e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended March 31, 2006 |
|
OR |
|
o
|
|
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
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
209 Redwood Shores Parkway
Redwood City, California
(Address of principal executive offices) |
|
94065
(Zip Code) |
Registrants telephone number, including area code:
(650) 628-1500
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o
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
registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
The aggregate market value of the registrants common
stock, $0.01 par value, held by non-affiliates of the
registrant as of September 30, 2005, the last business day
of the second fiscal quarter, was $11,606,848,957.
As of June 5, 2006 there were 306,156,891 shares of
the registrants common stock, $0.01 par value,
outstanding.
Documents Incorporated by Reference
Portions of the registrants definitive proxy statement for
its 2006 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.
ELECTRONIC ARTS INC.
2006 FORM 10-K
ANNUAL REPORT
Table of Contents
2
PART I
This Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical fact,
including statements regarding industry prospects and future
results of operations or financial position, made in this Report
are forward looking. We use words such as
anticipate, believe, expect,
intend, estimate (and the negative of
any of these terms), future and similar expressions
to help identify forward-looking statements. These
forward-looking statements are subject to business and economic
risk and reflect managements current expectations, and
involve subjects that are inherently uncertain and difficult to
predict. Our actual results could differ materially. 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 include, but are not limited to,
those discussed under the heading Risk Factors,
beginning on page 18.
Item 1: Business
Overview
Electronic Arts develops, markets, publishes and distributes
interactive software games (we sometimes refer to them as
titles) that are playable by consumers on the
following devices:
|
|
|
|
|
In-home video game players (such as the Sony
PlayStation® 2,
Microsoft
Xbox®
and Xbox
360tm
and Nintendo
GameCubetm)
we call these players consoles, |
|
|
|
Personal computers (PCs), |
|
|
|
Mobile platforms including handheld video game players (such as
the
PlayStation®
Portable
(PSPtm),
Nintendo
DStm
and Game
Boy®
Advance) and cellular handsets, and |
|
|
|
Online, over the Internet and other proprietary online networks. |
We refer to consoles, PCs, mobile platforms and online
collectively as platforms.
We were initially incorporated in California in 1982. In
September 1991, we reincorporated under the laws of Delaware.
Our principal executive offices are located near
San Francisco, California at 209 Redwood Shores
Parkway, Redwood City, California 94065 and our telephone number
is (650) 628-1500.
We publish interactive software games for multiple platforms.
Our products that are designed to play on consoles and certain
mobile platforms are published under license from the
manufacturers of these platforms (for example, Sony for the
PlayStation 2 and PSP, Microsoft for the Xbox and
Xbox 360, and Nintendo for the Nintendo GameCube, Game Boy
Advance and Nintendo DS). We invest in the creation of software
tools to more efficiently develop games for multiple platforms.
We also make investments in facilities and equipment that allow
us to create and edit video and audio recordings that are used
in our games. Since our inception, we have published games for
over 47 different platforms.
Our product development methods and organization are modeled on
those used in other sectors of the entertainment industry.
Employees whom we call executive producers are
responsible for overseeing the development of one or more
products. The interactive software games that we develop and
publish are broken down into two major categories:
(1) products developed by our EA studios for play on
consoles, PCs, mobile platforms and online, and
(2) co-publishing and distribution products.
We develop games internally at our development and production
studios located near San Francisco, Los Angeles, Orlando,
Chicago, Vancouver, Montreal, London, Sweden, Tokyo and
Shanghai. We also engage third parties to develop games on our
behalf at their own development and production studios.
On February 15, 2006, we acquired JAMDAT Mobile Inc.
(JAMDAT) based in Los Angeles, California. JAMDAT is
a global publisher of wireless games and other wireless
entertainment applications
3
for cellular handsets. Subsequent to this acquisition, we merged
our existing mobile business with JAMDAT to establish our EA
Mobile business which is responsible for the creation, marketing
and distribution of interactive entertainment software playable
on cellular handsets.
We market our products under four brand names:
|
|
|
|
|
EA
SPORTStm
We publish realistic sports simulation games under our EA SPORTS
brand. Some of our products published under the EA SPORTS brand
include Madden NFL 06 (professional football),
FIFA 06 (professional soccer) and NBA
Live 06 (professional basketball), |
|
|
|
EAtm
We publish a variety of games under our EA brand. Some of our
products published under the EA brand include Need for
Speed tm
Most Wanted, The
Simstm 2,
Harry Potter and the Goblet of
Firetm
and
Burnouttm
Revenge, |
|
|
|
EA SPORTS
BIGtm
We publish arcade-style extreme sports and modified traditional
sports games under our EA SPORTS BIG brand. Some of our products
published under the EA SPORTS BIG brand include
SSX tm
On Tour (skiing and snowboarding) and FIFA Street 2
(soccer), and |
|
|
|
Pogotm
Online casual games and downloadable casual games are marketed
under the Pogo brand and are marketed under three sub-brands:
(1) Pogo (our free online games service), (2) Club
Pogotm
(our premium subscription-based online games service) and
(3) Pogo-To-Gotm
(downloadable games). |
We develop product families, which we call
franchises around many of our products. For example,
every year we release new versions of most of our EA SPORTS
titles. Likewise, we have been successful in developing,
marketing, publishing and distributing sequels to several of our
EA and EA SPORTS BIG products. We also release products called
expansion packs for PC titles that provide
additional content (characters, storylines, settings, missions)
for games that we have previously published. For example, The
Simstm 2
Open for Business expands the characters, settings and
gameplay of the original The Sims 2 game. We
consider titles that iterate, sequel or spawn expansion packs to
be franchise titles.
|
|
|
Co-publishing and Distribution Products |
Through our EA Partners business unit, we team with other game
development companies to assist them to develop their own
interactive software games, which we then publish, market and
distribute. We refer to these types of arrangements as
co-publishing. An example of a co-publishing product
is TimeSplitters Future
Perfect tm,
which was developed by Free Radical Design, a game development
company located near London.
We also distribute interactive software games that are developed
and published by other companies. An example of one of our
recent distribution products is
Half-Life® 2,
developed and published by Valve, which we distribute worldwide.
Method of Delivery
The console, PC and handheld games that we publish are made
available to consumers on a disk (usually CD, DVD or Universal
Media Disc (UMD) format) that is packaged and
typically sold in retail stores and through online stores
(including our own online store). We refer to these as
packaged goods products. In North America and
Europe, our largest markets, these packaged goods products are
sold primarily to retailers that may be mass market retailers
(such as Wal-Mart), electronics specialty stores (such as Best
Buy) or game software specialty stores (such as GameStop).
4
Following our acquisition of JAMDAT in February 2006, we merged
our existing cellular handset software game development and
publishing business with JAMDAT to establish our EA Mobile
business. Through EA Mobile, we publish games for our customers
to download onto their cellular handsets. Our customers
typically purchase and download our games through a wireless
carriers branded
e-commerce service
accessed directly from their cellular handsets, which must be
enabled by technologies such as BREW or Java. These wireless
carrier services include, among others, Verizon Wireless
Get It Now, Sprint PCS Vision, Cingular
MEdia and Vodafone live!. Our customers are
charged a one-time or monthly subscription fee on their cellular
handset invoice for the game. The wireless carriers generally
retain a percentage of the fee and pay the rest to us. The
wireless distribution of our games eliminates traditional
publishing complexities, including physical production,
packaging, shipping, inventory management and return processing.
There are three ways in which we publish games that are playable
online by consumers:
|
|
|
|
|
Online-only casual games that we make available on the World
Wide Web such as card games, puzzle games and word
games marketed under our Pogo brand. These are made
available to consumers on our web site, www.pogo.com, and on
certain online services provided by America Online, Inc. |
|
|
|
Another type of online-only games is called massively
multiplayer online games (sometimes called
persistent state world games). Players experience
these games as interactive virtual worlds where thousands of
other players can interact with one another. We currently have
two massively multiplayer online game products, Ultima
Onlinetm
and The Sims
Onlinetm.
These games are sold to consumers in the form of a CD, DVD or
download containing the software necessary to play the game. |
|
|
|
We include online capability features in certain of our PC,
PlayStation 2, Xbox, Xbox 360 and PSP products, which
enable consumers to participate in online communities and play
against one another via the Internet. |
In addition, online downloads are available for (1) certain
PC games either from our EA.com site or third party sites such
as Gametap, and (2) Microsofts Xbox Live service. We
are also developing digital content, which we intend to sell
online via microtransactions, for next-generation console-based
games.
We also maintain a smaller business where we license to
manufacturers of products in related industries (for example,
makers of personal computers or computer accessories) rights to
include certain of our products with the manufacturers
product or offer our products to consumers who have purchased
the manufacturers product. We call these combined products
OEM bundles.
Intellectual Property
Like other entertainment companies, our business is based on the
creation, acquisition, exploitation and protection of
intellectual property. Some of this intellectual property is in
the form of software code, patented technology, and other
technology and trade secrets that we use to develop our games
and to make them run properly on the platforms. Other
intellectual property is in the form of audio-visual elements
that consumers can see, hear and interact with when they are
playing our games we call this form of intellectual
property content.
Each of our products embodies a number of separate forms of
intellectual property protection: the software and the content
of our products are copyrighted; our products may use patented
inventions or trade secrets; our product brands and names may be
trademarks of ours or others; our products may contain voices and
5
likenesses of actors, athletes and/or commentators (protected by
personal publicity rights) and often contain musical
compositions and performances that are also copyrighted. Our
products also may contain content licensed from others, such as
trademarks, fictional characters, storylines and software code.
We acquire the rights to include these kinds of intellectual
property in our products through our own development,
acquisitions, and license agreements such as those with sports
leagues and player associations, movie studios and performing
talent, music labels, music publishers and musicians. These
licenses are typically limited to use of the licensed rights in
products for specific time periods. In addition, our products
that play on consoles such as the Sony PlayStation 2 and some
mobile platforms include technology that is owned by the console
manufacturer (for example, Sony) and licensed non-exclusively to
us for use. While we may have renewal rights for some licenses,
our business and the justification for the development of many
of our products is dependent on our ability to continue to
obtain the intellectual property rights from the owners of these
rights at reasonable rates.
Our products are susceptible to unauthorized copying. We
typically distribute our PC products using copy protection
technology that we license from other companies. In addition,
console manufacturers, such as Sony, typically incorporate
security devices in their consoles in an effort to prevent the
use of unlicensed products. Our primary protection against
unauthorized use, duplication and distribution of our products
is enforcement of our copyright and trademark interests. We
typically own the copyright to the software code as well as the
brand or title name trademark under which our products are
marketed. We register our copyrights in the United States and
other countries.
Market Segment
Historically, there have been multiple consoles and mobile video
game players available to consumers that play interactive
software games like ours, and there has been vigorous
competition between manufacturers. While Sonys
PlayStation®
and PlayStation 2 consoles have significantly outsold their
competitors in the past, Microsoft and Nintendo are large and
viable competitors, and PCs continue to be a strong interactive
game platform. Similarly, while Nintendos Game Boy, Game
Boy Color and Game Boy Advance have been the historic leaders in
the mobile video game player market, Sonys PlayStation
Portable is a recent successful competitor in this segment. We
develop and publish products for multiple platforms, and this
diversification continues to be a cornerstone of our product
strategy.
We currently develop or publish products for 12 different
hardware platforms. In fiscal 2006, we released games designed
to play on the PlayStation 2, Xbox, Xbox 360, Nintendo
GameCube, PC, Game Boy Advance, Sony PSP, Nintendo DS,
online and cellular handsets. In fiscal 2007, we plan to release
games designed for play on these platforms as well as games
designed for play on the PlayStation 3 and Nintendo
Wiitm.
6
The latest generation of video game consoles was initiated by
the launch of Microsofts Xbox 360 in fiscal 2006 and
will continue with the launches of the upcoming Sony and
Nintendo consoles. The following table details select
information on some of the console platforms for which we have
published titles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Introduced |
|
|
Manufacturer |
|
Video Game Console/Platform Name |
|
in North America |
|
Medium/Product Base |
|
|
|
|
|
|
|
Sega
|
|
Genesis |
|
|
1989 |
|
|
Cartridge |
Nintendo
|
|
Super
NEStm |
|
|
1991 |
|
|
Cartridge |
Matsushita
|
|
3DOtm
Interactive
Multiplayertm |
|
|
1993 |
|
|
Compact Disk |
Sega
|
|
Saturn |
|
|
1995 |
|
|
Compact Disk |
Sony
|
|
PlayStation |
|
|
1995 |
|
|
Compact Disk |
Nintendo
|
|
Nintendo 64 |
|
|
1996 |
|
|
Cartridge |
Sony
|
|
PlayStation 2 |
|
|
2000 |
|
|
Digital Versatile Disk |
Nintendo
|
|
Nintendo GameCube |
|
|
2001 |
|
|
Proprietary Optical Format |
Microsoft
|
|
Xbox |
|
|
2001 |
|
|
Digital Versatile Disk |
Microsoft
|
|
Xbox 360 |
|
|
2005 |
|
|
Digital Versatile Disk |
PlayStation 2. 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
DVD-based system that, with a network adaptor, is Internet
ready, as well as backward compatible with games published for
its predecessor, the PlayStation. We have published and are
currently developing numerous products for the Sony
PlayStation 2.
Nintendo GameCube. Nintendo launched the Nintendo
GameCube console in Japan in September 2001, in North America in
November 2001, and in Europe in May 2002. The Nintendo GameCube
plays games that are manufactured on a proprietary optical disk.
We have published and are currently developing several products
for the Nintendo GameCube.
Xbox. 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 DVD-based system
that is Internet ready. In May 2004, we began to support the
Xbox Live service with features including Quickmatch, Optimatch,
gamertags, Xbox Live friends list, voice communication and EA
messenger service. We have published and are currently
developing numerous products for the Microsoft Xbox.
Xbox 360. Microsoft launched the Xbox 360 console in
North America in November 2005, and in Europe and Japan in
December 2005. The Xbox 360 is a DVD-based system that is
Internet and high definition ready. We have published several
titles and are currently developing numerous products for the
Xbox 360, all of which also support the Xbox Live service. In
addition, we are developing digital content for sale via
microtransactions on the Xbox Live service.
Our industry is cyclical and is in the transition stage to the
next cycle. Microsoft launched the Xbox 360 at the end of
calendar year 2005. In the coming months, we expect Sony and
Nintendo to introduce new video game consoles as well. These
next-generation consoles have and are expected to introduce new
complexities. Both the Xbox 360 and the PlayStation 3 have
a complex multi-processor architecture and High-Definition video
outputs. The Nintendo Wii will introduce a unique
controller.
7
The following table details select information on some of the
handheld video game players for which we have published titles:
|
|
|
|
|
|
|
|
|
Mobile Game Machine/ |
|
Year Introduced |
Manufacturer |
|
Platform Name |
|
in North America |
|
|
|
|
|
Nintendo
|
|
Game Boy |
|
|
1989 |
|
Nintendo
|
|
Game Boy Color |
|
|
1998 |
|
Nintendo
|
|
Game Boy Advance |
|
|
2001 |
|
Nokia
|
|
N-Gage |
|
|
2003 |
|
Nintendo
|
|
Nintendo DS |
|
|
2004 |
|
Sony
|
|
PSP |
|
|
2005 |
|
Nintendo DS. Nintendo launched the Nintendo DS in North
America in November 2004, in Japan in December 2004, and in
Europe in March 2005. We have published several products and are
currently developing several more products for the Nintendo DS.
Sony PSP. Sony launched the PSP in Japan in December
2004, in North America in March 2005, and in Europe in September
2005. The Sony PSP is a UMD-based system. We have published, are
currently developing, and expect to develop numerous products
for the Sony PSP.
Cellular handsets. Following our acquisition of JAMDAT in
February 2006, we merged our existing cellular handset software
game development and publishing business with JAMDAT to
establish our EA Mobile business. Through EA Mobile, we are a
leading global publisher of interactive entertainment software
playable on cellular handsets, which include games, ringtones,
images and other content. In North America, we are the leading
publisher of interactive entertainment software playable on
cellular handsets.
Many of our games are designed to take advantage of multimedia
enhancements in the latest generation of cellular handsets,
including high-resolution color displays, increased processing
power, improved audio capabilities and increased memory
capabilities. We publish games in multiple categories designed
to appeal to a broad range of wireless subscribers. Our
portfolio is primarily based on intellectual properties that we
create and own, and well-established brands and content that we
license from third parties.
There are three types of EA-published games that are played
online by consumers: (1) online casual games marketed under
the Pogo brand available to consumers on our web site,
www.pogo.com, and on certain online services provided by America
Online, Inc., (2) massively multiplayer online games sold
to consumers in the form of a CD, DVD or download containing the
software necessary to play the game, and (3) online-enabled
packaged goods in which certain of our PC, PlayStation 2,
PSP and Xbox products, allow consumers to participate in online
communities and play against one another via the Internet.
We believe that online gaming is integral to our existing and
future products. However, the continued growth of the online
sector in our industry will depend on the following key factors:
|
|
|
|
|
Growing interest in multiplayer games, |
|
|
|
Willingness by consumers to pay for online game content, |
|
|
|
Rapid innovation of new online entertainment experiences, |
|
|
|
Mass market adoption of broadband technologies, |
|
|
|
Convergence of online capabilities in next-generation
consoles, and |
|
|
|
Ability to create online products that are applicable in diverse
global markets. |
8
Competition
We compete in the entertainment industry. At the most
fundamental level, our products compete with other forms of
entertainment, such as motion pictures, television and music,
for the leisure time and discretionary spending of consumers. We
believe that the software games segment is best viewed as a
segment of the overall entertainment market. We believe that
large software companies and media companies are increasing
their focus on the software games segment of the entertainment
market and, as a result, may compete directly with us. Several
large software companies and media companies (e.g., Microsoft
and Sony) have been publishing products that compete with ours
for a long time, and other diversified media/entertainment
companies (e.g., Time Warner, Viacom, Fox and Disney) are
expanding their software game publishing efforts.
The software games business is highly competitive. It is
characterized by the continuous introduction of new titles and
the development of new technologies. Our competitors vary in
size and cost structure from very small companies with limited
resources to very large, diversified corporations with greater
financial and marketing resources than ours. Our business is
driven by hit titles, which require ever-increasing budgets for
development and marketing. As a result, the availability of
significant financial resources has become a major competitive
factor in developing and marketing software games. Competition
is also based on product quality and features, timing of product
releases, brand-name recognition, quality of in-game content,
access to distribution channels, effectiveness of marketing and
price.
|
|
|
Games for Consoles, PCs and Handheld Video Game
Players |
We currently compete with Sony, Microsoft and Nintendo, each of
which develop and publish software for their respective console
platforms. We also compete with numerous companies which are,
like us, licensed by the console manufacturers to develop and
publish software games that operate on their consoles. These
competitors include Activision, Atari, Capcom, Koei, Konami,
LucasArts, Midway, Namco, Sega, Take-Two Interactive, THQ,
Ubisoft and Vivendi Universal Games, among others. As discussed
above, diversified media companies such as Time Warner, Viacom,
Fox and Disney are also expanding their software game publishing
efforts.
In addition to competing for product sales, we face heavy
competition from other software game companies to obtain license
agreements granting us the right to use intellectual property
included in our products. Some of these content licenses are
controlled by the diversified media companies, which, in some
cases, have decided to publish their own games based on popular
movie properties that they control, rather than licensing the
content to a software game company such as us.
The market for our products is also characterized by significant
price competition and we regularly face pricing pressures from
our competitors. These pressures have, from time to time,
required us to reduce our prices on certain products. Our
experience has been that software game prices tend to decline
once a generation of consoles has been in the market for a
significant period of time due to the increasing number of
software titles competing for acceptance by consumers and the
anticipation of the next-generation of consoles. We have
experienced this kind of price erosion during the past twelve
months, as the software game segment has been going through a
transition from the current generation of consoles
(PlayStation 2, Xbox and Nintendo GameCube) to the next
generation of consoles (Xbox 360, PlayStation 3 and Nintendo
Wii).
|
|
|
Applications for Cellular Handsets |
The wireless entertainment applications market segment, for
which we develop and publish games, ringtones and wallpapers for
cellular handsets, is highly competitive and characterized by
frequent product introductions, evolving wireless platforms and
new technologies. As demand for applications continues to
increase, we expect new competitors to enter the market and
existing competitors to allocate more resources to develop and
market applications. As a result, we expect competition in the
wireless entertainment market segment to intensify.
9
The current and potential competition in the wireless
entertainment applications market segment includes major media
companies, traditional video game publishing companies, wireless
carriers, wireless software providers and other companies that
specialize in wireless entertainment applications. We also
compete with wireless content aggregators, who pool applications
from multiple developers (and sometimes publishers) and offer
them to carriers or through other sales channels.
Currently, we consider our primary competitors in the wireless
entertainment applications market segment to be Disney,
Gameloft, Infospace, Mforma, Namco, Sony Pictures, Sorrent, THQ
Wireless, VeriSign and Yahoo!.
The online games market segment is also highly competitive and
characterized by frequent product introductions, new business
models and new platforms. As the proportion of households with
broadband connections increases, we expect new competitors to
enter the market and existing competitors to allocate more
resources to develop online games. As a result, we expect
competition in the online games market segment to intensify.
Our current and potential competitors in the online game market
segment include major media companies, traditional video game
publishing companies, and companies that specialize in online
games. Our competitors in the casual games market segment
include Yahoo! Popcap, Real and MSN. In the massively
multiplayer online game market segment our competitors include
Vivendi Games, NC Soft, Sony and Atari.
Significant Relationships
|
|
|
Hardware Platform Companies |
Sony. Under the terms of license agreements we entered
into with Sony Computer Entertainment of America, Sony Computer
Entertainment of Europe and Sony Computer Entertainment Inc.
(Japan), we are authorized to develop and distribute DVD-based
software products and online content compatible with the
PlayStation 2. Pursuant to these agreements, we engage Sony to
supply PlayStation 2 DVDs for our products. Many of our
PlayStation 2 products are capable of being played online by
customers who have an online adaptor, which is manufactured and
sold by Sony. In addition, through another set of agreements
with Sony, we are authorized to develop and distribute games
compatible with the Sony PSP.
In fiscal 2006, approximately 38 percent of our net revenue
was derived from sales of EA Studio games designed for play on
the PlayStation 2, compared to 43 percent in fiscal
2005. We released 28 titles worldwide in fiscal 2006 for the
PlayStation 2, compared to 27 titles in fiscal 2005. Our
top five PlayStation 2 releases for fiscal 2006 were Need for
Speed Most Wanted, Madden NFL 06, FIFA 06,
NCAA®
Football 06 and NBA LIVE 06.
In fiscal 2006, approximately 9 percent of our net revenue
was derived from sales of EA Studio games designed for play on
the Sony PSP, compared to 1 percent in fiscal 2005. We
released 16 titles worldwide in fiscal 2006 for the Sony PSP,
compared to three titles in fiscal 2005. Our top five Sony PSP
releases for fiscal 2006 were Need for Speed Most Wanted,
Burnout Revenge, Madden NFL 06, Need for
Speed tm
Underground 2 and FIFA 06.
We are currently in discussions with Sony Computer Entertainment
of America, Sony Computer Entertainment of Europe and Sony
Computer Entertainment Inc. (Japan) to secure a license to
develop and distribute Blu-Ray based software products
compatible with the forthcoming PlayStation 3 console.
Microsoft. Under the terms of license agreements we have
entered into with Microsoft, we are authorized to develop and
distribute DVD-based software products and online content
compatible with the Xbox and Xbox 360.
In fiscal 2006, approximately 13 percent of our net revenue
was derived from sales of EA Studio games designed for play on
the Xbox, compared to 16 percent in fiscal 2005. We
released 28 titles worldwide in
10
fiscal 2006 for the Xbox, compared to 26 titles in fiscal 2005.
Our top five Xbox releases for fiscal 2006 were Madden NFL
06, Need for Speed Most Wanted, NCAA Football 06, Burnout
Revenge and FIFA 06.
In fiscal 2006, approximately 5 percent of our net revenue
was derived from sales of EA Studio games designed for play on
the Xbox 360. We released seven titles worldwide in fiscal 2006
for the Xbox 360. Our top five Xbox 360 releases for fiscal 2006
were Need for Speed Most Wanted, Madden NFL 06,
EA SPORTS tm
Fight Night Round 3, FIFA 06 and NBA LIVE 06.
Nintendo. Under the terms of license agreements we
entered into with Nintendo of America and Nintendo Company Ltd.
(Japan), we are authorized to develop and distribute proprietary
optical format disk products compatible with the Nintendo
GameCube, the Nintendo DS and Game Boy Advance. Pursuant to
these agreements, we engage Nintendo to supply Nintendo GameCube
proprietary optical format disk products for our products.
In fiscal 2006, approximately 5 percent of our net revenue
was derived from sales of EA Studio games designed for play on
the Nintendo GameCube, compared to 7 percent in fiscal
2005. We released 14 titles worldwide in fiscal 2006 for the
Nintendo GameCube, compared to 20 titles in fiscal 2005. Our top
five Nintendo GameCube releases for the year were Need for
Speed Most Wanted, Harry Potter and the Goblet of Fire, Madden
NFL 06, FIFA 06 and The Sims 2.
We are currently in discussions with Nintendo of America and
Nintendo Company Ltd. (Japan) to secure a license to develop and
distribute DVD-based software products compatible with the
forthcoming Nintendo Wii console.
We have agreements to distribute our wireless applications
through more than 90 carriers in over 40 countries. Our
customers download our applications to their cellular handsets
and their wireless carrier invoices them a one-time fee or
monthly subscription fee. Our carrier distribution agreements
establish the fees to be retained by the carrier for
distributing our applications. Our carrier agreements are not
exclusive and generally have a limited term of one or two years,
with evergreen, or automatic renewal, provisions upon expiration
of the initial term. The agreements generally do not obligate
the carriers to market or distribute any of our applications. In
addition, the carriers can often terminate these agreements
early and, in some instances, without cause.
Many of our products are based on or incorporate content and
trademarks owned by others. For example, our EA SPORTS and EA
SPORTS BIG products include rights licensed from the major
sports leagues and players associations. Similarly, many of our
hit EA franchises, such as The Godfather, Harry Potter and Lord
of the Rings, are based on key film and literary licenses.
Celebrities and organizations with whom we have contracts
include: FIFA, FIFPRO Foundation and UEFA (professional soccer);
NASCAR and ISC (stock car racing); National Basketball
Association (professional basketball); PGA TOUR, Tiger Woods and
Pebble Beach (professional golf); National Hockey League and
NHLPA (professional hockey); Warner Bros. (Harry Potter, Batman
and Superman); New Line Productions and Saul Zaentz Company (The
Lord of the Rings); Marvel Enterprises (fighting); National
Football League Properties, Arena Football League and PLAYERS
Inc. (professional football); Collegiate Licensing Company
(collegiate football, basketball and baseball); Simcoh (Def
Jam); Viacom Consumer Products (The Godfather); Valve
Corporation (Half-Life and Counter-Strike); ESPN (content in EA
SPORTS games); Twentieth Century Fox Licensing and Merchandising
(The Simpsons); Lamborghini, McLaren and Porsche (car licenses
for Need for Speed); and mobile game rights with PopCap
Games and The Tetris Company. In the future, we will likely
enter into other relationships with other significant content
providers.
