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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___ to ___
Commission File No. 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:
Class A 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 Class A common stock, $.01 par
value, held by non-affiliates of the Registrant on June 1, 2001 was
$6,054,430,726.
As of June 1, 2001 there were 136,323,266 shares of Registrant's Class A common
stock, $.01 par value, outstanding, and 6,250,000 shares of Registrant's Class B
common stock, $.01 par value, outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 2001 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 84 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 84.
ELECTRONIC ARTS INC.
2001 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4A. Executive Officers of the Registrant 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 74
PART III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial Owners and Management 75
Item 13. Certain Relationships and Related Transactions 75
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 76
Signatures 82
Exhibit Index 84
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. Risks and uncertainties that may affect our
future results and performance include, but are not limited to, those discussed
under the heading "Risk Factors" on pages 37 to 43.
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, ongoing
management of subscriptions of online games and website advertising.
EA Core
We create, market and distribute interactive entertainment software for
a variety of hardware platforms. As of March 31, 2001, 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".
o Distribution of localized versions of our products in the rest of the
world.
o Distribution of approximately 20 additional titles that were either
developed by other software publishers (that we refer to as Affiliated
Labels) in North America or titles we have assisted in the development
of with other software publishers (referred to as Co-Published titles).
o Distribution of over 4,000 Affiliated Label and Co-Published titles in
the rest of the world.
Since our inception, we have developed and are developing products for 41
different hardware platforms, including the following:
o IBM(R)PC and compatibles
o 32-bit Sony PlayStation(R)
o 32-bit Nintendo Game Boy Advance
o 64-bit Nintendo(R)64
o 128-bit Sony PlayStation 2
o 128-bit Microsoft Xbox(TM)
o 128-bit Nintendo GameCube(TM)
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
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Madden, the National Basketball Association, the PGA TOUR, Tiger Woods, the
National Hockey League, Football Association Premier League, Formula One and
Warner Bros. We maintain development studios in California, Canada, United
Kingdom, Florida, Texas, Japan, Washington, Maryland, Australia and Nevada.
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 80,000 retail locations worldwide. In fiscal 2001, approximately 37% of our
net revenues were generated by international operations, compared to 40% in
fiscal 2000 and 42% in fiscal 1999.
EA.com
On March 22, 2000, the stockholders of Electronic Arts authorized the
issuance of a new series of common stock, designated as Class B common stock
("Tracking Stock"). The Tracking Stock is 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
reflects the performance of Electronic Arts' other businesses ("EA Core").
EA.com, a division of Electronic Arts, represents Electronic Arts'
online and e-Commerce business. EA.com develops, publishes and distributes
online interactive games. EA.com's business includes subscription revenues
collected for Internet game play on our websites, website advertising, sales of
packaged goods for Internet-only based games and sales of Electronic Arts games
sold through the EA.com web store. 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
marketing sites for Electronic Arts' games or studios and the Games Channel on
America Online, which 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 have been generated by Ultima Online, Ultima Online: The Second Age and
Ultima Renaissance (collectively referred to as Ultima Online) and our Worldplay
and Kesmai games. In addition, all of our packaged goods revenues for
online-only games have been generated by 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. We also began generating advertising
revenues in October 2000 as a result of launching the EA.com site on the world
wide web and the AOL Games Channel.
Investments and Joint Ventures
Acquisitions
Pogo Corporation
On February 28, 2001, we acquired Pogo Corporation (now referred to as
"Pogo") for $43,333,000, including an initial investment of $42,000,000 and the
redemption of Pogo preferred stock of $1,333,000. The acquisition has been
accounted for under the purchase method. Pogo operates an ad-supported games
service that reaches a broad consumer market. Pogo's internet-based family games
focus on easy-to-play card, board and puzzle games. The Company has contributed
Pogo to EA.com. See note 14 of the Notes to the Consolidated Financial
Statements, included in item 8 hereof.
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 206,000 shares of Electronic Arts'
existing Class A 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 Company granted 5 percent of the
initial equity (Class B Stock) attributable to EA.com to News Corp in exchange
for the 206,000 shares noted above, adjusting the total common stock
consideration relating to the acquisition by $703,000 to $9,353,000. The Company
has contributed Kesmai to EA.com. See note 14 of the Notes to the Consolidated
Financial Statements, included in item 8 hereof.
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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 14 of the Notes to the Consolidated
Financial Statements, included in item 8 hereof.
Other Business Combinations
Additionally, during fiscal 2000, we acquired two software development
companies. See note 14 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 14 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 31, 2001, 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 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
Sony PlayStation 2 2000 Digital Versatile Disk 128-bit
- ------------------------ --------------------------------------------------------------- ------------------------ -------------
Sony
Sony released the PlayStation 2 console in Japan in March 2000, in
North America in October 2000 and in Europe in November 2000. Compared to the
initial forecast for PlayStation 2 hardware shipments from Sony, there was a
significant shortage of PlayStation 2 hardware units during the year in North
America and Europe. According to Sony, this was due to component shortages which
limited the number of units that could be manufactured. The PlayStation 2
console is a 128-bit, Digital Versatile
5
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".
Nintendo
Nintendo announced that it expects to release the Nintendo GameCube in
North America in November 2001. Nintendo GameCube will provide for games to be
delivered and played using a proprietary optical format.
