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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___ to ___
Commission File No. 0-17948
ELECTRONIC ARTS INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-2838567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 Redwood Shores Parkway
Redwood City, California 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 628-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's common stock, $.01 par value,
held by non-affiliates of the Registrant on June 1, 2000 was $2,269,355,144.
As of June 1, 2000 there were 64,638,382 shares of Registrant's common stock,
$.01 par value, outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 2000 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
Portions of Registrant's definitive proxy statement for its Notice of Special
Stockholders Meeting and Proxy Statement dated March 22, 2000 are incorporated
by reference into Part I hereof.
This report consists of 80 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 80.
Page 1 of 80
ELECTRONIC ARTS INC.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 4A. Executive Officers of the Registrant 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 71
PART III
Item 10. Directors and Executive Officers of the Registrant 72
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and Management 72
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 73
Signatures 78
Exhibit Index 80
2
PART I
This Annual Report on Form 10-K, including Item 1 ("Business") and Item 7
("Management's Discussion and Analysis of Financial Condition and Results of
Operations"), contains forward-looking statements about circumstances that have
not yet occurred. All statements, trend analysis and other information contained
below relating to markets, our products and trends in revenue, as well as other
statements including words such as "anticipate", "believe" or "expect" and
statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks, and
actual events or our actual future results could differ materially from those
set forth in the forward-looking statements due to such risks and uncertainties.
We will not necessarily update this information if any forward looking statement
later turns out to be inaccurate. Risk and uncertainties that may affect our
future results and performance include, but are not limited to those discussed
under the heading "Risk Factors" below at pages 36 to 41.
ITEM 1: BUSINESS
Overview
Electronic Arts was initially incorporated in California in 1982. In
September 1991, we were reincorporated under the laws of Delaware. Our principal
executive offices are located at 209 Redwood Shores Parkway, Redwood City,
California 94065 and our telephone number is (650) 628-1500.
We operate in two principal business segments globally:
o EA Core business segment: creation, marketing and distribution of
entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online.
EA Core
We create, market and distribute interactive entertainment software for
a variety of hardware platforms. As of March 31, 2000, our business was
comprised of the following:
o Distribution of over 100 titles that we developed and/or published
under one of our brand names in North America, including older titles
marketed as "Classics" or "Publisher's Choice."
o Distribution of localized versions of our products in the rest of the
world.
o Distribution of approximately 20 additional titles developed by other
software publishers (that we refer to as Affiliated Labels) in North
America and titles we have assisted in the development with other
software publishers (referred to as Co-Published titles).
o Distribution of over 1,000 Affiliated Label and Co-Published titles in
the rest of the world.
Since our inception, we have developed products for 38 different hardware
platforms, including the following:
o IBM(R) PC and compatibles
o 16-bit Sega(TM) Genesis(TM) video game system
o 16-bit Super Nintendo Entertainment System(R)
o 32-bit Sony PlayStation(R)
o 64-bit Nintendo(R) 64
o 128-bit Sony PlayStation 2
Our product development methods and organization are modeled on those used
in the entertainment industry. We also market our products with techniques
borrowed from other entertainment companies such as record producers, magazine
publishers and video distributors. Employees whom we call "producers", who are
responsible for the development of one or more products, oversee product
development and direct teams comprised of both our employees and outside
contractors. Our designers regularly work with celebrities and organizations in
sports, entertainment and other areas to develop products that provide gaming
experiences that are as realistic and interactive as possible. Celebrities and
organizations with whom we have contracts include: FIFA, NASCAR, John Madden,
the National Basketball Association, the PGA TOUR, Tiger Woods, the National
Hockey League, World Championship Wrestling Inc., Football Association Premier
League and Formula One. We maintain development studios in California, Canada,
United Kingdom, Florida, Texas, Japan, Washington, Maryland, Australia and
Nevada.
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We invest in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools allow for more
cost-effective product development and the ability to more efficiently convert
products from one hardware platform to another. We have also made investments in
facilities and equipment to facilitate the creation and editing of digital forms
of video and audio recordings and product development efforts for new hardware
platforms.
We distribute our products and those of our Affiliated Labels primarily
by direct sales to retail chains and outlets in the United States and Europe. In
Japan and the Asia Pacific region, we distribute products both directly to
retailers and through third party distributors. Our products are available in
over 79,000 retail locations worldwide. In fiscal 2000, approximately 40% of our
net revenues were generated by international operations, compared to 42% in
fiscal 1999 and 43% in fiscal 1998.
EA.com
On March 22, 2000, the stockholders of Electronic Arts voted on and
approved a proposal (the "Tracking Stock Proposal") to authorize the issuance of
a new series of common stock to be designated as Class B common stock ("Tracking
Stock"), intended to reflect the performance of Electronic Arts' online and
e-Commerce division ("EA.com"). As a result of the approval of the Tracking
Stock Proposal, Electronic Arts' existing common stock has been re-classified as
Class A common stock ("Class A Stock") and that stock will reflect the
performance of Electronic Arts' other businesses ("EA Core").
EA.com, a division of Electronic Arts Inc., represents Electronic Arts'
online and e-Commerce business. EA.com's online business includes subscription
revenues collected for Internet game play on our websites, sales of
Internet-based games and sales of Electronic Arts products sold through EA.com
websites. Electronic Arts began development of its initial online product,
Ultima Online during fiscal year 1996. We shipped Ultima Online during fiscal
year 1998, and began development of our online business during the same year.
EA.com's websites include EA.com, individual sites for Electronic Arts' games
and the Games Channel on America Online, which will be launched in the second
half of calendar 2000. Our goal is to be the leading online games site. To date,
the majority of our subscription revenues and packaged goods revenues for
online-only games have been generated by Ultima Online and Ultima Online: The
Second Age, (collectively referred to as Ultima Online). The packaged good
product is sold through our traditional distribution channel to various
retailers. The Ultima Online product is then sold by the retail channel to the
end customer who must sign up for EA.com's online service to enjoy online play
on a month-to-month subscription basis. For a more detailed description of
EA.com's online business, see Appendix IV of the Notice of Special Stockholders
Meeting and Proxy Statement dated March 22, 2000.
Investments and Joint Ventures
Acquisitions
Kesmai Corporation
On February 7, 2000, we acquired Kesmai Corporation (now referred to as
"Kesmai") from News America Corporation ("News Corp") in exchange for
$22,500,000 in cash and approximately 103,000 shares of Electronic Arts'
existing common stock valued at $8,650,000. The transaction was accounted for
under the purchase method. Kesmai(TM) is managed by EA.com and specializes in
the design and development of multiplayer games delivered directly to consumers
over the Internet and is a major provider of game content to the Games Channel
on the AOL service. The issuance of these shares was temporary, pending the
authorization of Class B common stock. Subsequently, on March 22, 2000, Class B
shares were authorized. The Company granted 5 percent of the initial equity
attributable to EA.com to News Corp, adjusting the total common stock
consideration relating to the acquisition by $703,000 to $9,353,000. The Company
has contributed Kesmai to the EA.com division. See note 13 of the Notes to the
Consolidated Financial Statements, included in item 8 hereof.
Westwood Studios
In September 1998, we completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studios
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The transaction was accounted for under the purchase
method. Westwood is best known for its successful PC franchises, Command and
Conquer and Lands of Lore. See note 13 of the Notes to the Consolidated
Financial Statements, included in item 8 hereof.
ABC Software
In July 1998, we acquired ABC Software AG, in Switzerland, and ABC
Software GmbH, in Austria (collectively "ABC"), independent distributors of
entertainment, edutainment and application software, for approximately
$9,466,000 in cash (net of cash
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acquired of $5,099,000) and $570,000 in other consideration. The transaction has
been accounted for under the purchase method. See note 13 of the Notes to the
Consolidated Financial Statements, included in item 8 hereof.
Other Business Combinations
Additionally, during fiscal 2000 and fiscal 1999, we acquired four
software development companies. See note 13 of the Notes to Consolidated
Financial Statements, included in item 8 hereof.
Joint Ventures
In May 1998, Electronic Arts and Square Co., Ltd. ("Square"), a leading
developer and publisher of entertainment software in Japan, completed the
formation of two new joint ventures, in North America and Japan. In North
America, the companies formed Square Electronic Arts, LLC ("Square EA"), which
has exclusive publishing rights in North America for future interactive
entertainment PlayStation titles created by Square. We own a 30% minority
interest in this joint venture while Square owns 70%. Additionally, we have the
exclusive right to distribute in North America products published by this joint
venture.
In Japan, the companies established Electronic Arts Square KK ("EA
Square KK"), which localizes and publishes in Japan our properties originally
created in North America and Europe, as well as develops and publishes original
video games in Japan. We own a 70% majority interest, while Square owns 30%. See
note 13 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
Investments
We have made investments as part of our overall strategy and currently
hold minority equity interests in several companies. As of March 30, 2000, our
minority equity investments include investments in NovaLogic, Inc. and Firaxis
Software, Inc.