11
Products and Product Development
In fiscal 2006, we generated approximately 73 percent of
our net revenue from EA Studio-produced products, released
during the year as compared to approximately 71 percent in
fiscal 2005. During fiscal 2006, we released 31 EA Studio
titles, excluding titles developed for cellular handsets,
compared to 35 EA Studio titles in fiscal 2005. We released 131
stock keeping units, or SKUs (a version of a title designed for
play on a particular platform) in fiscal 2006, compared to 109
SKUs in fiscal 2005. In fiscal 2006, we had 27 titles that sold
over one million units (aggregated across all platforms). In
fiscal 2005, we had 31 titles and in fiscal 2004 we had 27
titles that sold over one million units (aggregated across all
platforms). In fiscal 2006, we had one title, Need for Speed
Most Wanted, published on eight different platforms, which
represented approximately 10 percent of our total net
revenue. In fiscal 2005, we had one title, Need for Speed
Underground 2, published on five different platforms, which
represented approximately 11 percent of our total net
revenue. No title represented more than 10 percent of our
total net revenue in fiscal 2004.
The products produced by EAs studios are designed and
created by our employee designers and artists and by
non-employee software developers (we call them independent
artists or third-party developers). We
typically advance development funds to the independent artists
and third-party developers during development of our games.
These payments are considered advances against subsequent
royalties based on the sales of the products. These terms are
typically set forth in written agreements entered into with the
independent artists and third-party developers.
During fiscal 2006, the retail selling prices of our newly
released products in North America ranged from $29.99 to $59.99.
Other titles, including re-releases of older titles marketed as
Classics, had retail selling prices that ranged from
$9.99 to $29.99. These ranges may not be indicative of our
future retail selling prices in North America, which are based
on prevailing market conditions. The retail selling prices of
our titles outside of North America vary widely depending on
factors such as local market conditions.
Our goal is to maintain our position as a leading publisher of
games sold for play on video game consoles, PCs and mobile
platforms. We will continue to invest in tools and technologies
designed to facilitate development of our products for current
and next-generation consoles, mobile platforms and online. We
have incurred and expect to incur higher costs during this
transition to next-generation consoles. During this transition,
we intend to continue to develop titles for current-generation
video game consoles while we also continue to make significant
investments in the development of products that operate on
next-generation consoles such as the Xbox 360, PlayStation 3 and
Nintendo Wii. These investments are recorded in research and
development in our Consolidated Statement of Operations. We had
research and development expenditures of $758 million in
fiscal 2006, $633 million in fiscal 2005 and
$511 million in fiscal 2004.
We publish three types of games that are played online by
consumers: online casual games, massively multiplayer online
games, and online-enabled packaged goods games.
Online Casual Games. Our online casual games are marketed
under three brands: Pogo (our free online games service), Club
Pogo (our subscription-based online games service) and
Pogo-To-Go (downloadable games).
|
|
|
|
|
Pogo Pogo provides approximately 80 free
online games geared towards family entertainment. The offerings
include sports, arcade, card, board, casino, word, trivia and
puzzle games. This games service incorporates prizes,
tournaments, community-building activities and the popularity of
free, familiar games to appeal to a broad consumer market. |
|
|
|
Club Pogo In fiscal 2004, we launched Club
Pogo, a subscription-based service offering exclusive games and
premium features. We offer approximately 30 additional games for
Club Pogo subscribers. To join Club Pogo, players must register
and subscribe online. Players have the option of selecting a
monthly or annual subscription fee plan. When a player joins
Club Pogo, they have access to all of the games and content they
had on the free Pogo service, plus premium features |
12
|
|
|
|
|
and benefits, such as additional member-exclusive games, ad-free
gameplay, and an enhanced prize system. Club Pogo players also
have the option of purchasing digital content such as premium
badge albums. Club Pogo also provides a deeper community
experience through upgraded player profiles, weekly game
challenges and member badges. We had over 1.2 million
paying subscribers as of March 31, 2006, up from 800,000
paying subscribers as of March 31, 2005. |
|
|
|
Pogo-To-Go
Pogo-to-Go is our
downloadable games offering. A one-time fee allows users to
download a Pogo game to play offline. We currently offer
approximately 240 downloadable games under the Pogo-To-Go
service, including third party games. The Pogo-To-Go games
include extra features like exclusive game modes, bonus levels,
high scores and enhanced graphics and sounds. We also offer
packaged goods versions of some of these games that consumers
can purchase at retail outlets. |
Massively Multiplayer Online Games. Massively multiplayer
online games are played exclusively online and are experienced
as interactive virtual worlds where thousands of other players
can interact with one another. Massively multiplayer online
games are sold to consumers in the form of a CD, DVD or download
containing the software necessary to play the game. After
installing the software on their PCs, players are able to log-on
to servers in order to interact with other players.
To date, we have launched five massively multiplayer online
games with mixed results. While we have achieved success with
Ultima Online, our other massively multiplayer online
games have not met expectations. We continue to explore
opportunities to build success in this segment of online games.
Online-Enabled Packaged Goods. We include online
capability features in certain of our PC, PlayStation 2,
Xbox, Xbox 360 and PSP products, which enable consumers to
participate in online communities and play against one another
via the Internet. In fiscal 2006, 16 Xbox, 14
PlayStation 2, eight PC, seven Xbox 360 and four PSP titles
had online gameplay capability. We expect to include online
gameplay capability in almost all of our titles going forward.
Marketing and Distribution
We market the products produced by our studios under the EA
SPORTS, EA SPORTS BIG, EA and Pogo brands. Products marketed
under the EA SPORTS brand typically simulate professional and
collegiate sports and include franchises such as Madden NFL,
FIFA Soccer and NBA Live. Products marketed under the EA SPORTS
BIG brand typically feature extreme sports or modified
traditional sports in arcade-style games and include such titles
as FIFA Street 2 and NBA Street V3. We market
non-sports games under the EA brand including franchises such as
Need for Speed, The Sims and The Lord of the Rings, as well as
The
Godfather tm
The Game.
Our EA Partners business unit operates under a variety of deal
types and structures with the intent of generating, leveraging
and/or owning intellectual properties conceived by other
developers, publishers or licensors worldwide. Through EA
Partners we provide direct development expertise to our partners
via an internal production staff, while also making available
our publishing resources to provide sales, marketing and
distribution services on a global basis. EA Partners also
provides distribution and manufacturing services to other
publishers. These titles are typically delivered to us from
other publishers in gold master form or as completed products.
The interactive software game business is hit
driven, requiring significant expenditures for marketing and
advertising of our products. 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 generated approximately 94 percent of our North American
net revenue from direct sales to retailers. The remaining
6 percent 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. Outside of North America, we derive revenue
primarily from direct sales to retailers. In a few of our
smaller markets, we sell our products through distributors with
whom we have written agreements or informal arrangements,
depending on the business customs of the territories. We had
direct sales to one
13
customer, Wal-Mart Stores, Inc., which represented approximately
13 percent of total net revenue in both fiscal 2006 and
2004 and approximately 14 percent of total net revenue in
fiscal 2005.
In North America, we have stock-balancing programs for our PC
products, which allow for the exchange of PC products by
resellers under certain circumstances. We may also decide to
provide price protection for our PC products under certain
circumstances in North America. In most of our major
geographical markets, we accept product returns on our PC
products and we may decide to accept product returns or provide
price protection under certain circumstances for our console
products after we analyze inventory remaining in the channel,
the rate of inventory sell-through in the channel, and our
remaining inventory on hand. It is our policy to exchange
products or give credits, rather than give cash refunds. We
actively monitor the volume of our sales to our channel partners
and their inventories, as substantial overstocking in the
distribution channel could result in high returns or higher
price protection costs in subsequent periods.
The distribution channels through which our games are sold have
been characterized by change, including consolidations and
financial difficulties of certain distributors and retailers.
The bankruptcy or other business difficulties of a distributor
or retailer could render our accounts receivable from such
entity uncollectible, which could have an adverse effect on our
operating results and financial condition. In addition, an
increasing number of companies are competing for access to our
distribution 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 that
they are willing to devote to the software games category, and
there is intense competition for these resources. 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.
Inventory and Working Capital
We manage inventories by communicating with our customers prior
to the release of our products, and then using our industry
experience to forecast demand on a product-by-product and
territory-by-territory basis. Historically, we have experienced
high turnover of our products, and the lead times on re-orders
of our products are generally short, approximately two to three
weeks. Further, as discussed in Marketing and
Distribution and in Managements Discussion and
Analysis of Financial Condition and Results of Operations,
we have practices in place with our customers (such as stock
balancing and price protection) that reduce product returns.
International Operations
We conduct business and have wholly-owned subsidiaries
throughout the world, including offices in Australia, Austria,
Barbados, Belgium, Bermuda, Brazil, Canada, China, the Czech
Republic, Denmark, England, Finland, France, Germany, Greece,
Hong Kong, Hungary, India, Italy, Japan, Mexico, the
Netherlands, New Zealand, Norway, Poland, Portugal, Romania,
Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Taiwan, and Thailand. International net revenue
decreased by 7 percent to $1.367 billion, or
46 percent of total net revenue in fiscal 2006, compared to
$1.464 billion, or 47 percent of total net revenue in
fiscal 2005. Our decrease in international net revenue was
primarily driven by lower sales in Europe and the negative
impact of foreign exchange rates.
We believe that in order to increase our online sales in Asia,
we will need to devote significant resources to hire local
development talent and expand our infrastructure, most notably,
the expansion and creation of studio facilities to develop
content locally. In addition, we are establishing online game
marketing, publishing and distribution functions in China. As
part of this strategy, we may seek to partner with established
local companies through acquisitions, joint ventures or other
similar arrangements.
The amounts of net revenue and long-lived assets attributable to
each of our geographic regions for each of the last three fiscal
years are set forth in Note 17 of the Notes to Consolidated
Financial Statements, included in Item 8 of this report.
14
Manufacturing and Suppliers
The suppliers we use to manufacture our packaged goods games can
be characterized in three types:
|
|
|
|
|
Manufacturing entities that press our game disks, |
|
|
|
Entities that print our game instruction booklets, and |
|
|
|
Entities that package the disks and printed game instruction
booklets into the jewel cases and boxes for shipping to
customers. |
Our online games and cellular handset applications are delivered
digitally, and therefore, are not manufactured.
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 for the disk component of our
PlayStation 2, PSP and Nintendo GameCube disk products, as
well as Nintendo DS cartridges, as discussed in
Significant Relationships. 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,
manufacturing delays by Sony, Nintendo or other vendors, or
other factors beyond our control could impair our ability to
manufacture, or have manufactured, our products.
Backlog
We typically ship orders immediately upon receipt. To the extent
that any backlog may or may not exist at the end of a reporting
period, it would be both coincidental and an unreliable
indicator of future results of any period.
Seasonality
Our business is highly seasonal. We typically experience our
highest revenue and profit in the holiday season quarter ending
in December and a seasonal low in revenue and profit in the
quarter ending in June. Our results however can vary based on
title release dates, consumer demand for our products and
shipment schedules, among other factors.
Employees
As of March 31, 2006, we employed approximately 7,200
people, of whom over 4,000 were outside the United States. We
believe that our ability to attract and retain qualified
employees is a critical factor in the successful development of
our products 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. We believe that
our relationships with our employees are strong. Less than three
percent of our employees, all of whom work for our Swedish
development subsidiary, are represented by a union, guild or
other collective bargaining organization.
15
Executive Officers
The following table sets forth information regarding our
executive officers, who are appointed by and serve at the
discretion of the Board of Directors:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Lawrence F. Probst III
|
|
|
56 |
|
|
Chairman and Chief Executive Officer |
V. Paul Lee
|
|
|
41 |
|
|
President, Worldwide Studios |
Gerhard Florin
|
|
|
47 |
|
|
Executive Vice President, General Manager, International
Publishing |
David P. Gardner
|
|
|
40 |
|
|
Executive Vice President, Chief Operating Officer, Worldwide
Studios |
Frank D. Gibeau
|
|
|
37 |
|
|
Executive Vice President, General Manager, North America
Publishing |
Warren C. Jenson
|
|
|
49 |
|
|
Executive Vice President, Chief Financial and Administrative
Officer |
Joel Linzner
|
|
|
54 |
|
|
Executive Vice President, Business and Legal Affairs |
Nancy L. Smith
|
|
|
53 |
|
|
Executive Vice President, General Manager, The Sims Franchise |
Kenneth A. Barker
|
|
|
39 |
|
|
Senior Vice President, Chief Accounting Officer |
Stephen G. Bené
|
|
|
42 |
|
|
Senior Vice President, General Counsel and Corporate Secretary |
Mitch Lasky
|
|
|
44 |
|
|
Senior Vice President, EA Mobile |
Gabrielle Toledano
|
|
|
39 |
|
|
Senior Vice President, Human Resources |
Mr. Probst has been a director of Electronic Arts
since January 1991 and currently serves as Chairman and Chief
Executive Officer. He was elected as Chairman in July 1994.
Mr. Probst has previously served as President of Electronic
Arts; as Senior Vice President of EA Distribution, Electronic
Arts distribution division, from January 1987 to January
1991; and from September 1984, when he joined Electronic Arts,
until December 1986, served as Vice President of Sales.
Mr. Probst holds a B.S. degree from the University of
Delaware.
Mr. Lee was named President, Worldwide Studios, in
September 2005. He served as Executive Vice President and Chief
Operating Officer, Worldwide Studios from August 2002 to
September 2005. From 1998 to August 2002, he was Senior Vice
President and Chief Operating Officer, Worldwide Studios. 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 principal of Distinctive Software
Inc. until it was acquired by Electronic Arts in 1991.
Mr. Lee holds a Bachelor of Commerce degree from the
University of British Columbia and is a Chartered Financial
Analyst.
Dr. Florin has served as Executive Vice President,
General Manager, International Publishing since September 2005.
Previously he was Senior Vice President and Managing Director,
European Publishing since April 2003. Prior to this, he served
as Vice President, Managing Director for European countries
since 2001. From the time he joined Electronic Arts in 1996 to
2001, he was the Managing Director for German speaking
countries. Prior to joining Electronic Arts, Dr. Florin
held various positions at BMG, the global music division of
Bertelsmann AG, and worked as a consultant with McKinsey.
Dr. Florin holds Masters and Ph.D. degrees in Economics
from the University of Augsburg, Germany.
Mr. Gardner has served as Executive Vice President,
Chief Operating Officer, Worldwide Studios since September 2005.
Previously he served as Senior Vice President, International
Publishing since April 2004. During fiscal 2004,
Mr. Gardner took a leave of absence from EA. He previously
held the position of Senior Vice President and Managing
Director, European Publishing from May 1999 to April 2003. Prior
to
16
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.
Mr. Gibeau has served as Executive Vice President,
General Manager, North America Publishing since September 2005.
Previously he was Senior Vice President of North American
Marketing, a position he held since 2002. Mr. Gibeau has
held various publishing positions since joining the company in
1991. Mr. Gibeau holds a B.S. degree from the University of
Southern California and an M.B.A. from Santa Clara
University.
Mr. Jenson joined Electronic Arts in June 2002 as
Executive Vice President, Chief Financial and Administrative
Officer. Before joining Electronic Arts, he was the Senior Vice
President and Chief Financial Officer for Amazon.com from 1999
to 2002. From 1998 to 1999, he was the Chief Financial Officer
and Executive Vice President for Delta Air Lines. Prior to that,
he worked in several positions as part of the General Electric
Company. Most notably, he served as Chief Financial Officer and
Senior Vice President for the National Broadcasting Company, a
subsidiary of General Electric. Mr. Jenson earned his
Masters of Accountancy-Business Taxation, and B.S. in Accounting
from Brigham Young University.
Mr. Linzner has served as Executive Vice President,
Business and Legal Affairs since March 2005. From April 2004 to
March 2005, he served as Senior Vice President, Business and
Legal Affairs. From October 2002 to April 2004, Mr. Linzner
held the position of Senior Vice President of Worldwide Business
Affairs and from July 1999 to October 2002, he held the position
of Vice President of Worldwide Business Affairs. Prior to
joining Electronic Arts in July 1999, Mr. Linzner served as
outside litigation counsel to Electronic Arts and several other
companies in the video game industry. Mr. Linzner earned
his J.D. from Boalt Hall at the University of California,
Berkeley, after graduating from Brandeis University. He is a
member of the Bar of the State of California and is admitted to
practice in the United States Supreme Court, the Ninth Circuit
Court of Appeals and several United States District Courts.
Ms. Smith was named Executive Vice President,
General Manager, The Sims Franchise in September 2005. Prior to
this position, she served as Executive Vice President and
General Manager, North American Publishing since March 1998.
From October 1996 to March 1998, Ms. Smith served as
Executive Vice President, North American Sales. 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. Barker has served as Senior Vice President,
Chief Accounting Officer since April 2006. From June 2003 to
April 2006, Mr. Barker held the position of Vice President,
Chief Accounting Officer. Prior to joining Electronic Arts,
Mr. Barker was employed at Sun Microsystems, Inc., as Vice
President and Corporate Controller from October 2002 to June
2003 and Assistant Corporate Controller from April 2000 to
September 2002. Prior to that, he was an audit partner at
Deloitte. Mr. Barker graduated from the University of Notre
Dame with a B.A. degree in Accounting.
Mr. Bené has served as Senior Vice President,
General Counsel and Corporate Secretary since October 2004. From
April 2004 to October 2004, Mr. Bené held the position
of Vice President, Acting General Counsel and Corporate
Secretary, and from June 2003 to April 2004, he held the
position of Vice President and Associate General Counsel. Prior
to June 2003, Mr. Bené had served as internal legal
counsel since joining the Company in March 1995.
Mr. Bené earned his J.D. from Stanford Law School, and
received his B.S. in Mechanical Engineering from Rice
University. Mr. Bené is a member of the Bar of the
State of California.
Mr. Lasky joined Electronic Arts in February 2006 as
Senior Vice President of EA Mobile. From November 2000 until
February 2006, Mr. Lasky served as Chief Executive Officer
of JAMDAT Mobile Inc., and from February 2001 until February
2006, served as Chairman of the Board of JAMDAT. From
17
March 1995 to June 2000, Mr. Lasky held various positions
at Activision, Inc., including Executive Vice President of
Worldwide Studios. Mr. Lasky graduated from Harvard College
with a B.A. in History and Literature, and earned a J.D. from
the University of Virginia School of Law.
Ms. Toledano joined Electronic Arts in February 2006
as Senior Vice President, Human Resources. Prior to joining
Electronic Arts, Ms. Toledano served as Siebel Systems,
Inc.s Senior Vice President of Human Resources from July
2002 to February 2006. From September 2000 to June 2002, she
served as Senior Director of Human Resources for Microsoft
Corporation, and from September 1998 until September 2000, she
served as Director of Human Resources and Recruiting for
Microsoft. Ms. Toledano earned both her undergraduate
degree in Humanities and her graduate degree in Education from
Stanford University.
Investor Information
We file various reports with, or furnish them to, the Securities
and Exchange Commission (the SEC), including our
annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to such reports. These reports are available free of
charge on the Investor Relations section of our web site,
http://investor.ea.com, as soon as reasonably practicable
after we electronically file the reports with, or furnish them
to, the SEC.
The charters of our Audit, Compensation, and Nominating and
Governance committees of our Board of Directors, as well as our
Global Code of Conduct (which includes code of ethics provisions
applicable to our directors, principal executive officer,
principal financial officer, principal accounting officer, and
other senior financial officers), are available in the Investor
Relations section of our web site at
http://investor.ea.com. We will post amendments to our
Global Code of Conduct in the Investor Relations section of our
web site. Copies of our charters and Global Code of Conduct are
available without charge by contacting our Investor Relations
department at (650) 628-1500.
Shareholders of record may hold their shares of our common stock
in book-entry form. This eliminates costs related to safekeeping
or replacing paper stock certificates. In addition, shareholders
of record may request electronic movement of book-entry shares
between their account with our stock transfer agent and their
broker. Stock certificates may be converted to book-entry shares
at any time. Questions regarding this service may be directed to
our stock transfer agent, Wells Fargo Bank, N.A., at
1-800-468-9716.
Our business is subject to many risks and uncertainties, which
may affect our future financial performance. If any of the
events or circumstances described below occurs, our business and
financial performance could be harmed, our actual results could
differ materially from our expectations and the market value of
our stock could decline. The risks and uncertainties discussed
below are not the only ones we face. There may be additional
risks and uncertainties not currently known to us or that we
currently do not believe are material that may harm our business
and financial performance.
Our business is highly dependent on the success, timely
release and availability of new video game platforms, on the
continued availability of existing video game platforms, as well
as our ability to develop commercially successful products for
these platforms.
We derive most of our revenue from the sale of products for play
on video game platforms manufactured by third parties, such as
Sonys PlayStation 2 and Microsofts Xbox. The success
of our business is driven in large part by the availability of
an adequate supply of current-generation video game platforms,
the timely release, adequate supply, and success of new video
game hardware systems, our ability to accurately predict which
platforms will be most successful in the marketplace, and our
ability to develop commercially successful products for these
platforms. We must make product development decisions and commit
significant resources well in advance of the anticipated
introduction of a new platform. A new platform for which we are
developing products may be delayed, may not succeed or may have
a shorter life cycle than anticipated. If the platforms for
which we are developing products are not released when
anticipated, are not available in adequate amounts to meet
consumer demand, or do not attain wide
18
market acceptance, our revenue will suffer, we may be unable to
fully recover the resources we have committed, and our financial
performance will be harmed.
Our industry is cyclical and is in the midst of a transition
period heading into the next cycle. During the transition, we
expect our costs to continue to increase, we may experience a
decline in sales as consumers anticipate and adopt
next-generation products and our operating results may suffer
and become more difficult to predict.
Video game platforms have historically had a life cycle of four
to six years, which causes the video game software market to be
cyclical as well. Sonys PlayStation 2 was introduced in
2000 and Microsofts Xbox and the Nintendo GameCube were
introduced in 2001. Microsoft released the Xbox 360 in November
2005, and we expect Sony and Nintendo to introduce new video
game players into the market as well (so-called
next-generation platforms) in the coming months. As
a result, we believe that the interactive entertainment industry
is in the midst of a transition stage leading into the next
cycle. During this transition, we intend to continue developing
and marketing new titles for current-generation video game
platforms while we also make significant investments developing
products for the next-generation platforms. We have incurred and
expect to continue to incur increased costs during the
transition to next-generation platforms, which are not likely to
be offset in the near future. Moreover, we expect development
costs for next-generation video games to be greater on a
per-title basis than development costs for current-generation
video games.
We also expect that, as the current generation of platforms
reaches the end of its cycle and next-generation platforms are
introduced into the market, sales of video games for
current-generation platforms will continue to decline as
consumers replace their current-generation platforms with
next-generation platforms, or defer game software purchases
until they are able to purchase a next-generation platform. This
decline in current-generation product sales may not be offset by
increased sales of products for the new platforms. For example,
following the launch of Sonys PlayStation 2 platform, we
experienced a significant decline in revenue from sales of
products for Sonys older PlayStation game console, which
was not immediately offset by revenue generated from sales of
products for the PlayStation 2. More recently, we have seen a
sharp decrease in sales of titles for the Xbox following the
launch of the Xbox 360. In addition, during the transition, we
expect our operating results to be more volatile and difficult
to predict, which could cause our stock price to fluctuate
significantly.
We expect the average price of current-generation titles to
continue to decline.
As a result of the transition to next-generation platforms, a
more value-oriented consumer base, a greater number of
current-generation titles being published, and significant
pricing pressure from our competitors, we have experienced a
decrease in the average price of our titles for
current-generation platforms. As the interactive entertainment
industry continues to transition to next-generation platforms,
we expect few, if any, current-generation titles will be able to
command premium price points, and we expect that even these
titles will be subject to price reductions at an earlier point
in their sales cycle than we have seen in prior years. We expect
the average price of current-generation titles to continue to
decline, which will have a negative effect on our margins and
operating results.
Our platform licensors set the royalty rates and other fees
that we must pay to publish games for their platforms, and
therefore have significant influence on our costs. If one or
more of the platform licensors adopt a different fee structure
for future game consoles or we are unable to obtain such
licenses, our profitability will be materially impacted.
In November 2005, Microsoft released the Xbox 360 and, over the
course of the next twelve months, we expect Sony and Nintendo to
introduce new video game players into the market in various
parts of the world. In order to publish products for a new video
game player, we must take a license from the platform licensor,
which gives the platform licensor the opportunity to set the fee
structure that we must pay in order to publish games for that
platform.
Similarly, certain platform licensors have retained the
flexibility to change their fee structures for online gameplay
and features for their consoles. The control that platform
licensors have over the fee structures
19
for their future platforms and online access makes it difficult
for us to predict our costs and profitability in the medium to
long term. It is also possible that platform licensors may
choose not to renew our licenses. Because publishing products
for video game consoles is the largest portion of our business,
any increase in fee structures or failure to secure a license
relationship would significantly harm our ability to generate
revenues and/or profits.
If we do not consistently meet our product development
schedules, our operating results will be adversely affected.
Our business is highly seasonal, with the highest levels of
consumer demand and a significant percentage of our revenue
occurring in the December quarter. In addition, we seek to
release many of our products in conjunction with specific
events, such as the release of a related movie or the beginning
of a sports season or major sporting event. If we miss these key
selling periods for any reason, including product delays or
delayed introduction of a new platform for which we have
developed products, our sales will suffer disproportionately.
Likewise, if a key event to which our product release schedule
is tied were to be delayed or cancelled, our sales would also
suffer disproportionately. Our ability to meet product
development schedules is affected by a number of factors,
including the creative processes involved, the coordination of
large and sometimes geographically dispersed development teams
required by the increasing complexity of our products, and the
need to fine-tune our products prior to their release. We have
experienced development delays for our products in the past,
which caused us to push back release dates. In the future, any
failure to meet anticipated production or release schedules
would likely result in a delay of revenue or possibly a
significant shortfall in our revenue, harm our profitability,
and cause our operating results to be materially different than
anticipated.
Our business is subject to risks generally associated with
the entertainment industry, any of which could significantly
harm our operating results.
Our business is subject to risks that are generally associated
with the entertainment industry, many of which are beyond our
control. These risks could negatively impact our operating
results and include: the popularity, price and timing of our
games and the platforms on which they are played; economic
conditions that adversely affect discretionary consumer
spending; changes in consumer demographics; the availability and
popularity of other forms of entertainment; and critical reviews
and public tastes and preferences, which may change rapidly and
cannot necessarily be predicted.
