expires in July 2006. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13,
44
In December 2000, we entered into a second build-to-suit lease with Keybank National Association for a five-year term beginning December 2000 to expand our Redwood City, California headquarters facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. The facilities provide space for marketing, sales and research and development. We have an option to purchase the property for a maximum of $130.0 million or, at the end of the lease, to arrange for (i) an extension of the lease, or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $118.8 million if the sales price is less than this amount, subject to certain provisions of the lease.
We believe the estimated fair values of both properties under these operating leases are in excess of their respective guaranteed residual values as of March 31, 2004.
For the two lease agreements with Keybank
National Association, as described above, the lease rates are
based upon the Commercial Paper Rate and require us to maintain
certain financial covenants as shown below, all of which we were
in compliance with as of March 31, 2004.
Actual as of
Financial Covenants
Requirement
March 31, 2004
$
1,684 million
$
2,678 million
3.00
31.15
60
%
8.5
%
1.00
N/A
1.75
10.55
In July 2003, we entered into a lease agreement with an independent third party (“the Landlord”) for a studio facility in Los Angeles, California, which commenced in October 2003 and expires in September 2013 with two five-year options to extend the lease term. Additionally, we have options to purchase the property after five and ten years based on the fair market value of the property at the date of sale, a right of first offer to purchase the property upon terms offered by the landlord, and a right to share in the profits from a sale of the property. We have accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. Existing campus facilities comprise a total of 243,000 square feet and provide space for research and development functions. Our rental obligation under this agreement is $50.2 million over the initial ten-year term of the lease. We are taking possession of the property over a period of 18 months as the facilities become available for use. This commitment is offset by sublease income of $5.8 million for the sublet to an affiliate of the Landlord of 18,000 square feet of the Los Angeles facility, which commenced in October 2003 and expires in September 2013 with options of early termination by the affiliate after five years and by EA after four and five years.
INFLATION
We believe the impact of inflation on our results of operations has not been significant for each of the past three fiscal years.
45
RISK FACTORS
Our business is subject to many risks and uncertainties, which may affect our future financial performance. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations, and the market value of our securities could decline.
The success of our business is highly dependent on being able to predict which new videogame platforms will be successful, and on the market acceptance and timely release of those platforms.
We derive most of our revenue from the sale of products for play on videogame platforms manufactured by third parties, such as Sony’s PlayStation 2. Therefore, the success of our products is driven in large part by the success of new videogame hardware systems and our ability to accurately predict which platforms will be most successful in the marketplace. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new platform. A new platform for which we are developing products may be delayed, may not succeed or may have a shorter life cycle than anticipated. If the platforms for which we are developing products are not released when anticipated or do not attain wide market acceptance, our revenue growth will suffer, we may be unable to fully recover the resources we have committed, and our financial performance will be harmed.
Our platform licensors set the royalty rates and other fees that we must pay to publish games for their platforms, and therefore have significant influence on our costs. If one or more of the platform licensors adopt a different fee structure for future game consoles or we are unable to obtain such licenses, our profitability will be materially impacted.
In the next few years, we expect our platform licensors to introduce new game machines into the market. In order to publish products for a new game machine, we must take a license from the platform licensor which gives the platform licensor the opportunity to set the fee structure that we must pay in order to publish games for that platform. Similarly, the platform licensors have retained the flexibility to change their fee structures for online gameplay and features for their consoles. The control that platform licensors have over the fee structures for their future platforms and online access makes it difficult for us to predict our costs and profitability in the medium to long term. It is also possible that platform licensors will not renew our licenses. Because publishing products for videogame consoles is the largest portion of our business, any increase in fee structures or failure to secure a license relationship would have a significant negative impact on our business model and profitability.
Our business is both seasonal and cyclical. If we fail to deliver our products at the right times, our sales will suffer.
Our business is highly seasonal, with the highest levels of consumer demand, and a significant percentage of our revenue, occurring in the December quarter. If we miss this key selling period, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Our industry is also cyclical. Videogame platforms have historically had a life cycle of four to six years. As one group of platforms is reaching the end of its cycle and new platforms are emerging, consumers often defer game software purchases until the new platforms are available, causing sales to decline. This decline may not be offset by increased sales of products for the new platform. For example, following the launch of Sony’s PlayStation2 platform, we experienced a significant decline in revenue from sales of products for Sony’s older PlayStation game console, which was not immediately offset by revenue generated from sales of products for the PlayStation2 platform.
46
Our business is intensely competitive and increasingly “hit” driven. If we do not continue to deliver “hit” products, our success will be limited.
Competition in our industry is intense, and new products are regularly introduced. A relatively small number of “hit” titles accounts for a significant portion of total sales. For example, during calendar year 2003, approximately 19 percent of the sales of videogames in North America consisted of only 20 “hit” products. If our competitors develop more successful products, or if we do not continue to develop consistently high-quality products, our revenue and profitability will decline.
If we are unable to maintain or acquire licenses to intellectual property, we will publish fewer hit titles and our revenue, profitability and cash flows will decline. Competition for these licenses may make them more expensive and increase our costs.
Many of our products are based on or incorporate intellectual property owned by others. For example, our EA SPORTS products include rights licensed from the major sports leagues and players associations. Similarly, many of our hit EA GAMES franchises, such as Bond, Harry Potter and Lord of the Rings, are based on key film and literary licenses. Competition for these licenses is intense. If we are unable to maintain these licenses and obtain additional licenses with significant commercial value, our revenues and profitability will decline significantly. Competition for these licenses may also drive up the advances, guarantees and royalties that we must pay to the licensor, which could significantly increase our costs.
If patent claims continue to be asserted against us, we may be unable to sustain our current business models or profits.
Many patents have been issued that may apply to widely used game technologies. Additionally, infringement claims under many recently issued patents are now being asserted against Internet implementations of existing games. Several such claims have been asserted against us. Such claims can harm our business. We incur substantial expenses in evaluating and defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third-party patent, we could incur significant monetary liability and be prevented from using the rights in the future.
Other intellectual property claims may increase our product costs or require us to cease selling affected products.
Many of our products include extremely realistic graphical images, and we expect that as technology continues to advance, images will become even more realistic. Some of the images and other content are based on real-world examples that may inadvertently infringe upon the intellectual property rights of others. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Such claims or litigations could require us to stop selling the affected products, redesign those products to avoid infringement, or obtain a license, all of which would be costly and harm our business.
Our business, our products and our distribution are subject to increasing regulation in key territories of content, consumer privacy and online delivery. If we do not successfully respond to these regulations, our business may suffer.
Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, privacy laws in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory although the Internet recognizes no geographical boundaries. Other countries, such as Germany, have adopted laws regulating content both in packaged goods and those transmitted over the Internet that are stricter than current United States laws. In the United States, the federal and several state governments are considering content restrictions on products such as ours, as well as restrictions on distribution of such products. Any one or more of these factors could harm our business by limiting the products we are able to offer to our customers and by requiring additional differentiation between
47
If we do not consistently meet our product development schedules, we will experience fluctuations in our operating results.
Our ability to meet product development schedules is affected by a number of factors, including the creative processes involved, the coordination of large and sometimes geographically dispersed development teams required by the increasing complexity of our products, and the need to refine and tune our products prior to their release. We have in the past experienced development delays for several of our products. Failure to meet anticipated production or “go live” schedules may cause a shortfall in our revenue and profitability and cause our operating results to be materially different from expectations. Delays that prevent release of our products during peak selling seasons or in conjunction with specific events, such as the release of a related movie or the beginning of a sports season or major sporting event, could adversely affect our financial performance.
Technology changes rapidly in our business, and if we fail to anticipate new technologies, the quality, timeliness and competitiveness of our products will suffer.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies our products must take advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologically inferior to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule of our products, then we may delay products until these technology goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve our product launch schedule or to keep up with our competition, which would increase our development expenses.
If we do not continue to attract and retain key personnel, we will be unable to effectively conduct our business.
The market for technical, creative, marketing and other personnel essential to the development and marketing of our products and management of our businesses is extremely competitive. Our leading position within the interactive entertainment industry makes us a prime target for recruiting of executives and key creative talent. If we cannot successfully recruit and retain the employees we need, or replace key employees following their departure, our ability to develop and manage our businesses will be impaired.
Our platform licensors are our chief competitors and frequently control the manufacturing of and/or access to our videogame products. If they do not approve our products, we will be unable to ship to our customers.
Our agreements with hardware licensors (such as Sony for the PlayStation 2, Microsoft for the Xbox and Nintendo for the Nintendo GameCube) typically give significant control to the licensor over the approval and manufacturing of our products, which could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. These hardware licensors are also our chief competitors. In most events, control of the approval and manufacturing process by the platform licensors increases both our manufacturing lead times and costs as compared to those we can achieve independently. While we believe that our relationships with our hardware licensors are currently good, the potential for these licensors to delay or refuse to approve or manufacture our products exists. Such occurrences would harm our business and our financial performance.
48
We compete directly with Microsoft and Sony for sales of products with online capabilities. We also require compatibility code and the consent of each in order to include online capabilities in our products for their respective platforms. As online capabilities for videogame platforms become more significant, Microsoft and Sony could restrict our ability to provide online capabilities for our console platform products. If Microsoft or Sony refused to approve our products with online capabilities or significantly impacted the financial terms on which these services are offered to our customers, our business could be harmed.
Our international net revenue is subject to currency fluctuations.
For the year ended March 31, 2004, international net revenue comprised 45 percent of total net revenue. For the fiscal year ended March 31, 2003, international net revenue comprised 42 percent of total consolidated net revenue. We expect foreign sales to continue to account for a significant and growing portion of our revenue. Such sales are subject to unexpected regulatory requirements, tariffs and other barriers. Additionally, foreign sales are primarily made in local currencies, which may fluctuate against the dollar. While we utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign currency denominated assets and liabilities (primarily certain intercompany receivables and payables), and foreign currency option contracts to hedge some foreign currency forecasted transactions (primarily related to revenue generated by our operational subsidiaries), our results of operations and financial condition may, nonetheless, be adversely affected by foreign currency fluctuations.
Our reported financial results could be affected if significant changes in current accounting principles are adopted.
Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally. Similarly, Congress has considered a variety of bills that could affect certain accounting principles. The FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, such as accounting for stock options, some of which represent a significant change from current practices. For example, changes in our accounting for stock options could materially increase our reported expenses.
Our stock price has been volatile and may continue to fluctuate significantly.
As a result of the factors discussed in this report, general economic conditions, and other factors that may arise in the future, the market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to factors specific to us, to changes in analysts’ earnings estimates, to factors affecting the computer, software, Internet, entertainment, media or electronics businesses, or to national and international economic conditions.
The majority of our sales are made to a relatively small number of key customers. If these customers reduce their purchases of our products or become unable to pay for them, our business could be harmed.
In the U.S. in fiscal 2004, over 70 percent of our sales were made to six key customers. In Europe, our top ten customers accounted for over 35 percent of our sales in that territory in fiscal 2004. Worldwide, we had direct sales to one customer, Wal-Mart Stores, Inc., which represented 13 percent of total net revenue in fiscal 2004. Though our products are available to consumers through a variety of retailers, the concentration of our sales in one, or a few, large customers could lead to short-term disruption in our sales if one or more of these customers significantly reduced their purchases or ceased to carry our products, and could make us more vulnerable to collection risk if one or more of these large customers became unable to pay for our products. Additionally, our receivables from these large customers increase significantly in the December quarter as they stock up for the holiday selling season. Also, having such a large portion of our total net revenue concentrated in a few customers reduces our negotiating leverage with these customers.
49
Acquisitions, investments and other strategic transactions could result in operating difficulties, dilution to our investors and other negative consequences.
We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions, including (1) acquisitions of companies, businesses, intellectual properties, and other assets, and (2) investments in new interactive entertainment businesses (for example, online and mobile games). Any of these strategic transactions could be material to our financial condition and results of operations. Although we regularly search for opportunities to engage in strategic transactions, we may not be successful in identifying suitable opportunities. We may not be able to consummate potential acquisitions or investments or an acquisition or investment may not enhance our business or may decrease rather than increase our earnings. In addition, the process of integrating an acquired company or business, or successfully exploiting acquired intellectual property or other assets, could divert a significant amount of our management’s time and focus and may create unforeseen operating difficulties and expenditures. Additional risks we face include:
| n | The need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that prior to the acquisition lacked these controls, procedures and policies, | |
| n | Cultural challenges associated with integrating employees from an acquired company or business into our organization, | |
| n | Retaining employees from the businesses we acquire, | |
| n | The need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management, and | |
| n | To the extent that we engage in strategic transactions outside of the United States, we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. |
Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting our existing stockholders, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Our stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.
We have begun the implementation of a common set of financial information systems throughout our worldwide organization, which, if not completed in a successful and timely manner, could impede our ability to accurately process, prepare and analyze important financial data.
As part of our effort to improve efficiencies throughout our worldwide organization, we have begun the implementation of a common set of practices, processes and financial information systems. The successful conversion from our current financial information systems to new financial information systems entails a number of risks due to the complexity of the conversion and implementation process. Such risks include verifying the accuracy of the business data and information prior to conversion, the actual conversion of that data and information to the new systems and then using that business data and information in the new systems after the conversion. In addition, because the implementation is company-wide, there is a need for substantial and comprehensive company-wide employee training. While testing of these new systems and processes and training of employees are done in advance of implementation, there are inherent limitations in our ability to simulate a full-scale operating environment in advance of implementation. Finally, there can be no assurance that the conversion to, and the implementation of, the new financial information systems will not impede our ability to accurately and timely process, prepare and analyze the financial data we use in making operating decisions and which form the basis of the financial information we include in the periodic reports we file with the SEC.
50
Our products are subject to the threat of piracy by a variety of organizations and individuals. If we are not successful in combating and preventing piracy, our sales and profitability could be harmed significantly.
In many countries around the world, more pirated copies of our products are sold than legitimate copies. Though piracy has not had a material impact on our operating results to date, highly organized pirate operations have been expanding globally. In addition, the proliferation of technology designed to circumvent the protection measures we use in our products, the availability of broadband access to the Internet, the ability to download pirated copies of our games from various Internet sites, and the widespread proliferation of Internet cafes using pirated copies of our products, all have contributed to ongoing and expanding piracy. Though we take steps to make the unauthorized copying and distribution of our products more difficult, as do the manufacturers of consoles on which our games are played, neither our efforts nor those of the console manufacturers may be successful in controlling the piracy of our products. This could have a negative effect on our growth and profitability in the future.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange forward and option contracts used to either mitigate or hedge foreign currency exposures and short-term investments are subject to market risk. We do not consider our cash and cash equivalents to be subject to interest rate risk due to their short maturities. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
From time to time, we hedge some of our foreign currency risk related to anticipated future sales transactions by purchasing option contracts that generally have maturities of 15 months or less. If qualified, these transactions are designated as cash flow hedges. For the year ended March 31, 2004, we recognized a loss of $1.6 million in earnings associated with the time value of these option contracts.
The counterparties to these forward and options contracts are creditworthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be material. Notwithstanding our efforts to mitigate some foreign exchange risks, there can be no assurances that our mitigating activities will adequately protect us against the risks associated with foreign currency fluctuations.
51
The following table provides information about
our foreign currency forward and option contracts as of
March 31, 2004. The information is provided in
U.S. dollar equivalents and presents the notional amount
(forward or option amount), the weighted-average contractual
foreign currency exchange rates and fair value. The fair value
of our forward and option contracts is recorded in other current
assets on our Consolidated Balance Sheets.
Weighted-
Notional
Average
Amount
Contract Rate
Fair Value
$
84,222
1.8490
$
967
48,002
1.2308
96
14,730
0.0094
23
12,022
0.1336
255
8,092
0.1651
95
7,506
0.7506
43
5,848
0.1462
89
4,773
0.7956
41
4,392
0.1514
59
$
189,587
$
1,668
$
17,274
1.8319
$
(19
)
$
84,868
1.1316
$
1,257
52
Interest Rate Risk
As of March 31, 2004, our cash equivalents and short-term investments included $2.3 billion of debt securities, consisting primarily of U.S. agency bonds, money market funds and municipal securities. Notwithstanding our efforts to manage interest rate risks, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.
The table below presents the amounts (in
thousands) and related weighted-average interest rates of our
investment portfolio as of March 31, 2004:
Weighted-
Average
Interest Rate
Cost
Fair Value
1.59
%
$
698,479
$
699,076
1.41
%
1,292,186
1,292,204
1.69
%
214,972
214,483
1.42
%
50,000
49,978
$
2,255,637
$
2,255,741
| (1) | See definition in Note 1 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. |
| (2) | Maturity dates for short-term investments range from 10 months to 28 months with call dates ranging from 3 months to 5 months. |
53
| Item 8: | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
| Page | ||||||
|
|
||||||
|
Consolidated Financial Statements of Electronic
Arts Inc. and Subsidiaries:
|
||||||
|
Consolidated Balance Sheets as of March 31,
2004 and 2003
|
55 | |||||
|
Consolidated Statements of Operations for the
Years Ended March 31, 2004, 2003 and 2002
|
56 | |||||
|
Consolidated Statements of Stockholders’
Equity and Comprehensive Income (Loss) for the Years Ended
March 31, 2004, 2003 and 2002
|
57 | |||||
|
Consolidated Statements of Cash Flows for the
Years Ended March 31, 2004, 2003 and 2002
|
59 | |||||
|
Notes to the Consolidated Financial Statements
|
60 | |||||
|
Report of Independent Registered Public
Accounting Firm
|
93 | |||||
|
Financial Statement Schedules:
|
||||||
|
The following financial statement schedule of
Electronic Arts Inc. and Subsidiaries for the years ended
March 31, 2004, 2003 and 2002 is filed as part of this
report and should be read in conjunction with the Consolidated
Financial Statements of Electronic Arts Inc. and Subsidiaries:
|
||||||
|
Schedule II — Valuation and
Qualifying Accounts
|
100 | |||||
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.
54
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
(In thousands, except share data)
March 31,
March 31,
2004
2003
ASSETS
$
2,149,885
$
949,995
264,461
637,623
1,225
1,111
211,916
82,083
55,143
39,679
84,312
117,180
143,865
83,466
2,910,807
1,911,137
298,073
262,252
14,332
20,277
91,977
86,031
18,468
21,301
40,755
13,523
26,199
45,012
$
3,400,611
$
2,359,533
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS’ EQUITY
$
114,087
$
106,329
608,166
464,547
722,253
570,876
—
—
—
3,918
—
—
3,013
2,883
2
2
1,153,680
856,428
1,501,184
923,892
20,479
1,534
2,678,358
1,784,739
$
3,400,611
$
2,359,533
See accompanying Notes to Consolidated Financial Statements.
55
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
(In thousands, except per share data)
Year Ended March 31,
2004
2003
2002
$
2,957,141
$
2,482,244
$
1,724,675
1,102,950
1,072,802
814,783
1,854,191
1,409,442
909,892
370,468
332,453
241,109
184,825
130,859
107,059
510,858
400,990
380,564
2,735
7,482
25,418
9,708
15,102
7,485
—
66,329
12,818
1,078,594
953,215
774,453
775,597
456,227
135,439
20,963
5,222
12,848
796,560
461,449
148,287
219,268
143,049
45,969
577,292
318,400
102,318
—
(1,303
)
(809
)
$
577,292
$
317,097
$
101,509
$
577,292
$
329,212
$
124,256
$
577,292
$
317,097
$
101,509
$
1.95
$
1.17
$
0.45
$
1.87
$
1.08
$
0.35
295,396
281,978
273,665
308,233
292,891
286,284
N/A
$
(12,115
)
$
(22,747
)
N/A
$
(2.77
)
$
(3.77
)
N/A
$
(2.77
)
$
(3.77
)
N/A
4,368
6,026
N/A
4,368
6,026
See accompanying Notes to Consolidated Financial Statements.