Market
Historically, no hardware platform or video game system has achieved
long-term dominance in the interactive entertainment market. In fiscal 2000,
Sony's PlayStation was the dominant hardware platform in our industry. In
addition, the installed base of multimedia-enabled home computers, including
those with Internet accessibility, has continued to grow as personal computer,
or PC, prices have declined and the quality and choices of software have
increased dramatically. We develop and publish products for multiple platforms,
and this diversification continues to be a cornerstone of our strategy.
The following table details select information on a sample of the
hardware platforms for which we have published titles:
- ------------------------------------------------------------------------------------------------------------------------------------
Video Game Console / Date Introduced Medium/
Manufacturer Platform Name in North America Product Base Technology
- ------------------------ -------------------------------------------- ----------------------- --------------------- ----------------
Sega Genesis 1989 Cartridge 16-bit
Nintendo Super NES(TM) 1991 Cartridge 16-bit
Matsushita 3DO(TM)Interactive Multiplayer(TM) 1993 Compact Disk 32-bit
Sega Saturn 1995 Compact Disk 32-bit
Sony PlayStation 1995 Compact Disk 32-bit
Nintendo Nintendo 64 1996 Cartridge 64-bit
- ------------------------------------------------------------------------------------------------------------------------------------
Sega
Sega launched DreamcastTM in Japan in December 1998 and in North
America in September 1999. Sega designed Dreamcast to combine features from the
console and PC platforms. We currently have no products in development for the
Sega Dreamcast. See Risk Factors - "New video game platforms create additional
technical and business model uncertainties".
Sony
Sony released the PlayStation 2 console in Japan in March 2000. Sony
has announced the release of the PlayStation 2 console in the United States and
Europe in the fall of 2000. The PlayStation 2 console is a 128-bit, Digital
Versatile Disk ("DVD") based system that is Internet and cable ready, as well as
backward compatible with the current PlayStation console software. We currently
have various products under development for the Sony PlayStation 2 console. See
Risk Factors - "New video game platforms create additional technical and
business model uncertainties".
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Nintendo
Nintendo announced that it will release a next generation system, code
named Dolphin, in the first half of 2001. Dolphin will offer a DVD drive.
Microsoft
Microsoft announced that it expects to release its first video game
system, code named Xbox(TM), in the fall of 2001.
New Entrants
New entrants into the interactive entertainment and multimedia
industries, such as cable television, telephone, and diversified media and
entertainment companies, in addition to a proliferation of new technologies,
such as online networks and the Internet, have increased the competition in our
markets. We are scheduled to release several online network gaming products
during fiscal 2001. See Risk Factors - "New video game platforms create
additional technical and business model uncertainties" and "The impact of
e-Commerce and online games on our business is not known ".
The early investment in products for the 32-bit market, including both
Compact Disk personal computer (or PC) and dedicated entertainment systems (that
we call video game systems or consoles), has been strategically important in
positioning us for the current generation of 32-bit and 64-bit machines. We
believe that such investment continues to be important. PlayStation has achieved
significant market acceptance in all geographical territories. However, as the
PlayStation console market has matured and the next generation consoles are
introduced, we expect sales of current PlayStation products to decline. In
addition, our revenues and earnings are dependent on our ability to meet our
product release schedule and our failure to meet those schedules could result in
revenues and earnings which fall short of analysts' expectations in any
individual quarter. See Risk Factors - "Product development schedules are
frequently unreliable and make predicting quarterly results difficult".
Online Games
According to the market research firm, Jupiter Communications, online
gamers (defined as individuals who have played online games within the past
year) are expected to grow to 26.8 million Internet users by 2002 up from 3.7
million Internet users in 1998. Jupiter expects total online gaming market
revenue to grow to $2 billion by 2002. We believe the expected increases in
online gaming will be primarily attributable to the following factors:
o Increasing popularity of PC gaming,
o Growing interest in multiplayer games,
o Growth in the number of households with PCs and Internet connections,
o General growth in internet usage, including the number of users,
communities and increased frequency of use by consumers,
o Rapid innovation of new online entertainment experiences,
o Mass market adoption of broadband technologies, and
o Decreasing costs of Internet access.
Competition
EA Core
See Risk Factors - "Our platform licensors are our chief competitors
and frequently control the manufacturing of our video game products".
EA.com
We believe EA.com faces substantial competition from a number of existing and
potential competitors including:
o Console & PC Game Publishers. Other game publishers including Sony
Computer Entertainment of America ("Sony"), Nintendo, Sega, Hasbro,
Mattel, Acclaim, Havas, Microsoft, Interplay, Infogrames and Eidos, are
each developing individual online games and games with online
components. Currently, Sony (including the online divisions of Sony
Entertainment) may have the broadest collection of online game
offerings, which includes the online game, Everquest, a virtual world
that directly competes with EA.com's Ultima Online game. In addition,
Sony operates the Sony Station, a site that offers family-oriented game
shows. Each of these competitors may compete with EA.com for
advertising, subscription and e-Commerce sales.
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o Portals. With respect to advertising and e-Commerce sales, EA.com will
also compete with general purpose consumer web sites such as Yahoo,
Excite, Lycos, and Microsoft Network. In addition, many of these
Internet portals offer gaming sites such as Yahoo Games Channel, Excite
Games Channel, Lycos Games Channel, and Microsoft Gaming Zone. Although
most of the game areas of these portals have attained modest reach,
their key placement on powerful portals makes them potentially
significant competitors for gaming subscriptions as well.
o Family Oriented Game Sites. A number of sites such as Uproar.com,
Gamesville.com, Disney's go.com, Shockwave.com and Pogo.com (formerly
TEN), have driven significant amounts of traffic to their sites by
offering unique games and entertainment content. In addition, several
of the sites offer frequent prizes with easy to play "gamettes". These
sites are typically monetizing their traffic by selling advertising.
o Aggregators. Aggregators such as Hearme.com, Pogo.coom, Microsoft
Gaming Zone and Heat.net, provide an aggregation of various types of
online games, including aggregation of games developed by independent
third parties. While these sites have been primarily focused on serving
the gaming community, they have since adjusted their strategy to
include games, such as parlor games, that reach a broader audience.
o Sports Sites. Sports content sites such as ESPN.com, Sportsline.com and
Foxsports.com typically feature fantasy league games and easy to play
sports "gamettes" in addition to their editorial content. Such fantasy
league games and sports "gamettes" typically appeal to the overall
sports fan, rather than the sports gamer. However, these sites have
significant financial and content resources at their disposal and will
provide competition for advertising and e-Commerce sales.
o Microsoft Gaming Zone ("MGZ"). Microsoft falls into a number of the
foregoing categories, as it is a portal, an aggregator, and a publisher
of PC Software Products, including game products. As such, Microsoft's
offerings are the closest parallel to the proposed offerings of EA.com.
MGZ currently offers both family games and games directed towards the
more serious gamer and, at the same time, has the opportunity to
leverage these experiences with games sold at retail. At present, MGZ
offers matchmaking for about 80 games and offers approximately 20
playable online games, which consist primarily of card and parlor
games.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 2000, approximately 41% of our net revenues were derived from
sales of software for the PlayStation compared to 43% in fiscal 1999. During
fiscal 2000, we released 30 PlayStation games compared to 21 in fiscal 1999.
Among these releases were FIFA 2000, Tomorrow Never Dies, Madden NFL 2000, NBA
2000 and Knockout Kings(TM) 2000. The volume of sales of our PlayStation
products significantly increased in fiscal 2000 due to more titles being
released in the current fiscal year compared to the prior year. Sony has
announced the release of the PlayStation 2 console in the United States and
Europe in the fall of 2000. Although our PlayStation products will be playable
on the PlayStation 2 console, we expect sales of current PlayStation products to
decline in fiscal 2001. See Risk Factors - "Product development schedules are
frequently unreliable and make predicting quarterly results difficult".
Under the terms of a licensing agreement entered into with Sony
Computer Entertainment of America in July 1994 (the "Sony Agreement"), as
amended, we are authorized to develop and distribute CD-based software products
compatible with the PlayStation. Pursuant to the Sony Agreement, we engage Sony
to supply its PlayStation CDs for distribution by us. Accordingly, we have
limited ability to control our supply of PlayStation CD products or the timing
of their delivery. See Risk Factors - "Our platform licensors are our chief
competitors and frequently control the manufacturing of our video game
products".
Nintendo
During fiscal 2000, we released eight titles for the N64(R) compared to
nine titles in fiscal 1999. In fiscal 2000, approximately 8% of our net revenues
were derived from the sale of N64 products compared to 12% in 1999. The decrease
in N64 revenues for fiscal 2000 compared to the same period last year was due to
the weak market for N64 products as well as strong comparisons of World Cup 98
in the prior year. We expect revenues from N64 products to continue to decline
significantly in fiscal 2001.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture
our N64 cartridges for distribution by us. Accordingly, we have limited ability
to control our supply of N64 cartridges or the timing of their delivery. A
shortage of microchips or other factors outside our control could impair our
ability to obtain an adequate supply of cartridges.