Technology changes rapidly in our business and if we fail to
anticipate or successfully implement new technologies or the
manner in which people play our games, the quality, timeliness
and competitiveness of our products and services will suffer.
Rapid technology changes in our industry require us to
anticipate, sometimes years in advance, which technologies we
must implement and take advantage of in order to make our
products and services competitive in the market. Therefore, we
usually start our product development with a range of technical
development goals that we hope to be able to achieve. We may not
be able to achieve these goals, or our competition may be able
to achieve them more quickly and effectively than we can. In
either case, our products and services may be technologically
inferior to our competitors, less appealing to consumers,
or both. If we cannot achieve our technology goals within the
original development schedule of our products and services, then
we may delay their release until these technology goals can be
achieved, which may delay or reduce revenue and increase our
development expenses. Alternatively, we may increase the
resources employed in research and development in an attempt to
accelerate our development of new technologies, either to
preserve our product or service launch schedule or to keep up
with our competition, which would increase our development
expenses.
Our business is intensely competitive and hit
driven. If we do not continue to deliver hit
products and services or if consumers prefer our
competitors products or services over our own, our
operating results could suffer.
Competition in our industry is intense and we expect new
competitors to continue to emerge in the United States and
abroad. While many new products and services are regularly
introduced, only a relatively small
20
number of hit titles accounts for a significant
portion of total revenue in our industry. Hit products or
services offered by our competitors may take a larger share of
consumer spending than we anticipate, which could cause revenue
generated from our products and services to fall below
expectations. If our competitors develop more successful
products or services, offer competitive products or services at
lower price points or based on payment models perceived as
offering a better value proposition (such as pay-for-play or
subscription-based models), or if we do not continue to develop
consistently high-quality and well-received products and
services, our revenue, margins, and profitability will decline.
If we are unable to maintain or acquire licenses to
intellectual property, we will publish fewer hit titles and our
revenue, profitability and cash flows will decline. Competition
for these licenses may make them more expensive and increase our
costs.
Many of our products are based on or incorporate intellectual
property owned by others. For example, our EA SPORTS products
include rights licensed from major sports leagues and
players associations. Similarly, many of our other hit
franchises, such as The Godfather, Harry Potter and Lord of the
Rings, are based on key film and literary licenses. Competition
for these licenses is intense. If we are unable to maintain
these licenses or obtain additional licenses with significant
commercial value, our revenues and profitability will decline
significantly. Competition for these licenses may also drive up
the advances, guarantees and royalties that we must pay to the
licensor, which could significantly increase our costs.
If patent claims continue to be asserted against us, we may
be unable to sustain our current business models or profits, or
we may be precluded from pursuing new business opportunities in
the future.
Many patents have been issued that may apply to widely-used game
technologies, or to potential new modes of delivering, playing
or monetizing game software products. For example, infringement
claims under many issued patents are now being asserted against
interactive software or online game sites. Several such claims
have been asserted against us. We incur substantial expenses in
evaluating and defending against such claims, regardless of the
merits of the claims. In the event that there is a determination
that we have infringed a third-party patent, we could incur
significant monetary liability and be prevented from using the
rights in the future, which could negatively impact our
operating results. We may also discover that future
opportunities to provide new and innovative modes of game play
and game delivery to consumers may be precluded by existing
patents that we are unable to license on reasonable terms.
Other intellectual property claims may increase our product
costs or require us to cease selling affected products.
Many of our products include extremely realistic graphical
images, and we expect that as technology continues to advance,
images will become even more realistic. Some of the images and
other content are based on real-world examples that may
inadvertently infringe upon the intellectual property rights of
others. Although we believe that we make reasonable efforts to
ensure that our products do not violate the intellectual
property rights of others, it is possible that third parties
still may claim infringement. From time to time, we receive
communications from third parties regarding such claims.
Existing or future infringement claims against us, whether valid
or not, may be time consuming and expensive to defend. Such
claims or litigations could require us to stop selling the
affected products, redesign those products to avoid
infringement, or obtain a license, all of which would be costly
and harm our business.
From time to time we may become involved in other litigation
which could adversely affect us.
We are currently, and from time to time in the future may
become, subject to other claims and litigation, which could be
expensive, lengthy, and disruptive to normal business
operations. In addition, the outcome of any claims or litigation
may be difficult to predict and could have a material adverse
effect on our business, operating results, or financial
condition. For further information regarding certain claims and
litigation in which we are currently involved, see
Part I Item 3. Legal
Proceedings below.
21
Our business, our products and our distribution are subject
to increasing regulation of content, consumer privacy,
distribution and online hosting and delivery in the key
territories in which we conduct business. If we do not
successfully respond to these regulations, our business may
suffer.
Legislation is continually being introduced that may affect both
the content of our products and their distribution. For example,
data protection laws in the United States and Europe impose
various restrictions on our web sites. Those rules vary by
territory although the Internet recognizes no geographical
boundaries. Other countries, such as Germany, have adopted laws
regulating content both in packaged games and those transmitted
over the Internet that are stricter than current United States
laws. In the United States, the federal and several state
governments are continually considering content restrictions on
products such as ours, as well as restrictions on distribution
of such products. For example, recent legislation has been
adopted in several states, and could be proposed at the federal
level, that prohibits the sale of certain games (e.g., violent
games or those with M (Mature) or AO (Adults
Only) ratings) to minors. Any one or more of these factors
could harm our business by limiting the products we are able to
offer to our customers, by limiting the size of the potential
market for our products, and by requiring additional
differentiation between products for different territories to
address varying regulations. This additional product
differentiation could be costly.
If one or more of our titles were found to contain hidden,
objectionable content, our business could suffer.
Throughout the history of our industry, many video games have
been designed to include certain hidden content and gameplay
features that are accessible through the use of in-game cheat
codes or other technological means that are intended to enhance
the gameplay experience. However, in several cases, the hidden
content or feature was included in the game by an employee who
was not authorized to do so or by an outside developer without
the knowledge of the publisher. From time to time, some hidden
content and features have contained profanity, graphic violence
and sexually explicit or otherwise objectionable material. In a
few cases, the Entertainment Software Ratings Board
(ESRB) has reacted to discoveries of hidden content
and features by reviewing the rating that was originally
assigned to the product, requiring the publisher to change the
game packaging and/or fining the publisher. Retailers have on
occasion reacted to the discovery of such hidden content by
removing these games from their shelves, refusing to sell them,
and demanding that their publishers accept them as product
returns. Likewise, consumers have reacted to the revelation of
hidden content by refusing to purchase such games, demanding
refunds for games theyve already purchased, and refraining
from buying other games published by the company whose game
contained the objectionable material.
We have implemented preventative measures designed to reduce the
possibility of hidden, objectionable content from appearing in
the video games we publish. Nonetheless, these preventative
measures are subject to human error, circumvention, overriding,
and reasonable resource constraints. If a video game we
published were found to contain hidden, objectionable content,
the ESRB could demand that we recall a game and change its
packaging to reflect a revised rating, retailers could refuse to
sell it and demand we accept the return of any unsold copies or
returns from customers, and consumers could refuse to buy it or
demand that we refund their money. This could have a material
negative impact on our operating results and financial
condition. In addition, our reputation could be harmed, which
could impact sales of other video games we sell. If any of these
consequences were to occur, our business and financial
performance could be significantly harmed.
If we ship defective products, our operating results could
suffer.
Products such as ours are extremely complex software programs,
and are difficult to develop, manufacture and distribute. We
have quality controls in place to detect defects in the
software, media and packaging of our products before they are
released. Nonetheless, these quality controls are subject to
human error, overriding, and reasonable resource constraints.
Therefore, these quality controls and preventative measures may
not be effective in detecting defects in our products before
they have been reproduced and released into the marketplace. In
such an event, we could be required to recall a product, or we
may find it
22
necessary to voluntarily recall a product, and/or scrap
defective inventory, which could significantly harm our business
and operating results.
If we do not continue to attract and retain key personnel, we
will be unable to effectively conduct our business. In addition,
compensation-related changes in accounting requirements, as well
as evolving legal and operational factors, could have a
significant impact on our expenses and operating results.
The market for technical, creative, marketing and other
personnel essential to the development and marketing of our
products and management of our businesses is extremely
competitive. Our leading position within the interactive
entertainment industry makes us a prime target for recruiting of
executives and key creative talent. If we cannot successfully
recruit and retain the employees we need, or replace key
employees following their departure, our ability to develop and
manage our businesses will be impaired.
We annually review and evaluate with the Compensation Committee
of our Board of Directors the compensation and benefits that we
offer our employees to ensure that we are able to attract and
retain our talent. Within our regular review, we have considered
recent changes in the accounting treatment of stock options, the
competitive market for technical, creative, marketing and other
personnel, and the evolving nature of job functions within our
studios, marketing organizations and other areas of the
business. Any changes we make to our compensation programs could
result in increased expenses and have a significant impact on
our operating results.
Our platform licensors are our chief competitors and
frequently control the manufacturing of and/or access to our
video game products. If they do not approve our products, we
will be unable to ship to our customers.
Our agreements with hardware licensors (such as Sony for the
PlayStation 2, Microsoft for the Xbox and Nintendo for the
Nintendo GameCube) typically give significant control to the
licensor over the approval and manufacturing of our products,
which could, in certain circumstances, leave us unable to get
our products approved, manufactured and shipped to customers.
These hardware licensors are also our chief competitors. In most
events, control of the approval and manufacturing process by the
platform licensors increases both our manufacturing lead times
and costs as compared to those we can achieve independently.
While we believe that our relationships with our hardware
licensors are currently good, the potential for these licensors
to delay or refuse to approve or manufacture our products
exists. Such occurrences would harm our business and our
financial performance.
We also require compatibility code and the consent of Microsoft
and Sony in order to include online capabilities in our products
for their respective platforms. As online capabilities for video
game platforms become more significant, Microsoft and Sony could
restrict our ability to provide online capabilities for our
console platform products. If Microsoft or Sony refused to
approve our products with online capabilities or significantly
impacted the financial terms on which these services are offered
to our customers, our business could be harmed.
Our international net revenue is subject to currency
fluctuations.
For the fiscal year ended March 31, 2006, international net
revenue comprised 46 percent of our total net revenue. We
expect foreign sales to continue to account for a significant
portion of our total net revenue. Such sales may be subject to
unexpected regulatory requirements, tariffs and other barriers.
Additionally, foreign sales are primarily made in local
currencies, which may fluctuate against the U.S. dollar.
While we utilize foreign exchange forward contracts to mitigate
some foreign currency risk associated with foreign currency
denominated assets and liabilities (primarily certain
intercompany receivables and payables) and, from time to time,
foreign currency option contracts to hedge foreign currency
forecasted transactions (primarily related to a portion of the
revenue and expenses denominated in foreign currency generated
by our operational subsidiaries), our results of operations,
including our reported net revenue and net income, and financial
condition would be adversely affected by unfavorable foreign
currency fluctuations, particularly the Euro, British pound
sterling and Canadian dollar.
23
Changes in our tax rates or exposure to additional tax
liabilities could adversely affect our operating results and
financial condition.
We are subject to income taxes in the United States and in
various foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes, and, in
the ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is
uncertain.
We are also required to estimate what our taxes will be in the
future. Although we believe our tax estimates are reasonable,
the estimate process and the applicable law are inherently
uncertain, and our estimates are not binding on tax authorities.
Our effective tax rate could be adversely affected by changes in
our business, including the mix of earnings in countries with
differing statutory tax rates, changes in the elections we make,
changes in applicable tax laws as well as other factors.
Further, our tax determinations are regularly subject to audit
by tax authorities and developments in those audits could
adversely affect our income tax provision. Should our ultimate
tax liability exceed our estimates, our income tax provision and
net income could be materially affected.
We incur certain tax expenses that do not decline
proportionately with declines in our consolidated income. As a
result, in absolute dollar terms, our tax expense will have a
greater influence on our effective tax rate at lower levels of
pre-tax income than higher levels. In addition, at lower levels
of pre-tax income, our effective tax rate will be more volatile.
We are also required to pay taxes other than income taxes, such
as payroll, sales, use, value-added, net worth, property and
goods and services taxes, in both the United States and various
foreign jurisdictions. We are regularly under examination by tax
authorities with respect to these non-income taxes. There can be
no assurance that the outcomes from these examinations, changes
in our business or changes in applicable tax rules will not have
an adverse effect on our operating results and financial
condition.
Changes in our worldwide operating structure could have
adverse tax consequences.
As we expand our international operations and implement changes
to our operating structure or undertake intercompany
transactions in light of changing tax laws, expiring rulings,
acquisitions and our current and anticipated business and
operational requirements, our tax expense could increase. For
example, in the second and fourth quarters of fiscal 2006, we
incurred additional income taxes resulting from certain
intercompany transactions.
In the fourth quarter of fiscal 2006, we repatriated
$375 million under the American Jobs Creation Act of 2004.
As a result, we recorded an additional one-time tax expense in
fiscal 2006 of $17 million.
Beginning in fiscal year 2007, we will recognize expense for
stock-based compensation related to our employee equity
compensation and employee stock purchase programs. The
recognition of this expense will significantly lower our
reported net income (or increase our reported net loss).
On April 2, 2006, the first day of our current fiscal year,
we adopted Statement of Financial Accounting Standard
No. 123 (revised 2004)
(SFAS No. 123R), Share-Based
Payment, which requires us to recognize compensation
expense for all stock-based compensation based on estimated fair
values. As a result, beginning with our first quarter of fiscal
2007, our operating results will contain a charge for
stock-based compensation related to the equity-based
compensation we provide to our employees, as well as stock
purchases under our 2000 Employee Stock Purchase Plan. This
expense will be in addition to the stock-based compensation
expense we have recognized in prior periods related to
restricted stock unit grants, acquisitions and other grants. The
stock-based compensation charges we incur will depend on the
number of equity-based awards we grant, the number of shares of
common stock we sell under our 2000 Employee Stock Purchase
Plan, as well as a number of estimates and variables such as
estimated forfeiture rates, the trading price and volatility of
our common stock, the expected term of our options, and interest
rates. As a result, our stock-based compensation charges can
vary significantly from period to period. Going forward, our
adoption of SFAS No. 123R will significantly lower our
reported net income
24
(or increase our reported net loss), which could have an adverse
impact on the trading price of our common stock.
Our reported financial results could be adversely affected by
changes in financial accounting standards or by the application
of existing or future accounting standards to our business as it
evolves.
As a result of the enactment of the Sarbanes-Oxley Act and the
review of accounting policies by the SEC and national and
international accounting standards bodies, the frequency of
accounting policy changes may accelerate. For example,
accounting policies affecting software revenue recognition have
been the subject of frequent interpretations, which could
significantly affect the way we account for revenue related to
our products. In addition, the rules for tax accounting are in
the process of being changed. As we enhance, expand and
diversify our business and product offerings, the application of
existing or future financial accounting standards, particularly
those relating to the way we account for revenue and taxes,
could have a significant adverse effect on our reported results
although not necessarily on our cash flows. It is likely that,
as the industry transitions to the next generation of consoles,
a more significant portion of our business could be generated
through online services and, as a result, we would recognize the
related revenue over an extended period of time rather than up
front and all at once.
The majority of our sales are made to a relatively small
number of key customers. If these customers reduce their
purchases of our products or become unable to pay for them, our
business could be harmed.
Over 70 percent of our U.S. sales were made to five
key customers during the fiscal year ended March 31, 2006.
In Europe, our top ten customers accounted for approximately
32 percent of our sales in that territory during the fiscal
year ended March 31, 2006. Worldwide, we had direct sales
to one customer, Wal-Mart Stores, Inc., which represented
approximately 13 percent of total net revenue in the fiscal
year ended March 31, 2006. In addition, we believe it
likely that, had GameStop Corp.s acquisition of
Electronics Boutique Holdings Corp. occurred on April 1,
2005, the combined company would have represented greater than
10 percent of total net revenue for the fiscal year ended
March 31, 2006. Though our products are available to
consumers through a variety of retailers, the concentration of
our sales in one, or a few, large customers could lead to a
short-term disruption in our sales if one or more of these
customers significantly reduced their purchases or ceased to
carry our products, and could make us more vulnerable to
collection risk if one or more of these large customers became
unable to pay for our products. Additionally, our receivables
from these large customers increase significantly in the
December quarter as they stock up for the holiday selling
season. Also, having such a large portion of our total net
revenue concentrated in a few customers reduces our negotiating
leverage with these customers.
Acquisitions, investments and other strategic transactions
could result in operating difficulties, dilution to our
investors and other negative consequences.
We have engaged in, evaluated, and expect to continue to engage
in and evaluate, a wide array of potential strategic
transactions, including (i) acquisitions of companies,
businesses, intellectual properties, and other assets, and
(ii) investments in new interactive entertainment
businesses (for example, online and mobile games). Any of these
strategic transactions could be material to our financial
condition and results of operations. Although we regularly
search for opportunities to engage in strategic transactions, we
may not be successful in identifying suitable opportunities. We
may not be able to consummate potential acquisitions or
investments or an acquisition or investment may not enhance our
business or may decrease rather than increase our earnings. In
addition, the process of integrating an acquired company or
business, or successfully exploiting acquired intellectual
property or other assets, could divert a significant amount of
our managements time and focus and may create unforeseen
operating difficulties and expenditures. Additional risks we
face include:
|
|
|
The need to implement or remediate controls, procedures and
policies appropriate for a public company in an acquired company
that, prior to the acquisition, lacked these controls,
procedures and policies, |
|
|
Cultural challenges associated with integrating employees from
an acquired company or business into our organization, |
25
|
|
|
Retaining key employees from the businesses we acquire, |
|
|
The need to integrate an acquired companys accounting,
management information, human resource and other administrative
systems to permit effective management, and |
|
|
To the extent that we engage in strategic transactions outside
of the United States, we face additional risks, including risks
related to integration of operations across different cultures
and languages, currency risks and the particular economic,
political and regulatory risks associated with specific
countries. |
Future acquisitions and investments could involve the issuance
of our equity securities, potentially diluting our existing
stockholders, the incurrence of debt, contingent liabilities or
amortization expenses, write-offs of goodwill, intangibles, or
acquired in-process technology, or other increased expenses, any
of which could harm our financial condition. Our stockholders
may not have the opportunity to review, vote on or evaluate
future acquisitions or investments.
Our products are subject to the threat of piracy by a variety
of organizations and individuals. If we are not successful in
combating and preventing piracy, our sales and profitability
could be harmed significantly.
In many countries around the world, more pirated copies of our
products are sold than legitimate copies. Though we believe
piracy has not had a material impact on our operating results to
date, highly organized pirate operations have been expanding
globally. In addition, the proliferation of technology designed
to circumvent the protection measures we use in our products,
the availability of broadband access to the Internet, the
ability to download pirated copies of our games from various
Internet sites, and the widespread proliferation of Internet
cafes using pirated copies of our products, all have contributed
to ongoing and expanding piracy. Though we take steps to make
the unauthorized copying and distribution of our products more
difficult, as do the manufacturers of consoles on which our
games are played, neither our efforts nor those of the console
manufacturers may be successful in controlling the piracy of our
products. This could have a negative effect on our growth and
profitability in the future.
Our stock price has been volatile and may continue to
fluctuate significantly.
The market price of our common stock historically has been, and
we expect will continue to be, subject to significant
fluctuations. These fluctuations may be due to factors specific
to us (including those discussed in the risk factors above as
well as others not currently known to us or that we currently do
not believe are material), to changes in securities
analysts earnings estimates or ratings, to our results or
future financial guidance falling below the expectations of
analysts and investors, to factors affecting the computer,
software, Internet, entertainment, media or electronics
industries, or to national or international economic conditions.
26
|
|
Item 1B: |
Unresolved Staff Comments |
None.
The following diagram depicts the locations of the majority of
our facilities throughout the world:
We currently own a 418,000 square feet product development
studio facility in Burnaby, British Columbia, Canada and a
122,000 square feet administrative, sales and development
facility in Chertsey, England. In addition to the properties we
own, we lease approximately 2.6 million square feet of
facilities, including the following significant leases for our
headquarters in Redwood City, California, our studios in Los
Angeles, California and Orlando, Florida, and our distribution
center in Louisville, Kentucky. Our leased space is summarized
as follows (in square feet):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North | |
|
|
|
|
|
|
Purpose |
|
America | |
|
Europe | |
|
Asia | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Distribution
|
|
|
250,000 |
|
|
|
86,735 |
|
|
|
|
|
|
|
336,735 |
|
Sales & Administrative
|
|
|
732,077 |
|
|
|
167,978 |
|
|
|
65,519 |
|
|
|
965,574 |
|
Studio Development
|
|
|
1,138,080 |
|
|
|
122,078 |
|
|
|
65,805 |
|
|
|
1,325,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Leased Square Footage
|
|
|
2,120,157 |
|
|
|
376,791 |
|
|
|
131,324 |
|
|
|
2,628,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood City Headquarters |
In February 1995, we entered into a
build-to-suit lease
(Phase One Lease) with a third party for our
headquarters facilities in Redwood City, California (Phase
One Facilities). The Phase One Facilities comprise a total
of approximately 350,000 square feet and provide space for
sales, marketing, administration and research and development
functions. In July 2001, we refinanced the Phase One Lease with
Keybank National Association through July 2006. We account for
the Phase One Lease arrangement as an operating lease in
accordance with SFAS No. 13, Accounting for
Leases, as amended.
On May 26, 2006, we extended the financing under the Phase
One Lease through July 2007. Upon expiration of the financing in
July 2007, we may purchase the Phase One Facilities, request up
to two one-year extensions of the financing (subject to bank
approval), self-fund approximately 90 percent of the
financing and extend the remainder through July 2009, or arrange
for the sale of the Phase One Facilities to a third party.
The Phase One Lease terminates upon expiration of the financing
in July 2007 unless we have extended the financing or elected to
self-fund the financing as described above, in which case the
term of the lease
27
could be extended until as late as July 2009. Subject to certain
terms and conditions, upon termination of the lease, we may
purchase the Phase One Facilities, request an extension of the
lease or arrange for the sale of the Phase One Facilities to a
third party.
Pursuant to the terms of the Phase One Lease, as amended to
date, we have an option to purchase the Phase One Facilities at
any time for a maximum purchase price of $132 million. In
the event of a sale to a third party, if the sale price is less
than $132 million, we will be obligated to reimburse the
difference between the actual sale price and $132 million,
up to maximum of $117 million, subject to certain
provisions of the Phase One Lease, as amended.
In December 2000, we entered into a second
build-to-suit lease
(Phase Two Lease) with Keybank National Association
for a five and one-half year term beginning in December 2000 to
expand our Redwood City, California headquarters facilities and
develop adjacent property (Phase Two Facilities).
Construction of the Phase Two Facilities was completed in June
2002. The Phase Two Facilities comprise a total of approximately
310,000 square feet and provide space for sales, marketing,
administration and research and development functions. We
account for the Phase Two Lease arrangement as an operating
lease in accordance with SFAS No. 13, as amended.
On May 26, 2006, we extended the financing under the Phase
Two Lease through July 2007. Upon the expiration of the
financing in July 2007, we may purchase the Phase Two
Facilities, request up to two one-year extensions of the
financing (subject to bank approval), self-fund approximately
90 percent of the financing and extend the remainder
through July 2009, or arrange for the sale of the Phase Two
Facilities to a third party.
The Phase Two Lease terminates upon expiration of the financing
in July 2007 unless we have extended the financing or elected to
self-fund the financing as described above, in which case the
term of the lease could be extended until as late as July 2009.
Subject to certain terms and conditions, upon termination of the
lease, we may purchase the Phase Two Facilities, request an
extension of the lease or arrange for the sale of the Phase Two
Facilities to a third party.
Pursuant to the terms of the Phase Two Lease, as amended to
date, we have an option to purchase the Phase Two Facilities at
any time for a maximum purchase price of $115 million. In
the event of a sale to a third party, if the sale price is less
than $115 million, we will be obligated to reimburse the
difference between the actual sale price and $115 million,
up to a maximum of $105 million, subject to certain
provisions of the Phase Two Lease, as amended.
The lease rates of the Phase One and Phase Two Leases fluctuate
and are based upon LIBOR plus a margin that varies from 0.50% to
1.25% based on our ratio of total consolidated debt to
consolidated tangible net worth. Based on the
3-month LIBOR rate of
5.2% as of May 26, 2006, the annual rent obligation of the
two leases would total approximately $14 million. Our rent
obligation under the leases could increase or decrease
significantly depending on changes in LIBOR.
|
|
|
Guildford, Orlando, Los Angeles and Vancouver Studios;
Louisville Distribution Center |
In February 2006, we entered into an agreement with an
independent third party to lease a studio facility in Guildford,
Surrey, United Kingdom, which will commence in June 2006 and
will expire in May 2016. The facility comprises a total of
approximately 95,000 square feet, which we intend to use
for research and development functions. Our rental obligation
under this agreement is approximately $33 million over the
initial ten-year term of the lease.
In June 2004, we entered into a lease agreement, amended in
December 2005, with an independent third party for a studio
facility in Orlando, Florida, which commenced in January 2005
and expires in June 2010, with one five-year option to extend
the lease term. The campus facilities comprise a total of
140,000 square feet and provide space for research and
development functions. Our rental obligation over the initial
five-and-a-half year term of the lease is $15 million. As
of March 31, 2006, our remaining rental obligation under
this lease was $14 million.
28
In July 2003, we entered into a lease agreement with an
independent third party (the Landlord) for a studio
facility in Los Angeles, California, which commenced in October
2003 and expires in September 2013 with two five-year options to
extend the lease term. Additionally, we have options to purchase
the property after five and ten years based on the fair market
value of the property at the date of sale, a right of first
offer to purchase the property upon terms offered by the
Landlord, and a right to share in the profits from a sale of the
property. Existing campus facilities comprise a total of
243,000 square feet and provide space for research and
development functions. Our rental obligation under this
agreement is $50 million over the initial ten-year term of
the lease. This commitment is offset by expected sublease income
of $6 million for a sublease to an affiliate of the
Landlord of 18,000 square feet of the Los Angeles facility,
which commenced in October 2003 and expires in September 2013,
with options of early termination by the affiliate after five
years and by us after four and five years. As of March 31,
2006, our remaining rental obligation under this lease was
$43 million, offset by expected sublease income of
$5 million.
In October 2002, we entered into a lease agreement, with an
independent third party for a studio facility in Vancouver,
British Columbia, Canada, which commenced in May 2003 and
expires in April 2013. We amended the lease in October 2003. The
facility comprises a total of approximately 65,000 square
feet and provides space for research and development functions.
Our rental obligation under this agreement is approximately
$16 million over the initial ten-year term of the lease. As
of March 31, 2006, our remaining rental obligation under
this lease was $12 million.
