Edgar Filing: ELECTRONIC ARTS INC.

EA 09.30.2013 - Q2 FY14 10Q DOC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013


¨	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. 000-17948

ELECTRONIC ARTS INC.

(Exact name of registrant as specified in its charter)



Delaware	94-2838567
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

209 Redwood Shores Parkway Redwood City, California	94065
(Address of principal executive offices)	(Zip Code)

(650) 628-1500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ	Accelerated filer	¨
Non-accelerated filer (Do not check if a smaller reporting company)	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

As of October 31, 2013, there were 309,122,532 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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ELECTRONIC ARTS INC.

FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2013

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		Page
Part I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2013 and March 31, 2013	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended September 30, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	Report of Independent Registered Public Accounting Firm	30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	59

Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 6.	Exhibits	70
Signature		71
Exhibit Index		72

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PART I – FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements (Unaudited)

ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



(Unaudited) (In millions, except par value data)	September 30, 2013			March 31, 2013 ^(a)
ASSETS
Current assets:
Cash and cash equivalents	$	1,090		$	1,292
Short-term investments	328			388
Receivables, net of allowances of $117 and $200, respectively	594			312
Inventories	58			42
Deferred income taxes, net	51			52
Other current assets	219			239
Total current assets	2,340			2,325
Property and equipment, net	532			548
Goodwill	1,726			1,721
Acquisition-related intangibles, net	216			253
Deferred income taxes, net	48			53
Other assets	174			170
TOTAL ASSETS	$	5,036		$	5,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	208		$	136
Accrued and other current liabilities	708			737
Deferred net revenue (online-enabled games)	935			1,044
Total current liabilities	1,851			1,917
0.75% convertible senior notes due 2016, net	570			559
Income tax obligations	207			205
Deferred income taxes, net	1			1
Other liabilities	121			121
Total liabilities	2,750			2,803
Commitments and contingencies (See Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value. 10 shares authorized	—			—
Common stock, $0.01 par value. 1,000 shares authorized; 309 and 302 shares issued and outstanding, respectively	3			3
Paid-in capital	2,251			2,174
Retained earnings (accumulated deficit)	(30		)	21
Accumulated other comprehensive income	62			69
Total stockholders’ equity	2,286			2,267
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,036		$	5,070

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


(a)	Derived from audited consolidated financial statements.

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ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



(Unaudited)	Three Months Ended September 30,						Six Months Ended September 30,
(In millions, except per share data)	2013			2012			2013			2012
Net revenue:
Product	$	350		$	481		$	893		$	1,183
Service and other	345			230			751			483
Total net revenue	695			711			1,644			1,666
Cost of revenue:
Product	341			371			471			503
Service and other	72			74			136			147
Total cost of revenue	413			445			607			650
Gross profit	282			266			1,037			1,016
Operating expenses:
Research and development	283			306			561			588
Marketing and sales	164			219			311			370
General and administrative	129			100			214			188
Acquisition-related contingent consideration	(44		)	—			(37		)	(20		)
Amortization of intangibles	4			7			8			14
Restructuring and other charges	(2		)	(2		)	(1		)	25
Total operating expenses	534			630			1,056			1,165
Operating loss	(252		)	(364		)	(19		)	(149		)
Interest and other income (expense), net	(8		)	(4		)	(13		)	(9		)
Loss before provision for income taxes	(260		)	(368		)	(32		)	(158		)
Provision for income taxes	13			13			19			22
Net loss	$	(273	)	$	(381	)	$	(51	)	$	(180	)
Net loss per share:
Basic and Diluted	$	(0.89	)	$	(1.21	)	$	(0.17	)	$	(0.57	)
Number of shares used in computation:
Basic and Diluted	308			316			306			317

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

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ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS



(Unaudited)	Three Months Ended September 30,						Six Months Ended September 30,
(In millions)	2013			2012			2013			2012
Net loss	$	(273	)	$	(381	)	$	(51	)	$	(180	)
Other comprehensive income (loss), net of tax:
Change in unrealized gains and losses on available-for-sale securities	1			17			—			(25		)
Change in unrealized losses on derivative instruments	(9		)	(3		)	(11		)	(2		)
Reclassification adjustment for realized losses on derivative instruments	—			1			2			1
Foreign currency translation adjustments	14			19			2			2
Total other comprehensive income (loss), net of tax	6			34			(7		)	(24		)
Total comprehensive loss	$	(267	)	$	(347	)	$	(58	)	$	(204	)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

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ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)	Six Months Ended September 30,
(In millions)	2013			2012
OPERATING ACTIVITIES
Net loss	$	(51	)	$	(180	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion, net	112			112
Stock-based compensation	71			83
Acquisition-related contingent consideration	(37		)	(20		)
Non-cash restructuring charges	—			7
Change in assets and liabilities:
Receivables, net	(278		)	(274		)
Inventories	(15		)	(13		)
Other assets	8			—
Accounts payable	77			9
Accrued and other liabilities	(37		)	109
Deferred income taxes, net	5			(10		)
Deferred net revenue (online-enabled games)	(109		)	(95		)
Net cash used in operating activities	(254		)	(272		)
INVESTING ACTIVITIES
Capital expenditures	(53		)	(56		)
Proceeds from maturities and sales of short-term investments	250			280
Purchase of short-term investments	(191		)	(197		)
Acquisition-related restricted cash	—			25
Acquisition of subsidiaries, net of cash acquired	(5		)	(10		)
Net cash provided by investing activities	1			42
FINANCING ACTIVITIES
Proceeds from issuance of common stock	50			18
Payment of debt issuance costs	—			(2		)
Repurchase and retirement of common stock	—			(179		)
Acquisition-related contingent consideration payment	(1		)	(26		)
Net cash provided by (used in) financing activities	49			(189		)
Effect of foreign exchange on cash and cash equivalents	2			(3		)
Decrease in cash and cash equivalents	(202		)	(422		)
Beginning cash and cash equivalents	1,292			1,293
Ending cash and cash equivalents	$	1,090		$	871
Supplemental cash flow information:
Cash paid during the period for income taxes, net	$	15		$	17
Cash paid during the period for interest	$	3		$	2
Non-cash investing activities:
Change in unrealized gains and losses on available-for-sale securities, net of taxes	$	—		$	(25	)