Microsoft
Microsoft announced that it expects to release its first video game
system, Xbox(TM), in North America in November 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 2002. 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 128-bit machines. We believe that
such investment continues to be important. During the fiscal year 2001, the
video and computer games industry has experienced a platform transition from
32-bit and 64-bit CD-based consoles to the current generation 128-bit DVD-based
game consoles and related software. The transition to the current generation
systems was initiated by the launch of Sony's PlayStation 2 in fiscal 2001, and
continues with the anticipated launch in North America of the Nintendo GameCube
and Microsoft's Xbox in the Fall of calendar year 2001. As the market continues
to shift to the current generation systems, sales of current 32-bit and 64-bit
products have been declining and we expect a significant decline in fiscal 2002.
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, International Data Corporation
("IDC"), online gamers (defined as individuals who have played online games
within the past year) are expected to grow to 74.7 million by 2004 up from 39.4
million in 2000. IDC expects total online gaming market revenue to grow to $1.7
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 Future introduction of online gaming capabilities for next-generation
consoles.
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, Acclaim,
Havas, Microsoft, LucasArts, Interplay, Infogrames and Eidos, are each
developing individual online games and games with online components.
Currently, Sony (including the online divisions of Sony Entertainment)
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operates the Sony Station, a site that offers not only family-oriented
game shows, but also online game offerings, including the online game,
Everquest, a virtual world that directly competes with EA.com's Ultima
Online game. In addition, Sony has made public its intentions for
online connectivity via its next-generation console, the PlayStation 2,
though detailed plans have not been disclosed. In 2000, Sega introduced
SegaNet, an online gaming Internet subscription-based service optimized
for use with its Dreamcast video game console. However, Sega's
subsequent decision to discontinue the Dreamcast will impact this plan.
In 2001, Sega executives have made public statements about the
company's plans for supporting the online gaming functionality of
consoles produced by Sony and Microsoft. Each of these competitors may
compete with EA.com for advertising, subscription and e-Commerce sales.
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' Gamesville, 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,
Games.com and Shockwave.com, 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 Microsoft Gaming Zone, 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 30
playable online games, which consist primarily of card and parlor
games. In addition, Microsoft could utilize this site in some way with
its forthcoming Xbox console to develop an online gaming service.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 2001, approximately 20% of our net revenues were derived from
sales of software for the PlayStation 2. We released 15 titles worldwide in
fiscal 2001 for the PlayStation 2. Key releases for the year included Madden NFL
2001, SSX, FIFA 2001, NBA Live 2001 and NHL 2001. Revenues were lower than
expected due to the shortage of PlayStation 2 hardware in the year resulting
from component shortages which limited the number of units that could be
manufactured, according to Sony. We expect Sony to correct these issues for the
next fiscal year, and expect revenues from PlayStation 2 products to grow in
fiscal 2002.
In fiscal 2001, approximately 23% of our net revenues were derived from
sales of software for the PlayStation compared to 41% in fiscal 2000. During
fiscal 2001, we released 17 PlayStation games compared to 30 in fiscal 2000. As
expected, PlayStation sales decreased for fiscal 2001 compared to the prior year
primarily attributable to releasing fewer games and to the PlayStation 2
platform transition. With the exception of Madden NFL, all of our franchises
experienced significant decreases from prior year release. Although our
PlayStation products are playable on the PlayStation 2 console, we expect sales
of current PlayStation products to continue to decline significantly in fiscal
2002. 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. Furthermore, under the terms of an additional
licensing agreement entered into with Sony Computer Entertainment of America as
of April 2000 (the "PlayStation 2 Agreement"), as amended, we are authorized to
develop and distribute DVD-based software products compatible with the
PlayStation 2. Pursuant to these agreements, we engage Sony to supply its
PlayStation and
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PlayStation 2 CD's and DVD's for distribution by us. Accordingly, we have
limited ability to control our supply of PlayStation and PlayStation 2 CD and
DVD 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 2001, we released three titles for the N64(R) compared to
eight titles in fiscal 2000. In fiscal 2001, approximately 5% of our net
revenues were derived from the sale of N64 products compared to 8% in 2000. The
expected decrease in N64 revenues for the fiscal year, compared to the prior
fiscal year, was primarily due to fewer releases. The decrease was also due to
the weaker market for N64 products in the current year. With the expected
release of Nintendo GameCube in North America in November 2001, per Nintendo, we
expect revenues for N64 products to continue to decline significantly in fiscal
2002. The key release for the year was The World Is Not Enough.
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. 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
game sites on the world wide web that are 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 and ICQ). Users can
also access the EA.com website directly from the world wide web. EA.com is AOL's
exclusive provider of a broad aggregation of online games and programs and
manages all of the Games Channel content within AOL's flagship ISP service in
the United States and other AOL portals. Within any of the AOL properties, users
will be able to find a games channel or area which will provide the user access
to EA.com games. Through this agreement, EA.com has significantly expanded its
EA brand as a provider of online games. According to the April 2001 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 69 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 2001, we generated approximately 59% 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, 2001, 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 2001, we
introduced over 35 EA Studios titles, representing over 55 sku's, compared to 48
EA Studios titles, comprising over 69 sku's, in fiscal 2000.
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 2001, 2000 and 1999, no title represented revenues greater
than 10% of our total fiscal 2001, 2000 and 1999 net revenues.
We publish products in a number of categories such as sports, action,
strategy, simulations, role playing and adventure, each of which is becoming
increasingly competitive. Our sports-related products, marketed under the EA
SPORTS(TM) brand name, accounted for a significant percentage of net revenues in
fiscal years 2001, 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"), typically range from $35.00 to
$55.00. "Classics" 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.
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We currently develop or publish products for eight different hardware
platforms. In fiscal 2001, our product releases were predominantly for PC,
PlayStation, PlayStation 2, N64 and online Internet play. Our planned product
introductions for fiscal 2002 are for the PlayStation 2, PC, Xbox, Nintendo
GameCube, PlayStation, online Internet play, N64 and Game Boy Advance/Game Boy
Color. 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".