Our North American distribution is supported by a centralized
warehouse facility that we lease in Louisville, Kentucky
occupying 250,000 square feet.
In addition to the properties discussed above, we have other
properties under lease which have been included in our
restructuring costs as discussed in Note 6 of the Notes to
Consolidated Financial Statements included in Item 8 of
this report. While we continually evaluate our facility
requirements, we believe that suitable additional or substitute
space will be available as needed to accommodate our future
needs.
|
|
Item 3: |
Legal Proceedings |
On February 14, 2005, an employment-related class action
lawsuit, Hasty v. Electronic Arts Inc., was filed
against the company in Superior Court in San Mateo,
California. The complaint alleges that we improperly classified
Engineers in California as exempt employees and
seeks injunctive relief, unspecified monetary damages, interest
and attorneys fees. On May 16, 2006, the court
granted its preliminary approval of a settlement pursuant to
which we agreed to make a lump sum payment of
$14.9 million, to be paid to a third-party administrator,
to cover (a) all claims allegedly suffered by the class
members, (b) plaintiffs attorneys fees, not to
exceed 25% of the total settlement amount,
(c) plaintiffs costs and expenses, (d) any
incentive payments to the named plaintiffs that may be
authorized by the court, and (e) all costs of
administration of the settlement. The hearing for the court to
consider its final approval of the settlement is set for
September 22, 2006.
Each of the shareholder actions we have previously disclosed
have been voluntarily dismissed by all plaintiffs. The federal
securities class action complaint has been dismissed with
prejudice, by an order dated January 26, 2006; the federal
derivative action has been dismissed, by an order dated
March 10, 2006; and the two state derivative actions have
been dismissed, by orders dated May 4, 2006 and May 8,
2006.
In addition, we are subject to other claims and litigation
arising in the ordinary course of business. We believe that any
liability from any reasonably foreseeable disposition of such
other claims and litigation, individually or in the aggregate,
would not have a material adverse effect on our consolidated
financial position or results of operations.
|
|
Item 4: |
Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of our security
holders during the quarter ended March 31, 2006.
29
PART II
|
|
Item 5: |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Market Information
Our common stock is traded on the NASDAQ National Market under
the symbol ERTS. The following table sets forth the
quarterly high and low price per share of our common stock from
April 1, 2004 through March 31, 2006. Such prices
represent prices between dealers and do not include retail
mark-ups, mark-downs or commissions and may not represent actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
|
Prices | |
|
|
| |
|
|
High | |
|
Low | |
|
|
| |
|
| |
Fiscal Year Ended March 31, 2005:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
55.91 |
|
|
$ |
47.42 |
|
|
Second Quarter
|
|
|
55.01 |
|
|
|
45.52 |
|
|
Third Quarter
|
|
|
62.86 |
|
|
|
43.38 |
|
|
Fourth Quarter
|
|
|
71.16 |
|
|
|
54.52 |
|
|
Fiscal Year Ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
59.83 |
|
|
$ |
47.45 |
|
|
Second Quarter
|
|
|
63.12 |
|
|
|
55.22 |
|
|
Third Quarter
|
|
|
61.97 |
|
|
|
51.04 |
|
|
Fourth Quarter
|
|
|
58.59 |
|
|
|
50.14 |
|
Holders
There were approximately 1,738 holders of record of our common
stock as of June 5, 2006. In addition, we believe that a
significant number of beneficial owners of our common stock hold
their shares in street name.
Dividends
We have not paid any cash dividends and do not anticipate paying
cash dividends in the foreseeable future.
30
Item 6: Selected
Financial Data
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
STATEMENTS OF OPERATIONS DATA |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenue
|
|
$ |
2,951 |
|
|
$ |
3,129 |
|
|
$ |
2,957 |
|
|
$ |
2,482 |
|
|
$ |
1,725 |
|
Cost of goods sold
|
|
|
1,181 |
|
|
|
1,197 |
|
|
|
1,103 |
|
|
|
1,073 |
|
|
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,770 |
|
|
|
1,932 |
|
|
|
1,854 |
|
|
|
1,409 |
|
|
|
910 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
431 |
|
|
|
391 |
|
|
|
370 |
|
|
|
332 |
|
|
|
241 |
|
|
General and administrative
|
|
|
215 |
|
|
|
221 |
|
|
|
185 |
|
|
|
131 |
|
|
|
108 |
|
|
Research and development
|
|
|
758 |
|
|
|
633 |
|
|
|
511 |
|
|
|
401 |
|
|
|
381 |
|
|
Amortization of
intangibles(1)
|
|
|
7 |
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
|
|
25 |
|
|
Acquired in-process technology
|
|
|
8 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
26 |
|
|
|
2 |
|
|
|
9 |
|
|
|
15 |
|
|
|
7 |
|
|
Asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,445 |
|
|
|
1,263 |
|
|
|
1,078 |
|
|
|
953 |
|
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
325 |
|
|
|
669 |
|
|
|
776 |
|
|
|
456 |
|
|
|
135 |
|
Interest and other income, net
|
|
|
64 |
|
|
|
56 |
|
|
|
21 |
|
|
|
5 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and minority interest
|
|
|
389 |
|
|
|
725 |
|
|
|
797 |
|
|
|
461 |
|
|
|
148 |
|
Provision for income taxes
|
|
|
147 |
|
|
|
221 |
|
|
|
220 |
|
|
|
143 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
242 |
|
|
|
504 |
|
|
|
577 |
|
|
|
318 |
|
|
|
102 |
|
Minority interest
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
$ |
317 |
|
|
$ |
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
$ |
329 |
|
|
$ |
124 |
|
|
|
Diluted
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
$ |
317 |
|
|
$ |
102 |
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.78 |
|
|
$ |
1.65 |
|
|
$ |
1.95 |
|
|
$ |
1.17 |
|
|
$ |
0.45 |
|
|
|
Diluted
|
|
$ |
0.75 |
|
|
$ |
1.59 |
|
|
$ |
1.87 |
|
|
$ |
1.08 |
|
|
$ |
0.35 |
|
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
304 |
|
|
|
305 |
|
|
|
295 |
|
|
|
282 |
|
|
|
274 |
|
|
|
Diluted
|
|
|
314 |
|
|
|
318 |
|
|
|
308 |
|
|
|
293 |
|
|
|
286 |
|
|
|
Class B common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, net of retained interest in EA.com
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
(12 |
) |
|
$ |
(22 |
) |
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
(2.77 |
) |
|
$ |
(3.77 |
) |
|
|
Diluted
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
(2.77 |
) |
|
$ |
(3.77 |
) |
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4 |
|
|
|
6 |
|
|
|
Diluted
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4 |
|
|
|
6 |
|
31
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA (Continued)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
BALANCE SHEET DATA |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
1,242 |
|
|
$ |
1,270 |
|
|
$ |
2,150 |
|
|
$ |
950 |
|
|
$ |
553 |
|
Short-term investments
|
|
|
1,030 |
|
|
|
1,688 |
|
|
|
264 |
|
|
|
638 |
|
|
|
244 |
|
Marketable equity securities
|
|
|
160 |
|
|
|
140 |
|
|
|
1 |
|
|
|
1 |
|
|
|
7 |
|
Working capital
|
|
|
2,143 |
|
|
|
2,899 |
|
|
|
2,185 |
|
|
|
1,334 |
|
|
|
700 |
|
Total assets
|
|
|
4,386 |
|
|
|
4,370 |
|
|
|
3,464 |
|
|
|
2,429 |
|
|
|
1,699 |
|
Long-term liabilities
|
|
|
97 |
|
|
|
54 |
|
|
|
42 |
|
|
|
54 |
|
|
|
|
|
Total liabilities
|
|
|
966 |
|
|
|
861 |
|
|
|
786 |
|
|
|
640 |
|
|
|
453 |
|
Minority interest
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
4 |
|
|
|
3 |
|
Total stockholders equity
|
|
|
3,408 |
|
|
|
3,498 |
|
|
|
2,678 |
|
|
|
1,785 |
|
|
|
1,243 |
|
|
|
(1) |
In connection with our adoption of Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets, in fiscal 2003, we ceased
amortizing goodwill. Results for fiscal 2002 include the
amortization of goodwill. See Note 1 of the Notes to
Consolidated Financial Statements, included in Item 8 of
this report. |
32
|
|
Item 7: |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
OVERVIEW
The following overview is a top-level discussion of our
operating results as well as some of the trends and drivers that
affect our business. Management believes that an understanding
of these trends and drivers is important in order to understand
our results for the fiscal year ended March 31, 2006, as
well as our future prospects. This summary is not intended to be
exhaustive, nor is it intended to be a substitute for the
detailed discussion and analysis provided elsewhere in this
Form 10-K,
including in the Business section and the Risk
Factors above, the remainder of Managements
Discussion and Analysis of Financial Condition and Results of
Operations, or the Consolidated Financial Statements and
related notes.
We develop, market, publish and distribute interactive software
games that are playable by consumers on home video game consoles
(such as the Sony
PlayStation® 2,
Microsoft
Xbox®
and
Xbox 360tm,
and Nintendo
GameCubetm),
personal computers, mobile platforms (including cellular
handsets and hand-held game players such as the Nintendo
DStm
and the
PlayStation®
Portable
PSPtm)
and online, over the Internet and other proprietary online
networks. Some of our games are based on content that we license
from others (e.g., Madden NFL Football, The Godfather and FIFA
Soccer), and some of our games are based on our own wholly-owned
intellectual property (e.g., The
Simstm,
Need for
Speedtm
and
BLACKtm).
Our goal is to publish titles with mass-market appeal, which
often means translating and localizing them for sale in
non-English speaking countries. In addition, we also attempt to
create software game franchises that allow us to
publish new titles on a recurring basis that are based on the
same property. Examples of this franchise approach are the
annual iterations of our sports-based products (e.g., Madden NFL
Football,
NCAA®
Football and FIFA Soccer), wholly-owned properties that can be
successfully sequeled (e.g., The Sims, Need for Speed and
Battlefield) and titles based on long-lived literary movie
properties (e.g. Lord of the Rings and Harry Potter).
|
|
|
Overview of Financial Results |
Total net revenue for the fiscal year ended March 31, 2006
was $2.951 billion, down 6 percent as compared to the
fiscal year ended March 31, 2005. Total net revenue for the
fiscal year ended March 31, 2006 was driven by sales of
Need for
Speedtm
Most Wanted, Madden NFL 06, FIFA 06, The
Simstm 2,
and Harry Potter and the Goblet of
Firetm.
Four titles sold more than five million units in the fiscal year
ended March 31, 2006: Need for Speed Most Wanted, Madden
NFL 06, FIFA 06, and The Sims 2.
Net income for the fiscal year ended March 31, 2006 was
$236 million as compared to $504 million for the
fiscal year ended March 31, 2005. Diluted net income per
share for the fiscal year ended March 31, 2006 was $0.75 as
compared to $1.59 for the fiscal year ended March 31, 2005.
We generated $596 million in cash from operating activities
during the year ended March 31, 2006 as compared to
generating $634 million for year ended March 31, 2005.
The decrease in cash generated from operating activities was
primarily due to a decrease in our net revenue and an increase
in our operating expenses primarily to support the development
of next-generation console games. This decrease was partially
offset by a lower accounts receivable balance as of
March 31, 2006 compared to March 31, 2005, resulting
from a higher percentage of revenue recognized in the first two
months of our fourth quarter of fiscal 2006 as compared to the
fourth quarter of fiscal 2005, which allowed us to collect a
higher percentage of our revenue during the quarter.
|
|
|
Managements Overview of Historical and Prospective
Business Trends |
Transition to Next-Generation Consoles. Our industry is
cyclical and in the midst of a transition stage heading into the
next cycle. During the three months ended December 31,
2005, Microsoft launched the Xbox 360, and Sony and Nintendo
have both announced their intention to introduce new video game
consoles in the coming months. We expect that, as the current
generation of consoles continue to progress
33
and eventually reach the end of their commercial life cycle and
next-generation consoles are introduced into the market, sales
of video games for current-generation consoles will continue to
decline as consumers replace their current-generation consoles
with next-generation consoles, or defer game software purchases
until they are able to purchase a next-generation console. This
pattern is referred to in our industry as a transition to
next-generation consoles. During this transition, we intend to
continue to develop new titles for current-generation video game
consoles while we also continue to make significant investments
in the development of products for next-generation consoles. We
expect the average selling prices and the number of units of our
titles for current-generation consoles to continue to decline as
more value-oriented consumers purchase current-generation
consoles, a greater number of competitive titles are published
at reduced price points, and consumers defer purchases in
anticipation of next-generation consoles. We expect our gross
margins to be negatively impacted by (1) a decrease in
average selling prices of titles for current-generation
platforms, (2) higher license royalty rates, and
(3) amortization of our newly-acquired intangible assets.
We have incurred, and expect to continue to incur, higher costs
during this transition to next-generation consoles. Moreover, we
expect development costs for next-generation video games to be
greater on a per-title basis than development costs for
current-generation video games. We also expect our operating
expenses to increase for the fiscal year ending March 31,
2007 as compared to prior fiscal years, primarily as a result of
(1) the recognition of stock-based compensation due to our
adoption of Statement of Financial Accounting Standard
No. 123 (revised 2004)
(SFAS No. 123R), and (2) higher
expenditures for research and development due to our investment
in next-generation consoles, online and mobile platforms. As we
move through the life cycle of current-generation consoles, we
will continue to devote significant resources to the development
of current-generation titles while at the same time continuing
to invest heavily in tools, technologies and titles for the next
generation of platforms and technology. We expect our operating
results to continue to be volatile and difficult to predict,
which could cause our stock price to fluctuate significantly.
Expansion of Mobile Platforms. Advances in mobile
technology have resulted in a variety of new and evolving
platforms for on-the-go
interactive entertainment that appeal to a broader demographic
of consumers. Our efforts to capitalize on the growth in mobile
interactive entertainment are focused in two broad
areas packaged goods games for handheld game systems
and downloadable games for cellular handsets.
We have developed and published games for a variety of handheld
platforms, including the Nintendo Gameboy and Gameboy Advance,
for several years. The introductions of the Sony PSP and the
Nintendo DS, with their richer graphics, deeper gameplay, and
online functionality, provide a richer mobile gaming experience
to consumers. As a result, we have seen, and expect to continue
to see, an increase in demand for our games for handheld
platforms. In fiscal 2006, our net revenue from handheld
platforms increased 217 percent over fiscal 2005 to
$374 million.
As cellular handsets become more-and-more commonplace and
wireless technology advances to include high-resolution color
displays, increased processing power and improved audio
capabilities, we expect sales of games for cellular handsets to
become an increasingly important part of our business worldwide.
To accelerate our position in this growing segment, in February
2006, we acquired JAMDAT Mobile Inc. (JAMDAT), a
global publisher of wireless games and other wireless
entertainment applications. As a result of this acquisition, in
fiscal 2007, we expect our net revenue from games for cellular
handsets to increase significantly from $19 million in
fiscal 2006. Likewise, the acquisition, along with the
additional investment required to grow this portion of our
business globally, will result in increased development and
operating expenses.
As mobile technology continues to evolve and the installed base
of both handheld game systems and cellular phones expands, we
expect that sales of our titles for mobile platforms
for both handhelds and cellular handsets will become
an increasingly important part of our business.
Investment in Online. Today, we generate net revenue from
a variety of online products and services, including casual
games and downloadable content marketed under our Pogo brand,
persistent state world
34
games such as Ultima
Onlinetm,
PC-based downloadable content and online-enabled packaged goods.
As the nature of online game offerings expands and evolves, we
anticipate long-term opportunities for growth in this business.
For example, we expect that consumers will take advantage of the
online connectivity of next-generation consoles at a much higher
rate than they have so far on current-generation consoles,
allowing more consumers to enhance their gameplay experience
through multiplayer activity, community-building and downloading
content. We also plan to increase the amount of content
available for download on the PC and consoles, and to enable
entire PC-based games to be downloaded electronically. In
addition, we plan to expand our casual game offerings
internationally and to invest in growing genres such as advanced
casual games. Although we intend to make significant investments
in online products, infrastructure and services and believe that
online gameplay will become an increasingly important part of
our business in the long term, we do not expect revenue from
persistent state world games or online gameplay and distribution
to be significant in fiscal 2007.
International Expansion. Net revenue from international
sales accounted for approximately 46 percent of our total
net revenue during fiscal 2006. We expect international sales to
remain a fundamental part of our business. We believe that in
order to succeed in Asia, it is important to locally develop
content that is specifically directed toward Asian cultures and
consumers. As such, we expect to continue to devote resources to
hiring local development talent and expanding our infrastructure
outside of North America, most notably, through the expansion
and creation of local studio facilities in Asia. In addition, we
are in the process of establishing online game marketing,
publishing and distribution functions in China. Further, we are
planning to expand our development and publishing activities in
the cellular handset games business in Europe and Asia. As part
of our international expansion strategy, we may seek to partner
with established local companies through acquisitions, joint
ventures or other similar arrangements.
Sales of Hit Titles. Sales of hit
titles, several of which were top sellers in a number of
countries, contributed significantly to our net revenue. Our
top-selling titles across all platforms worldwide during the
year ended March 31, 2006 were Need for Speed Most
Wanted, Madden NFL 06, FIFA 06, The Sims 2, and Harry
Potter and the Goblet of Fire. Hit titles are important to
our financial performance because they benefit from overall
economies of scale. We have developed, and it is our objective
to continue to develop, many of our hit titles to become
franchise titles that can be regularly iterated.
Increasing Licensing Costs. We generate a significant
portion of our net revenue and operating income from games based
on licensed content such as Madden NFL Football, FIFA Soccer,
Harry Potter and ESPN. We have recently entered into new
licenses and renewed older licenses, some of which contain
higher royalty rates than similar license agreements we have
entered into in the past. We believe these licenses, and the
product franchises they support, will continue to be important
to our future operations, but the higher costs of these licenses
will negatively impact our gross margins.
International Foreign Exchange Impact. Net revenue from
international sales accounted for approximately 46 percent
of our total net revenue during fiscal 2006 and approximately
47 percent of our total net revenue during fiscal 2005. Our
international net revenue was primarily driven by sales in
Europe and, to a lesser extent, in Asia. Foreign exchange rates
had an unfavorable impact on our net revenue of
$36 million, or 1 percent, for the year ended
March 31, 2006 as compared to the year ended March 31,
2005.
Acquisitions, Investments and Strategic Transactions. We
have engaged in, evaluated, and expect to continue to engage in
and evaluate, a wide array of potential strategic transactions,
including (1) acquisitions of companies, businesses,
intellectual properties, and other assets, and
(2) investments in new interactive entertainment businesses
(for example, online and mobile games). In fiscal 2006, we
acquired JAMDAT as part of our efforts to accelerate our growth
in mobile gaming, and in fiscal 2005 we acquired Criterion
Software Group, Ltd. (Criterion), and took a
controlling interest in Digital Illusions C.E.
(DICE). We signed an agreement to fully merge DICE
into EA, which will allow DICE to become an integrated studio.
The merger is expected to be completed during our fiscal quarter
ending September 30, 2006.
35
Stock-Based Compensation. On April 2, 2006, the
first day of our current fiscal year, we adopted
SFAS No. 123R, Share-Based Payment,
which requires us to recognize compensation expense for all
stock-based compensation based on estimated fair values. As a
result, beginning with our first quarter of fiscal 2007, our
operating results will contain a charge for stock-based
compensation related to the equity-based compensation we provide
to our employees, as well as stock purchases under our 2000
Employee Stock Purchase Plan. This expense will be in addition
to the stock-based compensation expense we have recognized in
prior periods related to restricted stock unit grants,
acquisitions and other grants. The stock-based compensation
charges we incur will depend on the number of equity-based
awards we grant, the number of shares of common stock we sell
under our 2000 Employee Stock Purchase Plan, as well as a number
of estimates and variables such as estimated forfeiture rates,
the trading price and volatility of our common stock, the
expected term of our options, and interest rates. As a result,
our stock-based compensation charges can vary significantly from
period to period. The expensing of stock-based compensation will
have a material adverse impact on our Consolidated Statements of
Operations and may not be similar to our pro forma disclosure
under SFAS No. 123, as amended.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these Consolidated Financial
Statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
contingent assets and liabilities, and revenue and expenses
during the reporting periods. The policies discussed below are
considered by management to be critical because they are not
only important to the portrayal of our financial condition and
results of operations but also because application and
interpretation of these policies requires both judgment and
estimates of matters that are inherently uncertain and unknown.
As a result, actual results may differ materially from our
estimates.
|
|
|
Revenue Recognition, Sales Returns, Allowances and Bad
Debt Reserves |
We principally derive revenue from sales of packaged interactive
software games designed for play on video game consoles (such as
the PlayStation 2, Xbox, Xbox 360 and Nintendo GameCube),
PCs and mobile platforms including handheld game players (such
as the Sony PSP, Nintendo DS and Nintendo Game Boy Advance) and
cellular handsets. We evaluate the recognition of revenue based
on the criteria set forth in Statement of Position
(SOP) 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
and Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, as revised by SAB No. 104,
Revenue Recognition. We evaluate revenue
recognition using the following basic criteria and recognize
revenue when all four of the following criteria are met:
|
|
|
|
|
Evidence of an arrangement: Evidence of an agreement with the
customer that reflects the terms and conditions to deliver
products must be present in order to recognize revenue. |
|
|
|
Delivery: Delivery is considered to occur when the products are
shipped and risk of loss and reward have been transferred to the
customer. For online games and services, revenue is recognized
as the service is provided. |
|
|
|
Fixed or determinable fee: If a portion of the arrangement fee
is not fixed or determinable, we recognize that amount as
revenue when the amount becomes fixed or determinable. |
|
|
|
Collection is deemed probable: At the time of the transaction,
we conduct a credit review of each customer involved in a
significant transaction to determine the creditworthiness of the
customer. Collection is deemed probable if we expect the
customer to be able to pay amounts under the arrangement as
those amounts become due. If we determine that collection is not
probable, we recognize revenue when collection becomes probable
(generally upon cash collection). |
Determining whether and when some of these criteria have been
satisfied often involves assumptions and judgments that can have
a significant impact on the timing and amount of revenue we
report. For
36
example, for multiple element arrangements, we must make
assumptions and judgments in order to: (1) determine
whether and when each element has been delivered;
(2) determine whether undelivered products or services are
essential to the functionality of the delivered products and
services; (3) determine whether vendor-specific objective
evidence of fair value (VSOE) exists for each
undelivered element; and (4) allocate the total price among
the various elements we must deliver.
Changes to any of these assumptions or judgments, or changes to
the elements in a software arrangement, could cause a material
increase or decrease in the amount of revenue that we report in
a particular period.
Product revenue, including sales to resellers and distributors
(channel partners), is recognized when the above
criteria are met. We reduce product revenue for estimated future
returns, price protection, and other offerings, which may occur
with our customers and channel partners. In certain countries,
we have stock-balancing programs for our PC and video game
system products, which allow for the exchange of these products
by resellers under certain circumstances. It is our general
practice to exchange products or give credits, rather than give
cash refunds.
In certain countries, from time to time, we decide to provide
price protection for both our PC and video game system products.
When evaluating the adequacy of sales returns and price
protection allowances, 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. In addition, we monitor
the volume of sales to our channel partners and their
inventories, as substantial overstocking in the distribution
channel could result in high returns or higher price protection
costs in subsequent periods.
In the future, actual returns and price protections may
materially exceed our estimates 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 and/or price protection for
our products may continue to increase as the PlayStation 2,
Xbox and Nintendo GameCube consoles move through their
lifecycles and an increasing number and aggregate amount of
competitive products heighten pricing and competitive pressures.
While we believe we can make reliable estimates regarding these
matters, these estimates are inherently subjective. Accordingly,
if our estimates changed, our returns and price protection
reserves would change, which would impact the total net revenue
we report. For example, if actual returns and/or price
protection were significantly greater than the reserves we have
established, our actual results would decrease our reported
total net revenue. Conversely, if actual returns and/or price
protection were significantly less than our reserves, this would
increase our reported total net revenue.
Significant judgment is required to estimate our allowance for
doubtful accounts in any accounting period. We determine our
allowance for doubtful accounts by evaluating customer
creditworthiness in the context of current economic trends and
historical experience. Depending upon the overall economic
climate and the financial condition of our customers, the amount
and timing of our bad debt expense and cash collection could
change significantly.
Our royalty expenses consist of payments to (1) content
licensors, (2) independent software developers and
(3) co-publishing
and/or 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
delivery of product.
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 goods sold generally at the greater of the
contractual rate or
37
an effective royalty rate based on expected net product sales.
Significant judgment is required to estimate the effective
royalty rate for a particular contract. Because the computation
of effective royalty rates requires us to project future
revenue, it is inherently subjective as our future revenue
projections must anticipate (1) the total number of titles
subject to the contract, (2) the timing of the release of
these titles, (3) the number of software units we expect to
sell, and (4) future pricing. Determining the effective
royalty rate for hit-based titles is particularly difficult due
to the inherent risk of such titles. Accordingly, if our future
revenue projections change, our effective royalty rates would
change, which could impact the royalty expense we recognize.
Prepayments made to thinly capitalized independent software
developers and co-publishing affiliates are generally 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 as
research and development as the services are incurred. Payments
due after completion of the product (primarily royalty-based in
nature) are generally expensed as cost of goods sold generally
at the greater of the contractual rate or an effective royalty
rate based on expected net product sales.
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 significant
performance remains with the licensor. When significant
performance remains with the licensor, we record royalty
payments as an asset when actually paid and as a liability when
incurred, rather than upon execution of the contract. Minimum
royalty payment obligations are classified as current
liabilities to the extent such royalty payments are
contractually due within the next twelve months. As of
March 31, 2006 and 2005, approximately $9 million and
$51 million, respectively, of minimum guaranteed royalty
obligations had been recognized.
Each quarter, we also evaluate the 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 determined
before the launch of a product are charged to research and
development expense. Impairments determined post-launch are
charged to cost of goods sold. In either case, we rely on
estimated revenue to evaluate the future realization of prepaid
royalties and commitments. If actual sales or revised revenue
estimates fall below the initial revenue estimate, then the
actual charge taken may be greater in any given quarter than
anticipated. During fiscal 2006, 2005 and 2004, we recorded
impairment charges of $16 million, $8 million and
$2 million, respectively.
|
|
|
Valuation of Long-Lived Assets |
We evaluate both purchased intangible assets and other
long-lived assets in order to determine if events or changes in
circumstances indicate a potential impairment in value exists.
This evaluation requires us to estimate, among other things, the
remaining useful lives of the assets and future cash flows of
the business. These evaluations and estimates require the use of
judgment. Our actual results could differ materially from our
current estimates.
