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UNITED STATES
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, 2002
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 ___
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Class A common stock, $.01 par
value, held by non-affiliates of the Registrant on June 4, 2002 was
$5,685,093,156.
As of June 4, 2002 there were 138,897,712 shares of Registrant's Class A common
stock, $.01 par value, outstanding, and 6,233,463 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 2002 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 93 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 93.
ELECTRONIC ARTS INC.
2002 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 51
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 83
PART III
Item 10. Directors and Executive Officers of the Registrant 84
Item 11. Executive Compensation 84
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 84
Item 13. Certain Relationships and Related Transactions 84
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 85
Signatures 91
Exhibit Index 93
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 45 to 50.
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:
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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, 2002, our business was
comprised of the following:
. Distribution of approximately 90 titles that we developed and/or
published under one of our brand names in North America, including
older titles marketed as "Classics".
. Distribution of localized versions of our products in the rest of the
world.
. Distribution of additional titles that were either developed by other
software publishers (that we refer to as Affiliated Labels) or titles
we have assisted in the development of with other software publishers
(referred to as Co-Published titles). In North America, we distributed
approximately 30 Affiliated Label and Co-Published titles.
. Of the titles shipped in fiscal 2002, there were 16 titles that sold
over one million units.
Since our inception, we have developed and are developing products for
42 different hardware platforms, including the following:
. IBM(R) PC and compatibles
. 32-bit Sony PlayStation(R)
. 32-bit Nintendo Game Boy(R) Advance and Game Boy Color
. 64-bit Nintendo(R) 64
. 128-bit Sony PlayStation 2
. 128-bit Microsoft Xbox(TM)
. 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 Madden,
National Basketball Association, PGA TOUR, Tiger Woods, National Hockey League,
Warner Bros. (Harry Potter),
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MGM/Danjaq (James Bond) and National Football League. We maintain development
studios in California, Canada, United Kingdom, Florida, Texas, Japan,
Washington, Virginia 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 both fiscal 2002 and
2001, approximately 37% of our net revenues were generated by international
operations, compared to 40% in fiscal 2000.
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 represents Electronic Arts' online and e-Commerce businesses.
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(TM), 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. We are the leading online games site in
terms of unique monthly visitors according to March 2002 Media Metrix results.
To date, the majority of our subscription revenues have been generated by Ultima
Online, Ultima Online: The Second Age, Ultima Renaissance, Ultima Online Third
Dawn and Ultima Online Lord Blackthorn's Revenge (collectively referred to as
Ultima Online) and Motor City Online. In addition, our packaged goods revenues
for online-only games have primarily been generated by these titles. The
packaged good product is sold through our traditional distribution channel to
various retailers. The end customer registers for EA.com's online service to
enjoy online play on a month-to-month subscription basis. In addition, EA.com
generates advertising revenues on the world wide web and the AOL Games Channel.
Investments and Joint Ventures
Acquisitions
Pogo Corporation
On February 28, 2001, EA.com 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. See Note 13 of the
Notes to 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. 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 13 of the Notes to Consolidated
Financial Statements, included in item 8 hereof.
Other Business Combinations
Additionally, during fiscal 2000, we acquired two software development
companies. See Note 13 of the Notes to Consolidated Financial Statements,
included in item 8 hereof.
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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 titles created by Square. We have the exclusive right to
distribute in North America products published by this joint venture. Either
party may terminate the existence of Square EA and the distribution agreement
effective March 31, 2003. We own a 30% minority interest in this joint venture
while Square owns 70%.
In Japan, the companies established Electronic Arts Square KK ("EA
Square KK"), which localizes and publishes in Japan our properties originally
created in North America and Europe, as well as develops and publishes original
video games in Japan. We own a 70% majority interest, while Square owns 30%. See
Note 13 of the Notes to 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, 2002, 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
Proprietary Optical
Nintendo Nintendo GameCube 2001 Format 128-bit
Microsoft Xbox 2001 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. The PlayStation 2
console is a 128-bit, Digital Versatile Disk ("DVD") based system that is
Internet and cable ready, as well as backward compatible with the current
PlayStation console software. We currently have various products under
development for the Sony PlayStation 2 console. See Risk Factors - "New video
game platforms create additional technical and business model uncertainties".
Nintendo
Nintendo launched the Nintendo GameCube console in Japan in September
2001, North America in November 2001 and in Europe in May 2002. Nintendo
GameCube provides for games which are delivered and played using a proprietary
optical format. We currently have various products under development for the
Nintendo GameCube.
5
Microsoft
Microsoft launched the Xbox console in North America in November 2001,
in Japan in February 2002 and in Europe in March 2002. The Microsoft Xbox is a
128-bit DVD based system. We currently have various products under development
for the Microsoft Xbox.
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. Our new product releases in fiscal 2003 will be primarily for the
PlayStation 2, PC, Nintendo GameCube and Xbox. We are also scheduled to release
two online network gaming products during fiscal 2003. 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 years 2002 and
2001, the video and computer games industry has experienced a platform
transition from 32-bit CD-based and 64-bit cartridge-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 continued with the launches of the
Nintendo GameCube and Microsoft's Xbox in calendar year 2001. As the market
continues to shift to the current generation systems, sales of 32-bit and 64-bit
products have been declining and we expect a continued significant decline in
fiscal 2003. 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 March 2002 Media Metrix results, EA.com continues to
retain its position as the #1 gamesite in terms of unique monthly visitors with
over 13.3 million unique visitors for the month of March across all public and
AOL properties. In addition, EA.com comprised approximately 42% of all time
spent on Internet gamesites in March, totaling 4.6 billion minutes. We believe
the online gaming market will continue to grow due to the following factors:
. Increasing popularity of PC gaming;
. Growing interest in multiplayer games;
. Growth in the number of households with PCs and Internet connections;
. General growth in internet usage, including the number of users,
communities and increased frequency of use by consumers;
. Rapid innovation of new online entertainment experiences;
. Mass market adoption of broadband technologies; and
. 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:
. Console & PC Game Publishers. Other game publishers including Sony
Computer Entertainment of America ("Sony"), Nintendo, Sega,
Activision, THQ, Acclaim, Vivendi Universal, Microsoft, LucasArts,
Interplay, Infogrames and Eidos, are each developing individual online
games and games with online components. Currently, Flipside Inc., a
subsidiary of Vivendi Universal, operates Flipside Network, an online
game network that consists of Flipside.com, an online site that
targets unique users and advertisers with specific channel offerings,
including iWin.com, Uproar.com and Virtualvegas.com. Sony will launch
its online service later this year. PlayStation 2 owners will be
required to purchase a network adapter that will enable the console to
connect to the network. Microsoft's Xbox has built-in broadband
connectivity. Microsoft has announced its intentions to launch a
service called Xbox Live in the fall of 2002, an online gaming service
that will allow consumers for a monthly fee to play multi-player Xbox
games with each other. In 2002, Sega announced its intentions to
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develop games with online capabilities for the Nintendo GameCube,
PlayStation 2 and Xbox consoles. Each of these companies may compete
with EA.com for advertising, subscription and e-Commerce sales.