Our goal is to be the market leader on the next generation of video
game consoles. We are investing in the development of tools and technologies
associated with the introduction of the next generation video game console
platforms. 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 territories. However, as the PlayStation console market has reached
maturity, we expect sales of current PlayStation products to decline
significantly in fiscal 2002. Most of the console video game products will be
convertible for use on multiple advanced hardware systems. We had research and
development expenditures of $388.9 million in fiscal 2001, $262.0 million in
fiscal 2000, and $199.4 million in fiscal 1999. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult".
EA.com Web Site
Content. EA.com offers games within three broad categories of interest:
sports, family entertainment, and avid gaming. Each channel focuses 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 includes existing
Electronic Arts franchises adapted for game play on the Internet, as well as
additional original games for online play. EA.com's products are offered to
consumers within the appropriate "channels" on the site. The offerings
incorporate some or all of the following:
o Sports. EA.com currently leverages existing Electronic Arts'
franchises, such as PGA(R) Tour/Tiger Woods Golf(R), Knockout Kings(TM)
and Nascar Web Racing 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. With the Pogo acquisition, the EA.com family
games offering has significantly expanded to consist of card games,
board games, casino games, lotto games, trivia games, puzzles, game
shows and other products with mass-market appeal. This channel
leverages prizes, tournaments, community and Pogo's strength in free,
familiar games to significantly increase EA.com's appeal to the broad
consumer market.
o Avid Gaming. The general gaming offering is directed at teens and
adults looking to participate in multi-player hard core 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. Currently,
this offering capitalizes on the success of our existing Ultima Online
product as well as Electronic Arts' existing packaged goods franchises,
such as Need for Speed Web Racing. Upcoming games which EA.com
anticipates will be released in fiscal 2002 include Majestic,
BattleTech, Motor City Online and Earth & Beyond.
Marketing and Distribution
Electronic Arts Distribution
We distribute EA Studio, Affiliated Label and Co-Published products.
We market our EA Studio products using the EA GAMES(TM), EA SPORTS(TM)
and EA SPORTS BIG(TM) brands. EA GAMES consists of our separate brands,
including Electronic Arts, Maxis, Bullfrog Productions and Westwood. EA SPORTS
brand simulates professional and collegiate sports and includes titles such as
Madden NFL, FIFA and NBA Live. EA SPORTS BIG brand simulates extreme sports such
as the SSX game.
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, 2001, we distributed approximately 20
Affiliated Label and Co-
9
Published titles in North America and over 4,000 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 revenues 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 14 of 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 2001, Square EA published Final
Fantasy 9 for the PlayStation, which was a top ten selling title for Electronic
Arts.
We generated approximately 95% 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 5% 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 each of the fiscal years ended March 31, 2001, 2000 and 1999,
we had sales to one customer, Wal-Mart Stores, Inc., which represented 12% of
total net revenues.
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.
Within the EA.com site, we offer visitors the opportunity to purchase
Electronic Arts software products directly from us. We utilize EA Core's
distribution network to fulfill consumers' online orders. 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. In fiscal 2001, we
wrote off approximately $1,000,000 of a receivable as a result of the default of
payment from a customer in Europe. 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
The series of common stock designated as Class B was approved to reflect the
performance of EA.com. Accordingly, management considers EA.com to be a separate
reportable segment. Prior period information has been restated to disclose this
separate segment. 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, ongoing
management of subscriptions of online games and website advertising.
10
Please see the discussion regarding segment reporting in the MD&A and note 19 of
the Notes to the 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 19 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
International net revenues decreased by 14% to $490,349,000, or 37% of
consolidated fiscal 2001 net revenues, compared to $573,374,000 or 40% of
consolidated fiscal 2000 net revenues due to the following:
o Europe's net revenues decreased 21% primarily due to the console
transition, lower Affiliated Label sales due to product release slips and
fewer hit titles released in the current year, lower PC sales with fewer
titles shipping in the period, the strong sales of Command & Conquer:
Tiberian Sun (TM) for the PC in the comparable prior year period, and
weakness in the Euro currency. In addition, PlayStation revenues decreased
43% due to fewer titles shipping during the console transition period with
most franchise titles showing significant decreases from the prior year
releases. PlayStation 2 revenues did not offset the decrease in PlayStation
revenues due to fewer hardware units reaching the market and the weighting
of titles specifically appropriate for the North American market rather
than the European market.
o Asia Pacific's net revenues decreased 4%, mainly due to the decrease in
PlayStation revenues as there were no significant new titles released in
the current year. This was offset by sales of PlayStation 2 titles such as
SSX and FIFA 2001.
o Offset by Japan's net revenues which increased 58% compared to the prior
year primarily due to the shipment of PlayStation 2 titles such as FIFA
World Soccer Championship, FIFA 2001 and SSX.
Though international revenues are expected to grow in fiscal 2002,
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, PlayStation 2 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".
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 2002 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, the concentration of our product releases in the second
half of fiscal 2002 and uncertain economic conditions in the United States. 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 2002. See Risk Factors - "Platform transitions such as the one now
occurring typically
11
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, 2001, we employed approximately 3,500 people, of whom
over 1,400 were outside the United States. Of this amount, there were
approximately 700 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 competitors" 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".
12
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 mitigated 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.