56
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
(In thousands)
Accumulated
Class A
Class B
Other
Common Stock
Common Stock
Comprehensive
Treasury Stock
Total
Paid-in
Retained
Income
Stockholder’s
Shares
Amount
Shares
Amount
Capital
Earnings
(Loss)
Shares
Amount
Equity
269,429
$
2,695
6,250
$
63
$
539,006
$
505,286
$
(12,703
)
—
$
—
$
1,034,347
—
—
—
—
—
101,509
—
—
—
101,509
—
—
—
—
—
—
(3,540
)
—
—
(3,540
)
—
—
—
—
—
—
66
—
—
66
—
—
—
—
—
—
1,453
—
—
1,453
99,488
7,990
80
—
—
98,661
—
—
—
—
98,741
—
—
8
—
100
—
—
—
—
100
—
—
—
—
—
—
—
(560
)
(11,922
)
(11,922
)
(560
)
(6
)
—
—
(11,916
)
—
—
560
11,922
—
—
—
(25
)
(1
)
—
—
—
—
—
(1
)
—
—
—
—
22,541
—
—
—
—
22,541
276,859
2,769
6,233
62
648,392
606,795
(14,724
)
—
—
1,243,294
—
—
—
—
—
317,097
—
—
—
317,097
—
—
—
—
—
—
1,131
—
—
1,131
—
—
—
—
—
—
587
—
—
587
—
—
—
—
—
—
14,540
—
—
14,540
333,355
10,036
100
—
—
132,194
—
—
—
—
132,294
—
—
—
—
1,176
—
—
—
—
1,176
1,368
14
(6,000
)
(60
)
46
—
—
—
—
—
4
—
(8
)
—
—
—
—
—
—
—
—
—
—
—
74,620
—
—
—
—
74,620
288,267
2,883
225
2
856,428
923,892
1,534
—
—
1,784,739
57
(In thousands)
Accumulated
Class A
Class B
Other
Common Stock
Common Stock
Comprehensive
Treasury Stock
Total
Paid-in
Retained
Income
Stockholder’s
Shares
Amount
Shares
Amount
Capital
Earnings
(Loss)
Shares
Amount
Equity
288,267
2,883
225
2
856,428
923,892
1,534
—
—
1,784,739
—
—
—
—
—
577,292
—
—
—
577,292
—
—
—
—
—
—
(1,102
)
—
—
(1,102
)
—
—
—
—
—
—
913
—
—
913
—
—
—
—
—
—
19,134
—
—
19,134
596,237
13,066
130
—
—
227,690
—
—
—
—
227,820
—
—
(25
)
—
(225
)
—
—
—
—
(225
)
—
—
—
—
128
—
—
—
—
128
—
—
—
—
1,027
—
—
—
—
1,027
—
—
—
—
68,632
—
—
—
—
68,632
301,333
$
3,013
200
$
2
$
1,153,680
$
1,501,184
$
20,479
—
$
—
$
2,678,358
See accompanying Notes to Consolidated Financial Statements.
58
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
(In thousands)
Year Ended Match 31,
2004
2003
2002
$
577,292
$
317,097
$
101,509
77,513
91,639
110,901
(655
)
(5,467
)
(2,999
)
1,546
66,329
13,399
—
10,590
—
2,434
1,233
427
—
—
(200
)
—
1,303
809
1,027
906
3,099
68,632
74,620
22,541
(193,684
)
110,183
(16,046
)
(23,322
)
(4,911
)
(19,082
)
(66,816
)
(30,895
)
9,270
22,749
17,735
15,502
196,703
93,430
90,996
5,866
(29,341
)
(42,056
)
669,285
714,451
288,070
(89,595
)
(59,108
)
(51,518
)
1,446
738
299
(525
)
(9,323
)
2,919
8,467
—
570
(2,511,061
)
(1,049,765
)
(322,484
)
2,882,899
659,517
132,142
1,875
4,794
—
(2,513
)
—
—
—
3,000
—
(3,031
)
(12,868
)
—
287,962
(463,015
)
(238,072
)
227,819
131,696
95,741
(225
)
—
—
128
1,176
—
—
—
(11,922
)
(2,587
)
(751
)
(2,481
)
225,135
132,121
81,338
17,508
13,612
1,678
1,199,890
397,169
133,014
949,995
552,826
419,812
2,149,885
949,995
552,826
264,461
637,623
244,110
$
2,414,346
$
1,587,618
$
796,936
$
64,575
$
36,525
$
9,955
$
(764
)
$
3,018
$
(5,035
)
See accompanying Notes to Consolidated Financial Statements.
59
ELECTRONIC ARTS AND SUBSIDIARIES
Electronic Arts develops, markets, publishes and
distributes interactive software games that are playable by
consumers on home videogame machines (such as the Sony
PlayStation 2®, Microsoft Xbox®, Nintendo
GameCube
TM
consoles), personal computers, hand-held
game machines (such as the Game Boy® Advance) and online,
over the Internet and other proprietary online networks. Many of
our games are based on content that we license from others
(e.g., Madden NFL Football, Harry Potter and
FIFA Soccer), and many of our games are based on
intellectual property that is wholly-owned by EA (e.g., The
Sims
TM
, Medal of Honor
TM
). Our goal is to
develop titles which appeal to the mass markets and as a result,
we develop, market, publish and distribute our games in over
100 countries, often translating and localizing them for
sale in non-English speaking countries. Our goal is to create
software game “franchises” that allow us to publish
new titles on a recurring basis that are based on the same
property. Examples of this are our annual iterations of our
sports-based franchises (e.g., NCAA Football and
FIFA Soccer), titles based on long-lived movie properties
(e.g., James Bond
TM
) and wholly-owned properties
that can be successfully sequeled
(e.g., SimCity
TM
).
A summary of our significant accounting policies
applied in the preparation of our consolidated financial
statements follows:
60
We account for investments in marketable equity
and debt securities under Statement of Financial Accounting
Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities”
. Our policy is to minimize the principal
risk of our investment portfolio by earning returns based on
current interest rates. Management determines the appropriate
classification of its debt and equity securities at the time of
purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity
when we have the positive intent and ability to hold the
securities to maturity. Securities classified as
held-to-maturity are carried at amortized cost, which is
adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income.
Debt securities, not classified as held-to-maturity, are
classified as available-for-sale and are stated at fair value.
Unrealized gains and losses are included as a separate component
of accumulated other comprehensive income (loss) in
stockholders’ equity, net of any tax related effect.
Realized gains and losses are calculated based on the specific
identification method. See Note 2 of the Notes to
Consolidated Financial Statements.
In accordance with Accounting Principles Board
Opinion (“APB”) No. 18,
“The Equity
Method Of Accounting For Investments In Common Stock”
,
management evaluates equity investments accounted for under the
equity and cost methods of accounting to determine if events or
changes in circumstances indicate an other-than-temporary
impairment in value. We have cost and equity investments in
affiliates. Based on several factors, such as the financial
performance of the affiliate, our decision to no longer acquire
or continue investing in these affiliates, the limited cash flow
from future business arrangements and other information
available during fiscal 2003, we determined that some of our
investments in affiliates contained an other-than-temporary
impairment and recorded a charge in the amount of
$10.6 million to write-down these investments to their
estimated fair market value. This write-down was recorded in
interest and other income, net in the fiscal 2003 Consolidated
Statements of Operations. During fiscal 2004 and 2002, we did
not identify any other-than-temporary impairments on our
investments in affiliates and accordingly, no charge was
recorded in our Consolidated Statements of Operations.
Under the provisions of American Institute of
Certified Public Accountants Statement of Position
(“SOP”) 98-1,
“Accounting for the Costs of
Computer Software Developed or Obtained for Internal
Use”
, we capitalize costs associated with customized
internal-use software systems that have reached the application
development stage and meet recoverability tests. Such
capitalized costs include external direct costs utilized in
developing or obtaining the applications and payroll and
payroll-related expenses for employees who are directly
associated with the applications. Capitalization of such costs
begins when the preliminary project stage is complete and ceases
at the point in which the project is substantially complete and
ready for its intended purpose. The net book value of
capitalized costs associated with internal-use software amounted
to $29.9 million and $44.3 million as of
March 31, 2004 and 2003, respectively, and are being
depreciated on a straight-line basis over each project’s
estimated useful life that ranges from three to seven years.
61
(i) Long-Lived Assets
(j) Concentration of Credit
Risk
Short-term investments are placed with high
credit-quality financial institutions or in short-duration high
quality securities. We limit the amount of credit exposure in
any one financial institution or type of investment instrument.
(k) Revenue Recognition
Product Revenue:
Product revenue, including sales to resellers and distributors
(“channel partners”), is recognized when the above
criteria are met. We reduce product revenue for estimated
customer returns, price
62
Shipping and Handling: In accordance with
Emerging Issues Task Force (“EITF”) Issue
No. 00-10,
“Accounting for Shipping and Handling
Fees and Costs”
, we recognize as revenue amounts billed
to customers for shipping and handling. Additionally, shipping
and handling costs incurred by us are included in cost of goods
sold.
Online Subscription Revenue: Online subscription
revenue is derived principally from subscription revenue
collected from customers for online play related to our
persistent state world and Pogo products. These customers are
contractually obligated to pay on a month-to-month basis.
Prepaid monthly subscription revenue, including revenue
collected from credit card sales as well as sales of
Gametime
subscription cards, are recognized ratably over the period
for which the hosting services are provided.
Software Licenses: we license to manufacturers of
products in related industries (for example, makers of personal
computers or computer accessories) rights to include certain of
our products with the manufacturer’s product, or offer our
products to consumers who have purchased the manufacturer’s
product. We call these combined products “OEM
bundles”. These OEM bundles generally require the customer
to pay us an upfront nonrefundable fee, which represents the
guaranteed minimum royalty amount. Revenue is generally
recognized upon delivery of the product master or the first
copy. Per copy royalties on sales that exceed the minimum
guarantee are recognized as earned.
Similarly, significant judgment is required to
estimate our allowance for doubtful accounts in any accounting
period. We analyze customer concentrations, customer
credit-worthiness and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts.
63
Had compensation cost for our stock-based
compensation plans been measured based on the estimated fair
value at the grant dates in accordance with the provisions of
SFAS No. 123, we estimate that our reported net income
and net earnings per share would have been the pro forma amounts
indicated below. 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
were used for grants made in fiscal 2004, 2003 and 2002 under
the stock plans:
Our calculations are based on a multiple option
valuation approach and forfeitures are recognized when they
occur.
64
During the year ended March 31, 2004,
compensation expense for Class B stock option plans, based
on the estimated fair value at the grant dates in accordance
with the provisions of SFAS No. 123, would not have
had a material impact on reported net income and net earnings
per share. Compensation expense for fiscal 2003 and fiscal 2002
was $0.1 million and $0.8 million, respectively.
Compensation expense for fiscal 2003 would have increased our
net loss by $0.02 to $(2.79) for both basic and diluted loss per
Class B share. Compensation expense for fiscal 2002 would
have increased our net loss by $0.15 to $(3.92) for both basic
and diluted loss per Class B share.
In March 2004, the Financial Accounting Standards
Board, “FASB”, issued an exposure draft on the
Proposed Statement of Financial Accounting Standards,
“Share-Based Payment — an amendment of FASB
Statements No. 123 and 95”
. The proposed statement
addresses the accounting for share-based payment transactions
with employees and other third-parties. The proposed standard
would eliminate the ability to account for share-based
compensation transactions using APB No. 25,
“Accounting for Stock Issued to Employees”
, and
generally would require that such transactions be accounted for
using a fair-value-based method. If the final standard is
approved as currently drafted in the exposure draft, it would
have a material impact on the amount of earnings we report.
Management has not yet determined the impact that the proposed
statement will have on our business.
65
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, net, in the Consolidated
Statements of Operations are foreign currency transaction gains
(losses) of $44.3 million, $21.7 million and
$(2.0) million for the fiscal years ended March 31,
2004, 2003 and 2002, respectively.
In January 2003, the Emerging Issues Task Force
reached consensus on Issue No. 00-21
(“EITF 00-21”),
“Revenue Arrangements
with Multiple Deliverables”
. EITF 00-21 provides
guidance on how to determine whether an arrangement involving
multiple deliverables requires that such deliverables be
accounted for separately. EITF 00-21 allows for prospective
adoption for arrangements entered into after June 15, 2003
or adoption via a cumulative effect of a change in accounting
principle. We adopted EITF 00-21 in the quarter ended
June 30, 2003; however, it did not have a material impact
on our consolidated financial position or results of operations.
In March 2004, the Emerging Issues Task Force
ratified the consensus reached on paragraphs 6 through 23
of Issue No. 03-01 (“EITF 03-1”),
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments”
. EITF 03-1
requires that certain quantitative and qualitative disclosures
should be required for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under
SFAS No. 115,
“Accounting for Certain
Investments in Debt and Equity Securities”
and
SFAS No. 124,
“Accounting for Certain
Investments Held by Not-for-Profit Organizations”
that
are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. We
adopted EITF 03-1 in the year ended March 31, 2004;
however, it did not have a material impact on the disclosures in
our Consolidated Financial Statements.
66
(a) Fair Value of Financial
Instruments
Investments classified as marketable equity
securities are valued at their fair value based on quoted market
prices.
(b) Cash, Cash Equivalents and Short-term
Investments
(c) Marketable Equity
Securities
We account for our derivative and hedging
activities under SFAS No. 133,
“Accounting for
Derivative Instruments and Hedging Activities”
, as
amended. The assets or liabilities associated with our
derivative instruments and hedging activities are recorded at
fair value in other current assets or liabilities, respectively,
on our Consolidated Balance Sheets. As discussed below, gains
and losses resulting from changes in fair value are accounted
for depending on the use of the derivative and whether it is
designated and qualifies for hedge accounting.
We transact business in various foreign
currencies and have significant international sales and purchase
transactions denominated in foreign currencies. As a result, we
purchase currency option contracts as cash flow hedges to
reduce, but not eliminate, the volatility of cash flows
primarily related to revenue generated by our operational
subsidiaries. In addition, we utilize foreign exchange forward
contracts to mitigate foreign
67
Balance Sheet Activities
As of March 31, 2004, we had foreign
exchange contracts, all with maturities of less than three
months, to purchase and sell approximately $189.6 million
in foreign currencies, primarily in British Pounds, European
Currency Units (“Euros”) and Japanese Yen.
As of March 31, 2004, the fair value of
foreign currency forward contracts was $1.7 million and was
recorded in other current assets on our Consolidated Balance
Sheet. The counterparties to these contracts are creditworthy
multinational commercial banks. The risks of counterparty
nonperformance associated with these contracts are not
considered to be material. Notwithstanding our efforts to manage
foreign exchange risk, there can be no assurances that our
mitigating or hedging activities will adequately protect us
against the risks associated with foreign currency fluctuations.
Cash Flow Hedge Activities
(4) BUSINESS COMBINATIONS
Square Co., Ltd.
68
In Japan, the companies established Electronic
Arts Square K.K. (“EA Square KK”) in 1998, which
localized and published in Japan; a selection of EA’s
properties originally created in North America and Europe, as
well as developed and published original videogames in Japan. We
contributed cash and had a 70 percent majority ownership
interest, while Square contributed cash and owned
30 percent. Accordingly, the assets, liabilities and
results of operations for EA Square KK were included in our
Consolidated Balance Sheets and Consolidated Statements of
Operations since June 1, 1998, the date of formation.
Square’s 30 percent interest in EA Square KK was
reflected as “Minority interest in consolidated joint
venture” on our Consolidated Balance Sheet as of
March 31, 2003, and Consolidated Statements of Operations
for the years ended March 31, 2003 and March 31, 2002.
In May 2003, we acquired Square’s
30 percent ownership interest in EA Square KK for
approximately $2.5 million in cash. As a result of the
acquisition, EA Square KK has become our wholly owned
subsidiary and has been renamed Electronic Arts K.K. The
acquisition was accounted for as a step acquisition purchase and
the excess purchase price over fair value of the net tangible
assets acquired, $1.2 million, was allocated to goodwill.
(5) GOODWILL AND OTHER INTANGIBLE
ASSETS
Effective April 1, 2002, we adopted the
provisions of SFAS No. 141,
“Business
Combinations”
, which requires business combinations
initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and acquired intangible assets
meeting certain criteria to be recorded apart from goodwill. We
evaluated our goodwill and intangibles acquired prior to
June 30, 2001 using the criteria of SFAS No. 141,
which resulted in $41.5 million of other intangibles being
recorded separately from goodwill and $4.0 million of
acquired workforce intangibles being subsumed into goodwill at
April 1, 2002. In addition, effective April 1, 2002,
we adopted the provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets”
.
SFAS No. 142 requires that purchased goodwill and
certain indefinite-lived intangibles no longer be amortized;
rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value-based test.
SFAS No. 142 also requires, among other things,
reassessment of the useful lives of existing recognized
intangibles and the testing for impairment of existing goodwill
and other indefinite-lived intangibles. Upon adoption, we
evaluated the estimated useful lives of existing recognized
intangibles and determined that the estimated useful lives of
all such assets were appropriate.
Upon adoption of SFAS No. 142, we
ceased amortizing goodwill (see goodwill information in table
below). In lieu of amortization, SFAS No. 142 requires
a two-step approach to testing goodwill for impairment for each
reporting unit. The first step tests for impairment by applying
fair value-based tests at the reporting unit level. The second
step (if necessary), measures the amount of impairment by
applying fair value-based tests to individual assets and
liabilities within each reporting unit. We completed the first
step of transitional goodwill impairment testing during the
quarter ended June 30, 2002 and found no indicators of
impairment of our recorded goodwill. As a result, we recognized
no transitional impairment loss in fiscal 2003 in connection
with the adoption of SFAS No. 142. We completed our
annual impairment test in the fourth quarter of fiscal 2004 and
2003 with a measurement date of January 1, 2004 and
January 1, 2003, respectively, and found no indicators of
impairment of our recorded goodwill. There can be no assurance
that future impairment tests will not result in a charge to
earnings and there is a potential for a write down of goodwill
in connection with the annual impairment test in future periods.
69
The following table presents comparative
information showing the effects that non-amortization of
goodwill would have had on the Consolidated Statements of
Operations for fiscal 2002 (in thousands, except per share
amounts):
During fiscal 2004, we recorded an additional
$1.2 million of goodwill as a result of our acquisition of
Square Co., Ltd.’s 30 percent interest in Electronic
Arts Square K.K. See Note 4 of the Notes to Consolidated
Financial Statements for further discussion on this joint
venture termination. Additionally, we recorded an additional
$3.0 million of goodwill in fiscal 2004 as a result of our
acquisition of Studio 33 (UK) Limited and NuFX, Inc.