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

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ELECTRONIC ARTS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

We develop, market, publish and distribute game software content and services that can be played by consumers on a variety of platforms, including video game consoles (such as the Sony PLAYSTATION 3 and Microsoft Xbox 360), personal computers, mobile devices (such as the Apple iPhone and Google Android compatible phones), tablets and electronic readers (such as the Apple iPad and Amazon Kindle), and the Internet. Our ability to publish games across multiple platforms, through multiple distribution channels, and directly to consumers (online and wirelessly) has been, and will continue to be, a cornerstone of our product strategy. We have generated substantial growth in new business models and alternative revenue streams (such as subscription, micro-transactions, and advertising) based on the continued expansion of our online and wireless product and service offerings. Some of our games are based on our wholly-owned intellectual property (e.g., Battlefield, Mass Effect, Need for Speed, The Sims, Bejeweled, and Plants v. Zombies), and some of our games are based on content that we license from others (e.g., FIFA and Madden NFL). Our goal is to turn our core intellectual properties into year-round businesses available on a range of platforms. Our products and services may be purchased through physical and online retailers, platform providers such as console manufacturers and mobile carriers via digital downloads, as well as directly through our own online distribution platform Origin.

Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal years ending or ended, as the case may be, March 31, 2014 and 2013 contain 52 weeks each, and ends or ended, as the case may be, on March 29, 2014 and March 30, 2013, respectively. Our results of operations for the three and six months ended September 30, 2013 and 2012 contained 13 and 26 weeks each and ended on September 28, 2013 and September 29, 2012, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.

The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.

These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, as filed with the United States Securities and Exchange Commission (“SEC”) on May 22, 2013.

Reclassifications

During the fourth quarter of fiscal year 2013, we reviewed our operating expenses and reclassified certain amounts, primarily headcount and facilities costs, to align with our current operating structure. As a result, we also reclassified the related prior year amounts within our Condensed Consolidated Statements of Operations for comparability purposes. These reclassifications did not affect the Company’s consolidated net revenue, gross profit, operating income, or net income. The effect of the reclassifications on the previously-reported Condensed Consolidated Statement of Operations is reflected in the table below:



	Three Months Ended September 30, 2012							Six Months Ended September 30, 2012
	As Previously Reported		Change			Reclassified Balance		As Previously Reported		Change			Reclassified Balance
Operating expenses:
Research and development	$	314	$	(8	)	$	306	$	604	$	(16	)	$	588
Marketing and sales	212		7			219		357		13			370
General and administrative	99		1			100		185		3			188

Impact of Recently Issued Accounting Standards

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 220): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments of this ASU require that entities that have an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset for the loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce

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the loss or tax credit carryforward under the tax law. The disclosure requirements will be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2013, and will require prospective application. Early adoption is permitted. We expect to adopt this new standard in the first quarter of fiscal year 2015. While not yet quantified, we anticipate the adoption may have a material impact on the balance sheet only, resulting in equal reductions to both deferred tax assets and noncurrent income tax obligations.

(2) FAIR VALUE MEASUREMENTS

There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.

Fair Value Hierarchy

The three levels of inputs that may be used to measure fair value are as follows:


•	Level 1. Quoted prices in active markets for identical assets or liabilities.

•

Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.


•	Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2013 and March 31, 2013, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):



			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Financial Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
	As of September 30, 2013		(Level 1)		(Level 2)		(Level 3)		Balance Sheet Classification
Assets
Money market funds	$	253	$	253	$	—	$	—	Cash equivalents
Available-for-sale securities:
Corporate bonds	179		—		179		—		Short-term investments
U.S. agency securities	58		—		58		—		Short-term investments
U.S. Treasury securities	54		54		—		—		Short-term investments
Commercial paper	42		—		42		—		Short-term investments and cash equivalents
Deferred compensation plan assets ^(a)	12		12		—		—		Other assets
Foreign currency derivatives	1		—		1		—		Other current assets
Total assets at fair value	$	599	$	319	$	280	$	—
Liabilities
Contingent consideration ^(b)	$	2	$	—	$	—	$	2	Accrued and other current liabilities and other liabilities
Foreign currency derivatives	4		—		4		—		Accrued and other current liabilities
Total liabilities at fair value	$	6	$	—	$	4	$	2

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	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Contingent Consideration
Balance as of March 31, 2013		$	43
Change in fair value ^(c)		(37		)
Payments ^(d)		(4		)
Balance as of September 30, 2013		$	2



			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Financial Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
	As of March 31, 2013		(Level 1)		(Level 2)		(Level 3)		Balance Sheet Classification
Assets
Money market funds	$	469	$	469	$	—	$	—	Cash equivalents
Available-for-sale securities:
Corporate bonds	178		—		178		—		Short-term investments
U.S. agency securities	91		—		91		—		Short-term investments and cash equivalents
U.S. Treasury securities	88		88		—		—		Short-term investments and cash equivalents
Commercial paper	73		—		73		—		Short-term investments and cash equivalents
Deferred compensation plan assets ^(a)	11		11		—		—		Other assets
Foreign currency derivatives	6		—		6		—		Other current assets
Total assets at fair value	$	916	$	568	$	348	$	—
Liabilities
Contingent consideration ^(b)	$	43	$	—	$	—	$	43	Accrued and other current liabilities and other liabilities
Total liabilities at fair value	$	43	$	—	$	—	$	43



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Contingent Consideration
Balance as of March 31, 2012		$	112
Change in fair value ^(c)		(64		)
Payment ^(d)		(5		)
Balance as of March 31, 2013		$	43


(a)	The deferred compensation plan assets consist of various mutual funds.