In December 2000, the Company entered into a second operating lease for
the construction and occupation of two buildings and a parking structure to be
constructed in Redwood City, California. The initial term of the lease is for a
period of five years from December 8, 2000. Monthly lease payments are based
upon the Commercial Paper Rate and the London InterBank Offered Rate. The
Company has the option to purchase the property for the unamortized financed
balance at any time after the non-cancelable lease term, or it may terminate the
lease at any time after the non-cancelable term by arranging a third party sale
or by making a termination payment. Should the Company elect to terminate the
lease, it will guarantee a residual value of up to 85% of the unamortized value
of the property. As part of the agreement, the Company must also comply with
certain financial covenants.
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 173,500 sq. ft. development
facility in Austin, Texas, and lease development facilities in Walnut Creek, San
Francisco and Carlsbad, California, New York, New York and Charlottesville,
Virginia.
We own a 127,000 sq. ft. administrative, sales and development facility
in Chertsey, England, which our United Kingdom subsidiaries moved into in March
2000. In Europe, we also lease a distribution hub in Heerlen, Holland, as well
as sales and distribution facilities in Madrid, Spain 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 Gold Coast, Australia. We also have sales and
distribution facilities in New Zealand, Singapore, Thailand, Korea, South Africa
and Taiwan, and representative offices in Hong Kong and Beijing, China. We also
maintain a 27,000 sq. ft. sales and development office in Tokyo, Japan. See
notes 4 and 12 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.
13
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 on our
consolidated financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended March 31, 2001.
14
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 51 Chairman and Chief
Executive Officer
Don A. Mattrick 37 President, Worldwide Studios
John S. Riccitiello 41 President and Chief
Operating Officer
William B. Gordon 51 Executive Vice President and
Chief Creative Officer
E. Stanton McKee, Jr. 56 Executive Vice President and
Chief Financial and
Administrative Officer
Nancy L. Smith 48 Executive Vice President and
General Manager, North
American Publishing
David L. Carbone 50 Senior Vice President, Finance
David Gardner 36 Senior Vice President, European
Publishing
Ruth A. Kennedy 46 Senior Vice President,
General Counsel and
Secretary
V. Paul Lee 36 Senior Vice President and Chief
Operating Officer, Worldwide Studios
J. Russell Rueff, Jr. 39 Senior Vice President,
Human Resources
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.
15
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 Senior Vice President of North American Sales
and Distribution from July 1993 to October 1996 and as Vice President of Sales
from 1988 to 1993. Ms. Smith has also served as Western Regional Sales Manager
and National Sales Manager since she joined Electronic Arts in 1984. Ms. Smith
holds a B.S. degree in management and organizational behavior from the
University of San Francisco.
Mr. Carbone has served as Senior Vice President, Finance since December
2000. Prior to this, he served as Vice President, Finance since February 1991.
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.
Mr. Gardner has served as Senior Vice President and Managing Director,
European Publishing since May 1999. Prior to this, he held several positions in
EA Europe, which he helped establish in 1987, including Director of European
Sales and Marketing and Managing Director of EA Europe. Mr. Gardner has also
held various positions at Electronic Arts in the sales, marketing and customer
support departments since joining the company in 1983.
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. Lee has served as Senior Vice President and Chief Operating
Officer, Worldwide Studios since 1998. Prior to this, he served as General
Manager of EA Canada, Chief Operating Officer of EA Canada, Chief Financial
Officer of EA Sports and Vice President, Finance and Administration of EA
Canada. Mr. Lee was a principle of Distinctive Software Inc. until it was
acquired by EA in 1991. Mr. Lee holds a Bachelor of Commerce degree from the
University of British Columbia and is a Chartered Financial Analyst.
Mr. Rueff has served as Senior Vice President of Human Resources since
October 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.
16
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock is traded on the Nasdaq National Market under the
symbol "ERTS". The following table sets forth the quarterly high and low closing
sales price per share of our Common Stock from April 1, 1999 through March 31,
2001. 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, 2000:
First Quarter $27.41 $22.82
Second Quarter 38.10 26.44
Third Quarter 60.47 33.22
Fourth Quarter 51.10 34.50
Fiscal Year Ended March 31, 2001:
(for Class A common stock, see note 2)
First Quarter $39.06 $26.59
Second Quarter 54.47 37.06
Third Quarter 55.38 35.19
Fourth Quarter 56.13 29.84
There were approximately 2,000 holders of record of our Common Stock as of June
1, 2001. In addition, 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.