Goodwill information is as follows (in thousands):
Finite-lived intangible assets net of accumulated
amortization as of March 31, 2004 and 2003, of
$18.5 million and $21.3 million, respectively, include
costs for obtaining tradenames. Amortization of intangibles for
the fiscal years ended March 31, 2004, 2003 and 2002 was
$2.7 million, $7.5 million and $12.3 million,
respectively. Finite-lived intangible assets are amortized using
the straight-line method over the lesser of their estimated
useful lives or the agreement terms, typically from two to
twelve years. As of March 31, 2004 and March 31, 2003,
the weighted-average remaining useful life for finite-lived
intangible assets was approximately 7.5 years and
8.5 years, respectively.
When indicators are present and circumstances
warrant, we perform impairment tests under
SFAS No. 144 to evaluate the recoverability of our
long-lived assets and remaining finite-lived identifiable
intangibles utilized in our business. This test was performed in
the fourth quarter of fiscal 2003 in conjunction with the
overall valuation of the EA.com legal entity and our
Class B common stock and resulted in an impairment of
$12.4 million. Please see Note 6 to Consolidated
Financial Statements.
70
Finite-lived intangibles consist of the following
(in thousands):
As of March 31, 2004, future amortization of
finite-lived intangibles is estimated as follows (in thousands):
(6) RESTRUCTURING AND ASSET IMPAIRMENT
CHARGES
Fiscal 2004 Studio Restructuring
71
Fiscal 2003 Studio Restructuring
Additionally, during the fourth quarter of fiscal
2003, we approved a plan to consolidate the Los Angeles,
California, Irvine, California and Las Vegas, Nevada, studios
into one major game studio in Los Angeles. These measures were
taken in order to maximize efficiencies and streamline the
creative development process and operations of our studios. In
connection with these consolidation activities, we recorded a
total pre-tax restructuring charge of $5.1 million,
including $1.6 million for the shutdown of facilities
related to non-cancelable lease payments for permanently vacated
properties and associated costs, $2.0 million for the
write-off of abandoned equipment and leasehold improvements at
facilities that were permanently vacated and $1.5 million
for employee severance expenses related to involuntary
terminations.
Fiscal 2003 Online Restructuring
During fiscal 2003, we recorded restructuring
charges, including asset impairment, of $67.0 million,
consisting of $1.8 million for workforce reductions,
$2.3 million for consolidation of facilities and other
administrative charges, and $62.9 million for the write-off
of non-current assets. The estimated costs for workforce
reduction included severance charges for terminated employees,
costs for certain outplacement service contracts and costs
associated with the tender offer to retire employee Class B
options. The workforce reduction resulted in the termination of
approximately 50 positions. The consolidation of facilities
resulted in the closure of EA.com’s Chicago and Virginia
facilities and an adjustment for the closure of EA.com’s
San Diego studio in fiscal 2002. The estimated costs for
consolidation of facilities and other administrative charges
included contractual rental commitments under real estate leases
for unutilized office space reduced by estimated future
sub-lease income and costs to close the facilities.
As part of the restructuring efforts, we
performed impairment tests under SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets”
, to evaluate the recoverability of our
long-lived assets and remaining finite-lived identifiable
intangible assets utilized in the EA.com business. This test was
performed in the fourth quarter of fiscal 2003 in conjunction
with the overall valuation of the EA.com legal entity and its
Class B common stock. In February 2003, our only outside
holder of Class B common stock, AOL, exercised its right to
exchange its Class B shares for shares of Class A
common stock. In late December 2002, EA.com launched
The Sims
Online,
an online game based on our “The Sims”
line of PC games, which had sold over 20 million units
worldwide at that time.
The Sims Online
was expected to
be EA.com’s flagship online subscription offering. As of
March 31, 2003, the number of units sold and the number of
subscribers for this product along with other EA.com revenue
were significantly below our expectations. We considered these
developments to be a triggering event under
SFAS No. 144, which caused us to cancel most of our
plans to develop similar online products that would have
utilized the long-lived assets associated with the EA.com
business. Impairment charges on long-lived assets amounted to
$62.9 million and included $24.9 million relating to
impaired customized internal-use software systems for the EA.com
infrastructure, $25.6 million for other long-lived assets
and $12.4 million of finite-lived intangibles impairment
charges relating to EA.com’s acquisitions of Kesmai
Corporation and Pogo Corporation (now referred to as
“Kesmai” and “Pogo”, respectively) studios.
As of March 31, 2003, there were no finite-lived intangible
balances remaining related to Kesmai and Pogo studios.
72
In conjunction with our annual policy to reassess
the remaining useful lives of goodwill and certain
indefinite-lived intangibles and test the recoverability of
these long-lived assets in accordance with
SFAS No. 142, our fair value based tests did not
indicate an impairment of our recorded goodwill and certain
indefinite-lived intangibles at the EA.com reporting unit level
as of January 1, 2003. The remaining portion of Kesmai
goodwill assets as of March 31, 2003 was
$13.8 million. The remaining portion of Pogo goodwill
assets as of March 31, 2003 was $15.9 million. There
are no assurances that future impairment tests will not result
in a charge to earnings and a corresponding write down of
goodwill and certain indefinite-lived intangibles.
Fiscal 2002 Online Restructuring
During fiscal 2002, we recorded restructuring
charges of $20.3 million, consisting of $4.2 million
for workforce reductions, $3.3 million for consolidation of
facilities and other administrative charges, and
$12.8 million for the write-off of non-current assets and
facilities. The estimated costs for workforce reduction included
severance charges for terminated employees and costs for certain
outplacement service contracts. The consolidation of facilities
resulted in the closure of EA.com’s San Diego studio
and consolidation of its San Francisco and Virginia
facilities. The estimated costs for consolidation of facilities
included contractual rental commitments under real estate leases
for unutilized office space offset by estimated future sub-lease
income, costs to close or consolidate facilities, and costs to
write off a portion of the assets from these facilities.
Impairment charges on long-lived assets amounted to
$12.8 million and included $11.2 million relating to
abandoned technologies consisting of customized internal-use
software systems for the EA.com infrastructure,
$1.0 million of Kesmai intangibles impairment because
associated products and services were discontinued and
$0.6 million of goodwill charges relating to EA.com’s
San Diego studio closure. The remaining portion of Kesmai
assets as of March 31, 2002 was $15.9 million,
consisting of $13.1 million of goodwill and
$2.8 million of intangibles relating to Kesmai’s
developed and core technology and acquired workforce.
All restructuring charges recorded prior to
December 31, 2002 were recorded in accordance with EITF
No. 94-3,
“Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a
Restructuring)
”, EITF No. 95-03,
“Recognition of Liabilities in Connection with a
Purchase Business Combination”
, and SAB No. 100,
“Restructuring and Impairment Charges”
. For all
restructuring charges recorded subsequent to December 31,
2002, we recorded them in accordance with
SFAS No. 146,
“Accounting for Costs Associated
with Exit or Disposal Activities”
. Adjustments to the
restructuring reserves will be made in future periods, if
necessary, based upon the then-current events and circumstances.
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The following table summarizes the activity in
the accrued restructuring accounts for the fiscal 2004, 2003 and
2002 restructuring plans, (in thousands):
For fiscal 2004, the pre-tax restructuring charge
of $9.2 million consisted of $8.7 million in cash
charges and $0.5 million in non-cash charges related to the
write-off of non-current assets. For fiscal 2003, the pre-tax
restructuring charge of $81.4 million consisted of
$15.1 million in cash charges and $66.3 million in
non-cash charges related to the write-off of non-current assets.
For fiscal 2002, the pre-tax restructuring charge of
$20.3 million consisted of $6.9 million in cash
charges and $13.4 million in non-cash charges related to
the write-offs of non-current assets and facilities.
As of March 31, 2004, an aggregate of
$16.2 million in cash had been paid out under the fiscal
2004, 2003 and 2002 restructuring plans. In addition, there have
been subsequent net adjustments of approximately
$0.5 million and $(0.7) million in fiscal 2004 and
2003, respectively, relating to future cash outlays under the
fiscal 2003 and 2002 restructuring plans. Of the remaining cash
outlay of $14.3 million, $6.4 million is expected to
be utilized in fiscal 2005 while the remaining $7.9 million
is expected to be utilized by January 30, 2009. The
facilities-related commitments disclosed above include
$18.4 million of estimated future sub-lease income. The
restructuring accrual is included in accrued expenses in
Note 9 of the Notes to Consolidated Financial Statements.
In November 1999, Electronic Arts Inc., EA.com
and AOL entered into a five-year $81.0 million carriage fee
agreement (the “Prior Agreement”) which gave EA.com
the exclusive right to provide online games and interactive
entertainment content on the “Games” channels/areas of
certain AOL online services and gain access to and sell our
products to AOL subscribers and to users of AOL properties. This
agreement provided for carriage fees, advertising commitments,
advertising revenue sharing and other fees.
During the three months ended June 30, 2003,
the Prior Agreement was terminated and we entered into a new
two-year agreement (the “New Agreement”) under which
we will continue to provide current online game content
services, and launch new online game content and services, on
the “Games” channels/ areas of certain AOL online
services in exchange for a programming fee from AOL.
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Below is a discussion of the Prior Agreement and
the changes in our relationship with AOL that are reflected in
the New Agreement.
Carriage Fee
Carriage fee amounts paid under the Prior
Agreement were capitalized as a prepaid asset as payments were
made to AOL. Until April 1, 2003, the total carriage fee of
$81.0 million that was provided for in the Prior Agreement
was being expensed using the straight-line method over the
remaining life of the Prior Agreement subsequent to
EA.com’s site launch in October 2000. As the carriage fee
was expensed, we applied the portion that had been paid against
the prepaid asset and recorded the remaining amount as a
liability. Amortization expense was classified as
“Marketing and sales” expense in our Consolidated
Statements of Operations. The prepaid asset and liability
balances were classified as “Other assets” and
“Accrued and other liabilities”, respectively, on our
Consolidated Balance Sheets.
Under the New Agreement, in July 2003, AOL
refunded $18.0 million in carriage fees that we had
previously paid to AOL under the Prior Agreement. This refund
was applied against the prepaid balance and the remaining asset,
$6.4 million, is being amortized over the term of the New
Agreement as a reduction to revenue. As of March 31, 2004,
$3.6 million of this asset remained to be amortized.
Programming Fee
Advertising Commitment
Upon the termination of the Prior Agreement, this
advertising commitment was extinguished, and there is no similar
commitment provided for in the New Agreement.
Advertising Revenue and Revenue
Sharing
75
The Prior Agreement required that AOL pay us
50 percent of all revenue collected by AOL from the sale of
advertisements on our online games sites, until advertising
revenue reached $16.0 million in a year (measured from
October 1 through the following September 30).
Thereafter, the Prior Agreement provided that AOL would pay us
70 percent of all advertising revenue collected by AOL from
the sale of advertisements on our game sites. Under the New
Agreement, AOL is entitled to retain all advertising revenue
they collect from the sale of advertisements on our games sites
on the AOL properties, until net advertising revenue reaches
$20.0 million in the twelve months ended March 31,
2004, and until net advertising revenue reaches
$35.0 million for the remainder of the term of the New
Agreement. After advertising revenue exceeds these thresholds,
AOL is required to pay us 50 percent of the additional net
advertising revenue. These thresholds were not met during fiscal
2004 and accordingly, we did not record additional net revenue.
Other Fee Arrangements
Under the New Agreement, we are required to pay
AOL a percentage of revenue derived from game service
subscriptions, e-commerce, downloadable games and prize games
that we makes available on the AOL online services. We account
for these amounts in a similar manner as described above.
Our royalty expenses consist of payments to
(1) co-publishing and/or distribution affiliates,
(2) content licensors, and (3) independent software
developers. Co-publishing and distribution royalties are
payments made to third parties for delivery of product. License
royalties consist of payments made to celebrities, professional
sports organizations, movie studios and other organizations for
our use of their trademark, copyright, 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.
Royalty-based payments made to content licensors
and distribution affiliates that are paid in advance are
generally capitalized as prepaid royalties and expensed to cost
of goods sold at the greater of the contractual or effective
royalty rate based on net product sales. With regard to payments
made to independent software developers and co-publishing
affiliates, we are generally subject to development risk prior
to the general release of the product. Accordingly, payments
that are due prior to completion of the product are generally
expensed as research and development as the services are
incurred. Payments due after completion of the product
(primarily royalty-based in nature) are generally expensed as
cost of goods sold at the higher of the contractual or effective
royalty rate based on net product sales.
Each quarter, we also evaluate the future
realization of any prepaid royalties as well as minimum
commitments not yet paid to determine amounts we deem unlikely
to be realized through product sales. Any impairments determined
before the launch of a product are charged to research and
development expense. Impairments determined post-launch are
charged to cost of goods sold. In either case, we rely on
estimated revenue to evaluate the future realization of prepaid
royalties. If actual revenue, or revised sales estimates, fall
below the initial sales estimate, then the actual charge taken
may be greater in any given quarter than anticipated.
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The current and long-term portions of prepaid
royalties, included in other current assets and other assets,
consisted of (in thousands):
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
have unpaid royalty amounts due to these parties that are
recognized as either accounts payable or accrued liabilities.
Accrued royalties included in accrued liabilities as of
March 31, 2004 and 2003 are $82.6 million and
$77.7 million, respectively.
In addition, at March 31, 2004, we have
approximately $130.3 million that we are obligated to pay
co-publishing and/or distribution affiliates and content
licensors but that are generally contingent upon performance by
the counterparty (i.e., delivery of the product or content). See
Note 10 of the Notes to Consolidated Financial Statements.
(a) Inventories
(b) Property and Equipment, Net
Depreciation and amortization expenses associated
with property and equipment amounted to $74.8 million,
$66.3 million and $67.6 million for the fiscal years
ended March 31, 2004, 2003 and 2002, respectively.
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(c) Accrued and Other
Liabilities
Lease Commitments and Residual Value
Guarantees
In February 1995, we entered into a build-to-suit
lease with a third party for our headquarters facility in
Redwood City, California, which was refinanced with Keybank
National Association in July 2001 and expires in July 2006. We
accounted for this arrangement as an operating lease in
accordance with SFAS No. 13,
“Accounting for
Leases”
, as amended. Existing campus facilities
developed in phase one comprise a total of 350,000 square
feet and provide space for sales, marketing, administration and
research and development functions. We have an option to
purchase the property (land and facilities) for a maximum of
$145.0 million or, at the end of the lease, to arrange for
(i) an extension of the lease or (ii) sale of the
property to a third party while we retain an obligation to the
owner for approximately 90 percent of the difference
between the sale price and the guaranteed residual value of up
to $128.9 million if the sales price is less than this
amount, subject to certain provisions of the lease.
In December 2000, we entered into a second
build-to-suit lease with Keybank National Association for a
five-year term beginning December 2000 to expand our Redwood
City, California headquarters facilities and develop adjacent
property adding approximately 310,000 square feet to our
campus. Construction was completed in June 2002. We accounted
for this arrangement as an operating lease in accordance with
SFAS No. 13, as amended. The facilities provide space
for marketing, sales and research and development. We have an
option to purchase the property for a maximum of
$130.0 million or, at the end of the lease, to arrange for
(i) an extension of the lease, or (ii) sale of the
property to a third party while we retain an obligation to the
owner for approximately 90 percent of the difference
between the sale price and the guaranteed residual value of up
to $118.8 million if the sales price is less than this
amount, subject to certain provisions of the lease.
78
We believe the estimated fair values of both
properties under these operating leases are in excess of their
respective guaranteed residual values as of March 31, 2004.
For the two lease agreements with Keybank
National Association, as described above, the lease rates are
based upon the Commercial Paper Rate and require us to maintain
certain financial covenants as shown below, all of which we were
in compliance with as of March 31, 2004.
In July 2003, we entered into a lease agreement
with an independent third party (“the Landlord”) for a
studio facility in Los Angeles, California, which commenced in
October 2003 and expires in September 2013 with two five-year
options to extend the lease term. Additionally, we have options
to purchase the property after five and ten years based on the
fair market value of the property at the date of sale, a right
of first offer to purchase the property upon terms offered by
the landlord, and a right to share in the profits from a sale of
the property. We have accounted for this arrangement as an
operating lease in accordance with SFAS No. 13, as
amended. Existing campus facilities comprise a total of
243,000 square feet and provide space for research and
development functions. Our rental obligation under this
agreement is $50.2 million over the initial ten-year term
of the lease. We are taking possession of the property over a
period of 18 months as the facilities become available for
use. This commitment is offset by sublease income of
$5.8 million for the sublet to an affiliate of the Landlord
of 18,000 square feet of the Los Angeles facility, which
commenced in October 2003 and expires in September 2013 with
options of early termination by the affiliate after five years
and by EA after four and five years.
Letters of Credit
In August 2003, we provided an irrevocable
standby letter of credit to 300 California Associates II,
LLC in replacement of our security deposit for office space. The
standby letter of credit guarantees performance of our
obligations to pay our lease commitment up to $1.1 million.
The standby letter of credit expires in December 2006. As of
March 31, 2004, we did not have a payable balance on this
standby letter of credit.
Development, Celebrity, League and Content
Licenses: Payments and Commitments
79
The following table summarizes our minimum
contractual obligations and commercial commitments as of
March 31, 2004 (in thousands), and the effect we expect
them to have on our liquidity and cash flow in future periods:
Total rent expense for all operating leases was
$27.3 million, $22.3 million and $27.5 million,
for the fiscal years ended March 31, 2004, 2003 and 2002,
respectively.
The lease commitments disclosed above exclude
commitments included in our restructuring activities for
contractual rental commitments of $31.3 million under real
estate leases for unutilized office space, offset by
$18.4 million of estimated future sub-lease income. These
amounts were expensed in the periods of the related
restructuring and are included in our accrued liabilities
reported on our Consolidated Balance Sheet as of March 31,
2004. Please see Note 6 in the Notes to Consolidated
Financial Statements for additional information.
Litigation
Director Indemnity Agreements
80
Our pretax income from operations for the fiscal
years ended March 31, 2004, 2003 and 2002 consisted of the
following components (in thousands):
Income tax expense (benefit) for the fiscal years
ended March 31, 2004, 2003 and 2002 consisted of (in
thousands):
81
The components of the net deferred tax assets as
of March 31, 2004 and 2003 consist of (in thousands):
As of March 31, 2004, deferred tax assets of
$84.3 million and $40.8 million were classified as
current assets and long-term assets, respectively. In addition,
deferred tax liabilities of $2.0 million were classified as
accrued and other liabilities. As of March 31, 2003,
deferred tax assets of $117.2 million and
$13.5 million were classified as current assets and
long-term assets, respectively.
We have research and experimental tax credit
carryforwards aggregating approximately $29.5 million and
$37.2 million for federal and California purposes,
respectively. The federal credit carryforwards expire from 2022
to 2024. The California credits carry over indefinitely until
utilized. We also have foreign tax credit carryforwards of
approximately $6.2 million, which expire from 2005 to 2008.
The differences between the statutory income tax
rate and our effective tax rate, expressed as a percentage of
income before provision for (benefit from) income taxes, for the
years ended March 31, 2004, 2003 and 2002 were as follows:
Our effective income tax rate reflects the tax
benefits from having significant operations outside the United
States that are taxed at rates lower than the statutory rate of
35 percent.