(b)

The contingent consideration as of September 30, 2013 and March 31, 2013 represents the estimated fair value of the additional variable cash consideration payable primarily in connection with our acquisitions of PopCap Games, Inc. (“PopCap”), KlickNation Corporation (“KlickNation”), and Chillingo Limited (“Chillingo”) that are contingent upon the achievement of certain performance milestones. We estimated the fair value of the acquisition-related contingent consideration payable using probability-weighted discounted cash flow models, and applied a discount rate that appropriately captures the risk associated with the obligation. The weighted average of the discount rates used during the six months ended September 30, 2013 was 16 percent. The weighted average of the discount rates used during the fiscal year 2013 was 13 percent. The significant unobservable input used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would result in a significantly higher or lower fair value measurement. At September 30, 2013 and March 31, 2013, the fair market

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value of acquisition-related contingent consideration totaled $2 million and $43 million, respectively, compared to a maximum potential payout of $560 million and $566 million, respectively.


(c)	The change in fair value is reported as acquisition-related contingent consideration in our Condensed Consolidated Statements of Operations.


(d)	During the six months ended September 30, 2013, we made payments totaling $4 million to settle certain performance milestones achieved in connection with one of our acquisitions. During fiscal year 2013, we made payments totaling $5 million to settle certain performance milestones achieved in connection with two of our acquisitions.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three and six months ended September 30, 2013, our assets that were measured and recorded at fair value on a nonrecurring basis and the related impairments on those assets were as follows (in millions):



			Fair Value Measurements Using
	Net Carrying Value as of September 30, 2013		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Impairments for the Three Months Ended September 30, 2013		Total Impairments for the Six Months Ended September 30, 2013
	Net Carrying Value as of September 30, 2013		(Level 1)		(Level 2)		(Level 3)
Assets
Royalty-based asset	$	—	$	—	$	—	$	—	$	—	$	17
Total impairments recorded for non-recurring measurements on assets held as of September 30, 2013									$	—	$	17

During the six months ended September 30, 2013, we became aware of facts and circumstances that indicated that the carrying value of one of our royalty-based assets was not recoverable. The impairment charge is included in cost of revenue on our Condensed Consolidated Statements of Operations.

During the three and six months ended September 30, 2012, there were no material impairment charges for assets and liabilities measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.

(3) FINANCIAL INSTRUMENTS

Cash and Cash Equivalents

As of September 30, 2013 and March 31, 2013, our cash and cash equivalents were $1,090 million and $1,292 million, respectively. Cash equivalents were valued at their carrying amounts as they approximate fair value due to the short maturities of these financial instruments.

Short-Term Investments

Short-term investments consisted of the following as of September 30, 2013 and March 31, 2013 (in millions):



	As of September 30, 2013								As of March 31, 2013
	Cost or Amortized Cost		Gross Unrealized				Fair Value		Cost or Amortized Cost		Gross Unrealized				Fair Value
	Cost or Amortized Cost		Gains		Losses		Fair Value		Cost or Amortized Cost		Gains		Losses		Fair Value
Corporate bonds	$	178	$	1	$	—	$	179	$	177	$	1	$	—	$	178
U.S. agency securities	58		—		—		58		76		—		—		76
U.S. Treasury securities	54		—		—		54		85		—		—		85
Commercial paper	37		—		—		37		49		—		—		49
Short-term investments	$	327	$	1	$	—	$	328	$	387	$	1	$	—	$	388

We evaluate our investments for impairment quarterly. Factors considered in the review of investments with an unrealized loss include the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any

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anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process. Based on our review, we did not consider these investments to be other-than-temporarily impaired as of September 30, 2013 and March 31, 2013.

The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of September 30, 2013 and March 31, 2013 (in millions):



	As of September 30, 2013				As of March 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Short-term investments
Due in 1 year or less	$	114	$	114	$	160	$	160
Due in 1-2 years	98		99		126		127
Due in 2-3 years	109		109		101		101
Due in 3-4 years	6		6		—		—
Short-term investments	$	327	$	328	$	387	$	388

0.75% Convertible Senior Notes Due 2016

The following table summarizes the carrying value and fair value of our 0.75% Convertible Senior Notes due 2016 as of September 30, 2013 and March 31, 2013 (in millions):



	As of September 30, 2013				As of March 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
0.75% Convertible Senior Notes due 2016	$	570	$	692	$	559	$	614

The carrying value of the 0.75% Convertible Senior Notes due 2016 excludes the fair value of the equity conversion feature, which was classified as equity upon issuance, while the fair value is based on quoted market prices for the 0.75% Convertible Senior Notes due 2016, which includes the equity conversion feature. The fair value of the 0.75% Convertible Senior Notes due 2016 is classified as Level 2 within the fair value hierarchy. See Note 12 for additional information related to our 0.75% Convertible Senior Notes due 2016.

(4) DERIVATIVE FINANCIAL INSTRUMENTS

The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets or accrued and other current liabilities, respectively, on our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.

We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward and option contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling and Canadian dollar. In addition, we utilize foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately 3 months or less and are transacted near month-end. At each quarter-end, the fair value of the foreign currency forward contracts generally is not significant. We do not use foreign currency option or foreign currency forward contracts for speculative or trading purposes.

Cash Flow Hedging Activities

Our foreign currency option and forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research

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and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income to interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. During the three and six months ended September 30, 2013 and 2012, we reclassified an immaterial amount of losses into interest and other income (expense), net. Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows:



	As of September 30, 2013						As of March 31, 2013
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Asset		Liability		Notional Amount		Asset		Liability
Option contracts to purchase	$	49	$	—	$	—	$	84	$	—	$	—
Forward contracts to purchase	35		1		—		—		—		—
Total	$	84	$	1	$	—	$	84	$	—	$	—

Option contracts to sell	$	115	$	—	$	—	$	149	$	6	$	—
Forward contracts to sell	115		—		4		—		—		—
Total	$	230	$	—	$	4	$	149	$	6	$	—

The net impact of the gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2013 and 2012 was immaterial.