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In connection with our purchases of N64 cartridges for distribution in
North America, Nintendo requires us to provide irrevocable letters of credit
prior to Nintendo's acceptance of purchase orders from us for purchases of these
cartridges. For purchases of N64 cartridges for distribution in Japan and
Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo
maintains a policy of not accepting returns of N64 cartridges. Because of these
and other factors, the carrying of an inventory of cartridges entails
significant capital and risk. See Risk Factors - "Our platform licensors are our
chief competitors and frequently control the manufacturing of our video game
products".
Relationships with Internet Service Providers
America Online, Inc. ("AOL")
Our agreement with AOL establishes the basis for EA.com's creation of a
games site on the world wide web that will be available to AOL subscribers via
the Games Channel on the AOL's flagship ISP service and to other consumers who
use other AOL portals (AOL.com, CompuServe, Netscape/Netcenter, ICQ and Digital
City) as their base for navigating the web. Users will also be able to access
the EA.com website directly from the world wide web. EA.com will be AOL's
exclusive provider of a broad aggregation of online games and will program and
manage all of the Games Channel content within AOL's flagship ISP service in the
United States. In addition, EA.com will program and manage the game channels on
AOL.com, CompuServe, Netcenter/Netscape and ICQ. Within any of these AOL
properties, users will be able to find a games channel or area which will
provide the user access to EA.com games. According to the April 2000 Media
Metrix reports, the total number of unique monthly visitors to the AOL branded
properties that will have access to the EA.com games site was 53 million. Via an
anchor tenant location, EA.com will also be a non-exclusive provider of games on
AOL's Digital City property, the leading branded local content network and
community guide on the AOL service and the Internet. For the terms of the AOL
agreement, see Note 5 of the Notes to Consolidated Financial Statements,
included in item 8 hereof.
Products and Product Development
In fiscal 2000, we generated approximately 56% of our revenues from
products released during the year. See Risk Factors - "Product development
schedules are frequently unreliable and make predicting quarterly results
difficult". As of March 31, 2000, we were actively marketing over 100 titles,
comprising over 150 stock keeping units, or sku's, that were published by our
development divisions and subsidiaries, EA Studios. During fiscal 2000, we
introduced over 48 EA Studios titles, representing over 69 sku's, compared to 38
EA Studios titles, comprising over 59 sku's, in fiscal 1999.
The products published by EA Studios are designed and created by our
in-house designers and artists and by independent software developers
("independent artists"). We typically pay the independent artists royalties
based on the sales of the specific products, as defined in the related
independent artist agreements.
For fiscal 2000, 1999 and 1998, no title represented revenues greater
than 10% of the total fiscal 2000, 1999 and 1998 net revenues.
We publish products in a number of categories such as sports, action
and interactive movies, strategy, simulations, role playing and adventure, each
of which is becoming increasingly competitive. Our sports-related products,
marketed under the EA Sports brand name, accounted for a significant percentage
of net revenues in fiscal years 2000 and 1999. There can be no assurance that we
will be able to maintain our market share in the sports category.
The front line retail selling prices in North America of our products,
excluding older titles (marketed as "Classics" and "Publisher's Choice"),
typically range from $35.00 to $55.00. "Classics" and "Publisher's Choice"
titles have retail selling prices that range from $10.00 to $30.00. The retail
selling prices of EA titles outside of North America vary based on local market
conditions.
We currently develop or publish products for five different hardware
platforms. In fiscal 2000, our product releases were predominantly for
PlayStation, PC and N64. Our planned product introductions for fiscal 2001 are
predominantly for the PC, PlayStation, PlayStation 2, online Internet play and
N64. See Risk Factors - "Product development schedules are frequently unreliable
and make predicting quarterly results difficult" and "New video game platforms
create additional technical and business model uncertainties".
Compact disks are the preferred medium for interactive entertainment,
education, and information software, therefore, we are continuing our investment
in the development of CD-ROM tools and technologies in fiscal 2001. We are also
investing in the development of DVD tools and technologies associated with the
introduction of the next generation video game console platforms. Our goal is to
be the market leader on the next generation of video game consoles. We are also
increasing the investment in the development of tools and technologies for
online Internet game play and wide-area network infrastructure. Our goal is to
be the leading provider of interactive entertainment on the Internet.
PlayStation has achieved significant market acceptance in all geographic
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territories, however, as the PlayStation console market has reached maturity, we
expect sales of current PlayStation products to decline in fiscal 2001. Most of
the console video game products will be convertible for use on multiple advanced
hardware systems. We had research and development expenditures of $260.8 million
in fiscal 2000, $199.1 million in fiscal 1999, and $145.7 million in fiscal
1998. See Risk Factors - "Product development schedules are frequently
unreliable and make predicting quarterly results difficult".
EA.com Web Site
Content. EA.com intends to offer games within three broad categories of
interest: sports, family entertainment, and avid gaming. Each channel will focus
on targeting and serving its specific consumer group by:
o Offering engaging and accessible online games;
o 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;
o Delivering innovative content that continually entertains; and
o Establishing a direct relationship with each audience member through
personalization and customization of user experiences.
In addition, the product offering of each broad category will include
existing Electronic Arts franchises adapted for game play on the Internet, as
well as additional original games for online play. EA.com's products will be
offered to consumers within the appropriate "channels" on the site. It is
anticipated that the offerings will incorporate some or all of the following:
o Sports. EA.com intends to leverage existing Electronic Arts'
franchises, such as PGA(R) Tour/Tiger Woods Golf(R) and Knockout
Kings(TM), to develop a community of sports gamers. In addition, EA.com
will offer unique, original online sports gaming experiences, sports
game shows and support of existing EA packaged goods products with
services such as matchmaking, game updates, product downloads and game
tips.
o Family Entertainment. The EA.com family games offering will consist of
card games, board games, casino games, trivia games, game shows and
other products with mass-market appeal. This channel will leverage cash
prizes, merchandise prizes, tournaments and community.
o Avid Gaming. The general gaming offering will be directed at teens and
adults looking to participate in games made up of fantastic worlds,
characters, adventures or activities--big or small, real or imagined.
This offering will feature immersive experiences and sophisticated game
play appealing to dedicated gamers, as well as new forms of
cutting-edge Internet entertainment. This offering will capitalize on
the success of our existing Ultima Online product as well as Electronic
Arts' existing packaged goods franchises.
Marketing and Distribution
Electronic Arts Distribution
We distribute EA Studio, Affiliated Label and Co-Published products.
Affiliated Label products are delivered to us as completed products.
Co-Published products are titles we have assisted in developing with other
software publishers. As of March 31, 2000, we distributed approximately 20
Affiliated Label and Co-Published titles in North America and over 1,000
Affiliated Label and Co-Published titles in the rest of the world. No single
Affiliated Label Publisher has accounted for more than 10% of our net revenue in
any of the last three fiscal years.
In May 1998, Electronic Arts and Square Co., Ltd. formed a new joint
venture in North America, creating Square Electronic Arts, LLC ("Square EA") as
discussed in note 13 in the Notes to the Consolidated Financial Statements,
included in item 8 hereof. In conjunction with the formation of this joint
venture, we have the exclusive right in North America to distribute products
published by this joint venture. In fiscal 2000, Square EA published Final
Fantasy VIII for the PlayStation, which was a top five selling title for
Electronic Arts.
We generated approximately 90% of our North American net revenues from
direct sales to retailers through a field sales organization of professionals
and a group of telephone sales representatives. The remaining 10% 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. For the fiscal years ended March 31, 2000 and March 31, 1999, we
had sales to one customer, Wal-Mart Stores, Inc., which represented 12% of total
net revenues. We had no sales to any one customer in excess of 10% of total net
revenues for the fiscal year ended March 31, 1998.
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The video game and PC businesses have become increasingly "hits"
driven, requiring significantly greater expenditures for marketing and
advertising, particularly for television advertising. There can be no assurance
that we will continue to produce "hit" titles, or that advertising for any
product will increase sales sufficiently to recoup those advertising expenses.
We have stock-balancing programs for our personal computer products
that, under certain circumstances and up to a specified amount, allow for the
exchange of personal computer products by resellers. We also typically provide
for price protection for our personal computer and video game system products
that, under certain conditions, allows the reseller a price reduction from us
for unsold products. We maintain a policy of exchanging products or giving
credits, but do not give cash refunds. Moreover, the risk of product returns may
increase as new hardware platforms become more popular or market factors force
us to make changes in our distribution system. We monitor and manage the volume
of our sales to retailers and distributors and their inventories as substantial
overstocking in the distribution channel can result in high returns or the
requirement for substantial price protection in subsequent periods. We believe
that we provide adequate reserves for returns and price protection which are
based on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of our products and other factors. We believe our current reserves
will be sufficient to meet return and price protection requirements for current
in-channel inventory. However, there can be no assurance that actual returns or
price protection will not exceed our reserves.