Undistributed earnings of our foreign
subsidiaries amounted to approximately $738.3 million as of
March 31, 2004. Those earnings are considered to be
indefinitely reinvested and, accordingly, no U.S. income
taxes have been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, we would be
subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to
various foreign countries.
As of March 31, 2004, we believe it is more
likely than not that the results of future operations will
generate sufficient taxable income to realize the net deferred
tax assets.
82
During the fiscal year ended March 31, 2003,
we successfully prevailed in Tax Court proceedings with respect
to previously-contested deficiencies issued by the Internal
Revenue Service (“IRS”) in conjunction with its audit
of our U.S. income tax returns for the fiscal years 1993
through 1996. In addition, the IRS examined our U.S. income
tax returns for fiscal years 1997 through 1999 and has proposed
certain adjustments. During the fourth quarter of fiscal 2004,
we resolved certain of these matters with the Internal Revenue
Service, which lowered our income tax expense by
$19.7 million and resulted in a 2.5 percent rate
reduction. However, we have not resolved certain other issues
identified by the IRS for these tax years and are planning to
contest them. In addition, the IRS has recently commenced an
examination of our U.S. income tax returns for fiscal years
2000 through 2003. While the ultimate resolution of tax audits
involves a degree of uncertainty, we believe that adequate
amounts of tax accruals have been provided for any adjustments
that are expected to result for these years.
(a) Preferred Stock
(b) Tracking Stock
In March 2003, we consolidated the operations of
EA.com into our core operations in order to increase efficiency,
simplify our reporting structure and more directly integrate our
online activities into our core console and PC business. As
a result, we eliminated dual class reporting starting in fiscal
2004. The majority of outstanding Class B options and
warrants not directly held by us have been acquired or converted
to Class A shares and warrants.
(a) Employee Stock Purchase
Plan
The International Employee Stock Purchase Plan
was adopted by the Board of Directors in June 1996 and amended
in October 1998, February 1999 and February 2002 and is in all
material respects identical to the 2000 Class A Employee
Stock Purchase Plan approved by the stockholders for
U.S. employees. In February 2003, the Board of Directors
approved an amendment to the 2000 Class A Employee Stock
Purchase Plan to segregate provisions of the Plan for purchases
intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended (the “Code”) for
participants residing in the U.S., from those that are not
intended to qualify under Section 423 of the Code for
participants residing outside of the U.S. Accordingly, we
will no longer issue Class A common stock under the
International Employee Stock Purchase Plan.
83
Information related to stock issuances under
these plans is as follows:
The fair value above was estimated on the date of
grant using the Black-Scholes option-pricing model assumptions
described in Note 1(o) of the Notes to Consolidated
Financial Statements. As of March 31, 2004, we had
571,389 shares of Class A common stock reserved for
future issuance under the 2000 Class A Employee Stock
Purchase Plan.
(b) Stock Option Plans
At our Annual Meeting of Stockholders, held on
July 31, 2003, the stockholders approved an amendment to
amend the 2000 Class A Equity Incentive Plan to increase
the number of shares of our Class A common stock reserved
for issuance under the Plan by 11,000,000.
Our 2000 Class B Equity Incentive Plan
(“Class B plan”) allows the award of stock
options or restricted stock for up to an aggregate of
6,000,000 shares of Class B common stock. The
Class B plan included a provision for automatic option
grants to our outside directors. In February 2003, the Board of
Directors amended the Class B plan to eliminate automatic
grants to Directors and to preclude any further awards under the
Class B plan. As of March 31, 2004, there were 200,130
restricted shares issued and no shares available for future
issuance under the Class B plan. See Note 12 of the
Notes to Consolidated Financial Statements.
Options under the Class A Option Plans and
the Class B plan generally expire ten years from the date
of grant and are generally exercisable as to 24 percent of
the shares after 12 months, and then the remainder in
monthly increments over 38 months.
In fiscal 2001, our Board of Directors approved
the Key Partner Class B Equity Incentive Program which
allowed for the issuance of warrants to key business partners to
purchase up to 750,000 shares of Class B common stock.
As of March 31, 2002, there were warrants to
purchase 121,000 shares of Class B common stock
outstanding under this program. These warrants expire not later
than five years from issuance. In February 2003, we caused a
“Warrant Holder Exchange” of the warrants to purchase
Class B stock and terminated the program. Accordingly, all
of the Class B warrants were exchanged for warrants to
purchase 30,504 shares of Class A common stock,
and there are no longer any shares of Class B common stock
allocated for issuance under the program. As of March 31,
2004, there were outstanding warrants to
purchase 10,548 shares of Class A common stock.
We have an equity compensation stock plan which
was adopted without stockholder approval, the Celebrity and
Artist Stock Option Plan. The Celebrity and Artist Stock Option
Plan was adopted by the Board of Directors in July 1994 and
amended in May 1997, October 1997, September 1998 and July 1999.
The terms under this plan are substantially similar to the terms
of the 2000 Class A Equity Incentive Plan. The Celebrity
and Artist Stock Option Plan expires in July 2004.
84
The following summarizes the activity under our
Class A stock option plans during the fiscal years ended
March 31, 2004, 2003 and 2002:
The following summarizes the activity under the
Company’s Class B stock option plan during the fiscal
years ended March 31, 2004, 2003 and 2002:
85
Additional information regarding options
outstanding for Class A as of March 31, 2004 is as
follows:
Potential dilution is computed by dividing the
options in the related range of exercise prices by the shares of
common stock issued and outstanding at March 31, 2004
(301,332,458 shares). The weighted average estimated fair
value of stock options granted during fiscal 2004, 2003 and 2002
were $16.22, $13.64 and $11.96, respectively. The fair value was
estimated on the date of grant using the Black-Scholes
option-pricing model assumptions described in Note 1(o) of
the Notes to Consolidated Financial Statements.
The 43.6 million options outstanding have
vested or will vest approximately as follows (in millions):
(c) 401(k) Plan
Interest and other income, net for the years
ended March 31, 2004, 2003 and 2002 consisted of (in
thousands):
86
SFAS No. 130,
“Reporting
Comprehensive Income”
, requires classification of other
comprehensive income in a financial statement and display of
other comprehensive income separately from retained earnings and
additional paid-in capital. Other comprehensive income includes
primarily foreign currency translation adjustments and
unrealized gains (losses) on investments.
The change in the components of accumulated other
comprehensive income, net of tax, is summarized as follows (in
thousands):
The change in unrealized gains (losses) on
investments, net are shown net of taxes of $0.1 million,
$1.3 million and $(1.6) million in fiscal 2004, 2003
and 2002, respectively.
The foreign currency translation adjustments are
not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries.
The following summarizes the computations of
Basic Earnings Per Share (“EPS”) and Diluted EPS.
Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur from common shares issuable through stock-based
compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the
treasury stock method.
In fiscal years 2003 and 2002, net income (loss)
per share is computed individually for Class A common stock
and Class B common stock.
87
Excluded from the above computation of
weighted-average common shares for Class A Diluted EPS for
the fiscal years ended March 31, 2004, 2003 and 2002 were
options to purchase 3,218,000, 6,303,000 and
3,030,000 shares of common stock, respectively, as the
options’ exercise price was greater than the average market
price of the common shares. For fiscal 2004, 2003 and 2002, the
weighted-average exercise price of these respective options was
$47.19, $31.16 and $28.83 per share.
Due to our fiscal 2003 restructuring related to
EA.com, (see Note 6), Class B EPS reporting is no
longer required. The Diluted EPS calculation for Class A
common stock, presented above for 2003 and 2002, included the
potential dilution from the conversion of Class B common
stock to Class A common stock in the event that the initial
public offering for Class B common stock did not occur. Net
income used for the calculation of Diluted EPS for Class A
common stock was $317.1 million and $101.5 million for
the fiscal years ended March 31, 2003 and 2002,
respectively. This net income included the remaining interest in
EA.com (100 percent of EA.com losses) which was directly
attributable to outstanding Class B shares owned by third
parties, which would have been included in the Class A
common stock EPS calculation in the event that an initial public
offering for Class B common stock did not occur.
88
Due to the net loss attributable for the twelve
months ended March 31, 2003 and 2002 on a diluted basis to
Class B Stockholders, all stock options have been excluded
from the Diluted EPS calculation as their inclusion would have
been antidilutive. Had net income been reported for these
periods, an additional 1,405,000 and 842,000 shares would
have been added to diluted potential common shares for
Class B common stock for the twelve months ended
March 31, 2003 and 2002, respectively.
Transactions with Executive Officers
In April 2002, we agreed to pay certain taxes
incurred by Bruce McMillan, Executive Vice President, Group
Studio Head of EA Canada, arising from his temporary employment
with us in the United Kingdom. Mr. McMillan agreed to
reimburse us for those payments upon receipt of his
corresponding tax refund from the Canadian taxing authorities.
We subsequently paid approximately $168,704 and $32,931 in
October 2002 and April 2003, respectively, to the UK Inland
Revenue for taxes incurred by Mr. McMillan. In May 2003,
Mr. McMillan became an executive officer of Electronic
Arts. As of January 22, 2004, Mr. McMillan had repaid
us the entire amount of the tax payments we made on his behalf.
In May and June 2000, the following executive
officers entered into secured full recourse promissory notes to
purchase EA’s Class B common stock under Restricted
Stock Purchase Agreements: Mr. John Riccitiello, $449,500;
Mr. Don Mattrick, $224,750; Mr. E. Stanton McKee Jr.,
$134,850; Mr. J. Russell (Rusty) Rueff, Jr., $134,850,
and Mr. David Carbone, $44,950. The terms of the notes were
five years and the interest, set at a market rate as determined
under guidelines set forth in the Internal Revenue Code and
state statutes, was due and payable quarterly. In December 2002
and January 2003, Mr. Riccitiello, Mr. Mattrick,
Mr. McKee, Mr. Rueff and Mr. Carbone paid in full
all principal and accrued interest owed under these notes.
News America Corporation Exchange
On August 30, 2002, we entered into a new
agreement with News Corp under which (i) News Corp
exchanged its 2,000,000 shares of Class B common stock
for 412,908 shares of Class A common stock and
(ii) we paid News Corp $1.0 million in cash and
committed to spend an additional $17.0 million in
advertising with News Corp and its affiliates through the period
ended December 31, 2006. All of our other obligations to
News Corp under the original agreements were terminated. As of
March 31, 2004, we had satisfied our advertising commitment
with News Corp in full.
89
SFAS No. 131,
“Disclosures
About Segments of an Enterprise and Related
Information”
, establishes standards for the reporting
by public business enterprises of information about product
lines, geographic areas and major customers. The method for
determining what information to report is based on the way that
management organizes our operating segments for making
operational decisions and assessments of financial performance.
Our chief operating decision maker is considered
to be our Chief Executive Officer (“CEO”). The CEO
reviews financial information presented on a consolidated basis
accompanied by disaggregated information about revenue by
geographic region and by product lines for purposes of making
operating decisions and assessing financial performance.
In fiscal 2003 and 2002, we operated and reviewed
our business in two business segments:
In March 2003, we consolidated the operations of
the EA.com business segment into our core business. We consider
online functionality to be integral to our existing and future
products. Accordingly, beginning April 1, 2003, we no
longer manage our online products and services as a separate
business segment, and have consolidated our reporting related to
online products and services into our reporting for the overall
development and publication of our core products for all
reporting periods ending after that date. We believe that this
better reflects the way in which the CEO reviews and manages our
business and reflects the importance of the online products and
services relative to the rest of our business. Concurrently, we
also eliminated separate reporting for Class B common stock
for all reporting periods ending after April 1, 2003.
Our view and reporting of business segments may
change due to changes in the underlying business facts and
circumstances and the evolution of our reporting to our CEO.
Information about our net revenue by product line
for the fiscal years ended March 31, 2004, 2003 and 2002 is
presented below (in thousands):
90
Information about our operations in North America
and in foreign territories for the fiscal years ended
March 31, 2004, 2003 and 2002 is presented below (in
thousands):
Our direct sales to Wal-Mart Stores, Inc.
represented approximately 13 percent of total net revenue
in fiscal 2004, approximately 12 percent of total net
revenue in 2003, and approximately 14 percent of total net
revenue in fiscal 2002.
91
(1)
DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(a)
Consolidation
(b)
Fiscal Year
(c)
Stock Split
(d)
Reclassifications
(e)
Use of Estimates
(f)
Cash, Cash Equivalents, Short-Term
Investments, Marketable Equity Securities and Other
Investments
Table of Contents
(g)
Inventories
(h)
Property and Equipment, Net
20 to 25 years
3 to 7 years
3 to 7 years
Lesser of the lease terms or the estimated useful
lives of the improvements, generally 1 to 10 years
Table of Contents
n
Evidence of an arrangement: We recognize revenue
when we have evidence of an agreement with the customer
reflecting the terms and conditions to deliver products.
n
Delivery: Delivery is considered to occur when
the products are shipped and risk of loss has been transferred
to the customer. For online games, revenue is recognized as the
service is provided.
n
Fixed or determinable fee: If a portion of the
arrangement fee is not fixed or determinable, we recognize that
amount as revenue when the amount becomes fixed or determinable.
n
Collection is deemed probable: At the time of the
transaction, we conduct a credit review of each customer
involved in a significant transaction to determine the
creditworthiness of the customer. Collection is deemed probable
if we expect the customer to be able to pay amounts under the
arrangement as those amounts become due. If we determine that
collection is not probable, we recognize revenue when collection
becomes probable (generally upon cash collection).
Table of Contents
(l)
Sales Returns and Allowances and Bad Debt
Reserves
(m)
Advertising Costs
(n)
Software Development Costs
Table of Contents
(o)
Stock-based Compensation
Year Ended March 31,
2004
2003
2002
2.3
%
2.3
%
3.4
%
50
%
62
%
72
%
3.09
2.89
2.75
6
6
6
None
None
None
Year Ended March 31,
(In thousands)
2004
2003
2002
$
577,292
$
317,097
$
101,509
(97,030
)
(83,863
)
(73,596
)
124
—
—
$
480,386
$
233,234
$
27,913
Table of Contents
Year Ended March 31,
Class A Common Stock
2004
2003
2002
(In thousands, except per share data)
$
577,292
$
329,212
$
124,256
(97,030
)
(83,805
)
(72,751
)
124
—
—
$
480,386
$
245,407
$
51,505
Year Ended March 31,
2004
2003
2002
$
577,292
$
317,097
$
101,509
(97,030
)
(83,863
)
(73,596
)
124
—
—
$
480,386
$
233,234
$
27,913
$
1.95
$
1.17
$
0.45
$
1.63
$
0.87
$
0.19
$
1.87
$
1.08
$
0.35
$
1.58
$
0.81
$
0.10
Table of Contents
(p)
Foreign Currency Translation
(q)
Impact of Recently Issued Accounting
Standards
Table of Contents
(2)
FINANCIAL INSTRUMENTS
(In thousands)
As of March 31,
2004
2003
$
158,605
$
317,427
1,134,024
616,393
274,379
—
577,441
—
5,436
16,175
2,149,885
949,995
264,461
637,623
264,461
637,623
$
2,414,346
$
1,587,618
(3)
DERIVATIVE FINANCIAL INSTRUMENTS
Table of Contents
Table of Contents
Table of Contents
As of March 31, 2002
Class A
Class B
Class A
Common
Common
Common
Stock —
Stock — Basic
Stock — Basic
Diluted
and Diluted
$
124,256
$
101,509
$
(22,747
)
8,204
9,056
852
$
132,460
$
110,565
$
(21,895
)
$
0.45
$
0.35
$
(3.77
)
0.03
0.04
0.14
$
0.48
$
0.39
$
(3.63
)
Effects of
Foreign
As of
Goodwill
Currency
As of
March 31, 2003
Acquired
Translation
March 31, 2004
$
86,031
$
4,161
$
1,785
$
91,977
Effects of
Foreign
As of
Goodwill
Currency
As of
March 31, 2002
Acquired
Translation
March 31, 2003
$
69,050
$
16,139
$
842
$
86,031
Table of Contents
As of March 31, 2004
Gross
Other
Carrying
Accumulated
Intangibles,
Amount
Amortization
Impairment
Other
Net
$
28,263
$
(18,886
)
$
(9,377
)
$
—
$
—
35,169
(15,494
)
(1,211
)
—
18,464
8,694
(6,302
)
(1,776
)
(612
)
4
$
72,126
$
(40,682
)
$
(12,364
)
$
(612
)
$
18,468
As of March 31, 2003
Gross
Other
Carrying
Accumulated
Intangibles,
Amount
Amortization
Impairment
Other
Net
$
28,263
$
(18,886
)
$
(9,377
)
$
—
$
—
35,169
(12,763
)
(1,211
)
—
21,195
8,694
(6,298
)
(1,776
)
(514
)
106
$
72,126
$
(37,947
)
$
(12,364
)
$
(514
)
$
21,301
$
2,489
2,489
2,489
2,489
2,489
6,023
$
18,468
Table of Contents
Table of Contents
Table of Contents
Accrual
Charges
Charges
Accrual
Beginning
Charges to
Utilized
Utilized
Adjustments
Ending
Balance
Operations
in Cash
Non-cash
to Operations
Balance
$
1,692
$
1,741
$
(1,778
)
$
—
$
(70
)
$
1,585
9,063
7,007
(3,903
)
—
564
12,731
—
466
—
(466
)
—
—
$
10,755
$
9,214
$
(5,681
)
$
(466
)
$
494
$
14,316
$
674
$
3,923
$
(2,905
)
$
—
$
—
$
1,692
2,214
11,179
(3,643
)
—
(687
)
9,063
—
66,329
—
(66,329
)
—
—
$
2,888
$
81,431
$
(6,548
)
$
(66,329
)
$
(687
)
$
10,755
$
—
$
4,173
$
(3,499
)
$
—
$
—
$
674
—
3,312
(517
)
(581
)
—
2,214
—
12,818
—
(12,818
)
—
—
$
—
$
20,303
$
(4,016
)
$
(13,399
)
$
—
$
2,888
(7)
AMERICA ONLINE, INC. (“AOL”)
AGREEMENT
Table of Contents
Table of Contents
(8)
ROYALTIES AND LICENSES
Table of Contents
As of March 31,
2004
2003
$
13,163
$
25,371
9,508
7,382
$
22,671
$
32,753
(9)
BALANCE SHEET DETAILS
As of March 31,
2004
2003
$
2,263
$
2,762
52,880
36,917
$
55,143
$
39,679
As of March 31,
2004
2003
$
355,626
$
348,413
118,251
105,342
60,209
49,078
45,964
32,984
37,409
23,957
11,757
9,447
629,216
569,221
(331,143
)
(306,969
)
$
298,073
$
262,252
Table of Contents
As of March 31,
2004
2003
$
225,878
$
154,712
142,756
109,687
134,000
111,878
82,631
77,681
22,901
10,589
$
608,166
$
464,547
(10)
COMMITMENTS AND CONTINGENCIES
Table of Contents
Actual as of
Financial Covenants
Requirement
March 31, 2004
$
1,684 million
$
2,678 million
3.00
31.15
60
%
8.5
%
1.00
N/A
1.75
10.55
Table of Contents
Contractual Obligations
Commercial Commitments
Fiscal Year
Developer/
Bank and
Ended
Licensee
Other
Letters
March 31,
Leases
Commitments
Marketing
Guarantees
of Credit
Total
$
20,234
$
42,691
$
24,744
$
2,234
$
305
$
90,208
23,041
36,962
7,167
234
—
67,404
17,254
12,789
4,152
204
—
34,399
14,132
16,003
4,152
204
—
34,491
9,816
10,503
4,152
203
—
24,674
35,758
11,307
—
203
—
47,268
$
120,235
$
130,255
$
44,367
$
3,282
$
305
$
298,444
Table of Contents
(11)
INCOME TAXES
Year Ended March 31,
2004
2003
2002
$
489,857
$
222,123
$
17,020
306,703
239,326
131,267
$
796,560
$
461,449
$
148,287
Current
Deferred
Total
$
121,373
$
27,840
$
149,213
3,651
(14,864
)
(11,213
)
18,017
(5,381
)
12,636
68,632
—
68,632
$
211,673
$
7,595
$
219,268
$
76,435
$
(13,332
)
$
63,103
2,858
(13,318
)
(10,460
)
17,178
(1,392
)
15,786
74,620
—
74,620
$
171,091
$
(28,042
)
$
143,049
$
60,728
$
(44,277
)
$
16,451
1,048
(672
)
376
4,306
2,295
6,601
22,541
—
22,541
$
88,623
$
(42,654
)
$
45,969
Table of Contents
As of March 31,
2004
2003
$
70,637
$
83,906
1,204
2,723
77,564
77,202
149,405
163,831
(2,366
)
(10,741
)
(23,630
)
(21,785
)
(301
)
(602
)
(26,297
)
(33,128
)
$
123,108
$
130,703
Year Ended March 31,
2004
2003
2002
35.0
%
35.0
%
35.0
%
1.8
%
1.9
%
1.5
%
(6.2
%)
(4.5
%)
(3.0
%)
(0.6
%)
(1.2
%)
(3.4
%)
(2.5
%)
—
—
—
(0.2
%)
0.9
%
27.5
%
31.0
%
31.0
%
Table of Contents
(12)
STOCKHOLDERS’ EQUITY
(13)
EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION
PLANS
Table of Contents
Year Ended March 31,
2004
2003
2002
866,541
697,896
626,480
$22.44 to $38.14
$22.44 to $22.87
$21.22 to $22.52
$9.53
$9.78
$9.44
Table of Contents
Options Outstanding
Weighted-
Average
Number of
Exercise
Shares
Price
43,088,278
$
14.33
12,627,552
25.65
(2,717,380
)
18.07
(7,363,130
)
11.14
45,635,320
17.76
(20,448,146 shares were exercisable at a
weighted-average price of $13.02)
13,792,236
30.49
(2,129,664
)
23.63
(9,338,860
)
12.44
47,959,032
22.19
(21,562,992 shares were exercisable at a
weighted-average price of $16.17)
9,181,602
45.38
(1,363,068
)
28.71
(12,223,535
)
17.10
43,554,031
$
28.31
8,670,239
Options Outstanding
Weighted-
Average
Number of
Exercise
Shares
Price
5,106,482
$
9.68
977,983
12.00
(1,923,220
)
9.99
(80
)
9.00
4,161,165
10.09
(2,007,399 shares were exercisable at a
weighted-average price of $9.65)
15,000
9.00
(2,053,668
)
9.88
(50
)
9.00
2,122,447
10.30
(1,470,855 shares were exercisable at a
weighted-average price of $10.03)
—
—
(2,087,558
)
10.38
—
—
34,889
$
9.11
—
(a)
In February 2003, the Board of Directors amended
the Class B plan to preclude any further awards under the
Class B plan.