. Portals. With respect to advertising and e-Commerce sales, EA.com will
also compete with general purpose consumer web sites such as Yahoo,
Lycos, and Microsoft Network. In addition, many of these Internet
portals offer gaming sites such as Yahoo 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.
. Family Oriented Game Sites. A number of sites such as Station.com,
Uproar.com and iWin.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.
. 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.
. 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.
. 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 40 playable online games, which consist primarily of
card and parlor games.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 2002, approximately 28% of our net revenues were derived
from sales of software for the PlayStation 2 compared to 20% in fiscal 2001. We
released 18 titles worldwide in fiscal 2002 for the PlayStation 2 compared to 15
titles in fiscal 2001. Key releases for the year included Madden NFL(TM) 2002,
James Bond 007 in...Agent Under Fire(TM), FIFA 2002, NBA Street, NBA Live 2002,
NCAA Football 2002, SSX Tricky, NHL 2002 and NASCAR Thunder 2002. Revenues
increased for fiscal 2002 due to the higher installed base of PlayStation 2
hardware and more titles, including catalogue, available on the platform
compared to the prior year. We expect revenues from PlayStation 2 products to
continue to grow in fiscal 2003, but as revenues for these products increase, we
do not expect to maintain these growth rates.
In fiscal 2002, approximately 11% of our net revenues were derived
from sales of software for the PlayStation compared to 23% in fiscal 2001.
During fiscal 2002, we released five PlayStation games compared to 17 in fiscal
2001. As expected, PlayStation sales decreased for fiscal 2002 compared to the
prior year primarily attributable to releasing fewer games and to the
PlayStation 2 platform transition. Most of our franchises experienced
significant decreases from prior year releases. 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 2003. 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 manufacture its
PlayStation and PlayStation 2 CDs and DVDs for 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".
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Nintendo
In fiscal 2002, we released our first five Nintendo GameCube titles,
Madden NFL 2002, James Bond 007 in...Agent Under Fire, SSX Tricky, NBA Street
and FIFA Soccer 2002, following the platform's launch in Japan in September 2001
and in North America in November 2001.
During fiscal 2002, we released one title for the Nintendo 64
("N64(R)") compared to three titles in fiscal 2001. In fiscal 2002,
approximately 1% of our net revenues were derived from the sale of N64 products
compared to 5% in 2001. 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. We do not intend to release any new N64 products in fiscal 2003.
Microsoft
During fiscal 2002, following the launch of the Xbox platform in North
America in November 2001, in Japan in February 2002 and in Europe in March 2002,
we released our first ten Xbox titles. Titles released included Madden NFL 2002,
NBA Live 2002, James Bond 007 in...Agent Under Fire, NASCAR Thunder 2002, NHL
2002, Triple Play(TM) 2002, SSX Tricky, Knockout Kings 2002 and F1 2001.
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 March 2002 Media Metrix
Top 50 Web and Digital Media Properties report which combines unduplicated
home/work usage in the U.S., the total number of unique monthly visitors to the
AOL branded properties that will have access to the EA.com games site was 92
million. 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 2002, we generated approximately 61% of our revenues from EA
Studio products released during the year. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult". As of March 31, 2002, we were actively marketing
approximately 90 titles, comprising over 120 stock keeping units, or sku's, that
were published by our development divisions and subsidiaries, EA Studios. During
fiscal 2002, we introduced 32 EA Studios titles, representing 64 sku's, compared
to 35 EA Studios titles, comprising 55 sku's, in fiscal 2001. In fiscal 2002, we
had 16 titles that sold over one million units. In both fiscal 2001 and 2000, we
had 14 titles that sold over one million units.
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 2002, we had one title, Harry Potter and the Sorcerer's
Stone(TM), published on four different platforms, which represented
approximately 12% of our total fiscal 2002 net revenues. For fiscal 2001 and
2000, no title represented revenues greater than 10% of our total fiscal 2001
and 2000 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 2002, 2001 and 2000. 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 $30.00 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 2002, our product releases were for PlayStation 2, PC,
Xbox, PlayStation, Nintendo GameCube, Game Boy Advance, Game Boy Color, online
Internet play and N64. Our planned product introductions for fiscal 2003 are for
the PlayStation 2, PC, Nintendo GameCube, Xbox, PlayStation, Game Boy Advance,
online Internet play and 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. Our goal is to be the leading provider of interactive entertainment
on the Internet. We will invest in the development of tools and technologies
associated with the introduction of key online offerings in fiscal 2003.
PlayStation has achieved significant market acceptance in all geographic
territories. However, as the PlayStation console market has reached maturity, we
expect sales of PlayStation products to continue to decline significantly in
fiscal 2003. Most of the console video game products are convertible for use on
multiple advanced hardware systems. We had research and development expenditures
of $387.7 million in fiscal 2002, $388.9 million in fiscal 2001 and $262.0
million in fiscal 2000. See Risk Factors - "Product development schedules are
frequently unreliable and make predicting quarterly results difficult".