We also have a fulfillment group that sells product directly to
consumers through a toll-free number and through our websites listed in
advertising by us and our Affiliated Labels. This group is also responsible for
targeted direct mail marketing and sells product backups and accessories to
registered customers.
The distribution channels through which consumer software products are
sold have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The development of remote and
electronic delivery systems will create further changes. The bankruptcy or other
business difficulties of a distributor or retailer could render 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 these channels. Our arrangements with
our distributors and retailers may be terminated by either party at any time
without cause. Distributors and retailers often carry products that compete with
ours. Retailers of our products typically have a limited amount of shelf space
and promotional resources for which there is intense competition. There can be
no assurance that distributors and retailers will continue to purchase our
products or provide our products with adequate levels of shelf space and
promotional support.
Segment Reporting
As a result of the approval of the Tracking Stock proposal to authorize issuance
of a new series of common stock designated as Class B common stock, intended to
reflect the performance of EA.com, management considers EA.com a separate
reportable segment. Accordingly, prior period information has been restated to
disclose separate segments. The Company operates in two principal business
segments globally:
o EA Core business segment: creation, marketing and distribution of
entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online.
Please see the discussion regarding segment reporting in the MD&A and Note 18 of
the Notes to Consolidated Financial Statements.
International Operations
We have wholly owned subsidiaries throughout the world, including
offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South
Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. The amounts of
net revenues, operating profit and identifiable assets attributable to each of
our geographic regions for each of the last three fiscal years are set forth in
Note 18 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
International net revenues increased by 11% to $573,374,000, or 40% of
consolidated fiscal 2000 net revenues, compared to $516,865,000, or 42% of
consolidated fiscal 1999 net revenues due to the following:
o Europe's net revenues increased by 11% primarily due to an increase in
sales of PC titles including Command and Conquer: Tiberian Sun, Sim
City 3000 and The Sims as well as an increase in PlayStation revenues
due to the success of FIFA 2000,
10
Tomorrow Never Dies and F1 2000. These increases were partially offset
by an expected decline in sales of N64 products. Overall European
revenues were adversely impacted by a devaluation of the Euro compared
to the same period last year.
o Asia Pacific's net revenues increased 20% due to PC sales of Command
and Conquer: Tiberian Sun and Sim City 3000.
o Japan's net revenues were flat compared to the prior year. PC and
Affiliated Label revenues increased, offset by a decrease in
PlayStation product sales primarily due to strong sales of FIFA: Road
to World Cup and World Cup 98 in the prior year.
Though international revenues are expected to grow in fiscal 2001,
international revenues may not grow at as high a rate as in prior years. See
Risk Factors - "Our business, our products, and our distribution are subject to
increasing regulation in key territories" and "Foreign Sales and Currency
Fluctuations".
Manufacturing and Suppliers
Materials
In many instances, we are able to acquire materials on a
volume-discount basis. We have multiple potential sources of supply for most
materials, except with respect to our PlayStation and N64 products, as
previously mentioned. We also have alternate sources for the manufacture and
assembly of most of our products. To date, we have not experienced any material
difficulties or delays in production of our software and related documentation
and packaging. However, a shortage of components or other factors beyond our
control could impair our ability to manufacture, or have manufactured, our
products. See Risk Factors - "Our platform licensors are our chief competitors
and frequently control the manufacturing of our video game products".
Consultants
As of March 31, 2000, approximately 25% of the staff creating,
designing and developing the infrastructure of EA.com's website and network
interface is being provided by outside consultants such as Andersen Consulting
and Proxicom. See Risk Factors - "If we do not maintain our relationship with
outside consultants such as Andersen Consulting and Proxicom, our ability to
develop our online business will be impaired".
Backlog
We normally ship products within a few days after receipt of an order.
However, a backlog may occur for EA Studio and Affiliated Label products that
have been announced for release but not yet shipped. We do not consider backlog
to be an indicator of future performance.
Seasonality
Our business is highly seasonal. We typically experience our highest
revenues and profits in the calendar year-end holiday season and a seasonal low
in revenues and profits in the quarter ending in June. In our 2001 fiscal year,
and particularly in the June and September quarters, we expect these seasonal
trends to be magnified by general industry factors, including the current
platform transition and the concentration of our product releases in the second
half of fiscal 2001. In addition, we are continuing to invest significantly in
our online operation, EA.com. Accordingly, we expect significant operating
losses in the first half of fiscal 2001. See Risk Factors - "Platform
transitions such as the one now occurring typically depress the market for video
game software until new platforms achieve a wide market acceptance" and "Our
business is both seasonal and cyclical".
Employees
As of March 31, 2000, we employed approximately 3,100 people, of whom
over 1,300 were outside the United States. Of this amount, there were
approximately 300 EA.com full-time employees. We believe that our ability to
attract and retain qualified employees is an important factor in our growth and
development and that our future success will depend, in large measure, on our
ability to continue to attract and retain qualified employees. To date, we have
been successful in recruiting and retaining sufficient numbers of qualified
personnel to conduct our business successfully. See Risk Factors - "We face
intense competition for talent from highly valued Internet companies" and
"Because of the intense competition for qualified technical, creative, marketing
and other personnel, we may not be able to attract and retain the personnel
necessary for our business".
11
ITEM 2: PROPERTIES
Our principal administrative, sales and marketing, research and
development, and support facility is located in two modern buildings in Redwood
City, California, 20 miles south of San Francisco. We moved into this facility
in October 1998. We presently occupy approximately 350,000 sq. ft. in these
buildings under an operating lease for the buildings and certain adjoining land
that will expire on December 1, 2001. Monthly lease payments vary based upon the
London InterBank Offered Rate. We have the option to purchase the property for
the unamortized financed balance at any time after the non-cancelable lease
term, or we may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. In April 1999,
we exercised our option to purchase a parcel of land under the lease and sold it
to a third party. The proceeds will mitigate a portion of the occupancy costs
for this facility. Should we elect to terminate the lease, we will guarantee a
residual value of up to 85% of the unamortized value of the property. As part of
the agreement, we must also comply with certain financial covenants.
Our North American distribution is supported by a newly centralized and
expanded warehouse facility in Louisville, Kentucky occupying 250,000 sq. ft.
The Hayward distribution center was closed in fiscal 2001 in conjunction with
the expansion of our Louisville, Kentucky facility. We also occupy sales offices
in the metropolitan areas of Toronto, Chicago, Dallas and New York.
In addition to our Redwood City development studio, we own a 206,000
sq. ft. development facility in Burnaby, British Columbia, Canada and rent a
33,000 sq. ft. facility in Seattle, Washington. The move to the new Canadian
offices was completed in June 1999. We also own a 180,000 sq. ft. development
facility in Austin, Texas, and lease development facilities in Walnut Creek and
Carlsbad, California and Charlottesville, Virginia.
We own a 101,000 sq.ft. administrative and sales facility in Chertsey,
England, which our United Kingdom subsidiary moved into in March 2000. In
Europe, we also lease a distribution hub in Heerlen, Holland and an
administrative and sales facilities in Germany, as well as sales and
distribution facilities in: Madrid, Spain; Johannesburg, South Africa; and
Sennwald Switzerland. Additionally, we have sales and administrative offices
throughout Europe.
In Asia and the South Pacific, we maintain a 5,500 sq. ft. sales and
distribution facility in Brisbane, Australia. We also have sales and
distribution facilities in Singapore, Malaysia and Taiwan, and representative
offices in Beijing, Hong Kong and Shanghai, China. We also maintain a 27,000 sq.
ft. sales and development office in Tokyo, Japan. See Notes 4 and 11 of the
Notes to the Consolidated Financial Statements, included in Item 8 hereof.
We believe that these facilities are adequate for our current needs. We
believe that suitable additional or substitute space will be available as needed
to accommodate our future needs.
12
ITEM 3: LEGAL PROCEEDINGS
We are subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon our
consolidated financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Stockholders, held on March 22,
2000, the following matters were voted upon by the Stockholders:
Amendment and Restatement of the Certificate of Incorporation (Tracking Stock
Proposal).
Votes
-----------------------------------------------------------------------
For Against Abstain
---------- --------- ---------
44,913,392 1,053,403 6,989,594
To approve Electronic Arts Inc. 2000 Class B Equity Incentive Plan.
Votes
-----------------------------------------------------------------------
For Against Abstain
---------- --------- ---------
30,491,221 15,829,074 6,636,094
To approve Electronic Arts Inc. 2000 Class A Equity Incentive Plan.
