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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended September 30, 2002

OR

For the Transition Period from ______ to_____

Commission File No. 0-17948

ELECTRONIC ARTS INC.

(650) 628-1500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  [X]           NO  [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

ELECTRONIC ARTS INC. AND SUBSIDIARIES

INDEX

						Page
Part I - Financial Information
Item 1.	Unaudited Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2002 and March 31, 2002				3
		Condensed Consolidated Statements of Operations for the Three Months Ended     September 30, 2002 and 2001 and the Six Months Ended September 30, 2002    and 2001				4
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended     September 30, 2002 and 2001				5
		Notes to Condensed Consolidated Financial Statements				7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations					21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk					50
Item 4.	Controls and Procedures					52
Part II - Other Information
Item 1.	Legal Proceedings					53
Item 4.	Submission of Matters to a Vote of Security Holders					53
Item 6.	Exhibits and Reports on Form 8-K					53
Signatures						54
Certifications						55

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)

						September 30,				March 31,
						2002				2002
ASSETS
Current assets:
	Cash, cash equivalents and short-term investments					$	920,768			$	796,936
	Marketable securities						6,525				6,869
	Receivables, less allowances of $125,402 and $115,870, respectively						139,366				190,495
	Inventories, net						36,827				23,780
	Deferred income taxes						36,412				38,597
	Other current assets						159,287				95,866
		Total current assets					1,299,185				1,152,543
Property and equipment, net							307,056				308,827
Investments in affiliates							17,324				19,077
Goodwill and other intangibles, net							121,484				110,512
Long-term deferred income taxes							55,649				64,065
Other assets							46,387				44,350
						$	1,847,085			$	1,699,374
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable					$	120,320			$	88,563
	Accrued and other liabilities						333,558				364,419
		Total current liabilities					453,878				452,982
Minority interest in consolidated joint venture							1,420				3,098
Stockholders’ equity:
	Preferred stock, $0.01 par value. Authorized 10,000,000 shares						—				—
	Common stock
		Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 140,832,259 and 138,429,269 shares, respectively					1,408				1,384
		Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 4,233,463 and 6,233,413 shares, respectively					42				62
	Paid-in capital						729,774				649,777
	Retained earnings						664,433				606,795
	Accumulated other comprehensive loss						(3,870	)			(14,724	)
		Total stockholders’ equity					1,391,787				1,243,294
						$	1,847,085			$	1,699,374

See accompanying Notes to Condensed Consolidated Financial Statements.

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ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

						Three Months Ended								Six Months Ended
						September 30,								September 30,
						2002				2001				2002				2001
Net revenues						$	453,490			$	240,156			$	785,388			$	422,106
Cost of goods sold							198,891				117,760				340,256				206,789
			Gross profit				254,599				122,396				445,132				215,317
Operating expenses:
	Marketing and sales						55,514				45,020				120,888				85,824
	General and administrative						27,453				25,403				53,116				48,618
	Research and development						98,140				97,555				189,109				188,360
	Amortization of intangibles						2,246				6,475				4,491				12,950
				Total operating expenses			183,353				174,453				367,604				335,752
			Operating income (loss)				71,246				(52,057	)			77,528				(120,435	)
Interest and other income, net							1,177				4,060				4,324				6,777
			Income (loss) before provision for (benefit from) income taxes and minority interest				72,423				(47,997	)			81,852				(113,658	)
Provision for (benefit from) income taxes							22,451				(14,879	)			25,374				(35,234	)
			Income (loss) before minority interest				49,972				(33,118	)			56,478				(78,424	)
Minority interest in consolidated joint venture							262				294				1,160				346
		Net income (loss)				$	50,234			$	(32,824	)		$	57,638			$	(78,078	)
Class A common stock:
Net income (loss):
	Basic					$	53,407			$	(27,236	)		$	63,801			$	(66,611	)
	Diluted					$	50,234			$	(32,824	)		$	57,638			$	(78,078	)
Net income (loss) per share:
	Basic					$	0.38			$	(0.20	)		$	0.46			$	(0.49	)
	Diluted					$	0.34			$	(0.24	)		$	0.39			$	(0.57	)
Number of shares used in computation:
	Basic						139,843				136,652				139,317				136,158
	Diluted						146,619				137,304				146,269				136,810
Class B common stock:
Net loss, net of retained interest in EA.com						$	(3,173	)		$	(5,588	)		$	(6,163	)		$	(11,467	)
Net loss per share:
	Basic					$	(0.57	)		$	(0.93	)		$	(1.07	)		$	(1.90	)
	Diluted					$	(0.57	)		$	(0.93	)		$	(1.07	)		$	(1.90	)
Number of shares used in computation:
	Basic						5,547				6,022				5,759				6,020
	Diluted						5,547				6,022				5,759				6,020

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

						Six Months
						Ended September 30,
						2002				2001
Operating activities:
	Net income (loss)					$	57,638			$	(78,078	)
		Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
			Minority interest in consolidated joint venture				(1,160	)			(346	)
			Distribution from investment in affiliate				3,000				—
			Equity in net (income) loss of affiliates				(1,313	)			160
			Gain on sale of affiliate				—				(200	)
			Depreciation and amortization				49,373				55,294
			Loss on write-down of affiliate				471				—
			Loss on sale of fixed assets				115				315
			Permanent impairment of marketable securities				2,359				—
			Bad debt expense				4,639				2,327
			Stock-based compensation				2,161				1,154
			Tax benefit from exercise of stock options				16,866				16,789
			Change in assets and liabilities:
				Receivables			48,261				68,584
				Inventories			(13,047	)			(5,133	)
				Other assets			(85,409	)			(70,114	)
				Accounts payable			31,726				6,628
				Accrued and other liabilities			(35,800	)			(76,723	)
				Deferred income taxes			8,689				(581	)
				Net cash provided by (used in) operating activities			88,569				(79,924	)
Investing activities:
	Proceeds from sale of property and equipment						411				225
	Proceeds from sale of affiliate						—				570
	Capital expenditures						(23,386	)			(29,711	)
	Investment in affiliates, net						(405	)			3,018
	Change in short-term investments, net						(46,212	)			(81,104	)
	Acquisition, net of cash acquired						(12,868	)			—
				Net cash used in investing activities			(82,460	)			(107,002	)
Financing activities:
	Proceeds from sales of Class A shares through employee stock plans and other plans						61,281				49,010
	Proceeds from sales of Class B shares through employee stock plans and other plans						1				—
	Purchase of treasury shares						—				(6,824	)
	Proceeds from minority interest investment						(751	)			—
				Net cash provided by financing activities			60,531				42,186
Translation adjustment							8,005				3,733
Increase (decrease) in cash and cash equivalents							74,645				(141,007	)
Beginning cash and cash equivalents							552,826				419,812
Ending cash and cash equivalents							627,471				278,805
Short-term investments							293,297				129,140
Ending cash, cash equivalents and short-term investments						$	920,768			$	407,945

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Table of Contents

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(unaudited)

			Six Months
			Ended September 30,
			2002				2001