Balance Sheet Hedging Activities

Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. As of September 30, 2013, we had foreign currency forward contracts to purchase and sell approximately $337 million in foreign currencies. Of this amount, $301 million represented contracts to sell foreign currencies in exchange for U.S. dollars, $33 million to purchase foreign currency in exchange for U.S. dollars, and $3 million to sell foreign currency in exchange for British pounds sterling. As of March 31, 2013, we had foreign currency forward contracts to purchase and sell approximately $306 million in foreign currencies. Of this amount, $213 million represented contracts to sell foreign currencies in exchange for U.S. dollars, $87 million to purchase foreign currency in exchange for U.S. dollars, and $6 million to sell foreign currency in exchange for British pounds sterling. The fair value of our foreign currency forward contracts was measured using Level 2 inputs and was immaterial as of September 30, 2013 and March 31, 2013.

The effect of foreign currency forward contracts in our Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2013 and 2012, was as follows (in millions):



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		Three Months Ended September 30,						Six Months Ended September 30,
		2013			2012			2013			2012
Foreign currency forward contracts not designated as hedging instruments	Interest and other income (expense), net	$	(5	)	$	(6	)	$	(5	)	$	1

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(5) ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive income by component, net of related tax effects for the three months ended September 30, 2013 are as follows (in millions):



	Unrealized Gains (Losses) on Available-for-Sale Securities			Unrealized Gains (Losses) on Derivative Instruments			Foreign Currency Translation Adjustments		Total
Balances as of June 30, 2013	$	(5	)	$	—		$	61	$	56
Other comprehensive income (loss) before reclassifications	1			(9		)	14		6
Amounts reclassified from accumulated other comprehensive income	—			—			—		—
Net current-period other comprehensive income (loss)	1			(9		)	14		6
Balances as of September 30, 2013	$	(4	)	$	(9	)	$	75	$	62

The changes in accumulated other comprehensive income by component, net of related tax effects for the six months ended September 30, 2013 are as follows (in millions):



	Unrealized Gains (Losses) on Available-for-Sale Securities			Unrealized Gains (Losses) on Derivative Instruments			Foreign Currency Translation Adjustments		Total
Balances as of March 31, 2013	$	(4	)	$	—		$	73	$	69
Other comprehensive income (loss) before reclassifications	—			(11		)	2		(9		)
Amounts reclassified from accumulated other comprehensive income	—			2			—		2
Net current-period other comprehensive income (loss)	—			(9		)	2		(7		)
Balances as of September 30, 2013	$	(4	)	$	(9	)	$	75	$	62

The effects on net income of amounts reclassified from accumulated other comprehensive income for the three and six months ended September 30, 2013 was immaterial and included in net revenue and research and development.

(6) BUSINESS COMBINATIONS

During the six months ended September 30, 2013, we completed one acquisition that did not have a significant impact on our Condensed Consolidated Financial Statements.

(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET

The changes in the carrying amount of goodwill for the six months ended September 30, 2013 are as follows (in millions):



	As of March 31, 2013			Activity		Effects of Foreign Currency Translation		As of September 30, 2013
Goodwill	$	2,089		$	5	$	—	$	2,094
Accumulated impairment	(368		)	—		—		(368		)
Total	$	1,721		$	5	$	—	$	1,726

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. Goodwill is not amortized, but rather subject to at least an annual assessment for impairment by applying a fair value-based test. Our goodwill is fully attributed to the EA Labels segment.

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Acquisition-related intangibles consisted of the following (in millions):



	As of September 30, 2013							As of March 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Acquisition- Related Intangibles, Net		Gross Carrying Amount		Accumulated Amortization			Acquisition- Related Intangibles, Net
Developed and core technology	$	531	$	(354	)	$	177	$	527	$	(324	)	$	203
Trade names and trademarks	130		(102		)	28		130		(99		)	31
Registered user base and other intangibles	87		(86		)	1		87		(84		)	3
Carrier contracts and related	85		(75		)	10		85		(73		)	12
In-process research and development	—		—			—		4		—			4
Total	$	833	$	(617	)	$	216	$	833	$	(580	)	$	253

Amortization of intangibles for the three and six months ended September 30, 2013 and 2012 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):



	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Cost of product	$	8	$	8	$	17	$	17
Cost of service and other	6		6		12		12
Operating expenses	4		7		8		14
Total	$	18	$	21	$	37	$	43

Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from two to 14 years. As of September 30, 2013 and March 31, 2013, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 3.6 years and 3.9 years, respectively.

As of September 30, 2013, future amortization of acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions):



Fiscal Year Ending March 31,
2014 (remaining six months)	$	37
2015	66
2016	53
2017	32
2018	13
2019	8
Thereafter	7
Total	$	216

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(8) RESTRUCTURING AND OTHER CHARGES

Restructuring and other restructuring plan-related information as of September 30, 2013 was as follows (in millions):



	Fiscal 2013 Restructuring									Fiscal 2011 Restructuring			Other Restructurings and Reorganization
	Workforce			Facilities- related			Other			Other			Facilities- related			Total
Balances as of March 31, 2012	$	—		$	—		$	—		$	75		$	3		$	78
Charges to operations	10			3			9			6			(1		)	27
Charges settled in cash	(10		)	—			(1		)	(24		)	(1		)	(36		)
Changes settled in non-cash	—			(1		)	(7		)	—			1			(7		)
Balances as of March 31, 2013	—			2			1			57			2			62
Charges to operations	—			1			—			(2		)	—			(1		)
Charges settled in cash	—			(2		)	—			(1		)	—			(3		)
Balances as of September 30, 2013	$	—		$	1		$	1		$	54		$	2		$	58

Fiscal 2013 Restructuring

In fiscal year 2013, we announced a restructuring plan to align our cost structure with our ongoing digital transformation. Under this plan, we reduced our workforce, terminated licensing agreements, and consolidated or closed various facilities. We completed all actions under this restructuring plan during fiscal year 2013.