Votes
-----------------------------------------------------------------------
For Against Abstain
---------- --------- ---------
36,883,249 16,044,180 28,960
13
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive
officers of Electronic Arts, who are chosen by and serve at the discretion of
the Board of Directors:
Name Age Position
---- --- --------
Lawrence F. Probst III 50 Chairman and Chief Executive
Officer
Don A. Mattrick 36 President, Worldwide Studios
John S. Riccitiello 40 President and Chief Operating
Officer
William B. Gordon 50 Executive Vice President and
Chief Creative Officer
E. Stanton McKee, Jr. 55 Executive Vice President and
Chief Financial and
Administrative Officer
Nancy L. Smith 47 Executive Vice President and
General Manager, North
American Publishing
Ruth A. Kennedy 45 Senior Vice President, General
Counsel and Secretary
J. Russell Rueff, Jr. 38 Senior Vice President, Human
Resources
David L. Carbone 49 Vice President, Finance
Mr. Probst has been a director of Electronic Arts since January 1991
and currently serves as Chairman and Chief Executive Officer. He was elected as
Chairman in July 1994. Mr. Probst has previously served as President of
Electronic Arts; as Senior Vice President of EA Distribution, Electronic Arts'
distribution division, from January 1987 to January 1991; and from September
1984, when he joined Electronic Arts, until December 1986, served as Vice
President of Sales. Mr. Probst holds a B.S. degree from the University of
Delaware.
Mr. Mattrick has served as President of Worldwide Studios since
September 1997. Prior to this, he served as Executive Vice President, North
American Studios, since October 1996. From July 1991 to October 1996, he served
as Senior Vice President, North American Studios, Vice President of Electronic
Arts and Executive Vice President/General Manager for EA Canada. Mr. Mattrick
was founder and former chairman of Distinctive Software Inc. from 1982 until it
was acquired by us in 1991.
Mr. Riccitiello has served as President and Chief Operating Officer
since October 1997. Prior to joining Electronic Arts, Mr. Riccitiello served as
President and Chief Executive Officer of the worldwide bakery division at Sara
Lee Corporation. Before joining Sara Lee, he served as President and CEO of
Wilson Sporting Goods Co. and has also held executive management positions at
Haagen-Dazs, PepsiCo, Inc. and The Clorox Company. Mr. Riccitiello holds a
degree in Economics and Marketing from the University of California, Berkeley.
Mr. Gordon has served as Executive Vice President and Chief Creative
Officer since March 1998. Prior to this, he served as Executive Vice President,
Marketing since October 1995. From August 1993 to October 1995, he served as
Executive Vice President of EA Studios and as Senior Vice President of
Entertainment Production since February 1992. He also served as Senior Vice
President of Marketing, as General Manager of EA Studios, as Vice President of
Marketing, as Director of Advertising and as Vice President of our former
entertainment division while employed by us. Mr. Gordon holds a B.A. degree from
Yale University and an M.B.A. degree from Stanford University.
Mr. McKee joined Electronic Arts in March 1989 and is currently
Executive Vice President and Chief Financial and Administrative Officer. Prior
to October 1996, he served as Senior Vice President and Chief Financial and
Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford
University and is also a Certified Public Accountant.
Ms. Smith has served as Executive Vice President and General Manager,
North American Publishing since March 1998. Prior to this, she served as
Executive Vice President, North American Sales since October 1996. She
previously held the position of
14
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.
Ms. Kennedy has been employed by Electronic Arts since February 1990.
She served as Corporate Counsel until March 1991 and is currently Senior Vice
President, General Counsel and Secretary. Prior to October 1996, she served as
Vice President, General Counsel and Secretary. Ms. Kennedy was elected Secretary
in September 1994. Ms. Kennedy is a member of the State Bars of California and
New York and received her B.A. degree from William Smith College and her Juris
Doctor from the State University of New York.
Mr. Rueff has served as Senior Vice President of Human Resources since
October of 1998. Prior to joining Electronic Arts, Mr. Rueff held various
positions with the PepsiCo companies for over 10 years, including: Vice
President, International Human Resources; Vice President, Staffing and
Resourcing at Pepsi-Cola International; Vice President, Restaurant Human
Resources for Pizza Hut; and also various other management positions within the
Frito-Lay Company. Mr. Rueff holds a M.S. degree in Counseling and a B.A. degree
in Radio and Television from Purdue University in Indiana.
Mr. Carbone has been with Electronic Arts since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Mr. Carbone holds a B.S. degree in accounting from King's College and is a
Certified Public Accountant.
15
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the National Market under the symbol "ERTS". The
following table sets forth the quarterly high and low closing sales prices of
our Common Stock from April 1, 1998 through March 31, 2000. Such prices
represent prices between dealers and does not include retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
Closing Sales Prices
-------------------------
High Low
---------- ---------
Fiscal Year Ended March 31, 1999:
First Quarter $ 54.81 $ 41.63
Second Quarter 55.56 38.13
Third Quarter 56.00 33.88
Fourth Quarter 52.19 38.25
Fiscal Year Ended March 31, 2000:
First Quarter $ 54.81 $ 45.63
Second Quarter 76.19 52.88
Third Quarter 120.94 66.44
Fourth Quarter 102.19 69.00
There were approximately 2000 holders of record of our Common Stock as of June
1, 2000. We believe that a significant number of beneficial owners of our Common
Stock hold their shares in street names.
Dividend Policy
We have not paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
16
ITEM 6: SELECTED FINANCIAL DATA
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
Years Ended March 31 (In thousands, except per share data)
INCOME STATEMENT DATA 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 1,420,011 $ 1,221,863 $ 908,852 $ 673,028 $ 587,299
Cost of goods sold 705,808 627,823 481,233 328,943 291,491
------------------------------------------------------------------------------
Gross profit 714,203 594,040 427,619 344,085 295,808
Operating expenses:
Marketing and sales 188,628 163,407 128,308 102,072 85,771
General and administrative 92,502 76,219 57,838 48,489 37,711
Research and development 260,759 199,141 145,732 130,755 108,043
Charge for acquired in-process technology 6,539 44,115 1,500 -- 2,232
Merger costs -- -- 10,792 -- --
Amortization of intangibles 11,989 5,880 -- -- --
------------------------------------------------------------------------------
Total operating expenses 560,417 488,762 344,170 281,316 233,757
------------------------------------------------------------------------------
Operating income 153,786 105,278 83,449 62,769 62,051
Interest and other income, net 16,028 13,180 24,811 13,279 7,514
------------------------------------------------------------------------------
Income before provision for income taxes and
minority interest 169,814 118,458 108,260 76,048 69,565
Provision for income taxes 52,642 45,414 35,726 26,003 22,584
------------------------------------------------------------------------------
Income before minority interest 117,172 73,044 72,534 50,045 46,981
Minority interest in consolidated
joint venture (421) (172) 28 1,282 (304)
------------------------------------------------------------------------------
Net income $ 116,751(a) $ 72,872(b) $ 72,562(c) $ 51,327 $ 46,677(d)
------------------------------------------------------------------------------
Net income per share amounts:
Basic $ 1.86(a) $ 1.20(b) $ 1.23(c) $ 0.89 $ 0.84(d)
Diluted $ 1.76(a) $ 1.15(b) $ 1.19(c) $ 0.86 $ 0.80(d)
Number of shares used in computation:
Basic 62,830 60,748 58,867 57,544 55,685
Diluted 66,371 63,272 60,958 59,557 58,190
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA AT FISCAL YEAR END
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term
investments $ 339,804 $ 312,822 $ 374,560 $ 268,141 $ 190,873
Marketable securities 236 4,884 3,721 5,548 37,869
Working capital 440,021 333,256 408,098 284,863 247,001
Long-term investments 8,400 18,400 24,200 34,478 30,319
Total assets 1,192,312 901,873 745,681 584,041 489,496
Total liabilities 265,302 236,209 181,713 136,237 108,668
Minority interest 3,617 2,733 -- 28 1,277
Total stockholders' equity 923,393 662,931 563,968 447,776 379,551
Note: The selected five-year financial data has been restated to reflect the
acquisition of Maxis, Inc. which was accounted for as a pooling of interest.
(a) Net income and net income per share include one-time acquisition related
charges of $4.5 million, net of taxes, incurred in connection with the
acquisition of Kesmai and other business combinations made during the year
as well as goodwill amortization of $8.3 million, net of taxes.
(b) Net income and net income per share include one-time acquisition related
charges of $37.5 million, net of taxes, incurred in connection with the
acquisition of Westwood Studios and other business combinations made during
the year as well as goodwill amortization of $4.0 million, net of taxes.
(c) Net income and net income per share include one-time acquisition related
charges of $1.0 million, net of taxes, incurred in connection with the
acquisition of the remaining minority ownership interest in Electronic Arts
Victor, Inc. as well as merger costs of $7.2 million, net of taxes,
associated with the merger with Maxis, offset by a one-time gain on sale of
Creative Wonders, LLC in the amount of $8.5 million, net of taxes.
(d) Net income and net income per share include one-time acquisition related
charges of $1.5 million, net of taxes, incurred in connection with the
acquisition of Cinematronics LLC made by Maxis prior to the Maxis merger
with Electronic Arts.