17
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 2001 2000 1999 1998 1997
- -------------------------------------------------- ------------ ----------- ---------- ----------- ----------
Net revenues $1,322,273 $1,420,011 $1,221,863 $908,852 $673,028
Cost of goods sold 652,242 704,702 627,589 481,233 328,943
------------ ----------- ---------- ------------ -----------
Gross profit 670,031 715,309 594,274 427,619 344,085
Operating expenses:
Marketing and sales 185,336 188,611 163,407 128,308 102,072
General and administrative 104,041 92,418 76,219 57,838 48,489
Research and development 388,928 261,966 199,375 145,732 130,755
Amortization of intangibles 19,323 11,989 5,880 - -
Charge for acquired in-process technology 2,719 6,539 44,115 1,500 -
Merger costs - - - 10,792 -
------------ ----------- ---------- ------------ -----------
Total operating expenses 700,347 561,523 488,996 344,170 281,316
------------ ----------- ---------- ------------ -----------
Operating income (loss) (30,316) 153,786 105,278 83,449 62,769
Interest and other income, net 16,886 16,028 13,180 24,811 13,279
------------ ----------- ---------- ------------ -----------
Income (loss) before provision for (benefit
from) income taxes and minority interest (13,430) 169,814 118,458 108,260 76,048
Provision for (benefit from) income taxes (4,163) 52,642 45,414 35,726 26,003
------------ ----------- ---------- ------------ -----------
Income (loss) before minority interest (9,267) 117,172 73,044 72,534 50,045
Minority interest in consolidated joint venture (1,815) (421) (172) 28 1,282
------------ ----------- ---------- ------------ -----------
Net income (loss) $ (11,082)(a) $ 116,751(b) $ 72,872(c) $ 72,562(d) $ 51,327
------------ ----------- ---------- ------------ -----------
Net income per share amounts:
Basic N/A $ 0.93(b) $ 0.60(c) $ 0.62(d) $ 0.45
Diluted N/A $ 0.88(b) $ 0.58(c) $ 0.60(d) $ 0.43
Number of shares used in computation:
Basic N/A 125,660 121,495 117,734 115,087
Diluted N/A 132,742 126,545 121,917 119,114
Class A common stock:
Net income (loss):
Basic $ 11,944 (a) N/A N/A N/A N/A
Diluted $ (11,082)(a) N/A N/A N/A N/A
Net income (loss) per share:
Basic $ 0.09 (a) N/A N/A N/A N/A
Diluted $ (0.08)(a) N/A N/A N/A N/A
Number of shares used in computation:
Basic 131,404 N/A N/A N/A N/A
Diluted 132,056 N/A N/A N/A N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (23,026)(a) N/A N/A N/A N/A
Net loss per share:
Basic $ (3.83)(a) N/A N/A N/A N/A
Diluted $ (3.83)(a) N/A N/A N/A N/A
Number of shares used in computation:
Basic 6,015 N/A N/A N/A N/A
Diluted 6,015 N/A N/A N/A N/A
- -------------------------------------------------- ------------ ----------- ---------- ------------ -----------
18
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA (Continued)
Years Ended March 31, (In thousands, except per share data)
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA AT FISCAL YEAR END 2001 2000 1999 1998 1997
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Cash, cash equivalents and short-term investments
$ 466,492 $ 339,804 $ 312,822 $ 374,560 $ 268,141
Marketable securities 10,022 236 4,884 3,721 5,548
Working capital 478,701 440,021 333,256 408,098 284,863
Long-term investments 8,400 8,400 18,400 24,200 34,478
Total assets 1,378,918 1,192,312 901,873 745,681 584,041
Total liabilities 340,026 265,302 236,209 181,713 136,237
Minority interest 4,545 3,617 2,733 -- 28
Total stockholders' equity 1,034,347 923,393 662,931 563,968 447,776
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 (loss) and net income (loss) per share include one-time
acquisition related charges of $1.9 million, net of taxes, incurred in
connection with the acquisition of Pogo Corporation made during the
year as well as goodwill amortization of $13.3 million, net of taxes.
(b) 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.
(c) 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.
(d) 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.
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.
19
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 our future results
and performance include, but are not limited to, those discussed under the
heading "Risk Factors" at pages 37 to 43 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of Fiscal 2001 to 2000:
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, PlayStation 2 and Nintendo
64), EA Studio personal computer products (or PC), Co-Publishing products that
are co-published and distributed by us, and Affiliated Label (or AL) products
that are published by third parties and distributed by us. We also derive
revenues from licensing of EA Studio products and AL products through hardware
companies (or OEM), selling subscriptions on our online gaming service, selling
advertisements on our online web pages and selling our packaged goods through
our online store.
Information about our net revenues for North America and foreign areas for
fiscal 2001 and 2000 is summarized below (in thousands):
Increase/
2001 2000 (Decrease) % change
--------------------- ---------------------- ---------------- -----------------
North America $ 831,924 $ 846,637 $ (14,713) (1.7%)
--------------------- ---------------------- ---------------- -----------------
Europe 386,728 486,816 (100,088) (20.6%)
Asia Pacific 51,039 53,187 (2,148) (4.0%)
Japan 52,582 33,371 19,211 57.6%
--------------------- ---------------------- ---------------- -----------------
International 490,349 573,374 (83,025) (14.5%)
--------------------- ---------------------- ---------------- -----------------
Consolidated Net Revenues $1,322,273 $1,420,011 $ (97,738) (6.9%)
--------------------- ---------------------- ---------------- -----------------
North America Net Revenues
The decrease in North America net revenues for fiscal 2001 compared to fiscal
2000 was primarily attributable to:
o Expected declines in sales of PlayStation and Nintendo 64 ("N64") titles
due to the beginning of the transition to next generation consoles.
PlayStation net revenues decreased 49% and N64 net revenues decreased 46%
also due to fewer titles shipping in the current year for both platforms.
o A 6% decrease in AL revenues primarily due to the acquisition of an
affiliate, DreamWorks Interactive, by Electronic Arts in the fourth quarter
of the prior fiscal year.
o Offset partially by the launch of PlayStation 2 platform in North America
which generated $171,034,000 in revenue for the year from titles such as
Madden NFL 2001, SSX, NBA Live 2001 and NHL 2001. PlayStation 2 revenues
did not offset the decrease in PlayStation revenues due to a reduced number
of hardware units reaching the market due to hardware component shortages,
according to Sony.
o Offset by a 21% increase in PC revenues due to the shipment of key releases
including Command & Conquer: Red Alert 2 and The Sims: Livin' Large and
continued strong catalog sales of The Sims.
20
International Net Revenues
The decrease in international net revenues for fiscal 2001 compared to fiscal
2000 was attributable to the following:
o Europe's net revenues decreased 21% primarily due to the console
transition, lower AL sales due to product release slips and fewer hit
titles released in the current year, lower PC sales with fewer titles
shipping in the period, the strong sales of Command & Conquer: Tiberian
Sun(TM) for the PC in the comparable prior year period, and weakness in the
Euro currency. In addition, PlayStation revenues decreased 43% due to fewer
titles shipping during the console transition period with most franchise
titles showing significant decreases from the prior year releases.