Under current accounting standards, we make judgments about the
recoverability of purchased intangible assets and other
long-lived assets whenever events or changes in circumstances
indicate a potential impairment in the remaining value of the
assets recorded on our Consolidated Balance Sheet. In order to
determine if a potential impairment has occurred, management
makes various assumptions about the future value of the asset by
evaluating future business prospects and estimated cash flows.
Our future net cash flows are primarily dependent on the sale of
products for play on proprietary video game consoles, handheld
game players, PCs and cellular handsets (platforms).
The success of our products is affected by our ability to
accurately predict which platforms and which products we develop
will be successful. Also, our revenue and earnings are dependent
on our ability to meet our product release schedules. Due to
product sales shortfalls, we may not realize the future net cash
flows necessary to recover our long-lived assets, which may
result in an impairment charge being recorded in the future. We
did not record any asset impairment charges in fiscal 2006 and
fiscal 2005. During fiscal 2004, we recognized less than
$1 million of asset impairment charges.
38
In the ordinary course of our business, there are many
transactions and calculations where the tax law and ultimate tax
determination is uncertain. 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 prior to the completion and filing of tax returns for
such periods. This process requires estimating both our
geographic mix of income and our current tax exposures in each
jurisdiction where we operate. These estimates involve complex
issues, require extended periods of time to resolve, and require
us to make judgments, such as anticipating the positions that we
will take on tax returns prior to our actually preparing the
returns and the outcomes of disputes with tax authorities. We
are also required to make determinations of the need to record
deferred tax liabilities and the recoverability of deferred tax
assets. A valuation allowance is established to the extent
recovery of deferred tax assets is not likely based on our
estimation of future taxable income in each jurisdiction.
In addition, changes in our business, including acquisitions,
changes in our international structure, changes in the
geographic location of business functions, changes in the
geographic mix and amount of income, as well as changes in our
agreements with tax authorities, valuation allowances,
applicable accounting rules, applicable tax laws and
regulations, rulings and interpretations thereof, developments
in tax audit and other matters, and variations in the estimated
and actual level of annual pre-tax income can affect the overall
effective income tax rate and result in a variance between the
projected effective tax rate for any quarter and the final
effective tax rate for the fiscal year.
With respect to our projected annual effective income tax rate
at the end of each quarter prior to the end of a fiscal year, we
are required to make a projection of several items, including
our projected mix of full-year income in each jurisdiction in
which we operate and the related income tax expense in each
jurisdiction. This projection is inherently uncertain and can
fluctuate throughout the fiscal year. The projected annual
effective income tax rate may also be adjusted for taxes related
to certain anticipated changes in how we do business.
Significant non-recurring charges are taken in the quarter
incurred. The actual results could and often does vary from
those projections, and as such, the overall effective income tax
rate for a fiscal year could be different from that previously
projected for the full year.
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52 or
53-week period that,
historically, has ended on the final Saturday of March in each
year. Beginning with the fiscal year ended March 31, 2006,
we end our fiscal year on the Saturday nearest March 31. As
a result, fiscal 2006 contains 53 weeks with the first
quarter containing 14 weeks. Our results of operations for
the fiscal years March 31, 2007, 2006, 2005 and 2004
contain the following number of weeks:
|
|
|
|
|
|
|
Fiscal Years Ended |
|
Number of Weeks |
|
Fiscal Period End Date | |
|
|
|
|
| |
March 31, 2007
|
|
52 weeks |
|
|
March 31, 2007 |
|
March 31, 2006
|
|
53 weeks |
|
|
April 1, 2006 |
|
March 31, 2005
|
|
52 weeks |
|
|
March 26, 2005 |
|
March 31, 2004
|
|
52 weeks |
|
|
March 27, 2004 |
|
For simplicity of presentation, all fiscal periods are treated
as ending on a calendar month end.
Comparison of Fiscal 2006 to Fiscal 2005
Net Revenue
We principally derive net revenue from sales of packaged
interactive software games designed for play on video game
consoles (such as the PlayStation 2, Xbox, Xbox 360
and Nintendo GameCube), PCs and mobile platforms which include
handheld game players (such as the Sony PSP, Nintendo DS and
Nintendo Game Boy Advance) and cellular handsets. We also derive
net revenue from selling services to some of our online games,
programming third-party web sites with our game content,
allowing other
39
companies to manufacture and sell our products in conjunction
with other products, and selling advertisements on our online
web pages.
From a geographical perspective, our total net revenue for the
fiscal years ended March 31, 2006 and 2005 was as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
Increase/ | |
|
% | |
|
|
2006 | |
|
2005 | |
|
(Decrease) | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
1,584 |
|
|
|
54 |
% |
|
$ |
1,665 |
|
|
|
53 |
% |
|
$ |
(81 |
) |
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
1,174 |
|
|
|
40 |
% |
|
|
1,284 |
|
|
|
41 |
% |
|
|
(110 |
) |
|
|
(9 |
%) |
Asia
|
|
|
193 |
|
|
|
6 |
% |
|
|
180 |
|
|
|
6 |
% |
|
|
13 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
1,367 |
|
|
|
46 |
% |
|
|
1,464 |
|
|
|
47 |
% |
|
|
(97 |
) |
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
$ |
2,951 |
|
|
|
100 |
% |
|
$ |
3,129 |
|
|
|
100 |
% |
|
$ |
(178 |
) |
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2006, net revenue in North America was
$1,584 million, driven primarily by sales of
(1) Madden NFL 06, Need for Speed Most Wanted, NBA
LIVE 06,
NCAA®
Football 06 and The Sims 2,
(2) titles for the PSP, which was launched in North
America in March 2005, and (3) titles for the Xbox 360,
which launched in November 2005. Overall, net revenue decreased
$81 million, or 5 percent, as compared to fiscal 2005.
As noted in the Overview section above, our industry is in the
midst of a transition from current-generation to next-generation
consoles. Our net revenue was adversely impacted by this
transition in fiscal 2006 as overall net revenue from sales of
our titles for the PlayStation2, Xbox and Nintendo GameCube
decreased. While sales of titles for the PSP and the Xbox 360
helped to mitigate the impact of the transition in fiscal 2006,
they were not enough to offset the overall decrease in net
revenue in North America. As the transition to next-generation
consoles continues in fiscal 2007, we expect net revenue from
sales of titles for current-generation consoles to further
decline.
From a title and franchise perspective, the decrease in net
revenue was primarily due to (1) lower sales from our NFL
Street, NBA Street, Def Jam and The
Urbztm
franchises as there were no corresponding titles released during
fiscal 2006, and (2) lower sales from our Lord of the Rings
franchise which was released on multiple platforms during fiscal
2005 as compared to two platforms, the PSP and PC, during fiscal
2006. The overall decrease in net revenue was mitigated by
(1) sales of
Battlefield 2tm
on the PC which was released during the first quarter of fiscal
2006 and Battlefield 2: Modern
Combattm
on the PlayStation 2 and Xbox released during the third
quarter of fiscal 2006, (2) increased net revenue from our
Madden franchise primarily resulting from the release of
Madden NFL 06 on the Xbox 360 and PSP in fiscal
2006, and (3) increased net revenue from our Burnout
franchise primarily resulting from the release of
Burnouttm
Revenge on the Xbox 360 and
Burnouttm
Legends on the PSP in fiscal 2006.
For fiscal 2006, net revenue in Europe was $1,174 million,
driven primarily by sales of Need for Speed Most Wanted,
FIFA 06, The Sims 2, Harry Potter and the Goblet of
Fire, as well as sales of titles for the PSP and Xbox 360
which were both introduced in Europe during fiscal 2006.
Overall, net revenue declined $110 million, or
9 percent, as compared to fiscal 2005. We estimate that
foreign exchange rates (primarily the Euro and the British pound
sterling) decreased reported European net revenue by
approximately $36 million, or 3 percent, net of
realized gains from hedging activities, for the fiscal 2006 as
compared to fiscal 2005. Excluding the effect of foreign
exchange rates, we estimate that European net revenue decreased
by approximately $74 million, or 6 percent, for fiscal
2006. Our net revenue in Europe was adversely impacted by the
transition to next-generation consoles in fiscal 2006 as overall
net revenue from sales of our titles for the PlayStation 2,
Xbox and Nintendo GameCube decreased. Sales of titles for the
PSP, Nintendo DS, and the Xbox 360, however, were enough to
offset the overall decrease in net revenue from sales of titles
for current-generation consoles.
40
From a title and franchise perspective, the overall decrease in
net revenue was primarily due to (1) lower sales from our
Lord of the Rings and The Sims franchises, (2) the release
of The
Urbztm:
Sims in the
Citytm
during the three months ended December 31, 2004 as there
was no corresponding title released during fiscal 2006, and
(3) higher fiscal 2005 sales of UEFA Euro
2004tm,
which was released in the three months ended June 30, 2004
in conjunction with the UEFA Euro 2004 football tournament held
in Europe. The overall decrease in net revenue was mitigated by
increased net revenue from our Battlefield franchise due to the
release of multiple titles during fiscal 2006 and our FIFA
Street franchise due to the initial release of FIFA Street
late in the fourth quarter of fiscal 2005 which benefited
fiscal 2006 and the release of FIFA Street 2 earlier
in the fourth quarter of fiscal 2006.
For fiscal 2006, net revenue in Asia increased by
$13 million, or 7 percent, as compared to fiscal 2005.
The increase in net revenue for fiscal 2006 was driven primarily
by sales of titles for the PSP, which launched in the fourth
quarter of fiscal 2005. We estimate that the foreign exchange
rate impact on Asia net revenue was not material for fiscal 2006
as compared to fiscal 2005.
Our total net revenue by product line for fiscal years 2006 and
2005 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
Increase/ | |
|
% | |
|
|
2006 | |
|
2005 | |
|
(Decrease) | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
Consoles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PlayStation 2
|
|
$ |
1,127 |
|
|
|
38 |
% |
|
$ |
1,330 |
|
|
|
43 |
% |
|
$ |
(203 |
) |
|
|
(15 |
%) |
|
Xbox
|
|
|
400 |
|
|
|
13 |
% |
|
|
516 |
|
|
|
16 |
% |
|
|
(116 |
) |
|
|
(22 |
%) |
|
Xbox 360
|
|
|
140 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
N/M |
|
|
Nintendo GameCube
|
|
|
135 |
|
|
|
5 |
% |
|
|
212 |
|
|
|
7 |
% |
|
|
(77 |
) |
|
|
(36 |
%) |
|
Other consoles
|
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
(9 |
) |
|
|
(90 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consoles
|
|
|
1,803 |
|
|
|
61 |
% |
|
|
2,068 |
|
|
|
66 |
% |
|
|
(265 |
) |
|
|
(13 |
%) |
PC
|
|
|
418 |
|
|
|
14 |
% |
|
|
531 |
|
|
|
17 |
% |
|
|
(113 |
) |
|
|
(21 |
%) |
Mobility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSP
|
|
|
252 |
|
|
|
9 |
% |
|
|
18 |
|
|
|
1 |
% |
|
|
234 |
|
|
|
1,300 |
% |
|
Nintendo DS
|
|
|
67 |
|
|
|
2 |
% |
|
|
23 |
|
|
|
1 |
% |
|
|
44 |
|
|
|
191 |
% |
|
Game Boy Advance and Game Boy Color
|
|
|
55 |
|
|
|
2 |
% |
|
|
77 |
|
|
|
2 |
% |
|
|
(22 |
) |
|
|
(29 |
%) |
|
Cellular Handsets
|
|
|
19 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mobility
|
|
|
393 |
|
|
|
14 |
% |
|
|
118 |
|
|
|
4 |
% |
|
|
275 |
|
|
|
233 |
% |
Co-publishing and Distribution
|
|
|
213 |
|
|
|
7 |
% |
|
|
283 |
|
|
|
9 |
% |
|
|
(70 |
) |
|
|
(25 |
%) |
Internet Services, Licensing and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription Services
|
|
|
61 |
|
|
|
2 |
% |
|
|
55 |
|
|
|
2 |
% |
|
|
6 |
|
|
|
11 |
% |
|
Licensing, Advertising and Other
|
|
|
63 |
|
|
|
2 |
% |
|
|
74 |
|
|
|
2 |
% |
|
|
(11 |
) |
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Internet Services, Licensing and Other
|
|
|
124 |
|
|
|
4 |
% |
|
|
129 |
|
|
|
4 |
% |
|
|
(5 |
) |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
$ |
2,951 |
|
|
|
100 |
% |
|
$ |
3,129 |
|
|
|
100 |
% |
|
$ |
(178 |
) |
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2006, net revenue from sales of titles for the
PlayStation 2 was $1,127 million, driven primarily by sales
of Need for Speed Most Wanted, Madden NFL 06,
FIFA 06, NCAA Football 06 and NBA
LIVE 06. We released 28 titles for the PlayStation
2 during fiscal 2006, as compared to 27 titles in fiscal 2005.
Overall, PlayStation 2 net revenue decreased
$203 million, or 15 percent, as compared to fiscal
2005. As noted above, we believe the transition to
next-generation consoles adversely impacted our net revenue from
sales of titles for the PlayStation 2 in fiscal 2006. We
expect net revenue from sales of titles for the
41
PlayStation 2 to continue to decrease in fiscal 2007 as we
move through the transition to next-generation consoles. From a
title and franchise perspective, the decrease in net revenue was
primarily due to (1) lower sales from our Lord of the
Rings, The Urbz, Def Jam, NFL Street and NBA Street franchises,
none of which had fiscal 2006 releases, and (2) lower sales
of fiscal 2006 releases from our Need for Speed and Bond
franchises as well as lower sales of our Fight Night franchise
from which two titles were released in fiscal 2005 as compared
to one title in fiscal 2006. The overall decrease in net revenue
was mitigated by the releases of The
Godfathertm
The Game,
BLACKtm,
Medal of Honor European
Assaulttm,
and Battlefield 2: Modern Combat none of which had a
corresponding release in fiscal 2005.
For fiscal 2006, net revenue from sales of titles for the Xbox
was $400 million, driven primarily by sales of Madden
NFL 06, Need for Speed Most Wanted, NCAA Football 06
and Burnout Revenge. We released 28 titles for
the Xbox during fiscal 2006, as compared to 26 titles in fiscal
2005. Overall, Xbox net revenue decreased $116 million, or
22 percent, as compared to fiscal 2005. We believe the
transition to next-generation consoles, particularly the launch
of the Xbox 360 during the last half of fiscal 2006, adversely
impacted our net revenue from sales of titles for the Xbox in
fiscal 2006. We expect net revenue from sales of titles for the
Xbox to continue to decrease in fiscal 2007 as we move through
the transition and the Xbox 360 installed base grows. From
a title and franchise perspective, the decrease in net revenue
was primarily due to (1) lower sales from our Lord of the
Rings, NFL Street, Def Jam, NBA Street and The Urbz franchises,
none of which had fiscal 2006 releases, and (2) lower sales
of fiscal 2006 releases from our Need for Speed and Bond
franchises as well as lower sales of our Fight Night franchise
from which two titles were released in fiscal 2005 as compared
to one title in fiscal 2006. The overall decrease in net revenue
was mitigated by the release of Battlefield 2: Modern
Combat, BLACK and The Godfather The Game, none of
which had a corresponding release in fiscal 2005.
The Xbox 360 was launched in North America, Europe and Japan
during the three months ended December 31, 2005, and in the
rest of Asia during the three months ended March 31, 2006.
As of March 31 2006, the installed base of the
Xbox 360 continued to be small compared to the installed
base of the Xbox. Net revenue from sales of titles for the Xbox
360 was $140 million for fiscal 2006, driven by sales of
Need for Speed Most Wanted, Madden NFL 06 and
EA SPORTStm
Fight Night Round 3. We released seven titles for
the Xbox 360 in fiscal 2006. We expect net revenue from
sales of titles for the Xbox 360 to increase in fiscal 2007
as the installed base grows and we release more titles.
For fiscal 2006, net revenue from sales of titles for the
Nintendo GameCube was $135 million, driven primarily by
sales of Need for Speed Most Wanted, Harry Potter and the
Goblet of Fire and Madden NFL 06. We released
14 titles for the Nintendo GameCube during fiscal 2006, as
compared to 20 titles in fiscal 2005. Overall, Nintendo GameCube
net revenue decreased $77 million, or 36 percent, as
compared to fiscal 2005, consistent with the percentage decline
in the number of titles we released for this platform. We
believe the transition to next-generation consoles adversely
impacted our net revenue from sales of titles for the Nintendo
GameCube in fiscal 2006. We expect net revenue from sales of
titles for the GameCube to continue to decrease in fiscal 2007
as we move through the transition to next-generation consoles.
From a title and franchise perspective, the decrease in net
revenue in fiscal 2006 was primarily due to (1) lower sales
from our Lord of the Rings, The Urbz, NBA Street, NFL Street and
Def Jam franchises, none of which had fiscal 2006 releases, and
(2) lower sales of fiscal 2006 releases from our Need for
Speed and Bond franchises.
For fiscal 2006, net revenue from sales of titles for the PC was
$418 million, driven primarily by sales of titles from The
Sims franchise and Battlefield 2. We released 22 titles
for the PC during fiscal 2006, as
42
compared to 21 titles in fiscal 2005. Overall, PC net revenue
decreased $113 million, or 21 percent, as compared to
fiscal 2005. The decrease was primarily due to
(1) significantly higher fiscal 2005 sales of The
Sims 2, (2) lower sales from our Medal of
Honortm
franchise as there were no corresponding titles released during
fiscal 2006, and (3) lower sales from our Lord of the Rings
franchise. The overall decrease in net revenue was mitigated by
current-year sales of products from our Battlefield franchise.
On January 27, 2005, we began consolidating the financial
results of Digital Illusion C.E. (a game development company
based in Sweden of which we are the majority owner) into our
financial statements, and, therefore, have characterized
Battlefield 2
PC-based revenue as
part of our PC product line. Prior to consolidating DICEs
financial results, we classified revenue from the Battlefield
franchise as co-publishing and distribution revenue.
Net revenue from mobile products consisting of
packaged goods games for handheld systems and downloadable games
for cellular handsets increased from
$118 million in fiscal 2005 to $393 million in fiscal
2006. The increase was primarily due to sales of titles released
in fiscal 2006 for the PSP, and the Nintendo DS, both of which
were launched in fiscal 2005 in certain countries. We released
16 titles for the PSP during fiscal 2006, as compared to three
titles in fiscal 2005. Overall, PSP net revenue increased
$234 million, driven primarily by sales of titles from our
Need for Speed, FIFA, Burnout and Madden franchises. We released
ten titles for the Nintendo DS during fiscal 2006, as compared
to three titles in fiscal 2005. Nintendo DS net revenue
increased $44 million, driven primarily by sales of titles
from our Need for Speed, The Sims and Madden franchises. The
increase in PSP and Nintendo DS net revenue was partially offset
by lower sales of titles for the Game Boy Advance.
We expect mobile platform revenue to continue to increase in
fiscal 2007, driven primarily by anticipated growth in our
cellular handset games business.
|
|
|
Co-Publishing and Distribution |
Net revenue from co-publishing and distribution products
decreased from $283 million in fiscal 2005 to
$213 million in fiscal 2006. The decrease was primarily due
to (1) the change in our classification of sales of
products from our Battlefield franchise, which, as discussed
above, we no longer classify as co-publishing and distribution
revenue, and (2) overall higher fiscal 2005 sales of
various co-publishing and distribution titles. The overall
decrease in net revenue was mitigated by sales of
Half-Life®
2 in fiscal 2006.
Net revenue from subscription services increased from
$55 million in fiscal 2005 to $61 million in fiscal
2006. The increase in net revenue was primarily due to an
increase in the number of paying subscribers to Club
Pogotm,
partially offset by a decrease in net revenue from Ultima
Online.
|
|
|
Licensing, Advertising and Other |
Net revenue from licensing, advertising and other decreased from
$74 million in fiscal 2005 to $63 million in fiscal
2006. The decrease in net revenue was primarily due to Nokia
N-Gage license revenue in fiscal 2005.
Cost of Goods Sold
Cost of goods sold for our packaged-goods business consists of
(1) product costs, (2) certain royalty expenses for
celebrities, professional sports and other organizations and
independent software developers, (3) manufacturing
royalties, net of volume discounts and other vendor
reimbursements, (4) expenses for defective products,
(5) write-offs of post-launch prepaid royalty costs,
(6) amortization of certain intangible assets, and
(7) operations expenses. Volume discounts are generally
recognized upon achievement of milestones and vendor
reimbursements are generally recognized as the related revenue is
43
recognized. Cost of goods sold for our online products consists
primarily of data center and bandwidth costs associated with
hosting our web sites, credit card fees and royalties for use of
third-party properties. Cost of goods sold for our web site
advertising business primarily consists of ad-serving costs.
Cost of goods sold for fiscal years 2006 and 2005 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
% Change |
|
|
|
|
|
|
|
|
|
$1,181
|
|
|
40.0% |
|
|
$ |
1,197 |
|
|
|
38.2% |
|
|
|
(1.3%) |
|
In fiscal 2006, cost of goods sold as a percentage of total net
revenue increased 1.8 percent from 38.2 percent to
40.0 percent. As a percentage of total net revenue, the
increase was primarily due to an increase in our license
royalties associated with new license agreements for our
football titles.
We expect cost of goods sold as a percentage of total net
revenue to increase during fiscal 2007 as compared to fiscal
2006. Although there can be no assurance, and our actual results
could differ materially, we expect gross margin pressure as a
result of (1) a decrease in average selling prices of
titles for current-generation platforms, (2) higher license
royalty rates, and (3) amortization of our newly-acquired
intangible assets.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs
and advertising, marketing and promotional expenses, net of
advertising expense reimbursements from third parties.
Marketing and sales expenses for fiscal years 2006 and 2005 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$431
|
|
|
15% |
|
|
$ |
391 |
|
|
|
13% |
|
|
|
$40 |
|
|
|
10% |
|
Marketing and sales expenses increased by $40 million, or
10 percent, in fiscal 2006 as compared to fiscal 2005. The
increase was primarily due to (1) an increase of
$30 million in our marketing and advertising, promotional
and related contracted service expenses as a result of increased
advertising to support our titles, and (2) an increase of
$11 million in personnel-related costs resulting from an
increase in facilities and headcount-related expenses in support
of our marketing and sales functions worldwide.
Marketing and sales expenses included vendor reimbursements for
advertising expenses of $41 million and $42 million in
fiscal 2006 and 2005, respectively.
We expect marketing and sales expenses to increase in absolute
dollars in fiscal 2007 primarily due to our adoption of
SFAS No. 123R, which will require us to expense
stock-based compensation.
General and Administrative
General and administrative expenses consist of personnel and
related expenses of executive and administrative staff, fees for
professional services such as legal and accounting, and
allowances for doubtful accounts.
General and administrative expenses for fiscal years 2006 and
2005 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$215
|
|
|
7% |
|
|
$ |
221 |
|
|
|
7% |
|
|
$ |
(6 |
) |
|
|
(3%) |
|
General and administrative expenses decreased by
$6 million, or 3 percent, in fiscal 2006 as compared
to fiscal 2005 primarily due to a decrease in employee-related
costs resulting from charges taken in connection with certain
employee-related litigation matters in fiscal 2005. This
decrease was partially offset by an increase in
personnel-related expenses due to an increase in headcount costs
as well as an increase in professional and contracted services
to support our business.
44
We expect general and administrative expenses to increase in
absolute dollars in fiscal 2007 primarily due to our adoption of
SFAS No. 123R, which will require us to expense
stock-based compensation.
Research and Development
Research and development expenses consist of expenses incurred
by our production studios for personnel-related costs,
consulting, equipment depreciation and any impairment of prepaid
royalties for pre-launch products. Research and development
expenses for our online business include expenses incurred by
our studios consisting of direct development and related
overhead costs in connection with the development and production
of our online games. Research and development expenses also
include expenses associated with the development of web site
content, network infrastructure direct expenses, software
licenses and maintenance, and network and management overhead.
Research and development expenses for fiscal years 2006 and 2005
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$758
|
|
|
26% |
|
|
$ |
633 |
|
|
|
20% |
|
|
$ |
125 |
|
|
|
20% |
|
Research and development expenses increased by
$125 million, or 20 percent, in fiscal 2006 as
compared to fiscal 2005. The increase is primarily due to an
increase of $124 million in personnel-related costs
resulting from an increase in employee headcount in our Canadian
and European studios as we increased our internal development
efforts and invested in next-generation tools, technologies and
titles, as well as consolidation of DICE. To a lesser extent,
these increases were also due to higher facilities-related costs
offset by lower third-party development costs.
We expect research and development expenses to increase in
absolute dollars in fiscal 2007 primarily as a result of
(1) our recognition of stock-based compensation, and
(2) our investment in next-generation consoles, online and
mobile platforms.
Amortization of Intangibles
Amortization of intangibles for fiscal years 2006 and 2005 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$7
|
|
|
|
|
|
|
$3 |
|
|
|
|
|
|
|
$4 |
|
|
|
133% |
|
For fiscal 2006, amortization of intangibles resulted from our
acquisitions of JAMDAT, Criterion and others. For fiscal 2005,
amortization of intangibles resulted from our acquisition of
Criterion and others. See Note 4 of the Notes to
Consolidated Financial Statements included in Item 8 of
this report.
We expect amortization of intangible expenses to increase in
fiscal 2007 primarily due to the amortization of intangibles
related to JAMDAT.
Acquired In-process Technology
Acquired in-process technology charges for fiscal years 2006 and
2005 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$8
|
|
|
|
|
|
|
$13 |
|
|
|
1% |
|
|
$ |
(5 |
) |
|
|
(38%) |
|
The acquired in-process technology charge we incurred in fiscal
2006 was primarily the result of our acquisition of JAMDAT. The
acquired in-process technology charge we incurred in fiscal 2005
was the result of our acquisitions of Criterion, and a majority
stake of the outstanding shares of DICE. Acquired in-process
technology includes the value of products in the development
stage that are not considered to have reached technological
feasibility or have an alternative future use. Accordingly, upon
consummation of these acquisitions, we incurred a charge for the
acquired in-process technology, as reflected in our
45
Consolidated Statement of Operations. See Note 4 of the
Notes to Consolidated Financial Statements included in
Item 8 of this report.
Restructuring Charges
Restructuring charges for fiscal years 2006 and 2005 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$26
|
|
|
1% |
|
|
|
$2 |
|
|
|
|
|
|
|
$24 |
|
|
|
1,200% |
|
In November 2005, we announced plans to establish an
international publishing headquarters in Geneva, Switzerland.
Since that time and through the six months ending
September 30, 2006, we expect to continue to relocate
certain current employees to our new facility in Geneva, close
certain facilities in the U.K., and make other related changes
in our international publishing business.