EA.com Web Site
Free Content. In fiscal 2002, EA.com eliminated its free games
offering under various "channels" on the site and redesigned the site to reflect
this change in strategy. As part of this redesign, EA.com eliminated the
majority of its games on the EA Games Channel and integrated its remaining
browser-based games with Pogo free games subsequent to the Pogo acquisition.
EA.com now offers free games on its site under the following three brands: Pogo
brand, EA Games brand, and EA Sports brand. The majority of the free games are
original games designed solely for online play while some of the product
offerings capitalize on existing Electronic Arts franchises adapted for game
play on the Internet. The product offerings within each brand incorporate some
or all of the following:
. Pogo. EA.com currently offers approximately 35 free games under this
brand. The games offering, geared towards family entertainment,
consists of card games, board games, casino games, word games, trivia
games, puzzles, Bingo, and other products with appeal. This category
leverages prizes, tournaments, community and Pogo's strength and
popularity in free, familiar games to significantly increase EA.com's
appeal to the broad consumer market.
. EA Games. EA.com currently offers 15 free games under this brand. The
EA Games offering consists of original arcade style games and other
original EA games designed solely for online play, such as Tank
Hunter, Bunny Luv and Meteor Madness.
. EA Sports. EA.com currently offers 10 free games under this brand.
Some of the games in this category leverage existing Electronic Arts'
franchises, such as Knockout Kings and Nascar Web Racing, to develop a
community of sports gamers. In addition, there are original games
designed solely for online play such as Pebble Beach Golf, Pro 3-Point
and It's Outta Here!
Paid Content. In addition to the free games, EA.com offers premium
pay-to-play persistent state world games on its website. In order to access
these premium games, the player must purchase a CD-ROM through retail stores or
through our online store which will entitle the consumer to one free month of
game play. Thereafter, the player must pay a monthly subscription fee in order
to continue playing. These persistent state world games are designed to target
the avid gamers: 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 features immersive experiences and
sophisticated game play appealing to dedicated gamers, as well as new forms of
cutting-edge Internet entertainment targeted to mass market gamers. Currently,
this offering capitalizes on the success of our existing Ultima Online product
as well as Motor City Online. EA.com expects to release Earth & Beyond and The
Sims Online(TM) in the future.
Each of the categories above focuses on targeting and serving its
specific consumer group by:
. Offering engaging and accessible online games;
. 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;
. Delivering innovative content that continually entertains; and
. Establishing a direct relationship with each audience member through
personalization and customization of user experiences.
9
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 and Maxis. 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 and NBA Street games.
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, 2002, we distributed approximately 30
Affiliated Label and Co-Published titles in North America. 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 13 of the Notes to 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. Either party may terminate the existence of Square EA and
the distribution agreement effective March 31, 2003. In fiscal 2002, Square EA
published Final Fantasy(R) X for the PlayStation 2, 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. We had sales to one customer, Wal-Mart Stores, Inc., which
represented 14% of total net revenues in fiscal 2002 and 12% in both fiscal 2001
and 2000.
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 may decide to provide
price protection under certain circumstances for our personal computer and video
game system products after we analyze: inventory remaining in the channel, the
rate of inventory sell through in the channel, and our remaining inventory on
hand. We maintain a policy of exchanging products or giving credits, but do not
give cash refunds. Moreover, the risk of product returns for our products on
mature platforms may increase as new hardware platforms, such as Xbox, Nintendo
GameCube and PlayStation 2, become more popular. 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
historical returns, current sell through of distributor and retailer inventory
of our products, current trends in the video game market and the overall
economy, changes in customer demand and acceptance of our products and other
related 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. 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 January 2002, one of our retail
customers, Kmart, declared bankruptcy. We have adequately reserved for our
exposure to Kmart. In addition, an increasing number of companies are competing
for access to these channels. Our arrangements with our distributors and
retailers may be terminated by either party at any time without cause.
Distributors and retailers often carry products that compete with ours.
Retailers of our products typically have a limited amount of shelf space and
promotional resources
10
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
We operate in two principal business segments globally:
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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.
Please see the discussion regarding segment reporting in the MD&A and Note 18 of
the Notes to Consolidated Financial Statements, included in items 7 and 8
hereof.
International Operations
We have wholly owned subsidiaries throughout the world, including
offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South
Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. The amounts of
net revenues, operating profit and identifiable assets attributable to each of
our geographic regions for each of the last three fiscal years are set forth in
Note 18 of the Notes to Consolidated Financial Statements, included in item 8
hereof.
International net revenues increased by 29% to $631,431,000, or 37% of
consolidated fiscal 2002 net revenues, compared to $490,349,000 or 37% of
consolidated fiscal 2001 net revenues due to the following:
. Europe's net revenues increased 34% primarily due to higher PlayStation 2,
AL and PC sales, partially offset by the expected decrease of revenues from
Sony PlayStation. PlayStation 2 launched in November 2000. Consequently,
fiscal 2001 includes five months of revenues as compared to twelve months
of revenues from the PlayStation 2 in fiscal 2002, resulting in an 80%
increase in PlayStation 2 revenues in fiscal 2002 as compared to fiscal
2001.
. Asia Pacific's net revenues increased by 5% compared to the prior year
primarily due to higher PlayStation 2, Game Boy Color(R) and PC revenue,
partially offset by the expected decrease in PlayStation and Nintendo 64
sales, and an unfavorable exchange rate comparison of approximately 10%.
PlayStation 2 revenues increased by 46%, partially offset by a 34% decrease
in PlayStation revenues in fiscal 2002 as compared to fiscal 2001.
. Japan's net revenues increased by 11% compared to the prior year primarily
due to higher AL revenue and revenue generated from sales of PlayStation,
Nintendo GameCube and Xbox products, offset by the strong sales of our
first PlayStation 2 title, FIFA Soccer World Championship, in the prior
year and weakness in the Yen currency during fiscal 2002 resulting in a
rate decrease of approximately 14% from fiscal 2001. Also, Japan did not
benefit from our primary PlayStation 2 releases during the current fiscal
year, which have more appeal to the North American market. PlayStation 2
revenues decreased by 50% in fiscal 2002 as compared to fiscal 2001.