Since the inception of the fiscal 2013 restructuring plan through September 30, 2013, we have incurred charges of $23 million, consisting of (1) $10 million in employee-related expenses, (2) $9 million related to license termination costs, and (3) $4 million related to the closure of certain of our facilities. Substantially all of these costs were settled in cash by March 31, 2013, with the exception of approximately $2 million of license and lease termination costs, which will be settled by August 2016. We do not expect to incur any additional restructuring charges under this plan.

Fiscal 2011 Restructuring

In fiscal year 2011, we announced a plan focused on the restructuring of certain licensing and developer agreements in an effort to improve the long-term profitability of our packaged goods business. Under this plan, we amended certain licensing and developer agreements. To a much lesser extent, as part of this restructuring we had workforce reductions and facilities closures through March 31, 2011. Substantially all of these exit activities were completed by March 31, 2011.

Since the inception of the fiscal 2011 restructuring plan through September 30, 2013, we have incurred charges of $172 million, consisting of (1) $129 million related to the amendment of certain licensing agreements and other intangible asset impairment costs, (2) $31 million related to the amendment of certain developer agreements, and (3) $12 million in employee-related expenses. The $54 million restructuring accrual as of September 30, 2013 related to the fiscal 2011 restructuring is expected to be settled by June 2016. We currently estimate recognizing in future periods through June 2016, approximately $8 million for the accretion of interest expense related to our amended licensing and developer agreements, of which $2 million will be recognized during the remainder of fiscal year 2014. This interest expense will be included in restructuring and other charges in our Condensed Consolidated Statement of Operations.

Overall, including $172 million in charges incurred through September 30, 2013, we expect to incur total cash and non-cash charges between $180 million and $185 million by June 2016. These charges will consist primarily of (1) charges, including accretion of interest expense, related to the amendment of certain licensing and developer agreements and other intangible asset impairment costs (approximately $168 million) and (2) employee-related costs ($12 million).

Other Restructurings and Reorganization

We also engaged in various other restructurings and a reorganization based on management decisions made prior to fiscal 2011. We do not expect to incur any additional restructuring charges under these plans. The $2 million restructuring accrual as of September 30, 2013 related to our other restructuring plans is expected to be settled by September 2016.

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(9) ROYALTIES AND LICENSES

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.

Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract. Royalty liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the next 12 months.

Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any impairments or losses determined before the launch of a product are generally charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment generally using undiscounted cash flows when impairment indicators exist. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated. During the three months ended September 30, 2013 and 2012, we recognized losses of $10 million and $9 million, respectively, on previously unrecognized royalty-based commitments. During the six months ended September 30, 2013, we recognized total losses of $27 million, inclusive of impairment charges of $17 million on royalty-based assets recognized during the three months ended June 30, 2013. During the six months ended September 30, 2012, we recognized losses of $18 million on previously unrecognized royalty-based commitments, inclusive of $9 million in license termination costs related to our fiscal 2013 restructuring. The losses related to restructuring and other plan-related activities are presented in Note 8.

The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):



	As of September 30, 2013		As of March 31, 2013
Other current assets	$	73	$	63
Other assets	80		93
Royalty-related assets	$	153	$	156

At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we recognize unpaid royalty amounts owed to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions):



	As of September 30, 2013		As of March 31, 2013
Accrued royalties	$	102	$	103
Other accrued expenses	18		21
Other liabilities	47		46
Royalty-related liabilities	$	167	$	170

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As of September 30, 2013, $1 million of restructuring accruals related to the fiscal 2013 restructuring plan, and $54 million of restructuring accruals related to the fiscal 2011 restructuring plan are included in royalty-related liabilities in the table above. See Note 8 for details of restructuring and other restructuring plan-related activities and Note 10 for the details of our accrued and other current liabilities.

In addition, as of September 30, 2013, we were committed to pay approximately $1,199 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 13 for further information on our developer and licensor commitments.

(10) BALANCE SHEET DETAILS

Inventories

Inventories as of September 30, 2013 and March 31, 2013 consisted of (in millions):



	As of September 30, 2013		As of March 31, 2013
Finished Goods	$	54	$	41
Raw materials and work in process	4		1
Inventories	$	58	$	42

Property and Equipment, Net

Property and equipment, net, as of September 30, 2013 and March 31, 2013 consisted of (in millions):



	As of September 30, 2013			As of March 31, 2013
Computer equipment and software	$	693		$	660
Buildings	337			336
Leasehold improvements	129			129
Office equipment, furniture and fixtures	70			72
Land	63			64
Warehouse equipment and other	10			10
Construction in progress	9			8
	1,311			1,279
Less: accumulated depreciation	(779		)	(731		)
Property and equipment, net	$	532		$	548

Depreciation expense associated with property and equipment was $32 million and $62 million for three and six months ended September 30, 2013, respectively. Depreciation expense associated with property and equipment was $29 million and $57 million for the three and six months ended September 30, 2012, respectively.

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Accrued and Other Current Liabilities

Accrued and other current liabilities as of September 30, 2013 and March 31, 2013 consisted of (in millions):



	As of September 30, 2013		As of March 31, 2013
Other accrued expenses	$	357	$	338
Accrued compensation and benefits	167		217
Accrued royalties	102		103
Deferred net revenue (other)	82		79
Accrued and other current liabilities	$	708	$	737

Deferred net revenue (other) includes the deferral of subscription revenue, deferrals related to our Switzerland distribution business, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.

Deferred Net Revenue (Online-Enabled Games)

Deferred net revenue (online-enabled games) was $935 million and $1,044 million as of September 30, 2013 and March 31, 2013, respectively. Deferred net revenue (online-enabled games) generally includes the unrecognized revenue from bundled sales of certain online-enabled games for which we do not have VSOE for the obligation to provide unspecified updates. We recognize revenue from the sales of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated nine-month period beginning in the month after shipment for physical games sold through retail and an estimated six-month period for digitally distributed games. However, we expense the cost of revenue related to these transactions during the period in which the product is delivered (rather than on a deferred basis).