Please refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussions of EA Core and EA.com proforma financial
statements.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements about circumstances
that have not yet occurred. All statements, trend analysis and other information
contained below relating to markets, our products and trends in revenue, as well
as other statements including words such as "anticipate", "believe" or "expect"
and statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks and actual
events or our actual future results could differ materially from those set forth
in the forward-looking statements due to such risks and uncertainties. We will
not necessarily update information if any forward-looking statement later turns
out to be inaccurate. Risks and uncertainties that may affect out future results
and performance include, but are not limited to those discussed under the
heading "Risk Factors" at pages 36 to 41 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of Fiscal 2000 to 1999:
Revenues
We derive revenues primarily from shipments of entertainment software, which
includes EA Studio products for dedicated entertainment systems (that we call
video game systems or consoles such as PlayStation and Nintendo 64), EA Studio
personal computer products (or PC), and Affiliated Label (or AL) products that
are published by third parties and distributed or co-published by us. We also
derive revenues from licensing of EA Studio products and Affiliated Label
products through hardware companies (or OEMs) and online subscription revenues.
Information about our net revenues for North America and foreign areas for
fiscal 2000 and 1999 is summarized below (in thousands):
2000 1999 Increase % change
---------------------------------------------------------------------------
North America $ 846,637 $ 704,998 $ 141,639 20.1%
---------------------------------------------------------------------------
Europe 492,430 443,937 48,493 10.9%
Asia Pacific 47,573 39,560 8,013 20.3%
Japan 33,371 33,368 3 0.0%
---------------------------------------------------------------------------
International 573,374 516,865 56,509 10.9%
---------------------------------------------------------------------------
Consolidated Net Revenues $1,420,011 $1,221,863 $ 198,148 16.2%
===========================================================================
North America Net Revenues
The increase in North America net revenues for fiscal 2000 compared to fiscal
1999 was primarily attributable to:
o A 52% increase in PC revenues due to strong sales of Command and
Conquer: Tiberian Sun, Sim City 3000 as well as the fourth quarter
shipment of The Sims in fiscal 2000.
o A 20% increase in PlayStation revenues due to more titles released
during fiscal 2000 including Madden NFL 2000, NBA 2000 and Tomorrow
Never Dies as compared to fiscal 1999.
o A 17% increase in AL revenues primarily due to the shipment of titles
published by Square EA offset by the loss of an affiliate, Accolade,
due to its acquisition by a third party in the first quarter of the
current fiscal year.
o These increases were partially offset by an expected decline in sales
of Nintendo 64 ("N64") products.
International Net Revenues
The increase in international net revenues for fiscal 2000 compared to fiscal
1999 was attributable to the following:
o Europe's net revenues increased by 11% primarily due to an increase in
sales of PC titles including Command and Conquer: Tiberian Sun, Sim
City 3000 and The Sims as well as an increase in PlayStation revenues
due to the success of FIFA 2000, Tomorrow Never Dies and F1 2000. These
increases were partially offset by an expected decline in sales of N64
products. Overall European revenues were adversely impacted by a
devaluation of the Euro compared to the same period last year.
18
o Asia Pacific's net revenues increased 20% due to PC sales of Command
and Conquer: Tiberian Sun and Sim City 3000.
o Japan's net revenues were flat compared to the prior year. PC and
Affiliated Label revenues increased, offset by a decrease in
PlayStation product sales primarily due to strong sales of FIFA: Road
to World Cup and World Cup 98 in the prior year.
Information about our net revenues by product line for fiscal 2000 and 1999 is
presented below (in thousands):
Increase/
2000 1999 (Decrease) % change
--------------------------------------------------------------------------
EA Studio:
PlayStation $ 586,821 $ 519,830 $ 66,991 12.9%
PC 397,777 270,793 126,984 46.9%
N64 120,415 152,349 (31,934) (21.0)%
Online Subscriptions 16,771 12,570 4,201 33.4%
License, OEM and Other 22,894 18,216 4,678 25.7%
--------------------------------------------------------------------------
1,144,678 973,758 170,920 17.6%
Affiliated Label: 275,333 248,105 27,228 11.0%
--------------------------------------------------------------------------
Consolidated Net Revenues $1,420,011 $1,221,863 $ 198,148 16.2%
==========================================================================
Personal Computer Product Net Revenues
We released 31 PC titles in fiscal 2000 compared to 29 PC titles in fiscal 1999.
The worldwide increase in sales of PC revenues was primarily attributable to an
increase in sales in North America and Europe due to the success of Command and
Conquer: Tiberian Sun released in the second quarter of fiscal 2000 and
continued strong catalog sales of Sim City 3000 released in the fourth quarter
of fiscal 1999. Other key titles in the current year include The Sims and FIFA
2000.
We expect revenues from PC products to grow in fiscal 2001, but as revenues for
these products increase, they may not grow at the current rate.
PlayStation Product Net Revenues
We released 30 new PlayStation titles in fiscal 2000 compared to 21 in fiscal
1999. The increase in PlayStation product sales was attributable to more titles
released in the current fiscal year compared to the same period last year. Key
releases for the year include FIFA 2000, Tomorrow Never Dies, Madden NFL 2000,
NBA 2000 and Knockout Kings(TM) 2000.
Sony has announced the release of the PlayStation 2 console in the United States
and Europe in the fall of 2000. Although our PlayStation products will be
playable on the PlayStation 2 console, we expect sales of current PlayStation
products to decline in fiscal 2001.
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended, we are
authorized to develop and distribute software products compatible with the
PlayStation. Pursuant to the Sony Agreement, we engage Sony to manufacture
PlayStation Compact Disks for distribution by us. Accordingly, we have limited
ability to control our supply of PlayStation products or the timing of their
delivery.
Affiliated Label Product Net Revenues
AL product sales increased due to higher sales in North America. The increase in
Affiliated Label revenues compared to the same period last year was due to the
distribution of titles by Square EA, including Final Fantasy(R) VIII, partially
offset by the termination of our distribution agreement with Accolade, which was
acquired by a third party.
N64(R) Product Net Revenues
The expected decrease in N64 revenues for fiscal 2000 compared to the same
period last year was due to the weak market for N64 products as well as strong
comparisons of World Cup 98 in the prior year. We released eight titles in
fiscal 2000, including WCW(TM) Mayhem, compared to nine titles in fiscal 1999.
We expect revenues from N64 products to decline significantly in fiscal 2001.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture our N64
cartridges for distribution by us. Accordingly, we have little ability to
control our supply of N64 cartridges or the timing of their delivery. A shortage
of microchips or other factors outside our control could impair our ability to
obtain an adequate supply of cartridges.
19
In connection with our purchases of N64 cartridges for distribution in North
America, Nintendo requires us to provide irrevocable letters of credit prior to
Nintendo's acceptance of purchase orders from us for purchases of these
cartridges. For purchases of N64 cartridges for distribution in Japan and
Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo
maintains a policy of not accepting returns of N64 cartridges. Because of these
and other factors, the carrying of an inventory of cartridges entails
significant capital and risk.
Online Subscription Revenues
Online subscription revenues are revenues collected for Internet game play on
our websites. The increase in online revenues for fiscal 2000 as compared to
fiscal 1999 was attributable to the following:
o The average number of paying customers for Ultima Online increased to
over 140,000 for fiscal 2000 as compared to over 105,000 in fiscal
1999.
o The increase in paying customers was due to continued strong sales of
Ultima Online, the addition of new events within the Ultima worlds and
the release of Ultima Online: The Second Age(TM) in October 1998.
Ultima Online: The Second Age added features including new worlds,
monsters and an in-game chat feature.
o We established servers for Ultima Online in Europe in June 1999 and in
Japan in October 1998. This local dial-in capability resulted in new
customers in those territories for the fiscal 2000, as compared to
fiscal 1999.
License, OEM and Other Revenues
The increase in license, OEM and other revenues was primarily due to the
following:
o License/OEM revenues increased due to the sales of Gameboy(R) Color
titles in the current fiscal year.
o Other revenues decreased primarily due to decreases in 32-bit products,
other than PlayStation, as we are no longer publishing games for those
platforms.
Operations by Segment
As a result of the approval of the Tracking Stock proposal (see Note 2) to
authorize issuance of a new series of common stock designated as Class B common
stock, intended to reflect the performance of EA.com, management considers
EA.com a separate reportable segment. Accordingly, prior period information has
been restated to disclose this separate segment. We operate in two principal
business segments globally:
o Electronic Arts core ("EA Core") business segment: creation, marketing
and distribution of entertainment software.
o EA.com business segment: creation, marketing and distribution of
entertainment software which can be played or sold online.
EA.com, a division of Electronic Arts Inc., represents Electronic Arts' online
and e-Commerce businesses. EA.com's business includes subscription revenues
collected for Internet game play on our websites, sales of packaged goods for
Internet-only based games and sales of Electronic Arts games sold through EA.com
websites. The statement of income includes all revenues and costs directly
attributable to EA.com, including charges for shared facilities, functions and
services used by EA.com and provided by Electronic Arts. Certain costs and
expenses have been allocated based on management's estimates of the cost of
services provided to EA.com by Electronic Arts.