Table of Contents
Options Outstanding
Options Exercisable
Weighted-
Average
Weighted-
Weighted-
Remaining
Average
Average
Range of
Number of
Contractual
Exercise
Potential
Number of
Exercise
Potential
Exercise Prices
Shares
Life
Price
Dilution
Shares
Price
Dilution
4,844,424
3.62
$
9.26
1.6
%
4,841,864
$
9.26
1.6
%
4,770,157
5.94
17.42
1.6
%
3,855,828
17.07
1.3
%
7,313,755
7.05
23.82
2.5
%
4,021,731
24.04
1.3
%
5,715,784
7.42
26.75
1.9
%
2,598,569
26.60
0.9
%
4,715,375
8.18
30.03
1.6
%
1,431,571
29.98
0.5
%
6,381,092
8.53
31.31
2.1
%
1,314,343
31.31
0.4
%
4,357,256
9.17
39.41
1.4
%
408,412
32.96
0.1
%
4,658,320
9.60
48.23
1.5
%
68
44.49
0.0
%
797,868
9.62
50.06
0.3
%
5,000
49.45
0.0
%
43,554,031
7.47
$
28.31
14.5
%
18,477,386
$
20.26
6.1
%
2004 and
Prior
2005
2006
2007
2008
Total
18.5
12.1
7.6
5.1
0.3
43.6
(14)
INTEREST AND OTHER INCOME, NET
Year Ended March 31,
2004
2003
2002
$
29,369
$
21,476
$
16,691
(2,434
)
1,559
(131
)
—
(10,590
)
—
44,299
21,651
(2,041
)
(50,007
)
(30,079
)
(1,403
)
(1,638
)
—
—
655
5,467
2,999
719
(4,262
)
(3,267
)
$
20,963
$
5,222
$
12,848
Table of Contents
(15)
COMPREHENSIVE INCOME
Unrealized
Foreign
Gains
Accumulated
Currency
(Losses) on
Other
Translation
Investments,
Comprehensive
Adjustment
Net
Income (Loss)
$
(15,619
)
$
2,916
$
(12,703
)
1,453
(3,474
)
(2,021
)
(14,166
)
(558
)
(14,724
)
14,540
1,718
16,258
374
1,160
1,534
19,134
(189
)
18,945
$
19,508
$
971
$
20,479
(16)
NET INCOME (LOSS) PER SHARE
Year Ended March 31, 2004
(In thousands, except per share amounts):
Class A
Class A
Common
Common
Stock — Basic
Stock — Diluted
$
577,292
$
577,292
295,396
295,396
—
12,837
295,396
308,233
$
1.95
N/A
N/A
$
1.87
Table of Contents
Year Ended March 31, 2003
(In thousands, except per share amounts):
Class A
Class A
Class B
Common
Common
Common
Stock — Basic
Stock — Diluted
Stock
$
474,637
$
317,097
$
(157,540
)
(145,425
)
—
145,425
$
329,212
$
317,097
$
(12,115
)
281,978
281,978
4,368
—
10,913
—
281,978
292,891
4,368
$
1.17
N/A
$
(2.77
)
N/A
$
1.08
$
(2.77
)
Year Ended March 31, 2002
(In thousands, except per share amounts):
Class A
Class A
Class B
Common
Common
Common
Stock — Basic
Stock — Diluted
Stock
$
253,156
$
101,509
$
(151,647
)
(128,900
)
—
128,900
$
124,256
$
101,509
$
(22,747
)
273,665
273,665
6,026
—
12,619
—
273,665
286,284
6,026
$
0.45
N/A
$
(3.77
)
N/A
$
0.35
$
(3.77
)
Table of Contents
(17)
RELATED PARTY TRANSACTIONS
Table of Contents
(18)
SEGMENT INFORMATION
n
EA Core business segment: creation, marketing and
distribution of entertainment software.
n
EA.com business segment: creation, marketing and
distribution of entertainment software which can be played or
sold online, ongoing management of subscriptions of online games
and website advertising.
Year Ended March 31,
2004
2003
2002
$
1,314,758
$
910,693
$
482,882
469,692
499,634
456,292
384,320
219,378
78,363
199,893
176,656
51,740
77,305
79,093
43,653
49,514
44,648
34,236
29,619
99,951
189,535
2,525,101
2,030,053
1,336,701
398,221
375,759
269,010
33,819
76,432
118,964
$
2,957,141
$
2,482,244
$
1,724,675
Table of Contents
Asia
Pacific
North
(excluding
America
Europe
Japan)
Japan
Total
$
1,609,539
$
1,180,274
$
96,708
$
70,620
$
2,957,141
25,360
3,812
197
—
29,369
51,963
23,926
1,003
621
77,513
2,392,115
926,820
41,589
40,087
3,400,611
69,721
15,857
1,261
2,756
89,595
258,636
143,563
2,491
3,828
408,518
$
1,435,718
$
878,904
$
87,569
$
80,053
$
2,482,244
18,821
2,420
234
1
21,476
75,620
14,467
924
628
91,639
1,764,103
544,782
27,848
22,800
2,359,533
47,955
9,894
875
384
59,108
230,773
134,410
1,973
2,428
369,584
$
1,093,244
$
519,458
$
53,376
$
58,597
$
1,724,675
14,440
2,010
241
—
16,691
95,395
13,768
1,091
647
110,901
1,325,939
333,825
21,435
18,175
1,699,374
39,259
10,350
1,038
871
51,518
286,306
128,599
1,984
2,450
419,339
Table of Contents
| (19) | QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED) |
| (In thousands, except per share data) | Quarter Ended | ||||||||||||||||||||
|
|
|||||||||||||||||||||
| June 30 | Sept. 30 | Dec. 31 | March 31 | Year Ended | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
Fiscal 2004 Consolidated
|
|||||||||||||||||||||
|
Net revenue
|
$ | 353,381 | $ | 530,005 | $ | 1,475,323 | $ | 598,432 | $ | 2,957,141 | |||||||||||
|
Gross Profit
|
203,418 | 316,243 | 962,068 | 372,462 | 1,854,191 | ||||||||||||||||
|
Operating income
|
21,772 | 101,867 | 557,508 | 94,450 | 775,597 | ||||||||||||||||
|
Net income
|
18,368 | (a) | 76,588 | (b) | 392,296 | (c) | 90,040 | (d) | 577,292 | ||||||||||||
|
Class A Stockholders
|
|||||||||||||||||||||
|
Net income per share - basic
|
$ | 0.06 | $ | 0.26 | $ | 1.32 | $ | 0.30 | $ | 1.95 | |||||||||||
|
Net income per share - diluted
|
$ | 0.06 | $ | 0.25 | $ | 1.26 | $ | 0.29 | $ | 1.87 | |||||||||||
|
Common stock price per share
|
|||||||||||||||||||||
|
High
|
$ | 39.70 | $ | 48.50 | $ | 52.89 | $ | 52.18 | $ | 52.89 | |||||||||||
|
Low
|
$ | 28.10 | $ | 36.55 | $ | 40.60 | $ | 43.43 | $ | 28.10 | |||||||||||
|
Class B Stockholders
|
|||||||||||||||||||||
|
Net loss per share - basic
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
|
Net loss per share - diluted
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
|
Common stock price per share
|
|||||||||||||||||||||
|
High
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
|
Low
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
|
Fiscal 2003 Consolidated
|
|||||||||||||||||||||
|
Net revenue
|
$ | 331,898 | $ | 453,490 | $ | 1,233,726 | $ | 463,130 | $ | 2,482,244 | |||||||||||
|
Gross Profit
|
189,444 | 252,623 | 668,615 | 298,760 | 1,409,442 | ||||||||||||||||
|
Operating income
|
6,282 | 71,246 | 369,123 | 9,576 | 456,227 | ||||||||||||||||
|
Net income
|
7,404 | (e) | 50,234 | (e) | 250,219 | (f) | 9,240 | (g) | 317,097 | ||||||||||||
|
Class A Stockholders
|
|||||||||||||||||||||
|
Net income per share - basic
|
$ | 0.03 | $ | 0.19 | $ | 0.89 | $ | 0.04 | $ | 1.17 | |||||||||||
|
Net income per share - diluted
|
$ | 0.03 | $ | 0.17 | $ | 0.85 | $ | 0.03 | $ | 1.08 | |||||||||||
|
Common stock price per share
|
|||||||||||||||||||||
|
High
|
$ | 33.49 | $ | 34.50 | $ | 36.22 | $ | 30.23 | $ | 36.22 | |||||||||||
|
Low
|
$ | 26.75 | $ | 26.23 | $ | 25.08 | $ | 23.76 | $ | 23.76 | |||||||||||
|
Class B Stockholders
|
|||||||||||||||||||||
|
Net loss per share - basic
|
$ | (0.49 | ) | $ | (0.57 | ) | $ | (0.86 | ) | $ | (1.18 | ) | $ | (2.77 | ) | ||||||
|
Net loss per share - diluted
|
$ | (0.49 | ) | $ | (0.57 | ) | $ | (0.86 | ) | $ | (1.18 | ) | $ | (2.77 | ) | ||||||
|
Common stock price per share
|
|||||||||||||||||||||
|
High
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
|
Low
|
N/A | N/A | N/A | N/A | N/A | ||||||||||||||||
| (a) | Net income includes amortization of intangibles of $0.5 million, net of taxes. | |
| (b) | Net income includes amortization of intangibles of $0.6 million, net of taxes. | |
| (c) | Net income includes restructuring charges of $0.4 million, net of taxes, and amortization of intangibles of $0.4 million, net of taxes. | |
| (d) | Net income includes restructuring charges of $6.4 million, net of taxes, amortization of intangibles of $0.4 million, net of taxes and a reversal of previously accrued income taxes of $19.7 million. | |
| (e) | Net income includes amortization of intangibles of $1.6 million, net of taxes. | |
| (f) | Net income includes restructuring charges of $5.4 million, net of taxes, and asset impairment charges of $1.0 million, net of taxes, as well as amortization of intangibles of $1.5 million, net of taxes. | |
| (g) | Net income includes restructuring charges of $5.0 million, net of taxes, and asset impairment charges of $44.8 million, net of taxes, as well as amortization of intangibles of $0.5 million, net of taxes. |
The Company’s Class A common stock is traded on the Nasdaq National Market under the symbol “ERTS”. The prices for the Class A common stock in the table above represent the high and low sales prices as reported on the Nasdaq National Market.
92
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders
We have audited the accompanying consolidated
balance sheets of Electronic Arts Inc. and subsidiaries (the
Company) as of March 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity
and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended March 31, 2004. 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 the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Electronic Arts Inc. and
subsidiaries as of March 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years
in the three-year period ended March 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 5 to the Consolidated
Financial Statements, the Company changed its method of
accounting for goodwill, effective April 1, 2002.
KPMG LLP
San Francisco, California
93
Table of Contents
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Definition and limitations of disclosure controls. Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Executive Vice President, Chief Financial and Administrative Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.
Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Executive Vice President, Chief Financial and Administrative Officer, after evaluating the effectiveness of our disclosure controls and procedures, believe that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing the requisite reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Executive Vice President, Chief Financial and Administrative Officer, as appropriate to allow timely decisions regarding the required disclosure.
Changes in internal controls. During our last fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, in response to the certification requirements of the Sarbanes-Oxley Act and new SEC Regulations, during fiscal 2003 and 2004 we enhanced our internal controls and disclosure systems, through various measures including: detailing certain internal accounting policies; establishing a disclosure committee for the preparation of all periodic SEC reports; establishing an internal audit function; and requiring certifications from various trial balance controllers and other financial personnel responsible for our financial statements.
94
PART III
Item 10: Directors and Executive Officers of the Registrant
The information regarding directors who are nominated for election required by Item 10 is incorporated herein by reference to the information in our definitive Proxy Statement for the 2004 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 1 hereof. The information regarding Section 16 compliance is incorporated herein by reference to the information in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”.
The information required by Item 10 regarding our Global Code of Conduct (which includes code of ethics provisions applicable to our directors, principal executive officer, principal financial officer, principal accounting officer, and other senior financial officers) appears in Item 1 of this Form 10-K under the caption “Investor Information”.
Item 11: Executive Compensation
The information required by Item 11 is incorporated herein by reference to the information in the Proxy Statement under the caption “Compensation of Executive Officers” specifically excluding the “Compensation Committee Report on Executive Compensation”.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated herein by reference to the information in the Proxy Statement under the captions “Principal Stockholders” and “Equity Compensation Plan Information”.
Item 13: Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference to the information in the Proxy Statement under the caption “Certain Transactions”.
Item 14: Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein by reference to the information in the Proxy Statement under the caption “Fees of Independent Auditors”.
95
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
| 1. | Financial Statements: See Index to Consolidated Financial Statements under Item 8 on Page 54 of this report. |
| 2. | Financial Statement schedules: See Schedule II on Page 100 of this report. |
| 3. | Exhibits: The following exhibits (other than exhibits 32.1 and 32.2, which are furnished with this report) are filed as part of, or incorporated by reference into, this report: |
| Number | Exhibit Title | |
|
|
|
|
|
3.01
|
Amended and Restated Certificate of Incorporation of Electronic Arts Inc.(1) | |
|
3.02
|
Amended and Restated Bylaws.(2) | |
|
4.01
|
Specimen Certificate of Registrant’s Common Stock.(3) | |
|
10.01
|
Registrant’s Directors Stock Option Plan and related documents.(*)(4) | |
|
10.02
|
Registrant’s 1998 Directors’ Stock Option Plan and related documents, as amended(*)(5) | |
|
10.03
|
Registrants’ 1991 Stock Option Plan and related documents as amended.(*)(5) | |
|
10.04
|
Registrant’s 2000 Equity Incentive Plan as amended, and related documents.(*)(6) | |
|
10.05
|
Registrant’s 2000 Employee Stock Purchase Plan as amended, and related documents.(*)(6) | |
|
10.06
|
Form of Indemnity Agreement with Directors. | |
|
10.07
|
Description of Registrant’s FY 2005 Executive Bonus Plan.(*) | |
|
10.08
|
Lease Agreement by and between Registrant and the Prudential Insurance Company of America, dated January 10, 1994.(7) | |
|
10.09
|
Agreement for Lease between Flatirons Funding, LP and Electronic Arts Redwood, Inc. dated February 14, 1995.(8) | |
|
10.10
|
Guarantee from Electronic Arts Inc. to Flatirons Funding, LP dated February 14, 1995.(8) | |
|
10.11
|
Amended and Restated Guaranty from Electronic Arts Inc. to Flatirons Funding, LP dated March 7, 1997.(9) | |
|
10.12
|
Amended and Restated Agreement for Lease between Flatirons Funding, LP and Electronic Arts Redwood Inc. dated March 7,1997.(9) | |
|
10.13
|
Amendment No. 1 to Lease Agreement between Electronic Arts Redwood Inc. and Flatirons Funding, LP dated March 7, 1997.(9) | |
|
10.14
|
Lease Agreement by and between Registrant and Louisville Commerce Realty Corporation, dated April 1, 1999.(10) | |
|
10.15
|
Option agreement, agreement of purchase and sale, and escrow instructions for Zones 2 and 4, Electronic Arts Business Park, Redwood Shores California, dated April 5, 1999.(10) | |
|
10.16
|
Lease Agreement by and between Registrant and Spieker Properties, L.P., dated September 3, 1999.(11) | |
|
10.17
|
Master Lease and Deed of Trust by and between Registrant and Selco Service Corporation, dated December 6, 2000.(12) | |
|
10.19
|
Amendment No. 1 to Amended and Restated Credit Agreement by and among Flatirons Funding LP and The Dai-Ichi Kangyo Bank, Limited, New York Branch, dated February 21, 2001.(13) | |
|
10.20
|
Office Lease Agreement by and between Registrant and California Plaza of Walnut Creek, Inc., dated February 1, 2001.(13) | |
|
10.21
|
Amendment No. 2 to Lease Agreement by and between Electronic Arts Redwood, Inc. and Flatirons Funding, LP dated July 16, 2001.(14) | |
|
10.22
|
Participation Agreement among Electronic Arts Redwood, Inc., Electronic Arts Inc., Flatirons Funding, LP, Selco Service Corporation and Selco Redwood, LLC, Victory Receivables Corporation, The Bank of Tokyo-Mitsubishi, Ltd., various Liquidity Banks and Tranche Banks and Keybank National Association dated July 16, 2001.(14) | |
|
10.23
|
Amendment No. 1 to Lease Agreement by and between Registrant and California Plaza of Walnut Creek, Inc., dated May 20, 2002.(15) | |
|
10.24
|
Offer Letter for Employment at Electronic Arts Inc. to Warren Jenson, dated June 21, 2002.(15)* |
96
Number
Exhibit Title
Full Recourse Promissory Note between Electronic
Arts Inc. and Warren Jenson, dated July 19, 2002.(15)
Full Recourse Promissory Note between Electronic
Arts Inc. and Warren Jenson, dated July 19, 2002.(15)
Participation Agreement among Electronic Arts
Redwood, Inc., Electronic Arts, Inc., Selco Service Corporation,
Victory Receivables Corporation, The Bank of Tokyo-Mitsubishi,
Ltd., various Liquidity Banks and Keybank National Association,
dated December 6, 2000.(16)
Amendment No. 2 to Lease Agreement by and
between Registrant and California Plaza of Walnut Creek, Inc.,
dated January 7, 2003.(17)
Lease Agreement by and between Registrant and
Ontrea, Inc. dated October 7, 2002.(17)
Lease Agreement by and between Playa Vista-Waters
Edge, LLC and Electronic Arts Inc., dated July 31, 2003.(18)
Agreement Re: Right of First Offer to Purchase
and Option to Purchase by and between Playa Vista-Waters Edge,
LLC and Electronic Arts Inc., dated July 31, 2003.(18)
Profit Participation Agreement by and between
Playa Vista-Waters Edge, LLC and Electronic Arts Inc., dated
July 31, 2003.(18)
Sublease Agreement by and between Electronic Arts
Inc. and Playa Capital Company, LLC, dated July 31,
2003.(18)
Licensed Publisher Agreement by and between EA
and Sony Computer Entertainment America Inc. dated as of
April 1, 2000.(19)(**)
Amending Agreement among Ontrea Inc. (the
“Landlord”), Electronic Arts (Canada), Inc. (the
“Tenant”), and Electronic Arts Inc. (the
“Indemnifier”), dated October 30, 2003.(2)
First Amendment of Lease between Louisville
Commerce Realty Corporation and Electronic Arts Inc., dated
February 23, 2004.