PlayStation 2 revenues did not offset the decrease in PlayStation revenues
due to fewer hardware units reaching the market and the weighting of titles
specifically appropriate for the North American market rather than the
European market.
o Asia Pacific's net revenues decreased 4%, mainly due to the decrease in
PlayStation revenues as there were no significant new titles released in
the current year. This was offset by sales of PlayStation 2 titles such as
SSX and FIFA 2001.
o Offset by Japan's net revenues which increased 58% compared to the prior
year primarily due to the shipment of PlayStation 2 titles such as FIFA
Soccer World Championship, FIFA 2001 and SSX.
Information about our net revenues by product line for fiscal 2001 and 2000 is
presented below (in thousands):
Increase/
2001 2000 (Decrease) % change
------------------ -------------------- ----------------- --------------
EA Studio:
PC $ 408,454 $ 397,777 $ 10,677 2.7%
PlayStation 309,988 586,821 (276,833) (47.2%)
PlayStation 2 258,988 - 258,988 N/A
N64 67,044 120,415 (53,371) (44.3%)
Online Subscriptions 28,878 16,771 12,107 72.2%
License, OEM and Other 20,468 22,894 (2,426) (10.6%)
Advertising 6,175 - 6,175 N/A
------------------ -------------------- ----------------- --------------
1,099,995 1,144,678 (44,683) (3.9%)
Affiliated Label: 222,278 275,333 (53,055) (19.3%)
------------------ -------------------- ----------------- --------------
Consolidated Net Revenues $1,322,273 $1,420,011 $ (97,738) (6.9%)
------------------ -------------------- ----------------- --------------
Personal Computer Product Net Revenues
The increase in sales of PC products for fiscal 2001 was primarily attributable
to the continued strong sales of The Sims, which shipped in the prior year. Key
current year releases were Command & Conquer: Red Alert 2 and The Sims: Livin'
Large. We released 20 PC titles in fiscal 2001 compared to 31 titles in fiscal
2000. The Sims continues to be the number one PC title and has now sold over 4
million copies. Due to the sales of The Sims in fiscal 2001, we expect revenues
from PC products to be flat or lower in fiscal 2002.
PlayStation Product Net Revenues
We released 17 PlayStation titles in fiscal 2001 compared to 30 in fiscal 2000.
As expected, PlayStation sales decreased for fiscal 2001 compared to the prior
year primarily attributable to the PlayStation 2 platform transition and fewer
titles. With the exception of Madden NFL, all of our franchises experienced
significant decreases from the prior year release. Although our PlayStation
products are playable on the PlayStation 2 console, we expect sales of current
PlayStation products to continue to decline significantly in fiscal 2002.
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. Furthermore, under the terms of an additional licensing
agreement entered into with Sony Computer Entertainment of America as of April
2000 (the "PlayStation 2 Agreement"), as amended, we are authorized to develop
and distribute DVD-based software products compatible with the PlayStation 2.
Pursuant to these agreements, we engage Sony to supply its PlayStation and
PlayStation 2 CD's for distribution by us. Accordingly, we have limited ability
to control our supply of PlayStation and PlayStation 2 CD products or the timing
of their delivery.
21
PlayStation 2 Product Net Revenues
We released 15 titles worldwide in fiscal 2001 for the PlayStation 2. Key
releases for the year included Madden NFL 2001, SSX, FIFA 2001, NBA Live 2001
and NHL 2001. Revenue was lower than expected due to the shortage of PlayStation
2 hardware in the year resulting from component shortages which limited the
number of units that could be manufactured, according to Sony. We expect Sony to
correct these issues for the next fiscal year, and expect revenues from
PlayStation 2 products to grow in fiscal 2002.
Affiliated Label Product Net Revenues
The decrease in Affiliated Label net revenues for fiscal 2001 compared to the
prior fiscal year was primarily due to the strong sales of Final Fantasy(R) VIII
in the prior year, our acquisition of DreamWorks Interactive, formerly an AL, in
the fourth quarter of the prior year, fewer hit AL product releases and product
release slips in Europe.
N64 Product Net Revenues
We released three N64 titles in fiscal 2001 compared to eight titles during
fiscal 2000. The expected decrease in N64 revenues for the fiscal year, compared
to the prior fiscal year, was primarily due to fewer releases. The decrease was
also due to the weaker market for N64 products in the current year. With the
expected release of Nintendo GameCube in North America in November 2001, per
Nintendo, we expect revenues for N64 products to continue to decline
significantly in fiscal 2002. The key release for the year was The World Is Not
Enough.
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.
Online Net Revenues
The increase in online revenues for fiscal 2001 as compared to fiscal 2000 was
attributable to the following:
o The average number of paying customers for Ultima Online increased to
approximately 200,000 for fiscal 2001 as compared to over 140,000 for
fiscal 2000. This increase was due to continued strong sales of Ultima
Online, the addition of new events and parties within the Ultima worlds
and the release of Ultima Online Renaissance in April 2000.
o We generated over $5,100,000 in subscription revenues for Kesmai and
Worldplay online games for fiscal 2001. These products were not part of
EA.com last year due to the Kesmai acquisition in the fourth quarter of
fiscal 2000. Revenues associated with these services will continue to
decrease as some of these products will be converted into our
advertising supported free offerings or incorporated in our bundled
subscription offerings.