Though international revenues are expected to grow in fiscal 2003,
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 of content, consumer privacy and online delivery 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, Xbox and
Nintendo GameCube 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".
11
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. See Risk Factors - "Our
business is both seasonal and cyclical".
Employees
As of March 31, 2002, we employed approximately 3,500 people, of whom
over 1,400 were outside the United States. Of this amount, there were over 400
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 - "Because of the
competition for qualified technical, creative, marketing and other personnel, we
may not be able to attract and retain the personnel necessary for our
businesses".
12
Item 2: Properties
Our principal administrative, sales and marketing, research and
development, and support facility is located in Redwood City, California, 20
miles south of San Francisco.
In February of 1995, we entered into a build-to-suit lease with a
financial institution on our headquarter's facility in Redwood City, California,
which was extended in July of 2001 and runs through July of 2006. We accounted
for this arrangement as an operating lease in accordance with Statement of
Financial Accounting Standards No. 13 ("SFAS 13"), "Accounting for Leases", as
amended. Existing campus facilities developed in phase one comprise a total of
350,000 square feet and provide space for sales, marketing, administration and
research and development functions. We have an option to purchase the property
(land and facilities) for $145,000,000 or, at the end of the lease, to arrange
for (1) an additional extension of the lease or (2) sale of the property to a
third party with us retaining an obligation to the owner for the difference
between the sale price and the guaranteed residual value of up to $128,900,000
if the sales price is less than this amount, subject to certain provisions of
the lease.
In December 2000, we entered into a second build-to-suit lease with a
financial institution for a five year term from December 2000 to expand our
headquarter's facilities and develop adjacent property adding approximately
310,000 square feet to our campus. We expect to complete construction in June of
2002. We accounted for this arrangement as an operating lease in accordance with
SFAS 13, as amended. The facilities will provide space for marketing, sales and
research and development. We have an option to purchase the property for
$127,000,000 or, at the end of the lease, to arrange for (1) an extension of the
lease or (2) sale of the property to a third party with us retaining an
obligation to the owner for the difference between the sale price and the
guaranteed residual value of up to $118,800,000 if the sales price is less than
this amount, subject to certain provisions of the lease.
Lease rates are based upon the Commercial Paper Rate. The two lease
agreements described above require us to maintain certain financial covenants,
all of which we were in compliance with as of March 31, 2002.
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. 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, and a 5,000 sq. ft. development facility in Warrington, England.
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 15,678 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 11 of the Notes to 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, 2002.
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 52 Chairman and Chief
Executive Officer
Don A. Mattrick 38 President, Worldwide Studios
John S. Riccitiello 42 President and Chief
Operating Officer
William B. Gordon 52 Executive Vice President and
Chief Creative Officer
E. Stanton McKee, Jr. 57 Executive Vice President and
Chief Financial and
Administrative Officer
Nancy L. Smith 49 Executive Vice President and
General Manager, North
American Publishing
David L. Carbone 51 Senior Vice President, Finance
David Gardner 37 Senior Vice President, European
Publishing
Ruth A. Kennedy 47 Senior Vice President,
General Counsel and
Secretary
V. Paul Lee 37 Senior Vice President and Chief
Operating Officer,
Worldwide Studios
J. Russell Rueff, Jr. 40 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, 2000 through March 31,
2002. 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, 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
Fiscal Year Ended March 31, 2002:
(for Class A common stock)
First Quarter $63.04 $48.31
Second Quarter 60.60 44.50
Third Quarter 66.01 42.40
Fourth Quarter 62.95 51.16
There were approximately 1,800 holders of record of our Common Stock as of June
1, 2002. 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 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 1,724,675 $1,322,273 $ 1,420,011 $ 1,221,863 $908,852
Cost of goods sold 807,611 652,242 704,702 627,589 481,233
-------------------------------------------------------------------------------
Gross profit 917,064 670,031 715,309 594,274 427,619
Operating expenses:
Marketing and sales 241,109 185,336 188,611 163,407 128,308
General and administrative 107,059 104,041 92,418 76,219 57,838
Research and development 387,736 388,928 261,966 199,375 145,732
Amortization of intangibles 25,418 19,323 11,989 5,880 --
Charge for acquired in-process technology -- 2,719 6,539 44,115 1,500
Merger costs -- -- -- -- 10,792
Restructuring and asset impairment charges 20,303 -- -- -- --
-------------------------------------------------------------------------------
Total operating expenses 781,625 700,347 561,523 488,996 344,170
-------------------------------------------------------------------------------
Operating income (loss) 135,439 (30,316) 153,786 105,278 83,449
Interest and other income, net 12,848 16,886 16,028 13,180 24,811
-------------------------------------------------------------------------------
Income (loss) before provision for (benefit
from) income taxes and minority interest 148,287 (13,430) 169,814 118,458 108,260
Provision for (benefit from) income taxes 45,969 (4,163) 52,642 45,414 35,726
-------------------------------------------------------------------------------
Income (loss) before minority interest 102,318 (9,267) 117,172 73,044 72,534
Minority interest in consolidated joint
venture (809) (1,815) (421) (172) 28
-------------------------------------------------------------------------------
Net income (loss) $ 101,509/(a)/ $ (11,082)/(b)/ $ 116,751/(c)/ $ 72,872/(d)/ $ 72,562/(e)/
-------------------------------------------------------------------------------
Net income per share:
Basic N/A N/A $ 0.93 $ 0.60 $ 0.62
Diluted N/A N/A $ 0.88 $ 0.58 $ 0.60
Number of shares used in computation:
Basic N/A N/A 125,660 121,495 117,734
Diluted N/A N/A 132,742 126,545 121,917
Class A common stock:
Net income (loss):
Basic $ 124,256 $ 11,944 N/A N/A N/A
Diluted $ 101,509 $ (11,082) N/A N/A N/A
Net income (loss) per share:
Basic $ 0.91 $ 0.09 N/A N/A N/A
Diluted $ 0.71 $ (0.08) N/A N/A N/A
Number of shares used in computation:
Basic 136,832 131,404 N/A N/A N/A
Diluted 143,142 132,056 N/A N/A N/A
Class B common stock:
Net loss, net of retained interest in EA.com $ (22,747) $ (23,026) N/A N/A N/A
Net loss per share:
Basic $ (3.77) $ (3.83) N/A N/A N/A
Diluted $ (3.77) $ (3.83) N/A N/A N/A
Number of shares used in computation:
Basic 6,026 6,015 N/A N/A N/A
Diluted 6,026 6,015 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 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term
investments $ 796,936 $ 466,492 $ 339,804 $ 312,822 $ 374,560
Marketable securities 6,869 10,022 236 4,884 3,721
Working capital 699,561 478,701 440,021 333,256 408,098
Long-term investments - 8,400 8,400 18,400 24,200
Total assets 1,699,374 1,378,918 1,192,312 901,873 745,681
Total liabilities 452,982 340,026 265,302 236,209 181,713
Minority interest 3,098 4,545 3,617 2,733 -
Total stockholders' equity 1,243,294 1,034,347 923,393 662,931 563,968
Note:
(a) Net income includes restructuring and asset impairment charges of $14.0
million, net of taxes and goodwill amortization of $17.5 million, net
of taxes.