Subsidiaries of the Registrant.
Consent and Report of KPMG LLP, Independent
Registered Public Accounting Firm.
Certification of Chairman and Chief Executive
Officer pursuant to Rule 13a-14(a) of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Executive Vice President, Chief
Financial and Administrative Officer pursuant to
Rule 13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Additional exhibits furnished with this report:
Certification of Chairman and Chief Executive
Officer pursuant to Rule 13a-14(b) of the Exchange Act and
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Executive Vice President, Chief
Financial and Administrative Officer pursuant to
Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(*)
Management contract or compensatory plan or
arrangement.
| (**) | Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the SEC. |
| (1) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 2000. | |
| (2) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003. | |
| (3) | Incorporated by reference exhibits filed with Registrant’s Registration Statement on Form S-4, filed March 3, 1994 (File No. 33-75892). | |
| (4) | Incorporated by reference to exhibits filed with Amendment No. 2 to Registrant’s Registration Statement on Form S-8, filed November 6, 1991 (File No. 33-32616). | |
| (5) | Incorporated by reference to exhibits filed with Registrant’s Registration Statement on Form S-8, filed July 30, 1999 (File No. 333-84215). | |
| (6) | Incorporated by reference to exhibits filed with Registrant’s Registration Statement on Form S-8, filed August 6, 2003 (File No. 333-107710). | |
| (7) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 1994. |
97
| (8) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 1995. | |
| (9) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 1997. |
| (10) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 1999. | |
| (11) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. | |
| (12) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000. | |
| (13) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 2001. | |
| (14) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 2002. | |
| (15) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. | |
| (16) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002. | |
| (17) | Incorporated by reference to exhibits filed with Registrant’s Annual Report on Form 10-K for the year ended March 31, 2003. | |
| (18) | Incorporated by reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. | |
| (19) | Incorporated by reference to exhibits filed with Amendment No. 2 to Registrant’s Registration Statement on Form S-3, filed November 12, 2003 (File No. 333-102797). |
(b) Reports on Form 8-K
On January 27, 2004, we filed a current report on Form 8-K relating to the announcement of our financial results for the quarter ended December 31, 2003.
98
SIGNATURES
Pursuant to the requirements of 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 INC. |
| By: | /s/ Lawrence F. Probst III |
|
|
|
| Lawrence F. Probst III | |
| Chairman of the Board and Chief Executive Officer | |
| Date: June 4, 2004 |
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 4th of June 2004.
| Name | Title | |||
|
|
|
|||
|
/s/ Lawrence F. Probst III
Lawrence F. Probst III |
Chairman of the Board
and Chief Executive Officer |
|||
|
/s/ Warren C. Jenson
Warren C. Jenson |
Executive Vice President, Chief
Financial and Administrative Officer |
|||
|
/s/ Kenneth A. Barker
Kenneth A. Barker |
Vice President and
Chief Accounting Officer (Principal Accounting Officer) |
|||
| Directors: | ||||
|
/s/ M. Richard Asher
M. Richard Asher |
Director | |||
|
/s/ William J. Byron
William J. Byron |
Director | |||
|
/s/ Leonard S. Coleman
Leonard S. Coleman |
Director | |||
|
/s/ Gary M. Kusin
Gary M. Kusin |
Director | |||
|
/s/ Gregory B. Maffei
Gregory B. Maffei |
Director | |||
|
/s/ Timothy Mott
Timothy Mott |
Director | |||
|
/s/ Robert W. Pittman
Robert W. Pittman |
Director | |||
|
/s/ Linda J. Srere
Linda J. Srere |
Director | |||
99
ELECTRONIC ARTS INC. AND
SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2004, 2003 and
2002
Allowance for Doubtful
Balance at
Charged to
Charged to
Balance at
Accounts, Price
Beginning
Costs and
Other
End of
Protection and Returns
of Period
Expenses
Accounts(1)
Deductions
Period
$
164,634
$
299,427
$
14,110
$
323,489
$
154,682
$
115,870
$
318,534
$
10,486
$
280,256
$
164,634
$
89,833
$
183,847
$
(3,947
)
$
153,863
$
115,870
| (1) | Primarily the translation effect of using the average exchange rate for expense items and the year-ended exchange rate for the balance sheet item (allowance account) and other reclassification adjustments. |
100
ELECTRONIC ARTS INC.
101
Exhibit 10.06
ELECTRONIC ARTS INC.
INDEMNITY AGREEMENT
This Indemnity Agreement is entered into between Electronic Arts Inc. a corporation incorporated under the laws of Delaware (the “Company”) and the member of the Board of Directors of the Company named below (“Director”).
RECITALS
A. The Company has provided in its Amended and Restated Certificate of Incorporation that a director’s liability as a director of the Company will be limited to the extent permitted by the Delaware General Corporation Law.
B. The Company has provided in its Amended and Restated Bylaws that the Company will indemnify directors to the maximum extent permitted by the Delaware General Corporation Law and will advance expenses of litigation to its directors subject to an undertaking to repay such expenses if it is determined that they may not be reimbursed by the Company.
C. In order to induce Director to serve as a member of the Board of Directors of the Company, the Company desires to provide Director with the following additional contractual assurances.
NOW, THEREFORE, the Company and Director agree as follows:
1. Reimbursement of Expenses. The Company will reimburse Director for all reasonable and necessary expenses incurred by Director in connection with Director’s service as a member of the Board of Directors of the Company.
2. Advancement of Expenses. In the event that Director at any time is, or is threatened to be, sued or made a party to any judicial, administrative or investigative proceeding as a result of Director’s service as a member of the Board of Directors of the Company (or Director’s providing services at the request of the Company as a director, officer, employee or agent of another corporation or other entity), the Company will, subject to compliance with applicable laws, regulations and rules, upon the request of Director (and within ten (10) days of the presentment of invoices therefore), advance the costs and expenses, including attorneys’ fees, incurred by Director in defending such suit or other proceeding, or investigating any such threat, subject to an undertaking by Director, if required by law, to repay the Company if it is determined by a final judicial decision (from which there is no right of appeal) that Director is not entitled, under applicable law, the Bylaws, or this Agreement to be indemnified by the Company for such expenses. The burden of proving that Director is not so entitled shall be on the Company.
3. Indemnification. The Company agrees to indemnify Director, to the maximum extent permitted by law, against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by Director as a result of any lawsuit, judicial, administrative or investigative proceeding (criminal or civil, including an action by or in the right of the Company) in which Director at any time is sued or made a party, or is threatened to be made a party, as a result of Director’s service as a member of the Board of Directors of the Company (or Director’s providing services at the request of the Company as a director, officer, agent or employee of another corporation or other entity). The termination of any lawsuit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself, create a presumption that (i) Director did not act in good faith, (ii) Director did not act in a manner which Director reasonably believed to be or not opposed to the best interests of the Company or (iii) with respect to any criminal action or proceeding, Director had no reasonable cause to believe that Director’s conduct was unlawful. It is the parties’ intention that if the Company contests Director’s right to indemnification, the question of Director’s right to indemnification shall be for the court or arbitration panel to decide, and neither the failure of the Company (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination that indemnification of a director is proper in the circumstances because Director has met the applicable standard of conduct required by applicable law, nor any actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel or its shareholders) that Director has not met such applicable standard of conduct, shall create a presumption that Director has or has not met the applicable standard of conduct.
-1-
4. Directors’ and Officers’ Insurance. The Company will, to the extent that it is determined to be economically reasonable by the Company’s Board of Directors, maintain a policy of directors’ and officers’ liability insurance, on such terms and conditions as may be approved by the Board of Directors.
5. Contribution. If the indemnification provided in Section 3 is unavailable and may not be paid to Director for any reason other than statutory limitations, then in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Director (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Director in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Director on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Company on the one hand and of Director on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Director on the other shall be determined by reference to, among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations.
6. Miscellaneous. Each of the provisions of this agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be judicially determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other provision. In the event any provision hereof is determined to be unenforceable, the provision’s effect shall be deemed to be limited so as to be equal to the maximum effect that would be enforceable. This Agreement shall be interpreted and enforced in accordance with the laws within the state of California and shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Director, his heirs, personal representatives and assigns. No cancellation, amendment or modification of this Agreement shall be effective unless in writing signed by both parties.
7. Attorneys’ Fees. In the event that any action is instituted or claim is submitted to arbitration by Director under this Agreement to enforce or interpret any of the terms hereof, Director shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Director with respect to such action or arbitration, unless as a part of such action, a court of competent jurisdiction or the arbitrator(s) determines that each of the material assertions made by Director as a basis for such claim was not made in good faith or was frivolous. In the event of any action instituted or a claim submitted to arbitration by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Director shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Director in defense of such action or claim (including with respect to Director’s counterclaims and cross-claims made in such action or arbitration), unless as a part of such action the court or the arbitrator(s) determines that each of Director’s material defenses to such action or claim was made in bad faith or was frivolous.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day of , 2004.
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Exhibit 10.07
ELECTRONIC ARTS INC. AND SUBSIDIARIES
DESCRIPTION OF REGISTRANT’S FISCAL YEAR 2005
EXECUTIVE OFFICER BONUS PLAN
Target annual bonuses are set for each executive officer based upon a percentage of base salary. Bonuses for executive officers reporting to the Chief Executive Officer are generally paid in two parts, one of which relates only to the Company’s earnings results, and one of which is discretionary and is measured against each individual’s contributions. Other executive officers have a third part which relates to a specific business unit’s or product’s financial performance. Bonuses are paid after the end of the fiscal year. If profits in any period are less than 85 percent of the Company’s plan, no bonus based on the Company’s performance may be paid for that period. If profits exceed plan during a period, the bonus rate is accelerated for the incremental profits above plan, with a maximum of 200 percent payout of the bonus target.
Exhibit 10.36
FIRST AMENDMENT OF LEASE
THIS FIRST AMENDMENT OF LEASE (the “Amendment”) dated as of the 23 day of February, 2004 by and between LOUISVILLE COMMERCE REALTY CORPORATION , a Delaware corporation (“Landlord”) and ELECTRONIC ARTS INC. , a Delaware corporation (“Tenant”).
RECITALS :
A. Landlord and Tenant entered into that certain Lease dated April 1, 1999 (the “Lease”) demising approximately 250,000 rentable square feet as shown on Exhibit A thereto (the “Premises”) in the building (the “Building”) situated at 5000 Commerce Crossings Drive, Louisville, Kentucky.
B. The parties desire to amend the Lease subject to the terms, covenants and conditions hereinafter set forth.
C. Capitalized terms used in this Amendment, unless otherwise defined in this Amendment, shall have the respective meanings ascribed to them in the Lease.
AGREEMENTS :
2. EXTENSION OF LEASE TERM . The Term of the Lease is hereby extended for a period of six (6) years from May 1, 2004 to April 30, 2010 (“Extended Period”), unless sooner terminated as provided in the Lease. Paragraph 4 is hereby deleted from the Lease of no further effect.
3.
MONTHLY BASE RENT
. The monthly Base Rent for the Premises
shall be as follows:
Period
Monthly Base Rent
Annualized Base Rent
$
28,750.00
$
345,000.00
$
57,291.67
$
687,500.00
Landlord has agreed to a reduction of monthly Base Rent from May 1, 2004 through October 31, 2004 from $57,291.67 to $28,750.00 as shown above; provided, however, that if at any time prior to May 1, 2006, Tenant fails to cure a default within the applicable cure period under this Lease, then this reduction shall immediately become null and void, and within ten (10) days after request by Landlord, Tenant shall pay to Landlord an amount equal to any and all monthly Base Rent previously reduced. The reduction of monthly Base Rent provided herein shall not relieve Tenant from the performance of Tenant’s other obligations under this Lease, including the obligation to pay on a timely basis all Rent and all other Additional Rent and other obligations under this Lease, which shall become due and payable during the Term.
4. TENANT IMPROVEMENTS . Tenant shall accept the Premises “as is” with no representations or allowances except: (a) Landlord acknowledges the existence of cracks in the floor of the Premises, which have been investigated by Terracon and a copy of such consultant’s written report dated June 6, 2003 has been provided to Tenant, all at Landlord’s sole cost and expense; (b) Landlord shall repair those existing cracks in the floor of the Premises which interfere with Tenant’s use and enjoyment (i.e., those affecting the smooth operation of a forklift; not hairline cracks), at Landlord’s sole cost and expense, within one hundred fifty (150) days from the execution hereof provided Tenant’s Operations Manager allows reasonable access to perform such work; (c) Landlord and Tenant’s Operations Manager shall conduct quarterly inspections of the floor and any such future cracks to the floor of the Premises not caused by Tenant shall be repaired in a commercially reasonable time period by Landlord at Landlord’s sole cost and expense, with any such future repairs to be coordinated and planned with Tenant’s Operations Manager; and (d) Landlord shall be responsible for: (i) performing the work on Exhibit A attached hereto and made a part hereof on or before one hundred twenty (120) days from the execution hereof assuming no delays occur in the permitting process; and (ii) providing to Tenant a Tenant Improvement Allowance of $225,000.00 to reimburse Tenant for refurbishment and renovation of the existing office space in the Premises and construction of an additional 5,000 square feet of office space within the Premises and such other capital improvements as may be approved in writing by Landlord (which shall not be unreasonably withheld, delayed or denied) provided, however, such Tenant Improvement Allowance must be used before January 1, 2006 and the parties must execute a Work Letter Agreement substantially in the form of Exhibit “B” attached hereto and made a part hereof. If the cost of the Work (as defined in the Work Letter Agreement) exceeds $225,000.00, Landlord shall, at Tenant’s request, provide an additional allowance of up to $50,000.00 provided Tenant enters into an amendment to the Lease increasing the Base Rent by a sum sufficient to repay this $50,000.00 (or so much thereof as Tenant requests) over the remaining Lease Term together with interest thereon at six percent (6%) per annum. Landlord shall use commercially reasonable efforts to minimize
disruptions in Tenant’s work flow and will make such efforts to schedule contractor work at times convenient to Tenant.
5. RENEWAL OPTION. Tenant shall have three (3) consecutive options, (each a “Renewal Option”) to renew the Term with respect to all (but not less than all) of the Premises demised under or pursuant to this Lease for additional terms (each a “Renewal Term”) of five (5) years each, commencing on the day immediately following the expiration date of the Term or Renewal Term then in effect, under the following terms and conditions and subject to there being no material adverse change in Tenant’s financial condition:
(a) Tenant gives Landlord written notice of its intent to exercise the Renewal Option (“Notice of Intent”) no earlier than the date which is three hundred sixty five (365) days prior to the expiration date of the Term and no later than the date which is two hundred seventy (270) days prior to the expiration date of the Term or applicable Renewal Term, as the case may be.
(b) Tenant is not in breach or default under this Lease either on the date Tenant gives its Notice of Intent or exercises the Renewal Option or at any time through and including the proposed commencement date of the Renewal Term.
(c) If Tenant timely and properly gives its Notice of Intent in accordance with the provisions hereof:
(i) The Base Rent payable for the first Renewal Term shall be based on ninety-five percent (95%) of the then prevailing market rent (the “Prevailing Market Rent”) for similar institutional quality bulk warehouse space with a minimum 28’ clear height located within a radius of ten (10) miles of the Premises (the “Relevant Market”). The Base Rent for the second and third Renewal Terms shall be equal to the Prevailing Market Rent in the Relevant Market. In no event shall the rental rate for any Renewal Term be less than the adjusted rental rate payable under this Lease on the expiration date of the Term then in effect.
(ii) “Prevailing Market Rent” is further defined to mean the annual net rental rate per square foot, in the Relevant Market, for leases comparable to this Lease for space comparable to the Premises that a willing landlord would accept and a willing tenant would pay under a lease then being entered into, taking into account such factors as are then being offered to third party tenants such a remodeling credits, tenant improvement allowances, quality, age and location of the applicable building, rental concessions, relative operating expenses, relative services provided, size of tenant, the base year for pass-through expenses, the value of the tenant improvements already in place in the Premises at the commencement of the applicable Renewal Period, lease commissions saved or incurred, and moving allowances.