(11) INCOME TAXES

We estimate our annual effective tax rate at the end of each quarterly period, and we record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. In addition, jurisdictions with a projected loss for the year, jurisdictions with a year-to-date loss where no tax benefit can be recognized, and jurisdictions where we are unable to estimate an annual effective tax rate are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.

We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results, particularly in light of the economic environment. Therefore, cumulative losses weigh heavily in the overall assessment. Based on the assumptions and requirements noted above, we have recorded a valuation allowance against most of our U.S. deferred tax assets. In addition, we expect to provide a valuation allowance on future U.S. tax benefits until we can sustain a level of profitability or until other significant positive evidence arises that suggest that these benefits are more likely than not to be realized.

The provision for income taxes reported for the three and six months ended September 30, 2013 is based on our projected annual effective tax rate for fiscal year 2014, and also includes certain discrete items recorded during the period. Our effective tax rate for the three and six months ended September 30, 2013 was a tax expense of 5.0 percent and 59.4 percent, respectively, as compared to a tax expense of 3.5 percent and 13.9 percent, respectively, for the same periods of fiscal year 2013. The effective tax rate for the three and six months ended September 30, 2013 and 2012 differs from the statutory rate of 35.0 percent primarily due to the U.S. losses for which no benefit is recognized and non-U.S. losses with a reduced or zero tax rate. The effective tax rate for the three and six months ended September 30, 2013 differs from the same period in fiscal year 2013 primarily due to differences in pre-tax loss.

During the three and six months ended September 30, 2013, we recorded a net increase of $9 million and $7 million, respectively, in gross unrecognized tax benefits. The total gross unrecognized tax benefits as of September 30, 2013 is $304 million, of which approximately $46 million is offset by prior cash deposits to tax authorities for issues pending resolution. A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the

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uncertain tax positions. As of September 30, 2013, if recognized, approximately $110 million of the unrecognized tax benefits would affect our effective tax rate and approximately $181 million would result in adjustments to deferred tax assets with corresponding adjustments to the valuation allowance.

During the three and six months ended September 30, 2013, we recorded a net increase in taxes of $1 million and $2 million, respectively, for accrued interest and penalties related to tax positions taken on our tax returns. As of September 30, 2013, the combined amount of accrued interest and penalties related to uncertain tax positions included in income tax obligations on our Condensed Consolidated Balance Sheet was approximately $25 million.

The IRS has completed its examination of our federal income tax returns through fiscal year 2008. As of September 30, 2013, the IRS had proposed certain adjustments to our tax returns. The effects of these adjustments have been considered in estimating our future obligations for unrecognized tax benefits and are not expected to have a material impact on our financial position or results of operations. Some of these proposed adjustments are pending resolution by the Appeals division of the IRS. Furthermore, the IRS is currently examining our returns for fiscal years 2009 through 2011.

We are also currently under income tax examination in Canada for fiscal years 2004 and 2005, in Germany for fiscal years 2008 through 2012, and in Italy for fiscal years 2009 through 2011. We remain subject to income tax examination for several other jurisdictions including Canada for fiscal years after 2005, in France for fiscal years after 2011, in Germany for fiscal years after 2012, in the United Kingdom for fiscal years after 2011, and in Switzerland for fiscal years after 2007.

The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $82 million of the reserves for unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect our income tax provision (benefit) and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

(12) FINANCING ARRANGEMENTS

0.75% Convertible Senior Notes Due 2016

In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the “Notes”). The Notes are senior unsecured obligations which pay interest semiannually in arrears at a rate of 0.75 percent per annum on January 15 and July 15 of each year, beginning on January 15, 2012 and will mature on July 15, 2016, unless earlier purchased or converted in accordance with their terms prior to such date. The Notes are senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Notes.

The Notes are convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.74 per share). Upon conversion of the Notes, holders will receive cash up to the principal amount of each Note, and any excess conversion value will be delivered in shares of our common stock. Prior to April 15, 2016, the Notes are convertible only if (1) the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 percent of the conversion price ($41.26 per share) on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of notes falls below 98 percent of the last reported sale price of our common stock multiplied by the conversion rate on each trading day; or (3) specified corporate transactions, including a change in control, occur. On or after April 15, 2016, a holder may convert any of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate is subject to customary anti-dilution adjustments (for example, certain dividend distributions or tender or exchange offer of our common stock), but will not be adjusted for any accrued and unpaid interest. The Notes are not redeemable prior to maturity except for specified corporate transactions and events of default, and no sinking fund is provided for the Notes. The Notes do not contain any financial covenants.

We separately account for the liability and equity components of the Notes. The carrying amount of the equity component representing the conversion option is equal to the fair value of the Convertible Note Hedge, as described below, which is a substantially identical instrument and was purchased on the same day as the Notes. The carrying amount of the liability component was determined by deducting the fair value of the equity component from the par value of the Notes as a whole, and represents the fair value of a similar liability that does not have an associated convertible feature. A liability of $525 million as of the date of issuance was recognized for the principal amount of the Notes representing the present value of the Notes’ cash

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flows using a discount rate of 4.54 percent. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for $15 million of issuance costs related to the Notes issuance, we allocated $13 million to the liability component and $2 million to the equity component. Debt issuance costs attributable to the liability component are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

The carrying values of the liability and equity components of the Notes are reflected in our Condensed Consolidated Balance Sheet as follows (in millions):



	As of September 30, 2013			As of March 31, 2013
Principal amount of Notes	$	633		$	633
Unamortized discount of the liability component	(63		)	(74		)
Net carrying amount of Notes	$	570		$	559
Equity component, net	$	105		$	105

As of September 30, 2013, the remaining life of the Notes is 2.8 years.

Convertible Note Hedge and Warrants Issuance

In addition, in July 2011, we entered into privately negotiated convertible note hedge transactions (the “Convertible Note Hedge”) with certain counterparties to reduce the potential dilution with respect to our common stock upon conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock at a strike price of $31.74, which corresponds to the conversion price of the Notes and is equal to the number of shares of our common stock that notionally underlie the Notes. As of September 30, 2013, we have not purchased any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note Hedge, which was recorded as an equity transaction.