(b) Net loss includes 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.
(c) Net income includes 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.
(d) Net income includes 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.
(e) Net income includes 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 pro forma
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 45 to 50 of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical because
they are both important to the portrayal of our financial condition and results
of operations and their application places the most significant demands on
management's judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for
these critical accounting policies are described in the following paragraphs.
For all of these policies, management cautions that actual results may differ
materially from these estimates under different assumptions or conditions.
Sales allowances and bad debt reserves
We derive revenues from sales of our packaged goods product, subscriptions of
online service, sales of packaged goods through our online store and website
advertising. Product revenue is recognized net of an allowance for returns. We
also 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 may decide to provide price
protection under certain circumstances for our personal computer and video game
system products after we analyze: inventory remaining in the channel, the rate
of inventory sell through in the channel, and our remaining inventory on hand.
We maintain a policy of exchanging products or giving credits, but do not give
cash refunds.
We estimate potential future product returns, price protection and
stock-balancing programs related to current period product revenue. We analyze
historical returns, current sell through of distributor and retailer inventory
of our products, current trends in the video game market and the overall
economy, changes in customer demand and acceptance of our products and other
related factors when evaluating the adequacy of the sales returns and price
protection allowances. In addition, management monitors and manages the volume
of our sales to retailers and distributors and their inventories as substantial
overstocking in the distribution channel can result in high returns or the
requirement for substantial price protection in subsequent periods. In the past,
actual returns have not generally exceeded our reserves. However, actual returns
in any future period are inherently uncertain as unsold products in the
distribution channels are exposed to rapid changes in consumer preferences,
market conditions or technological obsolescence due to new platforms, product
updates or competing products. For example, the risk of product returns for our
products on mature platforms may increase as new hardware platforms, such as
Xbox, Nintendo GameCube and PlayStation 2, become more popular. While management
believes it can make reliable estimates for these matters, if we changed our
assumptions and estimates, our returns reserves would change, which would impact
the net revenue we report. In addition, if actual returns were significantly
greater than the reserves we have established, the actual results would decrease
our reported revenue. Conversely, if actual returns were significantly less than
our reserves, this would increase our reported revenue.
Similarly, management must use significant judgment and make estimates in
connection with establishing allowances for doubtful accounts in any accounting
period. Management analyzes customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. Material differences may result in the amount and timing of
our bad debt expense for any period if management made different judgments or
utilized different estimates. If our customers experience financial difficulties
and are not able to meet their ongoing financial obligations to us, our results
of operations may be adversely impacted. For example, in January 2002, one of
our retail customers, Kmart, declared bankruptcy. We have adequately reserved
for our exposure to Kmart. Our distribution channels have been characterized by
change, including consolidations and financial difficulties of certain
distributors and retailers.
20
Our gross accounts receivable balance was $306,365,000 and our allowance for
product returns, pricing allowances and doubtful accounts was $115,870,000 as of
March 31, 2002. As of March 31, 2001, our gross accounts receivable balance was
$264,282,000 and our allowance for product returns, pricing allowances and
doubtful accounts was $89,833,000.
Prepaid royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
co-publishing and/or distribution affiliates and license fees paid to
celebrities, professional sports organizations and other organizations for use
of their trade name and content. Also included in prepaid royalties are
prepayments made to independent software developers under development
arrangements that have alternative future uses. Prepaid royalties are expensed
at the contractual or effective royalty rate as cost of goods sold based on
actual net product sales. We evaluate the future realization of prepaid
royalties quarterly and charge to research and development expense any amounts
that we deem unlikely to be realized through product sales. We rely on
forecasted revenue to evaluate the future realization of prepaid royalties. If
actual revenues, or revised forecasted sales, fall below the initial forecasted
sales, the charge to research and development expense may be larger than
anticipated in any given quarter. Once the charge has been taken to research and
development expense, that amount will not be expensed in future quarters when
the product has shipped. The current portion of prepaid royalties, included in
other current assets, was $65,484,000 at March 31, 2002 and $46,264,000 at March
31, 2001. The long-term portion of prepaid royalties, included in other assets,
was $1,164,000 at March 31, 2002 and $9,664,000 at March 31, 2001.
Valuation of long-lived assets, including goodwill and other intangible assets
Under current accounting standards, we make judgments about the remaining useful
lives of goodwill, purchased intangible assets and other long-lived assets
whenever events or changes in circumstances indicate an other than temporary
impairment in the remaining value of the assets recorded on our balance sheet.