20
Information about our operations by segment for fiscal 2000 and 1999 is
presented below (in thousands):
Year Ended March 31, 2000
--------------------------------------------------------------------
EA Core Adjustments and Electronic
(excl. EA.com) EA.com Eliminations Arts
- --------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,399,093 $ 20,918 $ -- $ 1,420,011
Group sales 2,014 -- (2,014)(a) --
--------------------------------------------------------------------
Total net revenues 1,401,107 20,918 (2,014) 1,420,011
--------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 700,024 5,784 -- 705,808
Group cost of goods sold -- 2,014 (2,014) --
--------------------------------------------------------------------
Total cost of goods sold 700,024 7,798 (2,014) 705,808
--------------------------------------------------------------------
Gross profit 701,083 13,120 -- 714,203
Operating expenses:
Marketing and sales 185,714 2,914 -- 188,628
General and administrative 87,513 4,989 -- 92,502
Research and development 205,933 34,775 20,051(b) 260,759
Network development and support -- 20,051 (20,051) --
Charge for acquired in-process technology 2,670 3,869 -- 6,539
Amortization of intangibles 10,866 1,123 -- 11,989
--------------------------------------------------------------------
Total operating expenses 492,696 67,721 -- 560,417
--------------------------------------------------------------------
Operating income (loss) 208,387 (54,601) -- 153,786
Interest and other income, net 16,017 11 -- 16,028
--------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 224,404 (54,590) -- 169,814
Provision for income taxes 52,642 -- -- 52,642
--------------------------------------------------------------------
Income (loss) before minority interest 171,762 (54,590) -- 117,172
Minority interest in consolidated joint venture (421) -- -- (421)
--------------------------------------------------------------------
Net income (loss) $ 171,341 $ (54,590) $ -- $ 116,751
--------------------------------------------------------------------
21
Year Ended March 31, 1999
--------------------------------------------------------------------
EA Core Adjustments and Electronic
(excl. EA.com) EA.com Eliminations Arts
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,204,689 $ 17,174 $ -- $ 1,221,863
Group sales 985 -- (985)(a) --
--------------------------------------------------------------------
Total net revenues 1,205,674 17,174 (985) 1,221,863
--------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 624,252 3,571 -- 627,823
Group cost of goods sold -- 985 (985) --
--------------------------------------------------------------------
Total cost of goods sold 624,252 4,556 (985) 627,823
--------------------------------------------------------------------
Gross profit 581,422 12,618 -- 594,040
Operating expenses:
Marketing and sales 161,029 2,378 -- 163,407
General and administrative 74,995 1,224 -- 76,219
Research and development 181,245 8,050 9,846(b) 199,141
Network development and support -- 9,846 (9,846) --
Charge for acquired in-process technology 44,115 -- -- 44,115
Amortization of intangibles 5,880 -- -- 5,880
--------------------------------------------------------------------
Total operating expenses 467,264 21,498 -- 488,762
--------------------------------------------------------------------
Operating income (loss) 114,158 (8,880) -- 105,278
Interest and other income, net 13,180 -- -- 13,180
--------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 127,338 (8,880) -- 118,458
Provision for income taxes 45,414 -- -- 45,414
--------------------------------------------------------------------
Income (loss) before minority interest 81,924 (8,880) -- 73,044
Minority interest in consolidated joint venture (172) -- -- (172)
--------------------------------------------------------------------
Net income (loss) $ 81,752 $ (8,880) $ -- $ 72,872
--------------------------------------------------------------------
(a) Represents elimination of intercompany sales of Electronic Arts
packaged goods products to EA.com; and represents elimination of
royalties paid to Electronic Arts by EA.com for intellectual property
rights.
(b) Represents reclassification of Network Development and Support to
Research and Development.
The increase in net revenues for EA.com for fiscal 2000 as compared to fiscal
1999 was attributable to the following:
o Higher online revenues from increased subscriptions to Ultima Online.
o Higher internet-based e-Commerce revenues.
o Partially offset by lower Ultima Online packaged product revenues due
to the decrease in the average selling price.
22
The following table presents pro-forma results of operations allocating taxes
between EA Core and EA.com. Consolidated taxes have been allocated to EA Core
and EA.com on a pro rata basis based on the consolidated effective tax rates,
thereby giving EA.com the tax benefit of its losses which is utilized by the
consolidated group. Such tax benefit could not be recognized by EA.com on a
stand-alone basis. The sum of tax expense and tax benefit for EA Core and EA.com
is the same as consolidated tax expense. This presentation represents how
management analyzes each segment of the business (in thousands):
Year Ended March 31, 2000
---------------------------------------------------------
EA Core Adjustments and Electronic
excl. EA.com) EA.com Eliminations Arts
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest $ 224,404 $ (54,590) $-- $ 169,814
Provision (benefit) for income taxes 69,565 (16,923) -- 52,642
---------------------------------------------------------
Income (loss) before minority interest 154,839 (37,667) -- 117,172
Minority interest in consolidated joint venture (421) -- -- (421)
---------------------------------------------------------
Net income (loss) $ 154,418 $ (37,667) $-- $ 116,751
---------------------------------------------------------
Year Ended March 31, 1999
------------------------------------------------------------
EA Core Adjustments and Electronic
excl. EA.com) EA.com Eliminations Arts
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest $ 127,338 $ (8,880) $-- $ 118,458
Provision (benefit) for income taxes 48,256 (2,842) -- 45,414
------------------------------------------------------------
Income (loss) before minority interest 79,082 (6,038) -- 73,044
Minority interest in consolidated joint venture (172) -- -- (172)
------------------------------------------------------------
Net income (loss) $ 78,910 $ (6,038) $-- $ 72,872
------------------------------------------------------------
Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income
Information about our costs and expenses, interest and other income, net, income
taxes and net income for fiscal 2000 and 1999 is presented below:
Percent of Net
Revenues
----------------
2000 1999
---- ----
Cost of goods sold 49.7% 51.4%
Marketing and sales 13.3 13.4
General and administrative 6.5 6.2
Research and development (includes network
development and support) 18.4 16.3
Charge for acquired in-
process technology 0.5 3.6
Amortization of intangibles 0.8 0.5
Interest and other income, net 1.1 1.1
Income taxes - effective tax rate 31.0 38.3
Net income 8.2% 6.0%
Cost of Goods Sold. Cost of goods sold as a percentage of revenues decreased in
fiscal 2000 due to:
o An increase in sales of higher margin PC titles as a percentage of
revenues.
o An increase in sales of higher margin AL co-published titles which make
up a greater amount of total AL revenues as compared to the prior year.
23
o A decrease in sales of lower margin N64 titles.
o Higher average margin for PC sales due to higher percentage of revenues
from internally developed and Intellectual Property owned titles, such
as Command and Conquer: Tiberian Sun, Sim City 3000 and The Sims.
o Partially offset by a decrease, as a percentage of revenues, of
PlayStation products.
Marketing and Sales. Marketing and sales expenses increased in absolute dollars
by 15% primarily attributed to:
o Increased print, Internet and television advertising to support new
releases.
o Increased cooperative advertising associated with higher revenues in
North America and Europe as compared to the prior year.
o Additional headcount related to the continued expansion of our
worldwide distribution business.
General and Administrative. General and administrative expenses increased in
absolute dollars by 21% primarily due to:
o An increase in payroll and occupancy costs to support the increase in
growth in North America and Europe.
o Increased general and administrative spending for EA.com. EA.com
expanded its staff and incurred additional administrative related costs
required to support growth of the business. We anticipate a continued
increase in the absolute dollars spent on general and administrative
related expenses for EA.com.
Research and Development. The increase in absolute dollars by 31% for research
and development expenses (including Network Development and Support) was due to:
o Increased research and development spending due to the ongoing
investment in our online business. EA.com increased the number of
online projects in development and increased development staff. We
believe that continued spending for EA.com game development is critical
to the growth of the business and to meet certain targeted launch
commitments. EA.com intends to increase the number of online games in
development and significantly increase development and production
staff. As a result, research and development expenses are expected to
increase in absolute dollars.
o Additional headcount-related expenses attributable to the increased
in-house development capacity and a higher number of SKUs released in
fiscal 2000.
o An increase in development spending for next generation console
products including development for the PlayStation 2 console.
We released a total of 69 new products in fiscal 2000 compared to 59 in fiscal
1999.
Network Development and Support. The increase in network development and support
expenses was due to:
o The ongoing investment in our online business.
o EA.com's network and development support expenses increased due to
increased spending for network infrastructure in preparation for new
online products and the EA.com game site. In addition, we incurred
higher infrastructure costs related to increased server capacity for
Ultima Online, allowing EA.com to serve a higher number of active
subscribers.
We expect network development and support expenses to increase in absolute
dollars in the future.
Charge for Acquired In-Process Technology.