During fiscal 2006, restructuring charges were approximately
$14 million, of which $8 million was for the closure
of certain U.K. facilities, $3 million for employee-related
expenses, and $3 million in other costs relating to our
international publishing reorganization. In fiscal 2007, we
expect to incur between $15 million and $20 million of
restructuring costs. Overall, including fiscal 2006, we expect
to incur between $40 million and $50 million of
restructuring costs, substantially all of which will result in
cash expenditures by 2017. These restructuring costs will
consist primarily of employee-related relocation assistance
(approximately $28 million), facility exit costs
(approximately $10 million), as well as other
reorganization costs (approximately $8 million). While we
may incur severance costs paid to terminating employees in
connection with the reorganization, we do not expect these costs
to be significant.
During the fourth quarter of fiscal 2006, we aligned our
resources with our product plan for fiscal 2007 and strategic
opportunities with next-generation consoles, online and mobile
platforms. As part of this alignment we recorded a total pre-tax
restructuring charge of $10 million consisting entirely of
one-time benefits related to headcount reductions which are
included in restructuring charges in our Consolidated Statement
of Operations.
Interest and Other Income, Net
Interest and other income, net, for fiscal years 2006 and 2005
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$64
|
|
|
2% |
|
|
|
$56 |
|
|
|
2% |
|
|
|
$8 |
|
|
|
14% |
|
For fiscal 2006, interest and other income, net, increased by
$8 million, or 14 percent, as compared to fiscal 2005
primarily due to an increase of $31 million in interest
income as a result of higher yields on our cash, cash equivalent
and short-term investment balances, partially offset by a net
loss of $22 million in investments and foreign currency
activities.
Income Taxes
Income taxes for fiscal years 2006 and 2005 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
Effective |
|
March 31, |
|
Effective |
|
|
2006 |
|
Tax Rate |
|
2005 |
|
Tax Rate |
|
% Change |
|
|
|
|
|
|
|
|
|
$ |
147 |
|
|
|
37.6% |
|
|
$ |
221 |
|
|
|
30.5% |
|
|
|
(33%) |
|
Our effective income tax rates were 37.6 percent and
30.5 percent for fiscal 2006 and fiscal 2005, respectively.
For fiscal 2006, our effective income tax rate is higher than
the U.S. statutory rate of 35.0 percent for fiscal
2006 due to a number of factors, including the repatriation of
foreign earnings in connection with the American Jobs Creation
Act of 2004 (the Jobs Act), as discussed below, and
additional charges resulting from certain intercompany
transactions during the second and fourth quarters of fiscal
2006, which were partially offset by other items.
46
We historically have considered undistributed earnings of our
foreign subsidiaries to be indefinitely reinvested and,
accordingly, no U.S. taxes have been provided thereon. With
the exception of taking advantage of the one-time opportunity
afforded to us by the Jobs Act, we currently intend to continue
to indefinitely reinvest the undistributed earnings of our
foreign subsidiaries.
In July 2005, the Financial Accounting Standards Board
(FASB) issued an exposure draft of a proposed
interpretation of SFAS No. 109, Accounting for
Income Taxes which addresses the accounting for uncertain
tax positions. Including subsequent updates issued by the FASB,
the proposed interpretation provides that the best estimate of
the impact of a tax position would be recognized in an
entitys financial statements only if it is more likely
than not that the position will be sustained on audit based
solely on its technical merits. This proposed interpretation
also would provide guidance on recognition and measurement,
balance sheet presentation, disclosure, accrual of interest and
penalties, accounting in interim periods and transition. We
cannot predict what actions the FASB will take or how any such
actions might ultimately affect our financial position or
results of operations. In January 2006, the FASB announced that
companies would not have to apply the proposed interpretation
until fiscal years beginning after December 31, 2006. An
exposure draft of proposed amendments to SFAS No. 109
is expected in the third quarter of calendar year 2006.
Our effective income tax rates for fiscal 2007 and future
periods will depend on a variety of factors. For example,
changes in our business, including acquisitions and intercompany
transactions, changes in our international structure, changes in
the geographic location of business functions or assets, changes
in the geographic mix of income, as well as changes in, or
termination of, our agreements with tax authorities, valuation
allowances, applicable accounting rules, applicable tax laws and
regulations, rulings and interpretations thereof, developments
in tax audit and other matters, and variations in the estimated
and actual level of annual pre-tax income can affect the overall
effective income tax rate for future fiscal years. We incur
certain tax expenses that do not decline proportionately with
declines in our consolidated income. As a result, in absolute
dollar terms, our tax expense will have a greater influence on
our effective tax rate at lower levels of pre-tax income than
higher levels. In addition, at lower levels of pre-tax income,
our effective tax rate will be more volatile.
Net Income
Net income for fiscal years 2006 and 2005 was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$236
|
|
|
8% |
|
|
$ |
504 |
|
|
|
16% |
|
|
|
$(268) |
|
|
|
(53%) |
|
Reported net income decreased by $268 million, or
53 percent, in fiscal 2006 as compared to fiscal 2005. The
decrease was primarily due to a decrease in our net revenue and
growth in our operating expenses. The growth in our operating
expenses was primarily driven by an increase in research and
development expenses as we increased our internal development
efforts and invested in next-generation tools, technologies and
titles, while at the same time we continued to support
current-generation product development.
We expect our net income to decline in fiscal 2007 as a result
of (1) the effect of stock-based compensation charges
required by our adoption of SFAS No. 123R, and
(2) our continued support of current-generation product
development while at the same time making significant
investments in next-generation consoles, online and mobile
platforms.
47
Comparison of Fiscal 2005 to Fiscal 2004
Net Revenue
From a geographical perspective, our total net revenue for the
fiscal years ended March 31, 2005 and 2004 was as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
|
% | |
|
|
2005 | |
|
2004 | |
|
Increase | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
1,665 |
|
|
|
53 |
% |
|
$ |
1,610 |
|
|
|
54 |
% |
|
$ |
55 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
1,284 |
|
|
|
41 |
% |
|
|
1,180 |
|
|
|
40 |
% |
|
|
104 |
|
|
|
9 |
% |
Asia
|
|
|
180 |
|
|
|
6 |
% |
|
|
167 |
|
|
|
6 |
% |
|
|
13 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
1,464 |
|
|
|
47 |
% |
|
|
1,347 |
|
|
|
46 |
% |
|
|
117 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
$ |
3,129 |
|
|
|
100 |
% |
|
$ |
2,957 |
|
|
|
100 |
% |
|
$ |
172 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2005, net revenue in North America increased by
3 percent as compared to fiscal 2004. From a franchise
perspective, the net revenue increase was primarily due to
higher sales of products in our Need for Speed franchise. The
net revenue increase was also driven by sales of titles in our
Fight Night and Burnout franchises, neither of which had
corresponding titles released in fiscal 2004. Together, these
items resulted in a net revenue increase of $180 million
during the fiscal year ended March 31, 2005 as compared to
the fiscal year ended March 31, 2004. This increase was
partially offset by lower sales of products in our Medal of
Honor,
SSXtm
and Lord of the Rings franchises, which reduced net revenue by
$135 million in the fiscal year ended March 31, 2005
as compared to the fiscal year ended March 31, 2004. As
part of this overall increase in net revenue, we benefited from
the launch of the Nintendo DS and Sony PSP in November 2004 and
March 2005, respectively.
For fiscal 2005, net revenue in Europe increased by
9 percent as compared to fiscal 2004. We estimate foreign
exchange rates (primarily the Euro and the British pound
sterling) strengthened reported European net revenue by
approximately $86 million, or 7 percent, for the
fiscal year ended March 31, 2005. Excluding the effect of
foreign exchange rates, we estimate that European net revenue
increased by approximately $18 million, or 2 percent,
for the year ended March 31, 2005. From a franchise
perspective, the net revenue increase was primarily due to
(1) higher sales of products in our Need for Speed and The
Sims franchises, (2) sales of products in our Burnout
franchise which did not have a corresponding title release in
fiscal 2004 and (3) sales of UEFA Euro 2004, which
was released during the three months ended June 30, 2004 in
conjunction with the UEFA Euro 2004 football tournament held in
Europe. Together, these items resulted in a net revenue increase
of $241 million during the fiscal year ended March 31,
2005 as compared to the fiscal year ended March 31, 2004.
This increase was partially offset by lower sales of products in
our Medal of Honor, Final Fantasy, SSX and Lord of the Rings
franchises, which reduced net revenue by $143 million in
the fiscal year ended March 31, 2005 as compared to the
fiscal year ended March 31, 2004.
For fiscal 2005, net revenue from sales in Asia increased by
8 percent as compared to fiscal 2004. The increase in net
revenue was driven primarily by higher sales of products in our
Need for Speed franchise and sales of products in our Burnout
franchise, which did not have a corresponding title release in
fiscal 2004, partially offset by declines in our Medal of Honor
franchise. We estimate foreign exchange rates strengthened
reported Asia net revenue by approximately $9 million, or
5 percent, for the fiscal year ended
48
March 31, 2005. Excluding the effect of foreign exchange
rates, we estimate that Asia net revenue increased by
approximately $4 million, or 3 percent, for the fiscal
year ended March 31, 2005.
Our total net revenue by product line for fiscal years 2005 and
2004 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
Increase/ | |
|
% | |
|
|
2005 | |
|
2004 | |
|
(Decrease) | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
Consoles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PlayStation 2
|
|
$ |
1,330 |
|
|
|
43 |
% |
|
$ |
1,315 |
|
|
|
44 |
% |
|
$ |
15 |
|
|
|
1 |
% |
|
Xbox
|
|
|
516 |
|
|
|
16 |
% |
|
|
384 |
|
|
|
13 |
% |
|
|
132 |
|
|
|
34 |
% |
|
Nintendo GameCube
|
|
|
212 |
|
|
|
7 |
% |
|
|
200 |
|
|
|
7 |
% |
|
|
12 |
|
|
|
6 |
% |
|
Other consoles
|
|
|
10 |
|
|
|
|
|
|
|
30 |
|
|
|
1 |
% |
|
|
(20 |
) |
|
|
(67 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consoles
|
|
|
2,068 |
|
|
|
66 |
% |
|
|
1,929 |
|
|
|
65 |
% |
|
|
139 |
|
|
|
7 |
% |
PC
|
|
|
531 |
|
|
|
17 |
% |
|
|
470 |
|
|
|
16 |
% |
|
|
61 |
|
|
|
13 |
% |
Mobility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Game Boy Advance and Game Boy Color
|
|
|
77 |
|
|
|
2 |
% |
|
|
78 |
|
|
|
3 |
% |
|
|
(1 |
) |
|
|
(1 |
%) |
|
Nintendo DS
|
|
|
23 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
N/M |
|
|
PSP
|
|
|
18 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mobility
|
|
|
118 |
|
|
|
4 |
% |
|
|
78 |
|
|
|
3 |
% |
|
|
40 |
|
|
|
51 |
% |
Co-publishing and Distribution
|
|
|
283 |
|
|
|
9 |
% |
|
|
398 |
|
|
|
13 |
% |
|
|
(115 |
) |
|
|
(29 |
%) |
Internet Services, Licensing and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription Services
|
|
|
55 |
|
|
|
2 |
% |
|
|
49 |
|
|
|
2 |
% |
|
|
6 |
|
|
|
12 |
% |
|
Licensing, Advertising and Other
|
|
|
74 |
|
|
|
2 |
% |
|
|
33 |
|
|
|
1 |
% |
|
|
41 |
|
|
|
124 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Internet Services, Licensing and Other
|
|
|
129 |
|
|
|
4 |
% |
|
|
82 |
|
|
|
3 |
% |
|
|
47 |
|
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
$ |
3,129 |
|
|
|
100 |
% |
|
$ |
2,957 |
|
|
|
100 |
% |
|
$ |
172 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from PlayStation 2 products increased from
$1,315 million in fiscal 2004 to $1,330 million in
fiscal 2005. As a percentage of total net revenue, sales of
PlayStation 2 products decreased by 1 percent in fiscal
2005.
Net revenue from Xbox products increased from $384 million
in fiscal 2004 to $516 million in fiscal 2005. As a
percentage of total net revenue, sales of Xbox products
increased by 3 percent in fiscal 2005. The increase in net
revenue was primarily due to the continued growth in the Xbox
installed base driven by Microsofts price reductions in
the U.S. in March 2004 and in Europe in August 2004, as
well as the overall greater demand for our products.
Net revenue from Nintendo GameCube products increased from
$200 million in fiscal 2004 to $212 million in fiscal
2005. The increase in net revenue was primarily due to growth in
the installed base of the Nintendo GameCube.
Net revenue from PC-based products increased from
$470 million in fiscal 2004 to $531 million in fiscal
2005. As a percentage of total net revenue, sales of PC products
increased by 1 percent in fiscal 2005. The
49
increase in PC net revenue was primarily due to higher sales of
products in The Sims, Lord of the Rings and Need for Speed
franchises, partially offset by a decrease in sales of products
in our Command and
Conquertm
and
SimCitytm
franchises.
Net revenue from mobile products increased from $78 million
in fiscal 2004 to $118 million in fiscal 2005. Mobile
products include all mobile devices such as handhelds and
cellular handsets. The increase in mobility net revenue was
primarily due to the release of titles in conjunction with the
launch of the Nintendo DS and PSP platforms in North America and
Japan.
|
|
|
Co-Publishing and Distribution |
In fiscal 2005, net revenue from co-publishing and distribution
products decreased by $115 million to $283 million as
compared to fiscal 2004. The decrease was primarily due to a
significant decrease in the number of co-publishing and
distribution titles we released in fiscal 2005. We released six
co-publishing titles in fiscal 2005 as compared to 11 titles in
fiscal 2004.
In fiscal 2005, net revenue from subscription services products
increased by $6 million to $55 million as compared to
fiscal 2004. The increase in net revenue was primarily due to an
increase in the number of paying subscribers to Club Pogo,
partially offset by a decrease in subscription net revenue from
Earth &
Beyondtm
and The
Simstm
Online subscription services.
|
|
|
Licensing, Advertising and Other |
In fiscal 2005, net revenue from licensing, advertising and
other products increased by $41 million to $74 million
as compared to fiscal 2004. The increase was primarily due to
licensing revenue related to the Nokia N-Gage platform.
Cost of Goods Sold
Costs of goods sold for fiscal years 2005 and 2004 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
% Change |
|
|
|
|
|
|
|
|
|
$ |
1,197 |
|
|
|
38.2% |
|
|
$ |
1,103 |
|
|
|
37.3% |
|
|
|
8.5% |
|
In fiscal 2005, cost of goods sold as a percentage of total net
revenue increased 0.9 percent from 37.3 percent to
38.2 percent. As a percentage of total net revenue, the
increase was primarily due to a 2.3 percent increase for:
(1) pricing actions taken in both North America and Europe
due to higher than anticipated channel inventory,
(2) inventory-related costs due to a one-year rebate
agreement across several titles, and (3) incremental costs
incurred to produce our titles for the Nintendo DS and Sony PSP.
In addition, warranty and online costs increased by
0.8 percent.
Offsetting these increases was a decrease of 2.2 percent,
primarily the result of lower co-publishing and distribution
royalties due to the lower mix of co-publishing and distribution
net revenue during the year ended March 31, 2005 as
compared to the year ended March 31, 2004.
Marketing and Sales
Marketing and sales expenses for fiscal years 2005 and 2004 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
391 |
|
|
|
13% |
|
|
$ |
370 |
|
|
|
13% |
|
|
$ |
21 |
|
|
|
6% |
|
50
Marketing and sales expenses increased by 6 percent, but
remained flat as a percentage of net revenue, in fiscal 2005 as
compared to fiscal 2004 primarily due to:
|
|
|
|
|
An increase of $21 million in headcount and
facilities-related expenses, both to help support the growth of
our marketing and sales functions worldwide. |
|
|
|
An increase of $12 million in marketing-related costs to
support our fiscal 2005 releases. |
The increase in marketing and sales expenses was partially
offset by the following:
|
|
|
|
|
A decrease of $9 million in advertising expense for fiscal
2005 as compared to fiscal 2004. |
|
|
|
A decrease of $4 million in bonus expense for fiscal 2005
as compared to fiscal 2004. |
Marketing and sales expenses included vendor reimbursements for
advertising expenses of $42 million and $45 million in
fiscal 2005 and fiscal 2004, respectively.
General and Administrative
General and administrative expenses for fiscal years 2005 and
2004 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
221 |
|
|
|
7% |
|
|
$ |
185 |
|
|
|
6% |
|
|
$ |
36 |
|
|
|
19% |
|
General and administrative expenses increased by
19 percent, or 1 percent of net revenue, in fiscal
2005 compared to fiscal 2004 primarily due to:
|
|
|
|
|
An increase of $48 million in employee-related costs
primarily due to (1) charges taken in connection with
certain employee-related litigation matters and (2) an
increase in headcount and other personnel-related costs to help
support our administrative functions worldwide. |
|
|
|
An increase of $20 million in professional and contracted
services, such as Sarbanes-Oxley compliance costs, business
development expenses and legal fees, along with other costs to
support our business. |
The increase in general and administrative expenses was
partially offset by the following:
|
|
|
|
|
A decrease of $17 million in facilities-related expenses
primarily due to accelerated depreciation on equipment and
software that were replaced and due to write-offs of assets that
were taken out of service in fiscal 2004. |
|
|
|
A decrease of $8 million in bonus expense for fiscal 2005
as compared to fiscal 2004. |
|
|
|
A decrease of $8 million in our investment in strategic
university relationships. |
Research and Development
Research and development expenses for fiscal years 2005 and 2004
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
633 |
|
|
|
20% |
|
|
$ |
511 |
|
|
|
17% |
|
|
$ |
122 |
|
|
|
24% |
|
Research and development expenses increased by 24 percent,
or 3 percent of net revenue, in fiscal 2005 as compared to
fiscal 2004 primarily due to:
|
|
|
|
|
An increase of $103 million in personnel-related costs
resulting from a 30 percent increase in employee headcount
primarily in our Canadian and European studios, which included
$6 million of stock-based employee compensation related to
our acquisition of Criterion. These increases were partially
offset by a $20 million reduction in bonus expense for
fiscal 2005 as compared to fiscal 2004. |
51
|
|
|
|
|
An increase of $19 million in external development expenses
due to the development of new products with our co-publishing
partners and development costs for Renderware and mobile
platforms. |
|
|
|
An increase of $18 million in facilities-related expenses
to help support the growth of our research and development
functions worldwide. |
Acquired In-process Technology
Acquired in-process technology charges for fiscal years 2005 and
2004 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
13 |
|
|
|
1% |
|
|
$ |
|
|
|
|
|
|
|
$ |
13 |
|
|
|
N/M |
|
The acquired in process technology was the result of
acquiring all outstanding shares of Criterion and an additional
44 percent of Digital Illusions C.E. (DICE)
during the year ended March 31, 2005. Acquired in-process
technology includes the value of products in the development
stage that are not considered to have reached technological
feasibility or have alternative future use. Accordingly, the
acquired in process technology was expensed in our
Consolidated Statement of Operations upon consummation of these
acquisitions. See Note 4 of the Notes to Consolidated
Financial Statements for additional information.
Interest and Other Income, Net
Interest and other income, net, for fiscal years 2005 and 2004
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
56 |
|
|
|
2% |
|
|
$ |
21 |
|
|
|
1% |
|
|
$ |
35 |
|
|
|
167% |
|
Interest and other income, net, in fiscal 2005 increased from
fiscal 2004 primarily due to:
|
|
|
|
|
An increase of $15 million in interest income, net, as a
result of higher yields on higher average cash, cash equivalents
and short-term investments balances in fiscal 2005. |
|
|
|
An increase of $10 million due to gains on investments. |
|
|
|
An increase of $8 million due to a net gain from our
foreign currency activities. |
Income Taxes
Income taxes for fiscal years 2005 and 2004 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
Effective |
|
March 31, |
|
Effective |
|
|
2005 |
|
Tax Rate |
|
2004 |
|
Tax Rate |
|
% Change |
|
|
|
|
|
|
|
|
|
$ |
221 |
|
|
|
30.5% |
|
|
$ |
220 |
|
|
|
27.5% |
|
|
|
|
|
Our effective income tax rate reflects tax benefits derived from
significant operations outside the U.S., which are generally
taxed at rates lower than the U.S. statutory rate of
35 percent. The effective income tax rate was
30.5 percent for fiscal 2005 and 27.5 percent for
fiscal 2004. Our increased effective income tax rate in fiscal
2005 primarily reflects the fact that we resolved certain
tax-related matters with the Internal Revenue Service during
fiscal 2004, which lowered our fiscal 2004 income tax expense by
approximately $20 million and resulted in a
2.5 percent rate reduction. Additionally, adjustments
related to certain tax audit developments, a change in valuation
allowance, and non-deductible acquisition-related costs,
partially offset by the geographic mix of taxable income subject
to lower tax rates for fiscal 2005, increased our effective
income tax rate in fiscal 2005.
52
Net Income
Net income for fiscal years 2005 and 2004 was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% of Net |
|
March 31, |
|
% of Net |
|
|
|
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
504 |
|
|
|
16% |
|
|
$ |
577 |
|
|
|
20% |
|
|
$ |
(73 |
) |
|
|
(13% |
) |
Reported net income decreased in fiscal 2005 as compared to
fiscal 2004 primarily due to growth in our expenses, especially
research and development, as we prepared for the adoption of
next-generation technology within our industry while at the same
time we continued to devote resources to the development of
products for current-generation consoles.
|
|
|
Impact of Recently Issued Accounting Standards |
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB
No. 43, Chapter 4. SFAS No. 151
amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be
recognized as current-period charges. SFAS No. 151
also requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. SFAS No. 123R
requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements using a
fair-value-based method. The statement replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, supersedes Accounting Principles Board
No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95,
Statement of Cash Flows. While the fair value
method under SFAS No. 123R is similar to the fair
value method under SFAS No. 123 with regards to
measurement and recognition of stock-based compensation, there
are several key differences between the two standards. For
example, SFAS No. 123 permits us to recognize
forfeitures as they occur while SFAS No. 123R will
require us to estimate future forfeitures and adjust our
estimate on a quarterly basis. SFAS No. 123R will also
require a classification change in the statement of cash flows,
whereby a portion of the income tax benefit from stock options
will move from operating cash flow activities to financing cash
flow activities (total cash flows will remain unchanged). In
March 2005, the Securities and Exchange Commission
(SEC) released SAB No. 107,
Share-Based Payment, which provides the
SECs views regarding the interaction between
SFAS No. 123R and certain SEC rules and regulations
for public companies. In April 2005, the SEC adopted a rule that
amends the compliance dates of SFAS No. 123R. Under
the revised compliance dates, we are required to adopt the
provisions of SFAS No. 123R no later than our first
quarter of fiscal 2007. The expensing of stock-based
compensation will have a material adverse impact on our
Consolidated Statements of Operations and may not be similar to
our pro forma disclosure under SFAS No. 123, as
amended.
In October 2005, the FASB issued FASB Staff Position
(FSP) Financial Accounting Standard
(FAS) No. 123(R) 2, Practical
Accommodation to the Application of Grant Date As Defined in
FASB Statement No. 123(R). The FASB provides
companies with a practical accommodation when
determining the grant date of an award subject to
SFAS No. 123R. If (1) the award is a unilateral
grant, that is, the recipient does not have the ability to
negotiate the key terms and conditions of the award with the
employer, (2) the key terms and conditions of the award are
expected to be communicated to an individual recipient within a
relatively short time period, and (3) as long as all other
criteria in the grant date definition have been met, then a
mutual understanding of the key terms and conditions of an award
is presumed to exist at the date the award is approved. In
November 2005, the FASB issued FSP FAS No. 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards. The FASB allows
for a practical exception in calculating the additional
paid in capital pool of excess tax benefits upon
adoption that is available to absorb tax deficiencies recognized
53
subsequent to adoption SFAS No. 123R. Accordingly, we
may adopt either the method prescribed under
SFAS No. 123R or the one prescribed under FSP
FAS No. 123(R)-3. We have not yet determined which
method to adopt. In February 2006, the FASB issued FSP
FAS No. 123(R)-4, Classification of Options
and Similar Instruments Issued As Employee Compensation That
Allow for Cash Settlement upon the Occurrence of a Contingent
Event, which amends certain paragraphs in
SFAS No. 123R. FSP FAS No. 123(R)-4
addresses situations when a company has option plans that
require the company to settle outstanding options in cash upon
the occurrence of certain contingent events. Although we are
required to apply FSP FAS No. 123(R)-4 when we
initially adopt SFAS No. 123R, we do not expect it to
impact our Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 changes the
requirements for the accounting and reporting of a change in
accounting principle. Under previous guidance, changes in
accounting principle were recognized as a cumulative effect in
the net income of the period of the change. The new statement
requires retrospective application of changes in accounting
principle, limited to the direct effects of the change, to prior
periods financial statements, unless it is impracticable
to determine either the period-specific effects or the
cumulative effect of the change. Additionally, this Statement
requires that a change in depreciation, amortization or
depletion method for long-lived, nonfinancial assets be
accounted for as a change in accounting estimate affected by a
change in accounting principle and that correction of errors in
previously issued financial statements should be termed a
restatement. SFAS No. 154 is effective for
accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005. We do not believe that,
upon adoption, SFAS No. 154 will have a material
impact on our Consolidated Financial Statements, however, after
adoption, if a change in accounting principle is made,
SFAS No. 154 could have a material impact on our
Consolidated Financial Statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments An Amendment of FASB Statements
No. 133 and 140. SFAS No. 155
(1) permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, (2) clarifies that interest-only
strips and principal-only strips are not subject to the
requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(3) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (4) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (5) amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities A Replacement of FASB
Statement 125 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest
other than another derivative financial instrument.
SFAS No. 155 is effective for all financial
instruments acquired or issued for fiscal years beginning after
September 15, 2006. We do not believe the adoption of
SFAS No. 155 will have a material impact on our
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
| |
|
|
March 31, | |
|
March 31, | |
|
Increase/ | |
|
|
2006 | |
|
2005 | |
|
(Decrease) | |
(In millions) |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
1,242 |
|
|
$ |
1,270 |
|
|
$ |
(28 |
) |
Short-term investments
|
|
$ |
1,030 |
|
|
$ |
1,688 |
|
|
$ |
(658 |
) |
Marketable equity securities
|
|
|
160 |
|
|
|
140 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,432 |
|
|
$ |
3,098 |
|
|
$ |
(666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
55 |
% |
|
|
71 |
% |
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
| |
|
|
March 31, | |
|
March 31, | |
|
Increase/ | |
|
|
2006 | |
|
2005 | |
|
(Decrease) | |
(In millions) |
|
| |
|
| |
|
| |
Cash provided by operating activities
|
|
$ |
596 |
|
|
$ |
634 |
|
|
$ |
(38 |
) |
Cash used in investing activities
|
|
|
(108 |
) |
|
|
(1,726 |
) |
|
|
1,618 |
|
Cash provided by (used in) financing activities
|
|
|
(503 |
) |
|
|
200 |
|
|
|
(703 |
) |
Effect of foreign exchange on cash and cash equivalents
|
|
|
(13 |
) |
|
|
12 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$ |
(28 |
) |
|
$ |
(880 |
) |
|
$ |
852 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006, we generated $596 million of cash from
operating activities as compared to $634 million for fiscal
2005. The decrease in cash generated from operating activities
was primarily due to our overall decline in net income resulting
from a decrease in net revenue and an increase in operating
expenses primarily to support the development of titles for
next-generation consoles. This decrease was partially offset by
a lower accounts receivable balance as of March 31, 2006 as
compared to March 31, 2005, resulting from a higher
percentage of net revenue recognized in the first two months of
our fourth quarter of fiscal 2006 as compared to the fourth
quarter of fiscal 2005, which allowed us to collect a higher
percentage of our receivables prior to the end of the quarter.