License, OEM and Other Revenues
The decrease in license, OEM and other revenues for fiscal 2001 as compared to
fiscal 2000 was primarily a result of lower license revenue of certain titles on
the Game Boy platform.
Advertising
Following the launch of EA.com on the world wide web and the AOL Games Channel
in October, we began selling advertising on EA.com and AOL properties, including
the Slingo game. In addition, we generated advertising revenue from Pogo's
websites as a result of the purchase of Pogo Corporation (now referred to as
"Pogo") in February 2001.
Operations by Segment
The series of common stock designated as Class B (see note 2) was approved to
reflect the performance of EA.com. Accordingly, management considers EA.com to
be a separate reportable segment. 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, ongoing
management of subscriptions of online games and website advertising.
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 gameplay on our websites, website advertising, sales of
packaged goods for Internet-only based games and sales of Electronic Arts games
sold through the EA.com web store. The Consolidated Statement of Operations
includes all revenues and costs directly attributable to EA.com, including
charges for shared facilities, functions and
22
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.
Information about our operations by segment for fiscal 2001 and 2000 is
presented below (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $1,280,172 $ 42,101 $ - $1,322,273
Group sales 2,658 - (2,658) (a) -
------------------------------------------------------------------------
Total net revenues 1,282,830 42,101 (2,658) 1,322,273
------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 640,239 12,003 - 652,242
Group cost of goods sold - 2,658 (2,658) (a) -
------------------------------------------------------------------------
Total cost of goods sold 640,239 14,661 (2,658) 652,242
------------------------------------------------------------------------
Gross profit 642,591 27,440 - 670,031
Operating expenses:
Marketing and sales 163,928 12,475 8,933 (c) 185,336
General and administrative 93,885 10,156 - 104,041
Research and development 248,534 77,243 63,151 (b) 388,928
Network development and support - 51,794 (51,794) (b) -
Customer relationship management - 11,357 (11,357) (b) -
Carriage fee - 8,933 (8,933) (c) -
Amortization of intangibles 12,829 6,494 - 19,323
Charge for acquired in-process technology - 2,719 - 2,719
------------------------------------------------------------------------
Total operating expenses 519,176 181,171 - 700,347
------------------------------------------------------------------------
Operating income (loss) 123,415 (153,731) - (30,316)
Interest and other income, net 16,659 227 - 16,886
------------------------------------------------------------------------
Income (loss) before benefit from income
taxes and minority interest 140,074 (153,504) - (13,430)
Benefit from income taxes (4,163) - - (4,163)
------------------------------------------------------------------------
Income (loss) before minority interest 144,237 (153,504) - (9,267)
Minority interest in consolidated joint venture (1,815) - - (1,815)
------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 142,422 $ (153,504) $ - $ (11,082)
------------------------------------------------------------------------
Allocation of retained interest (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 142,422 $(153,504) $ - $ (11,082)
Net loss related to retained interest in EA.com (130,478) 130,478 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 11,944 $ (23,026) $ - $ (11,082)
===========================================================================================================================
23
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic 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 4,678 - 704,702
Group cost of goods sold - 2,014 (2,014) (a) -
------------------------------------------------------------------------
Total cost of goods sold 700,024 6,692 (2,014) 704,702
------------------------------------------------------------------------
Gross profit 701,083 14,226 - 715,309
Operating expenses:
Marketing and sales 185,714 2,897 - 188,611
General and administrative 87,513 4,905 - 92,418
Research and development 205,933 34,716 21,317 (b) 261,966
Network development and support - 17,993 (17,993) (b) -
Customer relationship management - 3,324 (3,324) (b) -
Amortization of intangibles 10,866 1,123 - 11,989
Charge for acquired in-process technology 2,670 3,869 - 6,539
------------------------------------------------------------------------
Total operating expenses 492,696 68,827 - 561,523
------------------------------------------------------------------------
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
===========================================================================================================================
(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 and
Customer Relationship Management to Research and Development.
(c) Represents reclassification of amortization of the Carriage fee to
Marketing and Sales.
24
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 and tax benefit. This presentation
represents how management analyzes each segment of the business (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2001
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $140,074 $(153,504) $ - $(13,430)
Provision for (benefit from) income taxes 43,423 (47,586) - (4,163)
------------------------------------------------------------------------
Income (loss) before minority interest 96,651 (105,918) - (9,267)
Minority interest in consolidated joint venture (1,815) - - (1,815)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 94,836 $(105,918) $ - $(11,082)
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2000
------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and minority interest $224,404 $ (54,590) $ - $169,814
Provision for (benefit from) 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
===========================================================================================================================
Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income
(Loss) for both EA Core and EA.com Segments
Cost of Goods Sold. Cost of goods sold for our packaged goods business consists
of actual product costs, royalties expense for celebrities, professional sports
organizations and independent software developers, manufacturing royalties,
expense for defective products and operations expense. Cost of goods sold for
our subscription business consists primarily of data center and bandwidth costs
associated with hosting our websites, credit card fees and intercompany
royalties for use of EA properties for subscription games.
Marketing and Sales. Marketing and sales expenses consist of personnel related
costs, advertising and marketing and promotional expenses. In addition,
marketing and sales includes the amortization of the AOL carriage and revenue
share fees (now referred to as "Carriage Fee"), which began with the launch of
EA.com in October. The Carriage Fee will be amortized straight line over the
term of the AOL agreement.
General and Administrative. General and administrative expenses consist of
personnel and related expenses of executive and administrative staff, fees for
professional services such as legal and accounting and allowances for bad debts.