Fiscal 2000:
o In connection with the acquisition of Kesmai by EA.com in the fourth
fiscal quarter of fiscal 2000, we allocated and expensed $3,869,000 of
the purchase price to acquired in-process technology. Kesmai had
various projects in progress at the time of the acquisition. As of the
acquisition date, costs to complete Kesmai projects acquired were
expected to be approximately $10,550,000 in future periods. We believe
there have been no significant changes to these estimates as of March
31, 2000. We currently expect to complete the development of these
projects at various dates through fiscal 2002 and to publish the
projects upon completion. In conjunction with the merger of Kesmai, we
accrued approximately $200,000 related to direct transaction and other
related costs. At March 31, 2000 there were $133,000 in accruals
remaining related to these items.
o In connection with the acquisitions of two development companies by EA
Core, made in the 2nd and 4th quarters of fiscal 2000, we allocated and
expensed $2,670,000 of the purchase price to acquired in-process
technology.
Fiscal 1999:
o In connection with the acquisition of Westwood by EA Core in September
1998, we allocated and expensed $41,836,000 of the purchase price to
acquired in-process technology.
o Additionally, in connection with the acquisition of two software
development companies by EA Core, in the first quarter of fiscal 1999,
we incurred a total charge of $2,279,000 for acquired in-process
technology.
24
These charges were made after we concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
Amortization of Intangibles. The amortization of intangibles results primarily
from the acquisitions of Westwood, Kesmai, ABC Software and other acquisitions
made in fiscal 2000. Amortization of intangibles was $10,866,000 for EA Core and
$1,123,000 for EA.com.
Interest and Other Income, Net. Interest and other income, net, increased in
absolute dollars primarily due to realized gains on sales of marketable
securities and the sale of our interest in an affiliate. Those gains were
partially offset by a write-off of a note receivable from an affiliate in the
current year as well as a gain on sale of land recognized in the prior year.
Income Taxes. Our effective tax rate was 31.0% for fiscal 2000 and 38.3% for
fiscal 1999. The effective tax rate was lower than the comparable prior year
period (excluding the effect of the one-time charges in the prior year)
primarily as a result of a higher portion of international income for fiscal
2000 subject to a lower foreign tax rate as compared to the prior year. Our
effective tax rate for fiscal 1999 was negatively affected as there was no tax
benefit recorded for a portion of the charges related to the acquired in-process
technology. Excluding the effect of these charges, the effective tax rate for
fiscal 1999 would have been 32.0%.
Net Income. In absolute dollars, reported net income increased by 60% primarily
related to higher revenues and gross profits as compared to the same period last
year. The increase was also due to significant one-time charges for acquired
in-process technology in the prior year. This was partially offset by higher
costs incurred by EA.com for the development of online projects, the network
infrastructure development and higher infrastructure costs for Ultima Online and
Ultima Online: The Second Age. Excluding the one-time charges relating to
acquired in-process technology of $4,512,000, net of taxes, in the current year,
net income would have been $121,263,000. Excluding the one-time charges relating
to acquired in-process technology of $37,506,000, net of taxes in the prior
year, net income would have been $110,378,000.
Excluding one-time charges related to acquired in-process technology and
goodwill amortization, net income would have been $129,535,000 for fiscal 2000.
Excluding one-time charges relating to acquired in-process technology and
goodwill amortization, net income would have been $114,376,000 for fiscal 1999.
Comparison of Fiscal 1999 to 1998:
Revenues
Information about our net revenues for North America and foreign areas for
fiscal 1999 and 1998 is summarized below (in thousands):
Increase/
1999 1998 (Decrease) % change
------------------------------------------------
North America $ 704,998 $ 519,423 $ 185,575 35.7%
------------------------------------------------
Europe 443,937 325,938 117,999 36.2%
Asia Pacific 39,560 41,494 (1,934) (4.7)%
Japan 33,368 21,997 11,371 51.7%
------------------------------------------------
International 516,865 389,429 127,436 32.7%
------------------------------------------------
Consolidated Net Revenues $1,221,863 $ 908,852 $ 313,011 34.4%
================================================
North America Net Revenues
The increase in North America net revenues was mainly attributable to:
o Strong growth in N64 and PlayStation systems. Net revenues from
PlayStation and N64 increased 51% due to a larger market and greater
installed base for these platforms as well as more title releases for
N64 in comparison to the prior year.
o AL sales increased 53% compared to the prior year primarily due to the
distribution of products published by Square EA.
o PC revenues increased 11% due to key title releases during the year.
25
International Net Revenues
The increase in international net revenues for fiscal 1999 compared to fiscal
1998 was attributable to the following:
o Europe's net revenues increased primarily due to an increase in sales
of PlayStation and Affiliated Label products.
o Japan's net revenues increased primarily due to the sales of FIFA: Road
to World Cup 98.
o Offset by a decrease in Asia Pacific net revenues due to the weakness
in Asian currencies. In local currency, in spite of weak economies, net
revenues for Asia Pacific increased compared to the prior year.
Information about our net revenues by product line for fiscal 1999 and 1998 is
presented below (in thousands):
Increase/
1999 1998 (Decrease) % change
------------------ -------------------- ----------------- --------------
EA Studio:
PlayStation $ 519,830 $380,299 $139,531 36.7%
PC 270,793 231,034 39,759 17.2%
N64 152,349 56,677 95,672 168.8%
Online subscriptions 12,570 4,451 8,119 182.4%
License, OEM and Other 18,216 50,526 (32,310) (63.9)%
------------------ -------------------- ----------------- --------------
973,758 722,987 250,771 34.7%
Affiliated Label: 248,105 185,865 62,240 33.5%
------------------ -------------------- ----------------- --------------
Consolidated Net Revenues $1,221,863 $908,852 $313,011 34.4%
================== ==================== ================= ==============
PlayStation Product Net Revenues
We released 21 new PlayStation titles in fiscal 1999 compared to 25 in fiscal
1998. The increase in PlayStation product sales was attributable to the greater
installed base of PlayStation game consoles and the releases of key titles for
this platform including FIFA 99, World Cup 98 and Madden NFL 99.
Personal Computer Product Net Revenues
We released 29 PC titles in fiscal 1999 compared to 30 PC titles in fiscal 1998.
The worldwide increase in sales of PC products was primarily attributable to an
increase in sales in Europe and North America due to the related releases of key
titles for this platform including SimCity 3000.
N64 Product Net Revenues
The increase in N64 revenues was primarily due to more title releases for this
platform compared to the prior year and a larger N64 market. We released nine
titles in fiscal 1999, including NASCAR(R) 99, compared to two titles in fiscal
1998.
Affiliated Label Product Net Revenues
AL product sales increased due to higher sales in North America and Europe. This
increase was primarily attributable to the distribution of products published by
Square EA in North America and the acquisition of ABC Software in Switzerland.
Online Subscription Revenues
The increase in online revenues for fiscal 1999 as compared to fiscal 1998 was
attributable to the following:
o The average paying customers for Ultima Online increased to over
105,000 for fiscal 1999 as compared to over 74,000 for fiscal 1998, due
to continued strong sales of Ultima Online and the release of Ultima
Online: The Second Age in the third quarter of fiscal 1999. Ultima
Online: The Second Age added features such as new worlds, monsters and
in-game chat features.
o EA.com established servers providing local dial-in capability for
Ultima Online in Japan in the third quarter of fiscal 1999. We only had
servers in North America in fiscal 1998.
License, OEM and Other Revenues
The decrease in license, OEM, online and other revenues was primarily due to the
following:
o Net revenues derived from 32-bit products other than PlayStation
decreased primarily due to lower sales of Sega Saturn(R) products. We
released no new Sega Saturn titles in fiscal 1999 compared to eight in
fiscal 1998.
o Net revenues generated by 16-bit video game cartridge-based products
decreased in fiscal 1999 as compared to fiscal 1998. As the 16-bit
video game market has been replaced by 32-bit and 64-bit systems, we
did not release any new titles in fiscal 1999.
26
o Licensing of EA Studio products increased primarily as a result of an
increase in the revenues generated by licensing of our products in
Europe.
Operations by Segment
Information about our operations by segment for fiscal 1999 and 1998 is
presented below (in thousands):
Year Ended March 31, 1999
--------------------------------------------------------------------
EA Core Adjustments and Electronic
(excl. EA.com) EA.com Eliminations Arts
--------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,204,689 $ 17,174 $ -- $ 1,221,863
Group sales 985 -- (985)(a) --
--------------------------------------------------------------------
Total net revenues 1,205,674 17,174 (985) 1,221,863
--------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 624,252 3,571 -- 627,823
Group cost of goods sold -- 985 (985) --
--------------------------------------------------------------------
Total cost of goods sold 624,252 4,556 (985) 627,823
--------------------------------------------------------------------
Gross profit 581,422 12,618 -- 594,040
Operating expenses:
Marketing and sales 161,029 2,378 -- 163,407
General and administrative 74,995