We expect cash from operating activities to decline in fiscal
2007.
For fiscal 2006, our primary use of cash in non-operating
activities consisted of $755 million used to purchase
short-term investments, $709 million used to repurchase and
retire a portion of our common stock, $661 million used
primarily for our acquisition of JAMDAT, and $123 million
in capital expenditures primarily related to the expansion of
our Vancouver studio and investments in our worldwide
development tools, technologies and equipment. These
non-operating expenditures were partially offset by
$1,427 million in proceeds from the maturities and sales of
short-term investments and $206 million in proceeds from
sales of common stock through our employee stock plans and other
plans. During fiscal 2007, we anticipate making continued
capital investments in our studios as well as investments in
next-generation consoles, online infrastructure and mobile
platforms.
|
|
|
Short-term investments and marketable equity
securities |
As of March 31, 2006, our portfolio of cash, cash
equivalents and short-term investments was comprised of
55 percent cash and cash equivalents and 45 percent
short-term investments. As of March 31, 2005,
43 percent of our portfolio consisted of cash and cash
equivalents and 57 percent of our portfolio consisted of
short-term investments. In absolute dollars, our cash and cash
equivalents decreased from $1,270 million as of
March 31, 2005 to $1,242 million as of March 31,
2006. This decrease was primarily due to our purchase of
short-term investments, our acquisition of JAMDAT, and our
common stock repurchase program during the first six months of
fiscal 2006. These decreases were partially offset by proceeds
received from the maturities and sales of short-term
investments. Due to our mix of fixed and variable rate
securities, our short-term investment portfolio is susceptible
to changes in short-term interest rates. As of March 31,
2006, our short-term investments included gross unrealized
losses of approximately $7 million, or less than
1 percent of the total in short-term investments. From time
to time, we may liquidate some or all of our short-term
investments to fund operational needs or other activities, such
as capital expenditures, business acquisitions or stock
repurchase programs. Depending on which short-term investments
we liquidate to fund these activities, we could recognize a
portion of the gross unrealized losses.
Marketable equity securities increased to $160 million as
of March 31, 2006, from $140 million as of
March 31, 2005, primarily due to an increase in the
unrealized gain on our investment in Ubisoft Entertainment.
55
Our gross accounts receivable balances were $431 million
and $458 million as of March 31, 2006 and 2005,
respectively. The decrease in our accounts receivable balance
was primarily due to a higher percentage of revenue recognized
in the first two months of our fourth quarter of fiscal 2006 as
compared to the fourth quarter of fiscal 2005, which allowed us
to collect a higher percentage of our net revenue during the
quarter. Reserves for sales returns, pricing allowances and
doubtful accounts increased in absolute dollars from
$162 million as of March 31, 2005 to $232 million
as of March 31, 2006. As a percentage of trailing six and
nine month net revenue, reserves increased from 8 percent
and 6 percent, respectively, as of March 31, 2005, to
12 percent and 9 percent, respectively, as of
March 31, 2006. The increase in these reserves was
primarily the result of lower anticipated demand for our
products and the continued decline in the average prices of our
titles for current-generation consoles due to the competitive
retail environment. We believe these reserves are adequate based
on historical experience and our current estimate of potential
returns, pricing allowances and doubtful accounts.
Inventories decreased slightly to $61 million as of
March 31, 2006 from $62 million as of March 31,
2005. No single title represented more than $7 million of
inventory as of March 31, 2006.
Other current assets increased to $234 million as of
March 31, 2006, from $164 million as of March 31,
2005, primarily due to an increase in prepaid royalties as we
continue to invest in our product development and content, as
well as an increase in advertising credits owed to us by our
vendors due to the timing of our claims.
Accounts payable increased to $163 million as of
March 31, 2006, from $134 million as of March 31,
2005, primarily due to higher sales volumes and higher
expenditures to support our business in the fourth quarter of
fiscal 2006 as compared to the fourth quarter of fiscal 2005.
|
|
|
Accrued and other liabilities |
Our accrued and other liabilities increased to $706 million
as of March 31, 2006 from $673 million as of
March 31, 2005. The increase was primarily due to
liabilities related to our JAMDAT acquisition and an increase in
deferred revenue.
|
|
|
Deferred income taxes, net |
Our long-term position of deferred income taxes changed by
$48 million, from an asset position as of March 31,
2005 to a liability position as of March 31, 2006 primarily
due to (1) a long-term deferred tax liability we recorded
in connection with our JAMDAT acquisition purchase accounting,
and (2) the utilization of tax credits during fiscal 2006.
We believe that existing cash, cash equivalents, short-term
investments, marketable equity securities and cash generated
from operations will be sufficient to meet our operating
requirements for at least the next twelve months, including
working capital requirements, capital expenditures, potential
future acquisitions or strategic investments. We may choose at
any time to raise additional capital to strengthen our financial
position, facilitate expansion, pursue strategic acquisitions
and investments or to take advantage of business opportunities
as they arise. There can be no assurance, however, that such
additional capital will be available to us on favorable terms,
if at all, or that it will not result in substantial dilution to
our existing stockholders.
56
The financing arrangements supporting our Redwood City
headquarters leases with Keybank National Association, described
in the Off-Balance Sheet Commitments section below,
are scheduled to expire in July 2007. Upon expiration of the
financing, we may purchase the facilities for $247 million,
request an extension of the financing (subject to bank
approval), self-fund approximately 90 percent of the
financing and extend the remainder, or arrange for a sale of the
facilities to a third party. In the event of a sale to a third
party, if the sale price is less than $247 million, we will
be obligated to reimburse the difference between the actual sale
price and $247 million, up to maximum of $222 million,
subject to certain provisions of the lease.
A portion of our cash, cash equivalents, short-term investments
and marketable equity securities that was generated from
operations domiciled in foreign tax jurisdictions (approximately
$692 million as of March 31, 2006) is designated as
indefinitely reinvested in the respective tax jurisdiction.
During the fourth quarter of fiscal 2006, our CEO approved a
domestic reinvestment plan, which was subsequently approved by
our Board of Directors, to repatriate $375 million of
foreign earnings in fiscal 2006 under the Jobs Act. We completed
the repatriation in fiscal 2006 and resulted in a tax expense of
$17 million related to this $375 million repatriation.
On October 18, 2004, our Board of Directors authorized a
program to repurchase up to an aggregate of $750 million of
our common stock. Pursuant to the authorization, we repurchased
shares of our common stock from time to time in the open market
until we had completed our common stock repurchase program in
September 2005. We repurchased and retired the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Number of Shares | |
|
|
|
|
Repurchased and | |
|
Approximate | |
|
|
Retired | |
|
Amount | |
|
|
| |
|
| |
From the inception of the program through March 31, 2005
|
|
|
0.8 |
|
|
$ |
41 |
|
Six months ended September 30, 2005
|
|
|
12.6 |
|
|
|
709 |
|
|
|
|
|
|
|
|
From the inception of the program through September 30, 2005
|
|
|
13.4 |
|
|
$ |
750 |
|
|
|
|
|
|
|
|
We have a shelf registration statement on
Form S-3 on file
with the SEC. This shelf registration statement, which includes
a base prospectus, allows us at any time to offer any
combination of securities described in the prospectus in one or
more offerings up to a total amount of $2.0 billion. Unless
otherwise specified in a prospectus supplement accompanying the
base prospectus, we will use the net proceeds from the sale of
any securities offered pursuant to the shelf registration
statement for general corporate purposes, including for working
capital, financing capital expenditures, research and
development, marketing and distribution efforts and, if
opportunities arise, for acquisitions or strategic alliances.
Pending such uses, we may invest the net proceeds in
interest-bearing securities. In addition, we may conduct
concurrent or other financings at any time.
Our ability to maintain sufficient liquidity could be affected
by various risks and uncertainties including, but not limited
to, those related to customer demand and acceptance of our
products on new platforms and new versions of our products on
existing platforms, our ability to collect our accounts
receivable as they become due, successfully achieving our
product release schedules and attaining our forecasted sales
objectives, the impact of competition, economic conditions in
the United States and abroad, the seasonal and cyclical nature
of our business and operating results, risks of product returns
and the other risks described in the Risk Factors
section, included in Item 1A of this report.
Contractual Obligations and Commercial Commitments
In July 2002, we provided an irrevocable standby letter of
credit to Nintendo of Europe, which we have amended on a number
of occasions. The standby letter of credit, as amended,
guarantees performance of our obligations to pay Nintendo of
Europe for trade payables. As of March 31, 2006, the
standby letter of credit, as amended, guaranteed our trade
payable obligations to Nintendo of Europe for up to
7 million.
57
As of March 31, 2006,
2 million
was payable to Nintendo of Europe under the standby letter of
credit, as amended.
In August 2003, we provided an irrevocable standby letter of
credit to 300 California Associates II, LLC in replacement
of our security deposit for office space. The standby letter of
credit guarantees performance of our obligations to pay our
lease commitment up to approximately $1 million. The
standby letter of credit expires in December 2006. As of
March 31, 2006, we did not have a payable balance on this
standby letter of credit.
|
|
|
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 are not dependent on any
deliverables. Celebrities and organizations with whom we have
contracts include: FIFA, FIFPRO Foundation and UEFA
(professional soccer); NASCAR and ISC (stock car racing);
National Basketball Association (professional basketball); PGA
TOUR, Tiger Woods and Pebble Beach (professional golf); National
Hockey League and NHL Players Association (professional
hockey); Warner Bros. (Harry Potter, Batman and Superman); New
Line Productions and Saul Zaentz Company (The Lord of the
Rings); Marvel Enterprises (fighting); National Football League
Properties, Arena Football League and PLAYERS Inc. (professional
football); Collegiate Licensing Company (collegiate football,
basketball and baseball); Simcoh (Def Jam); Viacom Consumer
Products (The Godfather); Valve Corporation (Half-Life); ESPN
(content in EA
SPORTStm
games); Twentieth Century Fox Licensing and Merchandising (The
Simpsons); Lamborghini, McLaren and Porsche (car licenses for
Need for Speed); and mobile game rights with PopCap Games
and The Tetris Company. 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.
58
The following table summarizes our minimum contractual
obligations and commercial commitments as of March 31,
2006, and the effect we expect them to have on our liquidity and
cashflow in future periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial | |
|
|
|
|
Contractual Obligations | |
|
Commitments | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
Developer/ | |
|
|
|
Letter of Credit, | |
|
|
|
|
|
|
Licensor | |
|
|
|
Other Purchase | |
|
Bank and Other | |
|
|
Fiscal Year Ending March 31, |
|
Leases(1) | |
|
Commitments(2) | |
|
Marketing | |
|
Obligations | |
|
Guarantees | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2007
|
|
$ |
36 |
|
|
$ |
155 |
|
|
$ |
45 |
|
|
$ |
7 |
|
|
$ |
4 |
|
|
$ |
247 |
|
2008
|
|
|
28 |
|
|
|
144 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
202 |
|
2009
|
|
|
24 |
|
|
|
152 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
207 |
|
2010
|
|
|
18 |
|
|
|
140 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
189 |
|
2011
|
|
|
14 |
|
|
|
275 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
320 |
|
Thereafter
|
|
|
30 |
|
|
|
700 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
150 |
|
|
$ |
1,566 |
|
|
$ |
354 |
|
|
$ |
7 |
|
|
$ |
4 |
|
|
$ |
2,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See discussion on operating leases in the
Off-Balance-Sheet Commitments section below for
additional information. |
|
(2) |
Developer/licensor commitments include $9 million of
commitments to developers or licensors that have been recorded
in current and long-term liabilities and a corresponding amount
in current and long-term assets in our Consolidated Balance
Sheet as of March 31, 2006 because payment is not
contingent upon performance by the developer or licensor. |
The lease commitments disclosed above include contractual rental
commitments of $25 million under real estate leases for
unutilized office space resulting from our restructuring
activities. These amounts, net of estimated future sub-lease
income, were expensed in the periods of the related
restructuring and are included in our accrued and other current
liabilities reported on our Consolidated Balance Sheet as of
March 31, 2006. See Note 6 of the Notes to
Consolidated Financial Statements.
Transactions with Related Parties
On June 24, 2002, we hired Warren Jenson as our Chief
Financial and Administrative Officer and agreed to loan him
$4 million to be forgiven over four years based on his
continuing employment. The loan does not bear interest. On
June 24, 2004, pursuant to the terms of the loan agreement,
we forgave $2 million of the loan and provided
Mr. Jenson approximately $1.6 million to offset the
tax implications of the forgiveness. As of March 31, 2006,
the remaining outstanding loan balance was $2 million,
which will be forgiven on June 24, 2006, provided that
Mr. Jenson has not voluntarily resigned his employment with
us or been terminated for cause prior to that time. No
additional funds will be provided to offset the tax implications
of the forgiveness of the remaining $2 million.
OFF-BALANCE SHEET COMMITMENTS
|
|
|
Lease Commitments and Residual Value Guarantees |
We lease certain of our current facilities and equipment under
non-cancelable operating lease agreements. We are required to
pay property taxes, insurance and normal maintenance costs for
certain of these facilities and will be required to pay any
increases over the base year of these expenses on the remainder
of our facilities.
In February 1995, we entered into a
build-to-suit lease
(Phase One Lease) with a third party for our
headquarters facilities in Redwood City, California (Phase
One Facilities). The Phase One Facilities comprise a total
of approximately 350,000 square feet and provide space for
sales, marketing, administration and research and development
functions. In July 2001, we refinanced the Phase One Lease
59
with Keybank National Association through July 2006. We account
for the Phase One Lease arrangement as an operating lease in
accordance with SFAS No. 13, Accounting for
Leases, as amended.
On May 26, 2006, we extended the financing under the Phase
One Lease through July 2007. Upon expiration of the financing in
July 2007, we may purchase the Phase One Facilities, request up
to two one-year extensions of the financing (subject to bank
approval), self-fund approximately 90 percent of the
financing and extend the remainder through July 2009, or arrange
for the sale of the Phase One Facilities to a third party.
The Phase One Lease terminates upon expiration of the financing
in July 2007 unless we have extended the financing or elected to
self-fund the financing as described above, in which case the
term of the lease could be extended until as late as July 2009.
Subject to certain terms and conditions, upon termination of the
lease, we may purchase the Phase One Facilities, request an
extension of the lease or arrange for the sale of the Phase One
Facilities to a third party.
Pursuant to the terms of the Phase One Lease, as amended to
date, we have an option to purchase the Phase One Facilities at
any time for a maximum purchase price of $132 million. In
the event of a sale to a third party, if the sale price is less
than $132 million, we will be obligated to reimburse the
difference between the actual sale price and $132 million,
up to maximum of $117 million, subject to certain
provisions of the Phase One Lease, as amended.
In December 2000, we entered into a second
build-to-suit lease
(Phase Two Lease) with Keybank National Association
for a five and one-half year term beginning in December 2000 to
expand our Redwood City, California headquarters facilities and
develop adjacent property (Phase Two Facilities).
Construction of the Phase Two Facilities was completed in June
2002. The Phase Two Facilities comprise a total of approximately
310,000 square feet and provide space for sales, marketing,
administration and research and development functions. We
account for the Phase Two Lease arrangement as an operating
lease in accordance with SFAS No. 13, as amended.
On May 26, 2006, we extended the financing under the Phase
Two Lease through July 2007. Upon the expiration of the
financing in July 2007, we may purchase the Phase Two
Facilities, request up to two one-year extensions of the
financing (subject to bank approval), self-fund approximately
90 percent of the financing and extend the remainder
through July 2009, or arrange for the sale of the Phase Two
Facilities to a third party.
The Phase Two Lease terminates upon expiration of the financing
in July 2007 unless we have extended the financing or elected to
self-fund the financing as described above, in which case the
term of the lease could be extended until as late as July 2009.
Subject to certain terms and conditions, upon termination of the
lease, we may purchase the Phase Two Facilities, request an
extension of the lease or arrange for the sale of the Phase Two
Facilities to a third party.
Pursuant to the terms of the Phase Two Lease, as amended to
date, we have an option to purchase the Phase Two Facilities at
any time for a maximum purchase price of $115 million. In
the event of a sale to a third party, if the sale price is less
than $115 million, we will be obligated to reimburse the
difference between the actual sale price and $115 million,
up to a maximum of $105 million, subject to certain
provisions of the Phase Two Lease, as amended.
The lease rates of the Phase One and Phase Two Leases fluctuate
and are based upon LIBOR plus a margin that varies from 0.50% to
1.25% based on our ratio of total consolidated debt to
consolidated tangible net worth. Based on the
3-month LIBOR rate of
5.2% as of May 26, 2006, the annual rent obligation of the
two leases would total approximately $14 million. Our rent
obligation under the leases could increase or decrease
significantly depending on changes in LIBOR.
The Phase One and Phase Two Leases require us to comply with
certain financial covenants as shown below, all of which we were
in compliance with as of March 31, 2006. In the event we
fail to comply with the financial and other covenants contained
in the leases, the lessor would have a number of remedies,
including the right to keep the leases in effect and suing for
periodic rent, evicting us from the facilities, or
60
causing the facilities to be sold to a third party. In the event
of a sale to a third party, we would be required to reimburse
the difference between the actual sale price and
$247 million, up to a total maximum of $222 million.
Alternatively, in order to avoid being evicted or having the two
facilities sold to a third party, we could elect to purchase the
Phase One and Phase Two Facilities for a combined maximum
purchase price of $247 million.
We believe that, as of March 31, 2006, the estimated fair
values of both properties under these operating leases exceeded
their respective guaranteed residual values of $117 million
for the Phase One Facility and $105 million for the Phase
Two Facility as of March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual as of | |
Financial Covenants |
|
Requirement | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
Consolidated Net Worth (in millions)
|
|
equal to or greater than |
|
$ |
2,293 |
|
|
$ |
3,408 |
|
Fixed Charge Coverage Ratio
|
|
equal to or greater than |
|
|
3.00 |
|
|
|
8.89 |
|
Total Consolidated Debt to Capital
|
|
equal to or less than |
|
|
60 |
% |
|
|
6.8 |
% |
Quick Ratio Q1 & Q2
|
|
equal to or greater than |
|
|
1.00 |
|
|
|
N/A |
|
|
|
equal to or greater than |
|
|
1.75 |
|
|
|
5.92 |
|
In February 2006, we entered into an agreement with an
independent third party to lease a studio facility in Guildford,
Surrey, United Kingdom, which will commence in June 2006 and
will expire in May 2016. The facility comprises a total of
approximately 95,000 square feet, which we intend to use
for research and development functions. Our rental obligation
under this agreement is approximately $33 million over the
initial ten-year term of the lease.
In June 2004, we entered into a lease agreement, amended in
December 2005, with an independent third party for a studio
facility in Orlando, Florida. The lease commenced in January
2005 and expires in June 2010, with one five-year option to
extend the lease term. The campus facilities comprise a total of
140,000 square feet and provide space for research and
development functions. Our rental obligation over the initial
five-and-a-half year term of the lease is $15 million. As
of March 31, 2006, our remaining rental obligation under
this lease was $14 million.
In July 2003, we entered into a lease agreement with an
independent third party (the Landlord) for a studio
facility in Los Angeles, California, which commenced in October
2003 and expires in September 2013 with two five-year options to
extend the lease term. Additionally, we have options to purchase
the property after five and ten years based on the fair market
value of the property at the date of sale, a right of first
offer to purchase the property upon terms offered by the
Landlord, and a right to share in the profits from a sale of the
property. We have accounted for this arrangement as an operating
lease in accordance with SFAS No. 13, as amended.
Existing campus facilities comprise a total of
243,000 square feet and provide space for research and
development functions. Our rental obligation under this
agreement is $50 million over the initial ten-year term of
the lease. This commitment is offset by expected sublease income
of $6 million for a sublease to an affiliate of the
Landlord of 18,000 square feet of the Los Angeles facility,
which commenced in October 2003 and expires in September 2013,
with options of early termination by the affiliate after five
years and by us after four and five years. As of March 31,
2006, our remaining rental obligation under this lease was
$43 million, of which $5 million was offset by
expected sublease income.
In October 2002, we entered into a lease agreement, with an
independent third party for a studio facility in Vancouver,
British Columbia, Canada, which commenced in May 2003 and
expires in April 2013. We amended the lease in October 2003. The
facility comprises a total of approximately 65,000 square
feet and provides space for research and development functions.
Our rental obligation under this agreement is approximately
$16 million over the initial ten-year term of the lease. As
of March 31, 2006, our remaining rental obligation under
this lease was $12 million.
61
On February 14, 2005, an employment-related class action
lawsuit, Hasty v. Electronic Arts Inc., was filed
against the company in Superior Court in San Mateo,
California. The complaint alleges that we improperly classified
Engineers in California as exempt employees and
seeks injunctive relief, unspecified monetary damages, interest
and attorneys fees. On May 16, 2006, the court
granted its preliminary approval of a settlement pursuant to
which we agreed to make a lump sum payment of
$14.9 million, to be paid to a third-party administrator,
to cover (a) all claims allegedly suffered by the class
members, (b) plaintiffs attorneys fees, not to
exceed 25% of the total settlement amount,
(c) plaintiffs costs and expenses, (d) any
incentive payments to the named plaintiffs that may be
authorized by the court, and (e) all costs of
administration of the settlement. The hearing for the court to
consider its final approval of the settlement is set for
September 22, 2006.
Each of the shareholder actions we have previously disclosed
have been voluntarily dismissed by all plaintiffs. The federal
securities class action complaint has been dismissed with
prejudice, by an order dated January 26, 2006; the federal
derivative action has been dismissed, by an order dated
March 10, 2006; and the two state derivative actions have
been dismissed, by orders dated May 4, 2006 and May 8,
2006.
In addition, we are subject to other claims and litigation
arising in the ordinary course of business. We believe that any
liability from any reasonably foreseeable disposition of such
other claims and litigation, individually or in the aggregate,
would not have a material adverse effect on our consolidated
financial position or results of operations.
|
|
|
Director Indemnity Agreements |
We have entered into indemnification agreements with the members
of our Board of Directors at the time they joined the Board to
indemnify them to the extent permitted by law against any and
all liabilities, costs, expenses, amounts paid in settlement and
damages incurred by the directors as a result of any lawsuit, or
any judicial, administrative or investigative proceeding in
which the directors are sued or charged as a result of their
service as members of our Board of Directors.
INFLATION
We believe the impact of inflation on our results of operations
has not been significant for each of the past three fiscal years.
Item 7A: Quantitative
and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including changes in
foreign currency exchange rates, interest rates, and market
prices. Market risk is the potential loss arising from changes
in market rates and market prices. We employ established
policies and practices to manage these risks. Foreign currency
option and foreign exchange forward contracts are used to either
hedge anticipated exposures or mitigate some existing exposures
subject to market risk. We do not enter into derivatives or
other financial instruments for trading or speculative purposes
(see Note 3 to the Consolidated Financial Statements
included in Item 8 of this report). Interest rate risk is
the potential loss arising from changes in interest rates. We do
not consider our cash and cash equivalents to be exposed to
significant interest rate risk because our portfolio consists of
highly liquid investments with original maturities of three
months or less (see Note 2 to the Consolidated Financial
Statements included in Item 8 of this report).
|
|
|
Foreign Currency Exchange Rate Risk |
From time to time, we hedge some of our foreign currency risk
related to forecasted foreign-currency-denominated sales and
expense transactions by purchasing option contracts that
generally have maturities of 15 months or less. These
transactions are designated and qualify as cash flow hedges. The
derivative
62
assets associated with our hedging activities are recorded at
fair value in other current assets in our Consolidated Balance
Sheet. The effective portion of gains or losses resulting from
changes in fair value of these hedges is initially reported, net
of tax, as a component of accumulated other comprehensive income
in stockholders equity and subsequently reclassified into
net revenue or operating expenses, as appropriate in the period
when the forecasted transaction is recorded. The ineffective
portion of gains or losses resulting from changes in fair value,
if any, is reported in each period in interest and other income,
net in our Consolidated Statement of Operations. Our hedging
programs reduce, but do not entirely eliminate, the impact of
currency exchange rate movements in revenue and operating
expenses. As of March 31, 2006, we had no foreign currency
option contracts outstanding. As of March 31, 2005, we had
foreign currency option contracts outstanding with a total fair
value of $1 million included in other current assets.
We utilize foreign exchange forward contracts to mitigate
foreign currency risk associated with
foreign-currency-denominated assets and liabilities, primarily
intercompany receivables and payables. The forward contracts
generally have a contractual term of approximately one month and
are transacted near month-end. Therefore, the fair value of the
forward contracts generally is not significant at each
month-end. Our foreign exchange forward contracts are not
designated as hedging instruments under SFAS No. 133
and are accounted for as derivatives whereby the fair value of
the contracts are reported as other current assets or other
current liabilities in our Consolidated Balance Sheet, and gains
and losses from changes in fair value are reported in interest
and other income, net. The gains and losses on these forward
contracts generally offset the gains and losses on the
underlying foreign-currency-denominated assets and liabilities,
which are also reported in interest and other income, net, in
our Consolidated Statement of Operations.
As of March 31, 2006, we had forward foreign exchange
contracts to purchase and sell approximately $161 million
in foreign currencies. Of this amount, $132 million
represented contracts to sell foreign currencies in exchange for
U.S. dollars, $14 million to sell foreign currencies
in exchange for British pound sterling and $15 million to
purchase foreign currency in exchange for U.S. dollars. As
of March 31, 2005 we had forward foreign exchange contracts
to purchase and sell approximately $425 million of foreign
currencies. Of this amount, $379 million represented
contracts to sell foreign currencies in exchange for
U.S. dollars, $22 million to sell foreign currencies
in exchange for British pound sterling and $24 million to
purchase foreign currency in exchange for U.S. dollars. The
fair value of our forward contracts was immaterial as of
March 31, 2006 and March 31, 2005.
The counterparties to these forward and option contracts are
creditworthy multinational commercial banks. The risks of
counterparty nonperformance associated with these contracts are
not considered to be material.