(iii) Within thirty (30) days after receipt by Landlord of Tenant’s Notice of Intent to exercise a Renewal Option, Landlord shall advise Tenant in writing of its determination of the Prevailing Market Rent on a rentable square foot basis as of the beginning of the applicable Renewal Term. Within thirty (30) days of receipt of Landlord’s notice, Tenant shall advise Landlord, in writing, whether or not Tenant accepts or rejects the Prevailing Market Rate proposed by Landlord. Each party hereby agrees to make its determination of the Prevailing Market Rent in good faith and in a commercially reasonable manner. Tenant’s failure to accept or reject in writing the Prevailing Market Rent proposed by Landlord within thirty (30) days of receipt of Landlord’s notice shall be deemed Tenant’s rejection of Landlord’s estimate of the Prevailing Market Rent. Tenant shall have the right to negotiate with Landlord the Prevailing Market Rent proposed by Landlord during such thirty (30) day period. Each party shall negotiate with the other in a good faith, commercially reasonable manner and hereby agrees to meet, upon the written request of the other at the Premises or another location mutually agreed upon by Landlord and Tenant during such thirty (30) day period.
(iv) If Tenant rejects, or is deemed to have rejected, Landlord’s estimate of the Prevailing Market Rent within thirty (30) days after receipt of Landlord’s notice, then within ten (10) business days after Tenant’s rejection (the “Initial Appointment Period”) Landlord and Tenant shall each appoint and employ, at its respective cost, a commercial real estate broker (who shall be licensed by the State of Kentucky and have at least ten (10) years of full-time commercial real estate brokerage experience in the Louisville, Kentucky metropolitan area) or an appraiser having an MAI
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designation for at least five (5) years to determine the Prevailing Market Rent in the Relevant Market. If the two (2) persons so appointed are unable to agree on the Prevailing Market Rent in the Relevant Market within ten (10) business days after the last was appointed (the “Initial Determination Period”), they shall meet promptly and attempt to agree upon and designate a third person meeting the same qualifications set forth above. If the two persons so appointed are unable to agree on the third person within five (5) business days after the expiration of the Initial Determination Period, either Landlord or Tenant, after giving five (5) days written notice to the other, may apply to the Presiding Judge of the Circuit Court of Jefferson County, Kentucky, for the selection of a third person meeting the qualifications stated above. Landlord and Tenant shall each bear one-half of the cost of the appointment of the third person and of that person’s fee. Within ten (10) business days after the selection of the third person, the three shall attempt to agree upon the Prevailing Market Rent for the Relevant Market. If the three are unable to agree upon the Prevailing Market Rent for the Relevant Market within ten (10) business days after selection of the third person, then the third person shall make his or her determination within such time by selecting either the Prevailing Market Rent designated by the person appointed by Landlord or the Prevailing Market Rent designated by the person appointed by Tenant ( i.e. , no averaging). After the Prevailing Market Rent for the Relevant Market has been determined (the “Final Determination”), the Landlord and Tenant shall be immediately notified in writing.
(v) If either Landlord or Tenant fails or refuses to appoint its representative within the Initial Appointment Period, and thereafter fails or refuses to appoint its representative within five (5) days of receiving written notice from the other party of such failure or refusal (which notice shall be given at or after the expiration of the Initial Appointment Period), then the person appointed by the other party as provided herein shall be the sole person for purposes of determining the Prevailing Market Rent for the Relevant Market, and the determination of such person shall be binding on the parties to the same degree as if three had been appointed pursuant to subsection (c)(iv) above.
(vi) Tenant shall, if at all, exercise the Renewal Option by delivering written notice of such election to Landlord on the earlier to occur of (1) one hundred and fifty (150) days prior to the expiration of the then current Term of this Lease or the then current Renewal Term of this Lease, as the case may be, or (2) on or before thirty (30) days after receipt by Tenant of the Final Determination. If Tenant fails to timely exercise any applicable Renewal Option, then the applicable Renewal Option and any subsequent Renewal Options, if any, shall terminate and be of no further force and effect.
(vii) Tenant shall have no further options to renew the Term of this Lease beyond the expiration date of the third Renewal Term.
(viii) Landlord will not be required to give any refurbishing allowance, leasehold improvement allowance or other economic concession in connection with the exercise of any option.
(ix) Except as otherwise provided herein, all of the terms and provisions of this Lease shall remain the same and in full force and effect during the Renewal Term.
| (d) | If Tenant timely and properly exercises a Renewal Option, Landlord and Tenant shall execute and deliver an amendment to this Lease reflecting the lease of the Premises by Landlord to Tenant for the Renewal Term on the terms provided above, which amendment shall be executed and delivered prior to the commencement date of the Renewal Term. | |||
| (e) | Each Renewal Option shall automatically terminate and become null and void and of no force or effect upon the earlier to occur of (1) the expiration or termination of this Lease, (2) the lawful termination of Tenant’s right to possession of the Premises, (3) Tenant’s failure to occupy the Premises and conduct operations therein, (4) the failure of Tenant to timely or properly exercise the Renewal Option, (5) the occurrence of an Event of Default by Tenant under the Lease, or (6) Tenant’s exercise of its Cancellation Option. | |||
6. CANCELLATION OPTION . Tenant shall have the option (the “Cancellation Option”) to terminate this Lease effective April 30, 2007 (the “Termination Date”) upon the following terms and conditions:
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A. Landlord receives written notice from Tenant on or before January 1, 2007 of its election to cancel the Lease;
B. Tenant is not in default under this Lease either on the date Tenant exercises the Cancellation Option or at any time prior to the Termination Date; and
C. Tenant pays to Landlord concurrently with its exercise of the Cancellation Option a cancellation fee in an amount equal to the unamortized actual costs of the Lease including the work described on Exhibit A , all tenant improvement allowances, and all brokerage commissions for the Premises calculated with a six percent (6%) interest rate.
In the event Tenant timely and properly exercises the Cancellation Option, the Term shall terminate effective as of the Termination Date. Rent shall be paid through and apportioned as of the Termination Date and neither Landlord nor Tenant shall have any rights, estates, liabilities or obligations accruing under this Lease after the Termination Date, except such rights and liabilities which, by the terms of this Lease, are obligations either of Landlord or Tenant which can survive the expiration of the Lease. The Cancellation Option shall automatically terminate and become null and void upon:
(w) the failure of Tenant to timely or properly exercise the Cancellation Option;
(x) the assignment or sublease of the Premises or any part thereof by Tenant to any non-affiliated entity; or
(y) the lawful termination of Tenant’s right to possession of the Premises.
7. EXPANSION; RIGHT OF FIRST REFUSAL FOR OTHER SPACE. Subject to Landlord’s ability in a commercially reasonable manner to demise the portion of the expansion space which becomes available, the rights of existing tenants whose leases pre-date this Amendment, credit approval by Landlord and provided Tenant is not in default under this Lease at the time the expansion space becomes available, or at any time through and including execution of a lease amendment by the Landlord for the subject space, Landlord shall use commercially reasonable efforts to accommodate Tenant’s growth needs within the Building.
In addition, Landlord shall, subject to the rights of existing tenants whose leases predate this Amendment, give Tenant a right of first refusal in both this Building and (for so long as Landlord owns it) the building located at 11400 Interchange Drive, Louisville, Kentucky, subject to the following conditions. Landlord shall provide Tenant with written notice that Landlord has received from a third party a serious expression of interest on terms which Landlord may accept which notice shall specify the applicable business terms relating to the space. Within ten (10) days of such notification, Tenant shall notify Landlord in writing sent with postage prepaid thereon that it elects to exercise its right of first refusal for the space. If Tenant does not so notify Landlord, Tenant will be deemed to have forever waived its right of first refusal respecting that space unless: (ii) Landlord fails to enter into a lease for the expansion space with the third party expressing a serious interest in the space within ninety (90) days following the date of Landlord’s written notice to Tenant or (ii) if the applicable business terms of such proposed lease of space become more favorable than that specified in Landlord’s written notice to Tenant in either of which cases Tenant’s right of first refusal hereunder shall be reinstated and in full force and effect.
The rights of Tenant under this paragraph are personal and may not be assigned to or exercised by any other party. In the event Tenant exercises the Right of First Refusal, Landlord and Tenant shall promptly execute and deliver a new lease for such space on substantially the same lease form as this Lease with only such modifications as are necessary to reflect those business terms presented to Tenant. If Tenant fails to execute and deliver such lease consistent with the foregoing within fifteen (15) days after receipt by Tenant of the subject lease, then Tenant’s previous exercise of its right of first refusal to lease the offered space shall be deemed null and void and Landlord shall thereafter have the right to let any and all of the space to any third party tenant(s).
This Right of First Refusal shall automatically terminate upon the earlier to occur of (i) the expiration or termination of this Lease, (ii) the lawful termination of Tenant’s right to possession of the Premises, (iii) Tenant’s failure to occupy the Premises and conduct operations therein, (iv) the occurrence of an Event of Default under the Lease or (v) the Tenant’s exercise of its Cancellation Option.
8. MISCELLANEOUS REVISIONS TO LEASE . The Lease is hereby modified as follows:
| (a) | Paragraph 11 is hereby amended by adding the following: “The amount of the Additional Rent payable by Tenant under Paragraph 11 of the Lease, due to Tenant’s percentage share of Operating Costs, shall be limited. Property taxes, assessments from Commerce Crossings Owners Association, insurance expenses, snow removal, contract price increases due to governmentally mandated items (such as prevailing |
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| wage agreements), and utility expenses shall not be subject to such limitation as such costs are not controllable by Landlord. The remaining Operating Costs (“Controllable Costs”) used to calculate Tenant’s obligation shall not be increased by more than three percent (3%) cumulative per calendar year on a compounded basis. For example, and not by way of limitation, if for any calendar year, Landlord’s Controllable Costs are one hundred five percent (105%) of the Controllable Costs for the immediately preceding calendar year (i.e., a five percent (5%) increase), Tenant shall be responsible for its share of those Controllable Costs only up to one hundred three percent (103%) of Landlord’s Controllable Costs for the previous calendar year; provided, however, that Tenant shall be responsible for its share of the two percent (2%) difference in subsequent calendar years to the extent Landlord’s Controllable Costs for a particular calendar year are less than one hundred three percent (103%) of the Controllable Costs for the immediately preceding calendar year.” | ||||
| (b) | Paragraph 16 is hereby amended by adding the following: “Tenant shall at its expense have the right throughout the Term to install and change its prototype signage including colors, fonts, etc. on the exterior of the Premises in accordance with Tenant’s then existing company standards subject to compliance with all applicable governmental regulations and the rules of the Commerce Crossings Owners Association.” | |||
9. NO BROKERS . Each party represents and warrants to the other that it has not dealt with any real estate broker, salesman or finder in connection with this Amendment and no other person initiated or participated in the negotiation of this Amendment or is entitled to any commission or other payment in connection herewith except Harry K. Moore & Son, Inc., Fortis Group Commercial Real Estate and The Staubach Company for whom Landlord shall be solely responsible. Tenant agrees to indemnify, defend and hold Landlord and Landlord’s property manager, harmless from and against any loss, cost, liability or expense, including reasonable attorney’s fees, suffered or incurred as a result of claims, liens, demands or actions for brokerage commissions, finder’s fees or similar fees from any other third party asserting to have acted for or on behalf of the Tenant in connection with this Amendment.
10. RATIFICATION AND BINDING EFFECT . Except as amended by the terms of this Amendment, all of the terms, covenants and conditions of the Lease, and the rights and obligations of the Landlord and Tenant thereunder shall remain in full force and effect and hereby are ratified and affirmed. This Amendment of shall be binding upon and inure to the benefit of Landlord, Tenant and their respective successors and permitted assigns.
11. EXHIBITS . All exhibits attached hereto are incorporated herein by reference and made a part hereof.
12. SUBMISSION. Submission of this Amendment by Landlord to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this Amendment unless and until this amendment is fully executed by the parties and delivered by Landlord to Tenant.
IN WITNESS WHEREOF
, the parties hereto have executed this First Amendment
of Lease as of the date first above written.
LANDLORD:
TENANT:
LOUISVILLE COMMERCE REALTY
CORPORATION,
a Delaware corporation
ELECTRONIC ARTS INC.,
a Delaware
corporation
By:
/s/ Tara A. Andrews
By:
/s/ Ken Kappner
Name:
Tara A. Andrews
Name:
Ken Kappner
Its:
Vice President
Its:
VP Operations
EXHIBIT A
-
Landlord’s Work
EXHIBIT B
-
Work Letter Agreement
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EXHIBIT “A”
IMPROVEMENTS TO BE PROVIDED BY LANDLORD
Site Finishes :
| • | Parking for an additional fifty (50) spaces |
Loading :
| • | Install three (3) 9’ x 10’ loading docks with manual doors | |||
| • | Install three (3) docks equipped with 6’ x 8’ mechanical levelers (minimum of 30,000 pound capacity), seals, bumpers, automatic dock-locks with “go/no go” lights, safety/ventilation chain-link gates and interior dock spotlights | |||
| • | Equip fifteen (15) existing doors with safety/ventilation chain-link gates. | |||
| • | Install secure area fencing around outbound doors and trailer storage area on the north side of the Building if such is approved by Commerce Crossings Owners Association and all governmental authorities. | |||
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EXHIBIT “B”
WORK LETTER AGREEMENT
[Tenant Performs Work]
This Work Letter Agreement (“Work Letter”) is executed simultaneously with that certain First Amendment of Lease (the “Lease”) between ELECTRONIC ARTS INC., a Delaware corporation, as “Tenant”, and LOUISVILLE COMMERCE REALTY CORPORATION, a Delaware corporation, as “Landlord”, relating to demised premises (“Premises”) in the building at 5000 Commerce Crossings Drive, Louisville, Kentucky (the “Building”), which Premises are more fully identified in the Lease. Capitalized terms used herein, unless otherwise defined in this Work Letter, shall have the respective meanings ascribed to them in the Lease.
For and in consideration of the agreement to lease the Premises and the mutual covenants contained herein and in the Lease, Landlord and Tenant hereby agree as follows:
1. Work. Tenant, at its sole cost and expense, shall perform, or cause to be performed, the work (the “Work”) in the Premises provided for in the Approved Plans (as defined in Paragraph 2 hereof). Subject to Tenant’s satisfaction of the conditions specified in this Work Letter Agreement, Tenant shall be entitled to Landlord’s Contribution (as defined in Paragraph 8[b] below).
2. Pre-Construction Activities.
(a) Prior to beginning any Work, Tenant shall submit the following information and items to Landlord for Landlord’s review and approval:
(i) itemized statement of estimated construction cost, including fees for permits and architectural and engineering fees.
(ii) The names and addresses of Tenant’s contractors to be engaged by Tenant for the Work (individually, a “Tenant Contractor,” and collectively, “Tenant’s Contractors”). Landlord has the right to approve or disapprove all or any one or more of Tenant’s Contractors. Landlord may, at its election and within 15 days from the date hereof, designate a list of approved contractors for performance of those portions of work involving electrical, mechanical, plumbing, heating, air conditioning or life safety systems, from which Tenant must select its contractors for such designated portions of work.
(iii) Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant’s Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord.
(iv) The Plans (as hereinafter defined) for the Work, which Plans shall be subject to Landlord’s approval in accordance with Paragraph 2(b) below.
Tenant will update such information and items by notice to Landlord of any changes.
(b) As used herein the term “Approved Plans” shall mean the Plans (as hereinafter defined), as and when approved in writing by Landlord. As used herein, the term “Plans” shall mean the full and detailed architectural and engineering plans and specifications covering the Work (including, without limitation, architectural, mechanical and electrical working drawings for the Work). The Plans shall be subject to Landlord’s approval and the approval of all local governmental authorities requiring approval of the Work and/or the Approved Plans. Landlord shall give its approval or disapproval (giving general reasons in case of disapproval) of the Plans within thirty (30) days after their delivery to Landlord. Landlord agrees not to unreasonably withhold its approval of said Plans; provided, however, that Landlord shall not be deemed to have acted unreasonably if it withholds its approval of the Plans because, in Landlord’s reasonable opinion: the Work as shown in the Plans is likely to adversely affect Building systems, the structure of the Building or the safety of the Building and/or its occupants; the Work as shown on the Plans might impair Landlord’s ability to furnish services to Tenant or other tenants; the Work would increase the cost of operating the Building; the Work would violate any governmental laws, rules or ordinances (or interpretations thereof); the Work contains or uses hazardous or toxic materials or substances; the Work would adversely affect the appearance of the Building; the Work might adversely affect another tenant’s premises; or the Work is prohibited by any mortgage or trust deed encumbering the Building. The foregoing reasons, however, shall not be exclusive of the reasons for which Landlord may withhold consent, whether or not such other reasons are similar or dissimilar to the foregoing. If Landlord notifies Tenant that changes are required to the final Plans submitted by Tenant, Tenant shall, within thirty (30) days thereafter, submit to Landlord, for its approval, the Plans amended in accordance with the changes so required. The Plans shall also be revised, and the Work shall be changed, all at Tenant’s cost and expense, which shall be included as part of Landlord’s Contribution under Paragraph 8(a), to incorporate any work required in the Premises by any local governmental field inspector. Landlord’s approval of the Plans shall in no way be deemed to be (i) an acceptance or approval of any element therein contained which is in violation of any applicable laws, ordinances, regulations or other governmental requirements, or (ii) an assurance that work done pursuant to the
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Approved Plans will comply with all applicable laws (or with the interpretations thereof) or satisfy Tenant’s objectives and needs.
(c) No Work shall be undertaken or commenced by Tenant in the Premises until (i) Tenant has delivered, and Landlord has approved, all items set forth in Paragraph 2(a) above, (ii) all necessary building permits have been applied for and obtained by Tenant, and (iii) to the extent the cost of the Work exceeds $225,000, Tenant has deposited immediately available funds equal to such excess cost with Landlord.
3. Delays. In the event Tenant fails to deliver or deliver in sufficient and accurate detail the information required under Paragraph 2 above on or before the respective dates specified in said Paragraph 2, or in the event Tenant, for any reason, fails to complete the Work on or before December 31, 2005, Tenant shall be responsible for Rent and all other obligations set forth in the Lease regardless of the degree of completion of the Work on such date, and no such delay in completion of the Work shall relieve Tenant of any of its obligations under the Lease.
4. Charges and Fees. Tenant shall pay Landlord a supervisory fee in an amount equal to three percent (3%) of the direct cost of the materials and labor for the Work (and all change orders with respect thereto) to defray Landlord’s administrative and overhead expenses incurred to review the Plans and coordinate with Tenant’s on-site project manager the staging and progress of the Work. This fee shall be included as part of Landlord’s Contribution under Paragraph 8(a) hereof.
5. Change Orders. All changes to the Approved Plans requested by Tenant must be approved by Landlord in advance of the implementation of such changes as part of the Work. All delays caused by Tenant-initiated change orders, including, without limitation, any stoppage of work during the change order review process, are solely the responsibility of Tenant and shall cause no delay in the commencement of the Lease or the Rent and other obligations therein set forth. All increases in the cost of the Work beyond $225,000 (together with such additional sum as may be deposited by Tenant pursuant to Paragraph 2(c) above) resulting from such change orders shall be borne by Tenant.
6. Standards Of Design And Construction And Conditions Of Tenant’s Performance. All work done in or upon the Premises by Tenant shall be done according to the standards set forth in this Paragraph 6, except as the same may be modified in the Approved Plans approved by or on behalf of Landlord and Tenant.
(a) Tenant’s Approved Plans and all design and construction of the Work shall comply with all applicable statutes, ordinances, regulations, laws, codes and industry standards, including, but not limited to, requirements of Landlord’s fire insurance underwriters.