In order to judge the remaining useful life of an asset, management makes
various assumptions about the value of the asset in the future. This may include
assumptions about future prospects for the business that the asset relates to
and typically involves computations of the estimated future cash flows to be
generated by these businesses. Please refer to the Operations by Segment
discussion of the Management's Discussion and Analysis of Financial Condition
and Results of Operations for discussions of EA Core and EA.com. For our EA Core
division, our future net cash flows are primarily dependent on the sale of
products for play on proprietary video game platforms. The success of our
products is affected by the ability to accurately predict which platforms and
which products we develop will be successful. Also, our revenues and earnings
are dependent on our ability to meet our product release schedules. For our
EA.com division, the future net cash flows are dependent on the success of
online games. Offering games solely for online play is a substantial departure
from our traditional business of selling packaged software games. Because of our
inexperience in predicting usage patterns for our games, we may not be effective
in achieving success that may otherwise be attainable from offering our games
online. Due to these and other factors described in our Risk Factors, we may not
realize the future net cash flows necessary to recover our long-lived assets.
For example, our product Majestic(TM) and our Platinum offering, which contained
certain browser-based entertainment games, were launched with a monthly
subscription pricing model and obtained only limited commercial success.
Accordingly, we did not realize our projected cash flows and discontinued these
offerings as part of EA.com's restructuring plan.
Based on these judgments and assumptions, management determines whether we need
to take an impairment charge to reduce the value of the asset stated on our
balance sheet to reflect its estimated fair value. Judgments and assumptions
about future values and remaining useful lives are complex and often subjective.
They can be affected by a variety of factors, including but not limited to,
significant negative industry or economic trends, significant changes in the
manner or use of the acquired assets or the strategy of our overall business and
significant underperformance relative to expected historical or projected future
operating results. Although we believe the judgments and assumptions management
has made in the past have been reasonable and appropriate, there is nonetheless
a high degree of uncertainty and judgment involved. For example, as part of a
restructuring plan to reduce EA.com's workforce and consolidate facilities in
the fiscal year ended March 31, 2002, we recorded impairment charges to write
down certain of EA.com's depreciable assets and certain intangibles to their
estimated fair value and to write off certain assets which were abandoned. The
impairment charges were based on management's projections regarding the assets'
remaining useful lives and future values. The EA.com business is still in the
growing stages, therefore evaluating its business and prospects is more
difficult than would be the case for a more mature business. We continue to
encounter the risks and difficulties faced with launching a new business. We
continue to look for ways to streamline the business by consolidating systems
and reducing infrastructure costs. Different judgments and assumptions could
materially impact our reported financial results. More conservative assumptions
of the anticipated future benefits from these businesses would result in greater
impairment charges, which would decrease net income and result in lower asset
values on our balance sheet. Conversely, less conservative assumptions would
result in smaller impairment charges, higher net income and higher asset values.
Impairment charges on long-lived assets amounted to $12,818,000 for the fiscal
year ended March 31, 2002. There were no impairment charges on long-lived assets
for the years ended March 31, 2001 and 2000.
On April 1, 2002, we adopted Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", which supersedes
Accounting Principles Board Opinion No. 17 "Intangible Assets". As a result of
adopting this standard, we will continue to amortize finite-lived intangibles,
but will no longer amortize certain other intangible assets, most notably
goodwill
21
and acquired workforce, which had a net book value at March 31, 2002 of
$69,050,000. Amortization of goodwill and acquired workforce totaled
approximately $13,125,000 for fiscal 2002, approximately $9,182,000 for fiscal
2001 and approximately $6,411,000 for fiscal 2000. Based on intangible assets as
of March 31, 2002, we estimate that amortization of finite-lived intangibles
will total approximately $8,700,000 for fiscal 2003. Following adoption of SFAS
142, we will continue to evaluate whether any event has occurred which might
indicate that the carrying value of an intangible asset is not recoverable. In
addition, SFAS 142 requires that goodwill be subject to at least an annual
assessment for impairment by applying a fair value-based test.
Income taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our current tax exposures in each
jurisdiction including the impact, if any, of additional taxes resulting from
tax examinations as well as making judgments regarding the recoverability of
deferred tax assets. To the extent recovery of deferred tax assets is not likely
based on our estimation of future taxable income in each jurisdiction, a
valuation allowance is established. Tax exposures can involve complex issues and
may require an extended period to resolve. To determine the quarterly tax rate,
we are required to estimate full-year income and the related income tax expense
in each jurisdiction. The estimated effective tax rate is adjusted for the tax
related to significant unusual items. Changes in the geographic mix or estimated
level of annual pre-tax income can effect the overall effective tax rate.
RESULTS OF OPERATIONS
Comparison of Fiscal 2002 to 2001:
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, Xbox and
Nintendo GameCube, and handheld systems such as Game Boy Advance), 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 2002 and 2001 is summarized below (in thousands):
2002 2001 Increase % change
-------------------------------------------------------------------------------
North America $ 1,093,244 $ 831,924 $ 261,320 31.4 %
------------------------------------------------------------------------------
Europe 519,458 386,728 132,730 34.3 %
Asia Pacific 53,376 51,039 2,337 4.6 %
Japan 58,597 52,582 6,015 11.4 %
------------------------------------------------------------------------------
International 631,431 490,349 141,082 28.8 %
------------------------------------------------------------------------------
Consolidated Net Revenues $ 1,724,675 $1,322,273 $ 402,402 30.4 %
==============================================================================
North America Net Revenues
The increase in North America net revenues for fiscal 2002 compared to fiscal
2001 was primarily attributable to:
... A 111% increase in PlayStation 2 revenues for the year due to the shipment
of key titles such as Madden NFL 2002, James Bond 007 in ...Agent Under
Fire, NBA Street, NBA Live 2002 and SSX Tricky, a higher installed base of
hardware and a strong catalogue business. PlayStation 2 launched in
October 2000. Consequently, fiscal 2001 includes six months of revenues as
compared to twelve months of revenues for the PlayStation 2 in fiscal
2002.
... The launch of the Xbox platform in North America in November 2001, which
generated $73,609,000 in revenues from titles such as Madden NFL 2002, NBA
Live 2002, James Bond 007 in...Agent Under Fire, NASCAR Thunder 2002, NHL
2002 and SSX Tricky.
... The launch of Nintendo GameCube in North America in November 2001, which
generated $48,744,000 for the year from key titles such as Madden NFL
2002, James Bond 007 in...Agent Under Fire, SSX Tricky, NBA Street and FIFA
Soccer 2002.