Separately, in July 2011 we also entered into privately negotiated warrant transactions with the certain counterparties whereby we sold to independent third parties warrants (the “Warrants”) to acquire, subject to customary anti-dilution adjustments that are substantially the same as the anti-dilution provisions contained in the Notes, up to 19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that notionally underlie the Notes), with a strike price of $41.14. The Warrants could have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeds $41.14 on or prior to the expiration date of the Warrants. We received proceeds of $65 million from the sale of the Warrants.

Credit Facility

On August 30, 2012, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. The credit facility terminates on February 29, 2016 and contains an option to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $250 million in additional commitments for revolving loans. Proceeds of loans made under the credit facility may be used for general corporate purposes.

The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our consolidated leverage ratio for the preceding fiscal quarter. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on February 29, 2016.

The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, dispose of all or substantially all assets and pay dividends or make distributions, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a capitalization ratio and maintain a minimum level of total liquidity and a minimum level of domestic liquidity.

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The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, bankruptcy and insolvency defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the credit agreement, an obligation by any guarantors to repay the obligations in full and an increase in the applicable interest rate.

As of September 30, 2013, no amounts were outstanding under the credit facility. During the three months ended September 30, 2012, we paid $2 million of debt issuance costs in connection with obtaining this credit facility. These costs are deferred and are being amortized to interest expense over the 3.5 years term of the credit facility.

The following table summarizes our interest expense recognized for the three and six months ended September 30, 2013 and 2012 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions):



	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Amortization of debt discount	$	5	$	5	$	10	$	10
Amortization of debt issuance costs	1		1		2		2
Coupon interest expense	1		1		2		2
Other interest expense	1		—		1		—
Total interest expense	$	8	$	7	$	15	$	14

(13) COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of September 30, 2013, we leased certain facilities, furniture and equipment under non-cancelable operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.

Development, Celebrity, League and Content Licenses: Payments and Commitments

The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.

In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), and DFL Deutsche Fußball Liga GmbH (German Soccer League) (professional soccer); Dr. Ing. h.c. F. Porsche AG, Ferrari S.p.A. (Need For Speed and Real Racing games); National Basketball Association (professional basketball); PGA TOUR (professional golf); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties, PLAYERS Inc., and Red Bear Inc. (professional football); Collegiate Licensing Company (collegiate football); Zuffa, LLC (Ultimate Fighting Championship); ESPN (content in EA SPORTS games); Hasbro, Inc. (certain of Hasbro’s board game intellectual properties); and Disney Interactive (Star Wars). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.

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The following table summarizes our minimum contractual obligations as of September 30, 2013 (in millions):



			Fiscal Year Ending March 31,
			2014
			(Remaining
	Total		six mos.)		2015		2016		2017		2018		2019		Thereafter
Unrecognized commitments
Developer/licensor commitments	$	1,199	$	59	$	180	$	271	$	99	$	92	$	62	$	436
Marketing commitments	220		44		35		35		21		20		21		44
Operating leases	155		26		44		34		19		14		9		9
0.75% Convertible Senior Notes due 2016 interest ^(a)	14		2		5		5		2		—		—		—
Other purchase obligations	27		15		10		2		—		—		—		—
Total unrecognized commitments	1,615		146		274		347		141		126		92		489

Recognized commitments
0.75% Convertible Senior Notes due 2016 principal ^(a)	633		—		—		—		633		—		—		—
Licensing and lease obligations ^(b)	80		18		13		12		35		1		1		—
Total recognized commitments	713		18		13		12		668		1		1		—

Total commitments	$	2,328	$	164	$	287	$	359	$	809	$	127	$	93	$	489

(a)

Included in the $14 million coupon interest on the 0.75% Convertible Senior Notes due 2016 is $1 million of accrued interest recognized as of September 30, 2013. We will be obligated to pay the $632.5 million principal amount of the 0.75% Convertible Senior Notes due 2016 in cash and any excess conversion value in shares of our common stock upon redemption of the Notes at maturity on July 15, 2016 or upon earlier redemption. The $632.5 million principal amount excludes $63 million of unamortized discount of the liability component. See Note 12 for additional information regarding our 0.75% Convertible Senior Notes due 2016.


(b)	See Note 8 for additional information regarding recognized commitments resulting from our restructuring plans. Lease commitments have not been reduced for approximately $6 million due in the future from third parties under non-cancelable sub-leases.

The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of September 30, 2013; however, certain payment obligations may be accelerated depending on the performance of our operating results.

In addition to what is included in the table above, as of September 30, 2013, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $263 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.

Also, in addition to what is included in the table above as of September 30, 2013, primarily in connection with our PopCap, KlickNation, and Chillingo acquisitions, we may be required to pay an additional $560 million of cash consideration based upon the achievement of certain performance milestones through March 31, 2015. As of September 30, 2013, we have accrued $2 million of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value of the contingent consideration.

Legal Proceedings

In June 2008, Geoffrey Pecover filed an antitrust class action in the United States District Court for the Northern District of California, alleging that EA obtained an illegal monopoly in a discreet antitrust market that consists of “league-branded football simulation video games” by bidding for, and winning, exclusive licenses with the NFL, Collegiate Licensing Company and Arena Football League. In December 2010, the district court granted the plaintiffs’ request to certify a class of plaintiffs consisting of all consumers who purchased EA’s Madden NFL, NCAA Football or Arena Football video games after 2005. In May 2012, the parties reached a settlement in principle to resolve all claims related to this action. As a result, we recognized a $27 million accrual for the fourth quarter of fiscal 2012 associated with the potential settlement. In May 2013, the district court

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granted its final approval of the settlement, following which we paid $27 million into a settlement fund. A subsequent appeal of the district court's decision made by a class member was recently withdrawn. The $27 million paid into the settlement fund is in the process of being distributed to claimants.