(b) Tenant shall, at its own cost and expense, which shall be included as part of Landlord’s Contribution under Paragraph 8(a), obtain all required building permits and occupancy permits. Tenant’s failure to obtain such permits shall not cause a delay in the obligation to pay Rent or any other obligations set forth in the Lease.
(c) Tenant’s Contractors shall be licensed contractors, capable of performing quality workmanship and working in harmony with Landlord’s contractors and subcontractors and with other contractors and subcontractors in the Building. All work shall be coordinated with any other construction or other work in the Building in order not to adversely affect construction work being performed by or for Landlord or its tenants.
(d) If the Work is not completed in accordance with the Approved Plans and the terms of this Work Letter Agreement, then Landlord shall have the right, but not the obligation, to perform, on behalf of and for the account of Tenant, any work which pertains to patching of the Work. If the cost to Landlord would cause Landlord to incur expenditures in excess of Landlord’s Contribution set forth in Paragraph 8(a), then Tenant shall promptly reimburse Landlord for such excess costs.
(e) Tenant shall use only new, first-class materials in the Work, except where explicitly shown in the Approved Plans. All Work shall be done in a good and workmanlike manner. Tenant shall obtain contractors’ warranties of at least one (1) year duration from the completion of the Work against defects in workmanship and materials on all work performed and equipment installed in the Premises as part of the Work.
(f) Tenant and Tenant’s Contractors shall make all efforts and take all steps appropriate to assure that all construction activities undertaken comport with the reasonable expectations of all tenants and other occupants of a fully-occupied (or substantially fully occupied) institutional grade bulk warehouse building and do not unreasonably interfere with the operation of the Building or with other tenants and occupants of the Building. Tenant and Tenant’s Contractors shall take all precautionary steps to minimize dust, noise and construction traffic, and to protect their facilities and the facilities of others affected by the Work and to properly police same. Construction equipment and materials are to be kept within the Premises and delivery and loading of equipment and materials shall be done at such locations and at such time as Landlord shall direct so as not to burden the construction or operation of the Building.
(g) Landlord shall have the right to order Tenant or any of Tenant’s Contractors who violate the requirements imposed on Tenant or Tenant’s Contractors in performing work to cease
- 8 -
work and remove its equipment and employees from the Building. No such action by Landlord shall delay the obligation to pay Rent or any other obligations therein set forth.
(h) All use of common areas is subject to scheduling by Landlord and the rules and regulations of the Building. Tenant shall arrange and pay for removal of construction debris and shall not place debris in the Building’s waste containers.
(i) Tenant shall permit access to the Premises, and the Work shall be subject to inspection, by Landlord and Landlord’s architects, engineers, contractors and other representatives, at all times during the period in which the Work is being constructed and installed and following completion of the Work.
(j) Tenant shall proceed with its work expeditiously, continuously and efficiently, and shall use its best efforts to complete the same on or before December 31, 2005. Tenant shall notify Landlord upon completion of the Work and shall furnish Landlord and Landlord’s title insurance company with such further documentation as may be necessary under Paragraphs 8 and 9 below.
(k) Tenant shall have no authority to deviate from the Approved Plans in performance of the Work, except as authorized by Landlord and its designated representative in writing. Tenant shall furnish to Landlord “as-built” drawings of the Work within thirty (30) days after completion of the Work.
(l) Tenant shall impose on and enforce all applicable terms of this Work Letter Agreement against Tenant’s architect and Tenant’s Contractors.
7. Insurance And Indemnification.
(a) In addition to any insurance which may be required under the Lease, Tenant shall secure, pay for and maintain or cause Tenant’s Contractors to secure, pay for and maintain during the continuance of construction and fixturing work within the Building or Premises, insurance in the following minimum coverages and the following minimum limits of liability:
(i) Worker’s Compensation and Employer’s Liability Insurance with limits of not less than $500,000.00, or such higher amounts as may be required from time to time by any Employee Benefit Acts or other statutes applicable where the work is to be performed, and in any event sufficient to protect Tenant’s Contractors from liability under the aforementioned acts.
(ii) Comprehensive General Liability Insurance (including Contractors’ Protective Liability) in a combined single limit amount of not less than $3,000,000. Such insurance shall provide for explosion and collapse, completed operations coverage and broad form blanket contractual liability coverage and shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant’s Contractors or by anyone directly or indirectly employed by any of them.
(iii) “All-risk” builder’s risk insurance upon the entire Work to the full insurable value thereof. This insurance shall include the interests of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the Work and shall insure against the perils of fire and extended coverage and shall include “all-risk” builder’s risk insurance for physical loss or damage including, without duplication of coverage, theft vandalism and malicious mischief. If portions of the Work are stored off the site of the Building or in transit to said site are not covered under said “all-risk” builder’s risk insurance, then Tenant shall effect and maintain similar property insurance on such portions of the Work. Any loss insured under said “all-risk” builder’s risk insurance is to be adjusted with Landlord and Tenant and made payable to Landlord, as trustee for the insureds, as their interests may appear.
All policies (except the worker’s compensation policy) shall be endorsed to include as additional insured parties the parties listed on, or required by, the Lease, Landlord’s property manager, contractors, Landlord’s architects, and their respective owners, beneficiaries, partners, directors, officers, employees and agents, and such additional persons as Landlord may designate. The waiver of subrogation provisions contained in the Lease shall apply to all insurance policies (except the worker’s compensation policy) to be obtained by Tenant pursuant to this paragraph. The insurance policy endorsements shall also provide that all additional insured parties shall be given thirty (30) days’ prior written notice of any reduction, cancellation or non-renewal of coverage (except that ten (10) days’ notice shall be sufficient in the case of cancellation for non-payment of premium) and shall provide that the insurance coverage afforded to the additional insured parties thereunder shall be primary to any insurance carried independently by said additional insured parties. Additionally, where applicable, each policy shall contain a cross-liability and severability of interest clause.
(b) Without limitation of the indemnification provisions contained in the Lease, to the fullest extent permitted by law Tenant agrees to indemnify, protect, defend and hold harmless
- 9 -
Landlord, the parties listed, or required by, the Lease to be named as additional insureds, Landlord’s property manager, contractors, Landlord’s architects, and their respective beneficiaries, partners, directors, officers, employees and agents, from and against all claims, liabilities, losses, damages and expenses of whatever nature arising out of or in connection with the Work or the entry of Tenant or Tenant’s Contractors into the Building and the Premises, including, without limitation, mechanic’s liens, the cost of any repairs to the Premises or Building necessitated by activities of Tenant or Tenant’s Contractors, bodily injury to persons (including, to the maximum extent provided by law, claims arising under the Kentucky Structural Work Act) or damage to the property of Tenant, its employees, agents, invitees, licenses or others. It is understood and agreed that the foregoing indemnity shall be in addition to the insurance requirements set forth above and shall not be in discharge of or in substitution for same or any other indemnity or insurance provision of the Lease.
8. Landlord’s Contribution.
Landlord agrees to disburse Landlord’s Contribution (and any excess funds as may be deposited by Tenant) for payment to Tenant’s Contractors and payment of all other costs associated with the Work as the Work progresses as follows:
(a) Landlord shall make a dollar contribution in the amount of $225,000.00 (“Landlord’s Contribution”) for application to the extent thereof to the cost of the Work. If the cost of the Work exceeds Landlord’s Contribution, Tenant shall have sole responsibility for the payment of such excess cost (subject to Paragraph 4 of the Lease) to Landlord prior to commencing any Work. Tenant shall, from time to time, deposit funds in amounts sufficient to pay the costs of the Work to the extent such costs exceed $225,000 (plus any previously deposited funds). If the cost of the Work is less than Landlord’s Contribution, Tenant shall not be entitled to any payment or credit for such excess amount. Notwithstanding anything herein to the contrary, Landlord may deduct from Landlord’s Contribution any amounts due Landlord or its architects or engineers under this Work Letter before disbursing any other portion of Landlord’s Contribution.
(b) As the Work progresses, Tenant shall submit (no more frequently than once a month) a request for disbursement accompanied by such contractor’s affidavits, tenant (owner) statements, partial and final waivers of lien, architect’s certificates and any additional documentation which may be reasonably requested by Landlord. Such submittal shall constitute Tenant’s representation that the Work performed to date is in accordance with the Approved Plans and has been done to Tenant’s satisfaction. Landlord reserves the right to inspect the status of such Work so as to ensure that funds on hand (including Landlord’s Contribution) are sufficient to pay for the Work remaining to be done. If any mechanic’s lien is filed in connection with the Work and such lien is not released by Tenant through bonding, payment or otherwise within 30 days following notice to Tenant of the filing thereof, Landlord may use and disburse the funds to pay for the Work or remove the lien without Tenant’s consent.
(c) Upon completion of the Work, Tenant shall furnish Landlord with full and final waivers of liens and contractors’ affidavits and statements, in such form as may be reasonably required by Landlord and Landlord’s title insurance company, if any, from all parties performing labor or supplying materials or services in connection with the Work showing that all of said parties have been compensated in full and waiving all liens in connection with the Premises and Building.
9. Miscellaneous.
(a) Time is of the essence of this Work Letter Agreement.
(b) Any person signing this Work Letter Agreement on behalf of Landlord and Tenant warrants and represents he has authority to sign and deliver this Work Letter Agreement and bind the party on behalf of which he has signed.
(c) If Tenant fails to make any payment relating to the Work as required hereunder, Landlord, at its option, may complete the Work pursuant to the Approved Plans and continue to hold Tenant liable for the costs thereof and all other costs due to Landlord in excess of Landlord’s Contribution set forth in Paragraph 8(a). Tenant’s failure to pay any amounts owed by Tenant hereunder when due or Tenant’s failure to perform its obligations hereunder shall also constitute a default under the Lease and Landlord shall have all the rights and remedies granted to Landlord under the Lease for nonpayment of any amounts owed thereunder or failure by Tenant to perform its obligations thereunder.
(d) Notices under this Work Letter shall be given in the same manner as under the Lease.
(e) The headings set forth herein are for convenience only.
- 10 -
(f) This Work Letter sets forth the entire agreement of Tenant and Landlord regarding the Work. This Work Letter may only be amended if in writing, duly executed by both Landlord and Tenant.
(g) All amounts due from Tenant hereunder shall be deemed to be Rent due under the Lease.
(h) Whenever any consent or approval is required hereunder, such consent or approval shall not be unreasonably withheld, delayed or denied.
10. On-Site Project Manager. Tenant hereby designates John Hefty (or such other person as Tenant may later specify in writing to Landlord) as an on-site project manager, who will be charged with the task of performing daily supervision of the Work. Such on-site manager shall be familiar with all rules and regulations and procedures of the Building and all personnel of the Building engaged directly or indirectly in the management, operation and construction of the Building. Such on-site project manager shall be accountable and responsible to Tenant and to Landlord and, where necessary, shall serve as a liaison between Landlord and Tenant with respect to the Work. The entire cost and expense of the on-site project manager shall be borne and paid for by Tenant (subject to Tenant’s right to use all or any part of Landlord’s Contribution to reimburse Tenant for the same.)
11. Exculpation of Landlord and Property Manager. Notwithstanding anything to the contrary contained in this Work Letter Agreement, it is expressly understood and agreed by and between the parties hereto that:
(a) The recourse of Tenant or its successors or assigns against Landlord with respect to the alleged breach by or on the part of Landlord of any representation, warranty, covenant, undertaking or agreement contained in this Work Letter Agreement (collectively, “Landlord’s Work Letter Undertakings”) shall extend only to Landlord’s interest in the real estate of which the Premises demised under the Lease are a part (hereinafter, “Landlord’s Real Estate”) and not to any other assets of Landlord or its owners; and
(b) Except to the extent of Landlord’s interest in Landlord’s Real Estate, no personal liability or personal responsibility of any sort with respect to any of Landlord’s Work Letter Undertakings or any alleged breach thereof is assumed by, or shall at any time be asserted or enforceable against, Landlord or its property manager, or against any of their respective owners, directors, officers, employees, agents, partners, beneficiaries, trustees or representatives.
IN WITNESS WHEREOF,
this Work Letter Agreement is executed as of this
23 day of February, 2004.
LANDLORD:
TENANT:
LOUISVILLE COMMERCE REALTY
CORPORATION,
a Delaware corporation
ELECTRONIC ARTS INC.,
a Delaware
corporation
/s/ Tara A. Andrews
By:
/s/ Ken Kappner
Tara A. Andrews
Name:
Ken Kappner
Vice President
Its:
VP Operations
- 11 -
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.01
Name in Corporate Articles
Doing Business As
Jurisdiction of Incorporation
Electronic Arts Pty. Ltd.
Commonwealth of
Australia
Electronic Arts (Canada), Inc.
British Columbia,
Canada
Electronic Arts, Limited
United Kingdom
Electronic Arts GmbH
Germany
Electronic Arts K.K.
Japan
Crocodile Productions
Delaware
Electronic Arts Puerto Rico, Inc.
Delaware
Electronic Arts International
California
Corporation
Electronic Arts Software S.L.
Spain
Bullfrog Productions Ltd.
United Kingdom
Electronic Arts Productions Ltd.
United Kingdom
Electronic Arts Nordic Aktienbolag
Sweden
Electronic Arts Asia Pacific PTE.,
Singapore
LTD
Electronic Arts Seattle Inc.
Washington
EA Software South Africa Pty. Ltd.
South Africa
(Formerly Vision Software (Pty)
Limited)
Electronic Arts V.I., Inc.
Virgin Islands
(U.S.)
Linear Arts Inc.
Delaware
Electronic Arts UK Holding Co.
Delaware
EA Islands Ltd.
British Virgin
Islands
EA Brazil
Brazil
Electronic Arts BV
The Netherlands
Electronic Arts Portugal
Portugal
Electronic Arts C.V.
Barbados
Electronic Arts Project Inc.
Delaware
Maxis K.K.
Japan
Electronic Arts Redwood Inc.
Delaware
Electronic Arts Austria
Austria
Electronic Arts Japan K.K. (Formerly
Japan
Electronic Arts Square K.K.)
Electronic Arts Switzerland
Switzerland
Tiburon
Florida
Westwood
Nevada
Kesmai Aries Ltd
Virginia
Kesmai Studios Inc.
Virginia
Gamestorm
Virginia
Pogo.com
Delaware
Parnassus Data Inc.
Delaware
EA.com Inc.
Delaware
ABC Software GmbH
Switzerland
Electronic Arts World LLC
Delaware
Electronic Arts Studio (UK) Limited
United Kingdom
Electronic Arts Publishing SARL
France
(Dissolved on March 27, 2004)
Electronic Arts Marketing EURL
(Dissolved on March 27, 2004)
France
Electronic Arts Studio EURL
France
(Dissolved on March 27, 2004)
Electronic Arts Distribution EURL
(Dissolved on March 27, 2004)
France
Black Box Holdings Ltd. (Dissolved
British Columbia
on June 30, 2003)
Black Box Games Ltd. (Dissolved on
British Columbia
June 30, 2003)
NuFX, Inc.
Illinois
EA Montreal
Quebec
EA Czech Republic
Czech Republic
EA Hungary
Hungary
EA Poland
Poland
EA Italy
Italy
Studio 33 (UK) Limited
United Kingdom
Electronic Arts Denmark Aps
Denmark
Electronic Arts Finland OY
Finland
Electronic Arts Europe Ltd
United Kingdom
Electronic Arts Norway A/S
Norway
Electronic Arts Transfer Company
Delaware
Electronic Arts Subsidiary
Delaware
Corporation
Electronic Arts Sales and
Delaware
Distribution Inc.
Electronic Arts Music Publishing
Delaware
Inc.
Electronic Arts New Zealand
New Zealand
Electronic Arts Korea Yuhan Hoesa
Korea
Electronic Arts Hong Kong Ltd.
Hong Kong
Exhibit 23.01
Consent and Report of
KPMG LLP, Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
The audits referred to in our report dated April 28, 2004, include the
related financial statement schedule as of March 31, 2004, and for each
of the years in the three-year period ended March 31, 2004, included in
Electronic Arts Inc.’s annual report on Form 10-K. This financial
statement schedule is the responsibility of the Company’s management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We consent to the incorporation by reference in the registration
statements on Forms S-8 (Nos. 33-66836, 33-55212, 33-53302, 33-41955,
33-82166, 33-61781, 33-61783, 333-09683, 333-09893, 333-32239,
333-32771, 333-46937, 333-60513, 333-60517, 333-84215, 333-39430,
333-39432, 333-44222, 333-60256, 333-67430, 333-82888, 333-99525 and
333-107710), and the registration statement on Form S-3 (No.
333-102797), of Electronic Arts Inc. of our reports dated April 28,
2004 relating to the consolidated balance sheets of Electronic Arts
Inc. and subsidiaries as of March 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each of the years in
the three-year period ended March 31, 2004, and the related financial
statement schedule, which reports appear in the March 31, 2004, annual
report on Form 10-K of Electronic Arts Inc. Our report refers to a
change in the method of accounting for goodwill.
San Francisco, California
June 3, 2004
Electronic Arts Inc.:
ELECTRONIC ARTS INC.
Certification of Chairman and Chief Executive
Officer
I, Lawrence F. Probst III, Chairman and Chief
Executive Officer, certify that:
1.
I have reviewed this Annual Report on
Form 10-K of Electronic Arts Inc.;
2.
Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s)
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the
registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in
the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s)
and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and
material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant’s internal control over financial
reporting.
By:
/s/ Lawrence F. Probst III
Lawrence F. Probst III
Chairman and Chief Executive Officer
Exhibit 31.2
ELECTRONIC ARTS INC.
Certification of Executive Vice President,
Chief Financial and Administrative Officer
I, Warren C. Jenson, Executive Vice President,
Chief Financial and Administrative Officer, certify that:
1.
I have reviewed this Annual Report on
Form 10-K of Electronic Arts Inc.;
2.
Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements,
and other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s)
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the
registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in
the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s)
and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and
material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant’s internal control over financial
reporting.
By:
/s/ Warren C. Jenson
Warren C. Jenson
Executive Vice President,
Chief Financial and Administrative Officer
ELECTRONIC ARTS INC.
Certification of Chairman and Chief Executive
Officer
In connection with the Annual Report of
Electronic Arts Inc. on Form 10-K for the period ended
March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I,
Lawrence F. Probst III, Chairman and Chief Executive Officer of
Electronic Arts Inc., certify, pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (“Section 906”),
that to my knowledge:
/s/ Lawrence F. Probst III
June 4, 2004
A signed original of this written statement
required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written
statement required by Section 906, has been provided to
Electronic Arts and will be retained by Electronic Arts and
furnished to the Securities and Exchange Commission or its staff
upon request.
1.
The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2.
The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of Electronic Arts Inc. for the periods
presented therein.
ELECTRONIC ARTS INC.
Certification of Executive Vice President,
Chief Financial and Administrative Officer
In connection with the Annual Report of
Electronic Arts Inc. on Form 10-K for the period ended
March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I,
Warren C. Jenson, Executive Vice President and Chief Financial
and Administrative Officer of Electronic Arts Inc., certify,
pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(“Section 906”), that to my knowledge:
/s/ Warren C. Jenson
June 4, 2004
A signed original of this written statement
required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written
statement required by Section 906, has been provided to
Electronic Arts and will be retained by Electronic Arts and
furnished to the Securities and Exchange Commission or its staff
upon request.
1.
The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2.
The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of Electronic Arts Inc. for the periods
presented therein.