22
... New revenues were generated by Game Boy Advance of $25,989,000 for the year
from key titles including Harry Potter and the Sorcerer's Stone, Madden NFL
and NHL 2002. Also, Game Boy Color generated new revenues of $16,870,000
for the year from titles such as Harry Potter and the Sorcerer's Stone,
Madden NFL 2002 and The World Is Not Enough.
... Advertising revenues increased by $31,849,000 for the twelve months ended
March 31, 2002 as we commenced generating advertising revenues immediately
following the launch of our gamesite on the world wide web in October 2000.
In addition, advertising revenues were generated from Pogo Corporation's
("Pogo") websites subsequent to the February 2001 acquisition.
... These increases were partially offset by the continued expected decreases
in Sony PlayStation and Nintendo 64 ("N64") revenues due to those declining
markets and fewer titles shipping compared to the same period in the prior
year.
International Net Revenues
The increase in international net revenues for fiscal 2002 compared to fiscal
2001 was attributable to the following:
... Europe's net revenues increased by 34% compared to the prior year primarily
due to higher PlayStation 2, AL and PC sales, partially offset by the
expected decrease of revenues from Sony PlayStation. PlayStation 2 launched
in November 2000. Consequently, fiscal 2001 includes five months of
revenues as compared to twelve months of revenues from the PlayStation 2 in
fiscal 2002, resulting in an 80% increase in PlayStation 2 revenues.
... Asia Pacific's net revenues increased by 5% compared to the prior year
primarily due to higher PlayStation 2, Game Boy Color and PC revenue,
partially offset by the expected decrease in PlayStation and Nintendo 64
sales, and an unfavorable exchange rate comparison of approximately 10%.
PlayStation 2 revenues increased by 46%, partially offset by a 34% decrease
in PlayStation revenues in fiscal 2002 as compared to fiscal 2001.
... Japan's net revenues increased by 11% compared to the prior year primarily
due to higher AL revenue and revenue generated from sales of PlayStation,
Nintendo GameCube and Xbox products, offset by the strong sales of our
first PlayStation 2 title, FIFA Soccer World Championship, in the prior
year and weakness in the Yen currency during fiscal 2002 resulting in a
rate decrease of approximately 14% from fiscal 2001. Also, Japan did not
benefit from our primary PlayStation 2 releases during the current fiscal
year, which have more appeal to the North American market. PlayStation 2
revenues decreased by 50% in fiscal 2002 as compared to fiscal 2001.
Information about our worldwide net revenues by product line for fiscal 2002 and
2001 is presented below (in thousands):
Increase/
2002 2001 (Decrease) % change
------------------------------------------------------------------------
EA Studio:
- ----------
PlayStation 2 $ 482,882 $ 258,988 $ 223,894 86.4 %
PC 456,292 405,256 51,036 12.6 %
PlayStation 189,535 309,988 (120,453) (38.9 %)
Xbox 78,363 - 78,363 N/A
Nintendo GameCube 51,740 - 51,740 N/A
Game Boy Advance 43,653 - 43,653 N/A
Game Boy Color 38,026 - 38,026 N/A
Advertising 38,024 6,175 31,849 515.8 %
Online Subscriptions 30,940 28,878 2,062 7.1 %
License, OEM and Other 24,762 20,468 4,294 21.0 %
N64 18,152 67,044 (48,892) (72.9 %)
Online Packaged Goods 3,296 3,198 98 3.1 %
-----------------------------------------------------------------------
1,455,665 1,099,995 355,670 32.3 %
Affiliated Label: 269,010 222,278 46,732 21.0 %
- ----------------- -----------------------------------------------------------------------
Consolidated Net Revenues $ 1,724,675 $ 1,322,273 $ 402,402 30.4 %
=======================================================================
PlayStation 2 Product Net Revenues
Revenues increased for the twelve months ended March 31, 2002 due to the higher
installed base of PlayStation 2 hardware and more titles, including catalogue,
available on the platform compared to the same period last year. Major releases
for the fiscal year include titles such as Madden NFL 2002, James Bond 007 in
.....Agent Under Fire, FIFA 2002, NBA Street, NBA Live 2002, NCAA Football 2002,
SSX Tricky, NHL 2002 and NASCAR Thunder 2002. We released 18 PlayStation 2
titles in the current fiscal year compared to 15 in the same period last year.
We expect revenues from PlayStation 2 products to continue to grow in fiscal
2003, but as revenues for these products increase, we do not expect to maintain
these growth rates.
23
Personal Computer Product Net Revenues
The increase in sales of PC products for the twelve months ended March 31, 2002
compared to the same period last year was primarily due to the continued strong
sales of The Sims, which shipped over two years ago. Key current year releases
were Harry Potter and the Sorcerer's Stone, The Sims Hot Date Expansion Pack,
Medal of Honor: Allied Assault(TM), Command & Conquer Renegade(TM) and Madden
NFL 2002. We released 16 PC titles in the twelve months ended March 31, 2002
compared to 18 in the same period last year. The Sims continues to be the number
one PC title and has now sold over six million copies. Due to the sales of The
Sims in fiscal 2002, we expect revenues from PC products to be flat or lower in
fiscal 2003.
PlayStation Product Net Revenues
We released five PlayStation titles in the twelve months ended March 31, 2002
compared to 17 titles in the same period last year. As expected, PlayStation
sales decreased for the twelve months ended March 31, 2002 compared to the prior
year primarily attributable to the transition to next generation console systems
and fewer titles released for the product during the current year.
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 2003.
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 manufacture its PlayStation and
PlayStation 2 CDs and DVDs for 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.
Xbox Net Revenues
Following the launch of the Xbox platform in North America in November 2001, we
released our first ten Xbox titles during fiscal 2002. Titles released included
Madden NFL 2002, NBA Live 2002, James Bond 007 in ... Agent Under Fire, NASCAR
Thunder 2002, NHL 2002, Triple Play(TM) 2002, SSX Tricky, Knockout Kings 2002
and F1 2001.