In March 2011, Robin Antonick filed a complaint in the United States District Court for the Northern District of California, alleging that he wrote the source code for the original John Madden Football game published by EA in 1988 and that EA used certain parts of that source code in later editions in the Madden franchise without compensating him. On July 23, 2013, a jury found in favor of Mr. Antonick with respect to John Madden Football games released on the Sega Genesis platform between 1990 and 1996. Mr. Antonick seeks compensatory damages for those games in the amount of approximately $3.5 million, plus an additional $8 million in prejudgment interest. The district court will decide the amount of damages owed by EA to Mr. Antonick. We intend to appeal the verdict.

We are a defendant in several actions that allege we misappropriated the likenesses of various college athletes in certain of our college-themed sports games.

•

We are defending a putative class action lawsuit brought by Ryan Hart, a former college football player, in the United States District Court for the District of New Jersey in June 2009, which alleges that we misappropriated his likeness in our college-themed football game. The complaint seeks actual damages and other unspecified damages, which have not been quantified. In September 2011, the district court granted our motion to dismiss the complaint. On May 21, 2013, the Third Circuit Court of Appeal reversed the district court's decision and remanded the case back to the district court.

•

The In re NCAA Student-Athlete Name & Likeness Licensing litigation pending in United States District Court for the Northern District of California involves two groups of common claims brought by several different former collegiate student-athletes in 2009. These various actions were consolidated into one action in February 2010. The first group of claims is a class action against us, the NCAA and the Collegiate Licensing Company (CLC) alleging that our college-themed video games misappropriated the likenesses of collegiate student-athletes without their authorization. This group of claims seeks actual damages, statutory damages and other unspecified damages, which have not been quantified. On July 31, 2013, the Ninth Circuit Court of Appeals affirmed the trial court’s denial of our motion to strike the complaint. The second group of claims is a federal antitrust class action against us, the NCAA and the CLC that challenges NCAA/CLC licensing practices and the NCAA By-Laws and regulations. This group of claims seeks unspecified damages, which have not been quantified. In June 2013, the plaintiffs in this second group of claims have asked the district court to certify the case as a class action. The district court has not ruled on their request.

In late September 2013, we reached an agreement to settle all actions brought by college athletes. We and counsel for plaintiffs are in the process of preparing a written settlement agreement and other documents necessary to present to the respective courts for approval of the settlement. We recognized a $30 million accrual during the second quarter of fiscal 2014 associated with the anticipated settlement. On November 4, 2013, the NCAA filed a complaint against the Company and CLC in the Superior Court of Fulton County, Georgia. The complaint seeks unspecified damages and alleges that the Company is contractually obligated to defend and indemnify the NCAA against claims asserted in In re NCAA Student-Athlete Name & Likeness Licensing concerning the alleged misappropriation of student-athletes’ publicity rights in EA’s collegiate video games.

We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.

(14) STOCK-BASED COMPENSATION

Valuation Assumptions

We are required to estimate the fair value of share-based payment awards on the date of grant. We recognize compensation costs for stock-based payment awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest.

We determine the fair value of our share-based payment awards as follows:

•

Restricted Stock Units, Restricted Stock, and Performance-Based Restricted Stock Units. The fair value of restricted stock units, restricted stock, and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant. Performance-based restricted stock units include grants made (1) to certain members of executive management primarily granted in fiscal year 2009 and (2) in connection with certain acquisitions.

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•

Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determined using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

•

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”), respectively, is determined using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends.

The determination of the fair value of market-based restricted stock units, stock options and ESPP is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes.

There were no significant stock options granted during the three and six months ended September 30, 2013.

The estimated assumptions used in the Black-Scholes valuation model to value our ESPP were as follows:



	Three Months Ended September 30,
	2013		2012
Risk-free interest rate	0.1	%	0.1 - 0.2%
Expected volatility	36 - 37%		41 - 42%
Weighted-average volatility	37	%	41	%
Expected term	6 - 12 months		6 - 12 months
Expected dividends	None		None

The estimated assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:



	Six Months Ended September 30,
	2013		2012
Risk-free interest rate	0.4	%	0.2 - 0.4%
Expected volatility	16 - 58%		17 - 116%
Weighted-average volatility	31	%	36	%
Expected dividends	None		None

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the three and six months ended September 30, 2013 and 2012 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment to stock-based compensation expense will be recognized at that time.

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The following table summarizes stock-based compensation expense resulting from stock options, restricted stock, restricted stock units and the ESPP included in our Condensed Consolidated Statements of Operations (in millions):



	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Cost of revenue	$	1	$	—	$	1	$	1
Research and development ^(a)	23		26		43		47
Marketing and sales^(a)	6		9		13		16
General and administrative^(a)	8		9		14		19
Stock-based compensation expense	$	38	$	44	$	71	$	83

(a)

During the fourth quarter of fiscal year 2013, we reviewed our operating expenses and reclassified certain amounts, primarily headcount and facilities costs, to align with our current operating structure. As a result, we also reclassified the related prior year stock-based compensation expense amounts within our Condensed Consolidated Statements of Operations for comparability purposes. These reclassifications did not affect the Company’s total stock-based compensation expense.

During the three and six months ended September 30, 2013, we did not recognize any provision for or benefit from income taxes related to our stock-based compensation expense.

As of September 30, 2013, our total unrecognized compensation cost related to stock options was $2 million and is expected to be recognized over a weighted-average service period of 2.1 years. As of September 30, 2013, our total unrecognized compensation cost related to restricted stock and restricted stock units (collectively referred to as “restricted stock rights”) was $295 million and is expected to be recognized over a weighted-average service period of 1.9 years. Of the $295 million of unrecognized compensation cost, $20 million relates to market-based restricted stock units.

Stock Options

The following table summarizes our stock option activity for the six months ended September 30, 2013:



	Options (in thousands)		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2013	7,802		$	34.17
Granted	7		21.02
Exercised	(1,822	)	17.98
Forfeited, cancelled or expired	(537	)	45.90