Research and Development. Research and development expenses consist of personnel
related costs, consulting and equipment depreciation. In addition, research and
development includes customer relationship management expenses associated with
the supervision of online play and the operation of Ultima Online. EA.com has
research and development expenses incurred by Electronic Arts' studios
consisting of direct development costs and related overhead costs (facilities,
network and development management and supervision) in connection with the
development and production of EA.com online games.
Network Development and Support. Network development and support costs consist
of expenses associated with development of web content, depreciation on server
equipment to support online games, network infrastructure, software licenses and
maintenance, and network and management overhead.
25
Cost of Goods Sold. Cost of goods sold as a percentage of revenues decreased in
fiscal 2001 due to:
o An increase in sales of higher margin PC titles as a percentage of
revenues. The current year included sales on titles such as The Sims,
Command & Conquer: Red Alert 2 and The Sims: Livin' Large.
o The introduction of higher margin PlayStation 2 products in the current
year.
o A decrease in sales of lower margin AL and N64 titles.
o An increase in higher margin Online and Advertising revenue.
o Offset by a decrease in sales of PlayStation titles combined with the
decrease in average margins on PlayStation products due to a decrease
in the average sales price on front line and catalogue products.
Marketing and Sales. Marketing and sales expenses for fiscal 2001 increased as a
percentage of revenue, primarily attributed to:
o Higher EA.com marketing and sales expenses due to increased staff
required to support the live game site and advertising campaigns run on
the AOL service promoting the Games Channel. In future periods, EA.com
intends to further increase marketing and advertising spending in order
to promote our game site and the Games Channel on AOL.
o The amortization of the AOL carriage fee, which began with the launch
of EA.com in October of the current fiscal year.
o Offset by lower television and print advertising in North America and
Europe due to fewer number of releases compared to last year.
General and Administrative. General and administrative expenses increased 12.6%
for fiscal 2001, primarily attributed to:
o The expansion of the EA.com staff and additional administrative-related
costs required to support the growth of the EA.com business.
o Increase in bad debts due to a write off of a receivable as a result of
the default of payment from a customer in Europe for approximately
$1,000,000.
o Increase in depreciation expense for Europe due to the implementation
of a new transaction processing system.
Research and Development (excluding Network Development and Support). Research
and development expenses increased in absolute dollars by 38.2% for fiscal 2001,
primarily attributed to:
o Increase in research and development expenses by EA.com (including
expenses incurred by EA Core on behalf of EA.com) due to an increase in
the number of online projects in development and increased development
staff to support these products. The type of games that will be in
development will most likely increase in complexity and depth.
o An increase in development spending for next generation console
products including development for the PlayStation 2 console, Xbox and
Nintendo GameCube.
o The increase is also due to research and development expenses related
to the acquisition of DreamWorks Interactive, a software development
company, in the fourth quarter of the prior fiscal year.
o Increased headcount related costs associated with the formation of our
customer relationship management organization for the live game site.
We released a total of 55 new packaged goods products in fiscal 2001 compared to
69 new products in fiscal 2000. In addition, the EA.com website launched in
October 2000, and has over 80 live games.
Network Development and Support. The increase in network development and support
expenses was primarily due to increased spending for the network infrastructure,
and the Games Channel on the AOL service and the amortization of capitalized
costs as required under SOP 98-1 associated with the pre-launch network
infrastructure build. As a result, we expect network development and support
expenses to increase in absolute dollars in the future.
Charge for Acquired In-Process Technology.
Fiscal 2001:
In connection with the acquisition of Pogo in the fourth fiscal quarter of
fiscal 2001, we allocated and expensed $2,719,000 of the $43,333,000 purchase
price to acquired in-process technology. At the date of acquisition, this amount
was expensed as a non-recurring charge as the in-process technology had not yet
reached technological feasibility and had no alternative future uses. Pogo had
various projects in progress at the time of the acquisition. As of the
acquisition date, costs to complete Pogo projects acquired were expected to be
approximately $1,200,000 in future periods. We believe there have been no
significant changes to these estimates
26
as of March 31, 2001. 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 acquisition of Pogo, we accrued
approximately $100,000 related to direct transaction and other related costs.
Fiscal 2000:
o In connection with the acquisition of Kesmai by EA.com in the fourth
quarter of fiscal 2000, we allocated and expensed $3,869,000 of the
purchase price to acquired in-process technology.
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.
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, DreamWorks Interactive, ABC Software,
Pogo and other acquisitions. Amortization of intangibles was $12,829,000 for EA
Core and $6,494,000 for EA.com for fiscal 2001. Amortization of intangibles was
$10,866,000 for EA Core and $1,123,000 for EA.com for fiscal 2000.
Interest and Other Income, Net. Interest and other income, net, increased in
absolute dollars primarily due to higher interest income as a result of higher
average cash balances and investing in higher yielding taxable securities in the
current year. Those gains were partially offset by realized gains on sales of
marketable securities in the prior year.
Income Taxes. Our effective tax rate was 31.0% for fiscal 2001 and fiscal 2000.
At March 31, 2001, we generated a federal income tax net operating loss. A
substantial portion of this loss will be utilized in a carryback claim with the
remainder being carried forward. A valuation allowance has not been established
on this loss carryforward or other net deferred tax assets as we believe it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize them.
Net Income (loss). In absolute dollars, reported net income (loss) decreased in
fiscal 2001 primarily related to lower revenues as well as higher costs and
expenses compared to the same period last year. The decrease in revenues was
primarily due to the beginning of the transition period to next generation
console systems. The increase in expenses was primarily due to increases in
development of next generation console products in the Core business and the
investment in EA.com, including expenses to build network and online game
products and to launch our game sites in October 2000.
Excluding goodwill, non-cash compensation and one-time charges