Nintendo GameCube Net Revenues
We released our first five Nintendo GameCube titles, Madden NFL 2002, James Bond
007 in ...Agent Under Fire, SSX Tricky, NBA Street and FIFA Soccer 2002, during
fiscal 2002 following the platform's launch in Japan in September 2001 and in
North America in November 2001.
Game Boy Advance Net Revenues
We released our first three Game Boy Advance titles, Harry Potter and the
Sorcerer's Stone, Madden NFL 2002 and NHL 2002 during fiscal 2002.
Game Boy Color Net Revenues
We released three Game Boy Color titles, Harry Potter and the Sorcerer's Stone,
Madden NFL 2002 and The World is Not Enough during fiscal 2002.
Advertising Revenues
We commenced generating advertising revenues in the third quarter of fiscal year
2001 following the launch of our gamesite on the world wide web and the AOL
Games Channel in October 2000. In addition, we generated advertising revenue
from Pogo's websites subsequent to the purchase of Pogo in February 2001. As a
result of establishing our ad business in late fiscal 2001, we experienced
significant revenue growth in fiscal 2002. Due to this and continuing
uncertainties in the ad market, we will not be able to sustain the same annual
growth rate as experienced in fiscal 2002.
Online Subscription Net Revenues
The increase in online revenues for fiscal 2002 as compared to fiscal 2001 was
primarily attributable to the following:
... An increase in the number of paying customers for Ultima Online to 207,000
as of March 31, 2002 as compared to 203,000 as of March 31, 2001. This
increase was primarily due to the continued strong sales of Ultima Online
Third Dawn and the release of Ultima Online Lord Blackthorn's Revenge in
February 2002. In addition, the launch of Motor City Online in October
2001, which contributed $1,500,000 in subscription revenues for fiscal
2002.
24
... Offset by a decrease in subscription revenues of $5,000,000 for Gamestorm,
Kesmai Corporation ("Kesmai") and Worldplay online games (most of which were
transferred to our free service when the EA/AOL site went live in October
2000) in fiscal 2002 as compared to fiscal 2001.
License, OEM and Other Revenues
The increase in license, OEM and other revenues for the twelve months ended
March 31, 2002 was primarily due to a new OEM agreement with a customer in
Europe and higher revenues in North America.
Nintendo 64 Product Net Revenues
We released one N64 title in fiscal 2002 compared to three titles during fiscal
2001. The expected decrease in N64 revenues for the fiscal year, compared to the
prior fiscal year, was primarily due to the declining market for N64 products
and fewer titles released on this platform in the current fiscal year. We do not
intend to release any new N64 products in fiscal 2003.
Online Packaged Goods Net Revenues
Online Packaged Goods revenues for fiscal 2002 were slightly higher than fiscal
2001 primarily due to the release of Motor City Online in October 2001.
Affiliated Label Product Net Revenues
AL product sales increased for fiscal 2002 compared to the prior fiscal year
primarily due to strong sales of hit titles including Devil May Cry and Resident
Evil: Code Veronica resulting from new distribution deals with Capcom as well as
The Simpsons(TM) Road Rage in the current year. This was partially offset by
lower revenues from shipment of Square EA products due to fewer titles released
in fiscal 2002 compared to fiscal 2001.
Operations by Segment
Management considers EA.com to be a separate reportable segment. We operate in
two principal business segments globally (see Note 2 of the Notes to
Consolidated Financial Statements):
. EA Core business segment: creation, marketing and distribution of
entertainment software.
. 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 represents Electronic Arts' online and e-Commerce businesses. 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. The
Consolidated Statements of Operations includes all revenues and costs directly
attributable to EA.com, including charges for shared facilities, functions and
services used by EA.com and provided by EA Core. Certain costs and expenses have
been allocated based on management's estimates of the cost of services provided
to EA.com by EA Core.
25
Information about our operations by segment for fiscal 2002 and 2001 is
presented below (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
-------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ----------------------------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated customers $ 1,647,502 $ 77,173 $ - $ 1,724,675
Group sales 4,016 - (4,016) /(a)/ -
-------------------------------------------------------------------------
Total net revenues 1,651,518 77,173 (4,016) 1,724,675
-------------------------------------------------------------------------
Cost of goods sold from unaffiliated customers 794,738 12,873 - 807,611
Group cost of goods sold - 4,016 (4,016) /(a)/ -
-------------------------------------------------------------------------
Total cost of goods sold 794,738 16,889 (4,016) 807,611
-------------------------------------------------------------------------
Gross profit 856,780 60,284 - 917,064
Operating expenses:
Marketing and sales 202,749 20,496 17,864 /(c)/ 241,109
General and administrative 96,919 10,140 - 107,059
Research and development 257,762 59,892 70,082 /(b)/ 387,736
Network development and support - 59,483 (59,483) /(b)/ -
Customer relationship management - 10,599 (10,599) /(b)/ -
Carriage fee - 17,864 (17,864) /(c)/ -
Amortization of intangibles 12,888 12,530 - 25,418
Restructuring and asset impairment charges - 20,303 - 20,303
-------------------------------------------------------------------------
Total operating expenses 570,318 211,307 - 781,625
-------------------------------------------------------------------------
Operating income (loss) 286,462 (151,023) - 135,439
Interest and other income (expense), net 13,472 (624) - 12,848
-------------------------------------------------------------------------
Income (loss) before provision for income
taxes and minority interest 299,934 (151,647) - 148,287
Provision for income taxes 45,969 - - 45,969
-------------------------------------------------------------------------
Income (loss) before minority interest 253,965 (151,647) - 102,318
Minority interest in consolidated joint venture (809) - - (809)
-------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 253,156 $ (151,647) $ - $ 101,509
-------------------------------------------------------------------------
Allocation of retained interest (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
-------------------------------------------------------------------------
EA Core Adjustments and
(excl. EA.com) EA.com Eliminations Electronic Arts
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before retained interest in
EA.com $ 253,156 $ (151,647) $ - $ 101,509
Net loss related to retained interest in EA.com (128,900) 128,900 - -
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 124,256 $ (22,747) $ - $ 101,509
============================================================================================================================
26
- -------------------------------------------------------------------------------------------------------------------------
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
- ----------