Notwithstanding our efforts to mitigate some foreign currency
exchange rate risks, there can be no assurances that our hedging
activities will adequately protect us against the risks
associated with foreign currency fluctuations. As of
March 31, 2006, we had no foreign currency option contracts
outstanding. As of March 31, 2005, a hypothetical adverse
foreign currency exchange rate movement of 10 percent or
15 percent would not have resulted in a material loss in
fair value of our option contracts under either scenario.
However, a hypothetical adverse foreign currency exchange rate
movement of 10 percent or 15 percent would result in
potential losses on our forward contracts of $16 million
and $23 million, respectively, as of March 31, 2006,
and $40 million and $61 million, respectively, as of
March 31, 2005. This sensitivity analysis assumes a
parallel adverse shift in foreign currency exchange rates, which
do not always move in the same direction. Actual results may
differ materially.
Our exposure to market risk for changes in interest rates
relates primarily to our short-term investment portfolio. We
manage our interest rate risk by maintaining an investment
portfolio generally consisting of debt instruments of high
credit quality and relatively short maturities. Additionally,
the contractual terms of the securities do not permit the issuer
to call, prepay or otherwise settle the securities at prices
less than the stated par value of the securities. Our
investments are held for purposes other than trading. Also, we
do not use derivative financial instruments or leverage in our
short-term investment portfolio.
63
As of March 31, 2006 and 2005, our short-term investments
were classified as available-for-sale and, consequently,
recorded at fair market value with unrealized gains or losses
resulting from changes in fair value reported as a separate
component of accumulated other comprehensive income, net of any
tax effects, in stockholders equity. Our portfolio of
short-term investments consisted of the following investment
categories, summarized by fair value as of March 31, 2006
and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
U.S. agency securities
|
|
$ |
575 |
|
|
$ |
1,168 |
|
U.S. Treasury securities
|
|
|
212 |
|
|
|
298 |
|
Corporate bonds
|
|
|
178 |
|
|
|
180 |
|
Asset-backed and other debt securities
|
|
|
65 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
1,030 |
|
|
$ |
1,688 |
|
|
|
|
|
|
|
|
Notwithstanding our efforts to manage interest rate risks, there
can be no assurance that we will be adequately protected against
risks associated with interest rate fluctuations. At any time, a
sharp change in interest rates could have a significant impact
on the fair value of our investment portfolio. The following
table presents the hypothetical changes in fair value in our
short-term investment portfolio as of March 31, 2006,
arising from potential changes in interest rates. The modeling
technique estimates the change in fair value from immediate
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points (BPS), 100 BPS, and 150 BPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given an Interest | |
|
Fair Value | |
|
Valuation of Securities Given an Interest | |
|
|
Rate Increase of X Basis Points | |
|
as of | |
|
Rate Increase of X Basis Points | |
(In millions) |
|
| |
|
March 31, | |
|
| |
|
|
(150 BPS) | |
|
(100 BPS) | |
|
(50 BPS) | |
|
2006 | |
|
50 BPS | |
|
100 BPS | |
|
150 BPS | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. agency securities
|
|
$ |
581 |
|
|
$ |
579 |
|
|
$ |
577 |
|
|
$ |
575 |
|
|
$ |
573 |
|
|
$ |
571 |
|
|
$ |
570 |
|
U.S. Treasury securities
|
|
|
218 |
|
|
|
216 |
|
|
|
214 |
|
|
|
212 |
|
|
|
210 |
|
|
|
208 |
|
|
|
205 |
|
Corporate bonds
|
|
|
182 |
|
|
|
181 |
|
|
|
179 |
|
|
|
178 |
|
|
|
176 |
|
|
|
175 |
|
|
|
173 |
|
Asset-backed and other debt securities
|
|
|
66 |
|
|
|
66 |
|
|
|
66 |
|
|
|
65 |
|
|
|
65 |
|
|
|
65 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
1,047 |
|
|
$ |
1,042 |
|
|
$ |
1,036 |
|
|
$ |
1,030 |
|
|
$ |
1,024 |
|
|
$ |
1,019 |
|
|
$ |
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the hypothetical changes in fair
value in our short-term investment portfolio as of
March 31, 2005, arising from selected potential changes in
interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given an Interest | |
|
Fair Value | |
|
Valuation of Securities Given an Interest | |
|
|
Rate Decrease of X Basis Points | |
|
as of | |
|
Rate Increase of X Basis Points | |
(In millions) |
|
| |
|
March 31, | |
|
| |
|
|
(150 BPS) | |
|
(100 BPS) | |
|
(50 BPS) | |
|
2005 | |
|
50 BPS | |
|
100 BPS | |
|
150 BPS | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. agency securities
|
|
$ |
1,177 |
|
|
$ |
1,175 |
|
|
$ |
1,172 |
|
|
$ |
1,168 |
|
|
$ |
1,162 |
|
|
$ |
1,156 |
|
|
$ |
1,151 |
|
U.S. Treasury securities
|
|
|
306 |
|
|
|
303 |
|
|
|
300 |
|
|
|
298 |
|
|
|
295 |
|
|
|
293 |
|
|
|
290 |
|
Corporate bonds
|
|
|
185 |
|
|
|
184 |
|
|
|
182 |
|
|
|
180 |
|
|
|
178 |
|
|
|
177 |
|
|
|
175 |
|
Asset-backed securities
|
|
|
44 |
|
|
|
43 |
|
|
|
43 |
|
|
|
42 |
|
|
|
42 |
|
|
|
41 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
1,712 |
|
|
$ |
1,705 |
|
|
$ |
1,697 |
|
|
$ |
1,688 |
|
|
$ |
1,677 |
|
|
$ |
1,667 |
|
|
$ |
1,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The value of our equity investments in publicly traded companies
are subject to market price volatility. As of March 31,
2006, our marketable equity securities were classified as
available-for-sale and, consequently, were recorded in our
Consolidated Balance Sheets at fair market value with unrealized
gains or losses
64
reported as a separate component of accumulated other
comprehensive income, net of any tax effects, in
stockholders equity. The fair value of our marketable
equity securities was $160 million and $140 million as
of March 31, 2006 and 2005, respectively.
At any time, a sharp change in market prices in our investments
in marketable equity securities could have a significant impact
on the fair value of our investments. The following table
presents the hypothetical changes in fair value in our
marketable equity securities as of March 31, 2006, arising
from changes in market prices plus or minus 25 percent,
50 percent and 75 percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given an | |
|
|
|
Valuation of Securities Given an | |
|
|
X Percentage Decrease in Each | |
|
Fair Value | |
|
X Percentage Increase in Each | |
|
|
Stocks Market Price | |
|
as of | |
|
Stocks Market Price | |
(In millions) |
|
| |
|
March 31, | |
|
| |
|
|
(75%) | |
|
(50%) | |
|
(25%) | |
|
2006 | |
|
25% | |
|
50% | |
|
75% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Marketable equity securities
|
|
$ |
40 |
|
|
$ |
80 |
|
|
$ |
120 |
|
|
$ |
160 |
|
|
$ |
200 |
|
|
$ |
240 |
|
|
$ |
280 |
|
The following table presents the hypothetical changes in fair
value in our marketable equity securities as of March 31,
2005, arising from changes in market prices plus or minus
25 percent, 50 percent and 75 percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given an | |
|
|
|
Valuation of Securities Given an | |
|
|
X Percentage Decrease in Each | |
|
Fair Value | |
|
X Percentage Increase in Each | |
|
|
Stocks Market Price | |
|
as of | |
|
Stocks Market Price | |
(In millions) |
|
| |
|
March 31, | |
|
| |
|
|
(75%) | |
|
(50%) | |
|
(25%) | |
|
2005 | |
|
25% | |
|
50% | |
|
75% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Marketable equity securities
|
|
$ |
35 |
|
|
$ |
70 |
|
|
$ |
105 |
|
|
$ |
140 |
|
|
$ |
175 |
|
|
$ |
210 |
|
|
$ |
246 |
|
65
Item 8: Financial
Statements and Supplementary Data
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
Page | |
|
|
| |
Consolidated Financial Statements of Electronic Arts Inc. and
Subsidiaries:
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
68 |
|
|
|
|
|
69 |
|
|
|
|
|
70 |
|
|
|
|
|
71 |
|
|
|
|
|
107 |
|
Financial Statement Schedule:
|
|
|
|
|
|
The following financial statement schedule of Electronic Arts
Inc. and Subsidiaries for the years ended March 31, 2006,
2005 and 2004 is filed as part of this report and should be read
in conjunction with the Consolidated Financial Statements of
Electronic Arts Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
|
|
118 |
|
Other financial statement schedules have been omitted because
the information called for in them is not required or has
already been included in either the Consolidated Financial
Statements or the notes thereto.
66
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
March 31, | |
|
|
2006 | |
|
2005 | |
(In millions, except par value data) |
|
| |
|
| |
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,242 |
|
|
$ |
1,270 |
|
|
Short-term investments
|
|
|
1,030 |
|
|
|
1,688 |
|
|
Marketable equity securities
|
|
|
160 |
|
|
|
140 |
|
|
Receivables, net of allowances of $232 and $162, respectively
|
|
|
199 |
|
|
|
296 |
|
|
Inventories
|
|
|
61 |
|
|
|
62 |
|
|
Deferred income taxes, net
|
|
|
86 |
|
|
|
86 |
|
|
Other current assets
|
|
|
234 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,012 |
|
|
|
3,706 |
|
|
Property and equipment, net
|
|
|
392 |
|
|
|
353 |
|
Investments in affiliates
|
|
|
11 |
|
|
|
10 |
|
Goodwill
|
|
|
647 |
|
|
|
153 |
|
Other intangibles, net
|
|
|
232 |
|
|
|
36 |
|
Deferred income taxes, net
|
|
|
|
|
|
|
19 |
|
Other assets
|
|
|
92 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
4,386 |
|
|
$ |
4,370 |
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
163 |
|
|
$ |
134 |
|
|
Accrued and other current liabilities
|
|
|
706 |
|
|
|
673 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
869 |
|
|
|
807 |
|
|
Deferred income taxes
|
|
|
29 |
|
|
|
|
|
Other liabilities
|
|
|
68 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
966 |
|
|
|
861 |
|
|
Commitments and contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
12 |
|
|
|
11 |
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value. 10 shares authorized
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. 1,000 shares
authorized; 305 and 310 shares issued and outstanding,
respectively
|
|
|
3 |
|
|
|
3 |
|
|
Paid-in capital
|
|
|
1,081 |
|
|
|
1,434 |
|
|
Retained earnings
|
|
|
2,241 |
|
|
|
2,005 |
|
|
Accumulated other comprehensive income
|
|
|
83 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,408 |
|
|
|
3,498 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
EQUITY
|
|
$ |
4,386 |
|
|
$ |
4,370 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
67
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
(In millions, except per share data) |
|
| |
|
| |
|
| |
|
Net revenue
|
|
$ |
2,951 |
|
|
$ |
3,129 |
|
|
$ |
2,957 |
|
Cost of goods sold
|
|
|
1,181 |
|
|
|
1,197 |
|
|
|
1,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,770 |
|
|
|
1,932 |
|
|
|
1,854 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
431 |
|
|
|
391 |
|
|
|
370 |
|
|
General and administrative
|
|
|
215 |
|
|
|
221 |
|
|
|
185 |
|
|
Research and development
|
|
|
758 |
|
|
|
633 |
|
|
|
511 |
|
|
Amortization of intangibles
|
|
|
7 |
|
|
|
3 |
|
|
|
3 |
|
|
Acquired in-process technology
|
|
|
8 |
|
|
|
13 |
|
|
|
|
|
|
Restructuring charges
|
|
|
26 |
|
|
|
2 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,445 |
|
|
|
1,263 |
|
|
|
1,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
325 |
|
|
|
669 |
|
|
|
776 |
|
Interest and other income, net
|
|
|
64 |
|
|
|
56 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and minority interest
|
|
|
389 |
|
|
|
725 |
|
|
|
797 |
|
Provision for income taxes
|
|
|
147 |
|
|
|
221 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
242 |
|
|
|
504 |
|
|
|
577 |
|
Minority interest
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.78 |
|
|
$ |
1.65 |
|
|
$ |
1.95 |
|
|
Diluted
|
|
$ |
0.75 |
|
|
$ |
1.59 |
|
|
$ |
1.87 |
|
Number of shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
304 |
|
|
|
305 |
|
|
|
295 |
|
|
Diluted
|
|
|
314 |
|
|
|
318 |
|
|
|
308 |
|
See accompanying Notes to Consolidated Financial Statements.
68
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(In millions, share data in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B |
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
Common Stock |
|
|
|
|
|
Other | |
|
Total | |
|
|
| |
|
|
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount |
|
Capital | |
|
Earnings | |
|
Income | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
Balances as of March 31, 2003
|
|
|
288,267 |
|
|
$ |
3 |
|
|
|
225 |
|
|
$ |
|
|
|
$ |
856 |
|
|
$ |
924 |
|
|
$ |
2 |
|
|
$ |
1,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
577 |
|
|
Change in unrealized gains (losses) on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of shares through employee stock plans and
other plans
|
|
|
13,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
228 |
|
Repurchase of Class B shares
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2004
|
|
|
301,333 |
|
|
$ |
3 |
|
|
|
200 |
|
|
$ |
|
|
|
$ |
1,154 |
|
|
$ |
1,501 |
|
|
$ |
20 |
|
|
$ |
2,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
504 |
|
|
Change in unrealized gains (losses) on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
27 |
|
|
Reclassification adjustment for (gains) losses, realized in
net income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of shares through employee stock plans and
other plans
|
|
|
9,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
241 |
|
Repurchase and retirement of common stock
|
|
|
(806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
(41 |
) |
Conversion of Class B shares to common stock
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2005
|
|
|
310,441 |
|
|
$ |
3 |
|
|
|
|
|
|
$ |
|
|
|
$ |
1,434 |
|
|
$ |
2,005 |
|
|
$ |
56 |
|
|
$ |
3,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
236 |
|
|
Change in unrealized gains (losses) on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
29 |
|
|
Reclassification adjustment for (gains) losses, realized on
investments in net income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
Change in unrealized gains (losses) on derivative instruments,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
Reclassification adjustment for (gains) losses, realized on
derivative instruments in net income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of shares through employee stock plans and
other plans
|
|
|
7,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
206 |
|
Repurchase and retirement of common stock
|
|
|
(12,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(709 |
) |
|
|
|
|
|
|
|
|
|
|
(709 |
) |
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
133 |
|
Assumption of stock options in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2006
|
|
|
304,994 |
|
|
$ |
3 |
|
|
|
|
|
|
$ |
|
|
|
$ |
1,081 |
|
|
$ |
2,241 |
|
|
$ |
83 |
|
|
$ |
3,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
69
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
(In millions) |
|
| |
|
| |
|
| |
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
95 |
|
|
|
75 |
|
|
|
78 |
|
|
|
Minority interest
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) losses on investments and sale of property
and equipment
|
|
|
7 |
|
|
|
(8 |
) |
|
|
2 |
|
|
|
Stock-based compensation
|
|
|
3 |
|
|
|
6 |
|
|
|
1 |
|
|
|
Tax benefit from exercise of stock options
|
|
|
133 |
|
|
|
75 |
|
|
|
69 |
|
|
|
Acquired in-process technology
|
|
|
8 |
|
|
|
13 |
|
|
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
104 |
|
|
|
(80 |
) |
|
|
(194 |
) |
|
|
|
Inventories
|
|
|
(3 |
) |
|
|
(14 |
) |
|
|
(23 |
) |
|
|
|
Other assets
|
|
|
(71 |
) |
|
|
(35 |
) |
|
|
(61 |
) |
|
|
|
Accounts payable
|
|
|
31 |
|
|
|
28 |
|
|
|
23 |
|
|
|
|
Accrued and other liabilities
|
|
|
39 |
|
|
|
46 |
|
|
|
191 |
|
|
|
|
Deferred income taxes
|
|
|
8 |
|
|
|
24 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
596 |
|
|
|
634 |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(123 |
) |
|
|
(126 |
) |
|
|
(90 |
) |
|
Proceeds from sale of property and equipment
|
|
|
2 |
|
|
|
16 |
|
|
|
1 |
|
|
Investments in affiliates
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
Proceeds from sale of investments in affiliates
|
|
|
2 |
|
|
|
|
|
|
|
8 |
|
|
Purchase of short-term investments
|
|
|
(755 |
) |
|
|
(2,442 |
) |
|
|
(2,511 |
) |
|
Proceeds from maturities and sales of short-term investments
|
|
|
1,427 |
|
|
|
996 |
|
|
|
2,883 |
|
|
Proceeds from sale of marketable equity securities
|
|
|
4 |
|
|
|
4 |
|
|
|
2 |
|
|
Purchase of marketable equity securities
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
|
(661 |
) |
|
|
(81 |
) |
|
|
(3 |
) |
|
Other investing activities
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(108 |
) |
|
|
(1,726 |
) |
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of common stock through employee stock plans
and other plans
|
|
|
206 |
|
|
|
241 |
|
|
|
228 |
|
|
Repurchase and retirement of common stock
|
|
|
(709 |
) |
|
|
(41 |
) |
|
|
|
|
|
Other financing activities
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(503 |
) |
|
|
200 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange on cash and cash equivalents
|
|
|
(13 |
) |
|
|
12 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(28 |
) |
|
|
(880 |
) |
|
|
1,200 |
|
Beginning cash and cash equivalents
|
|
|
1,270 |
|
|
|
2,150 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
|
1,242 |
|
|
|
1,270 |
|
|
|
2,150 |
|
Short-term investments
|
|
|
1,030 |
|
|
|
1,688 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
Ending cash, cash equivalents and short-term investments
|
|
$ |
2,272 |
|
|
$ |
2,958 |
|
|
$ |
2,414 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$ |
24 |
|
|
$ |
101 |
|
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net
|
|
$ |
37 |
|
|
$ |
26 |
|
|
$ |
(1 |
) |
|
Assumption of stock options in connection with acquisition
|
|
$ |
14 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
70
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1) |
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
We develop, market, publish and distribute interactive software
games that are playable by consumers on home video game consoles
(such as the Sony
PlayStation® 2,
Microsoft
Xbox®
and Xbox
360tm,
and Nintendo
GameCubetm),
personal computers, mobile platforms (including cellular
handsets and hand-held game players such as the Nintendo
DStm
and the
PlayStation®
Portable
PSPtm)
and online, over the Internet and other proprietary online
networks. Some of our games are based on content that we license
from others (e.g., Madden NFL Football, The Godfather and FIFA
Soccer), and some of our games are based on our own wholly-owned
intellectual property (e.g., The
Simstm,
Need for
Speedtm
and
BLACKtm).
Our goal is to publish titles with mass-market appeal, which
often means translating and localizing them for sale in
non-English speaking countries. In addition, we also attempt to
create software game franchises that allow us to
publish new titles on a recurring basis that are based on the
same property. Examples of this franchise approach are the
annual iterations of our sports-based products (e.g., Madden NFL
Football,
NCAA®
Football and FIFA Soccer), wholly-owned properties that can be
successfully sequeled (e.g., The Sims, Need for Speed and
Battlefield) and titles based on long-lived literary movie
properties (e.g. Lord of the Rings and Harry Potter).
A summary of our significant accounting policies applied in the
preparation of our Consolidated Financial Statements follows:
The accompanying Consolidated Financial Statements include the
accounts of Electronic Arts Inc. and its domestic and foreign
wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Our fiscal year is reported on a 52 or
53-week period that,
historically, has ended on the final Saturday of March in each
year. Beginning with the fiscal year ended March 31, 2006,
our fiscal year ends on the Saturday nearest March 31. As a
result, fiscal 2006 contained 53 weeks with the first
quarter containing 14 weeks. Our results of operations for
the fiscal years March 31, 2006, 2005 and 2004 contain the
following number of weeks:
|
|
|
|
|
|
|
Fiscal Years Ended |
|
Number of Weeks |
|
Fiscal Period End Date | |
|
|
|
|
| |
March 31, 2006
|
|
53 weeks |
|
|
April 1, 2006 |
|
March 31, 2005
|
|
52 weeks |
|
|
March 26, 2005 |
|
March 31, 2004
|
|
52 weeks |
|
|
March 27, 2004 |
|
For simplicity of presentation, all fiscal periods are treated
as ending on a calendar month end.
Certain prior-year amounts have been reclassified to conform to
the fiscal 2006 presentation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, contingent assets
and liabilities, and revenue and expenses during the reporting
period. Such estimates include sales returns and allowances,
provisions for doubtful accounts, accrued liabilities, income
taxes, estimates regarding the recoverability of prepaid
royalties and royalty commitments, inventories,
71
long-lived assets and deferred income tax assets as well as
estimates used in our goodwill impairment test. These estimates
generally involve complex issues and require us to make
judgments, involve analysis of historical and future trends, can
require extended periods of time to resolve, and are subject to
change from period to period. In all cases, actual results could
differ materially from our estimates.
|
|
(e) |
Cash, Cash Equivalents, Short-Term Investments, Marketable
Equity Securities and Other Investments |
Cash equivalents consist of highly liquid investments with
insignificant interest rate risk and original or remaining
maturities of three months or less at the time of purchase.
Short-term investments consist of securities with original or
remaining maturities of greater than three months at the time of
purchase. The short-term investments are available for use in
current operations or other activities such as capital
expenditures, business acquisitions, or stock repurchase
programs.
As of March 31, 2006 and March 31, 2005, short-term
investments and marketable equity securities were classified as
available-for-sale and stated at fair value based upon quoted
market prices for the securities or similar financial
instruments. Unrealized gains and losses are included as a
separate component of accumulated other comprehensive income,
net of any related tax effect, in stockholders equity.
Realized gains and losses are calculated based on the specific
identification method. We recognize an impairment charge when we
determine that a decline in the fair value of the securities
below its cost basis is other-than-temporary.
Investments in affiliates consist of investments in equity
securities accounted for under either the cost method or the
equity method in accordance with Accounting Principles Board
Opinion (APB) No. 18, The Equity
Method Of Accounting For Investments In Common Stock.
Our share of earnings or losses of investments in affiliates
accounted for under the equity method is included in interest
and other income, net, in our Consolidated Statement of
Operations, except for investments where we are not able to
exercise significant influence over the operating and financing
decisions of the investee, in which case the cost method of
accounting is used. We evaluate the investment in affiliates to
determine if events or changes in circumstances indicate an
other-than-temporary impairment in value. We recognize an
impairment charge when we determine an other-than-temporary
impairment in value exists.
Inventories consist of materials (including manufacturing
royalties paid to console manufacturers), labor and freight-in.
Inventories are stated at the lower of cost
(first-in, first-out
method) or market.
|
|
(g) |
Property and Equipment, Net |
Property and equipment, net, are stated at cost. Depreciation is
calculated using the straight-line method over the following
useful lives:
|
|
|
Buildings
|
|
20 to 25 years |
Computer equipment and software
|
|
3 to 5 years |
Furniture and equipment
|
|
3 to 5 years |
Leasehold improvements
|
|
Lesser of the lease term or the estimated useful lives of the
improvements, generally 1 to 10 years |
Under the provisions of American Institute of Certified Public
Accountants Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, we capitalize costs
associated with customized internal-use software systems that
have reached the application development stage and meet
recoverability tests. Such capitalized costs include external
direct costs utilized in developing or obtaining the
applications and payroll and payroll-related expenses for
employees who are directly associated with the applications.
Capitalization of such costs begins when the preliminary project
stage is complete and ceases at the point in which the project
is substantially complete
72
and ready for its intended purpose. The net book value of
capitalized costs associated with internal-use software amounted
to $23 million and $28 million as of March 31,
2006 and 2005, respectively, and are being depreciated on a
straight-line basis over each projects estimated useful
life that ranges from three to five years.
We evaluate long-lived assets and certain identifiable
intangibles for impairment, in accordance with Statement of
Financial Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets is measured by a
comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the
asset. 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. Based on these judgments and assumptions,
we determine whether we need to take an impairment charge to
reduce the value of the asset stated on our Consolidated Balance
Sheet to reflect its actual 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
of our use of the acquired assets or the strategy of our overall
business and significant under-performance relative to expected
historical or projected future operating results. If we were to
consider such assets to be impaired, the amount of impairment we
would recognize would be measured by the amount by which the
carrying amount of the asset exceeds its fair value which is
estimated by discounted cash flows. We recognized no long-lived
asset impairment charges in fiscal 2006 or 2005. During fiscal
2004, we recognized less than $1 million of asset
impairment charges. See Note 6 of the Notes to Consolidated
Financial Statements.
SFAS No. 142, Goodwill and Other Intangible
Assets requires that purchased goodwill and
indefinite-lived intangibles not be amortized. Rather, goodwill
and indefinite-lived intangible assets are subject to at least
an annual assessment for impairment by applying a
fair-value-based test.
SFAS No. 142 requires a two-step approach to testing
goodwill for impairment for each reporting unit. The first step
tests for impairment by applying fair value-based tests at the
reporting unit level. The second step (if necessary) measures
the amount of impairment by applying fair value-based tests to
individual assets and liabilities within each reporting unit. We
completed the first step of the annual goodwill impairment
testing as of January 1, 2006 and found no indicators of
impairment of our recorded goodwill. We did not recognize an
impairment loss on goodwill in fiscal 2006, 2005 or 2004.
|
|
(j) |
Concentration of Credit Risk |
We extend credit to various companies in the retail and mass
merchandising industries. Collection of trade receivables may be
affected by changes in economic or other industry conditions and
may, accordingly, impact our overall credit risk. Although we
generally do not require collateral, we perform ongoing credit
evaluations of our customers and maintain reserves for potential
credit losses. As of March 31, 2006, we had 11 percent
of our gross accounts receivable outstanding with Wal-Mart
Stores, Inc. As of March 31, 2005, we had 13 percent
of our gross accounts receivable outstanding with both Wal-Mart
Stores, Inc. and Pinnacle, which is a European logistics and
collections company.
Short-term investments are placed with high credit-quality
financial institutions or in short-duration, high-quality
securities. We limit the amount of credit exposure in any one
financial institution or type of investment instrument.
73
We evaluate the recognition of revenue based on the criteria set
forth in SOP 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
and Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, as revised by SAB No. 104,
Revenue Recognition. We evaluate revenue
recognition using the following basic criteria and recognize
revenue when all four of the following criteria are met:
|
|
|
|
|
Evidence of an arrangement: Evidence of an agreement with the
customer that reflects the terms and conditions to deliver
products must be present in order to recognize revenue. |
|
|
|
Delivery: Delivery is considered to occur when the products are
shipped and risk of loss and reward have been transferred to the
customer. For online games and services, revenue is recognized
as the service is provided. |
|
|
|
Fixed or determinable fee: If a portion of the arrangement fee
is not fixed or determinable, we recognize that amount as
revenue when the amount becomes fixed or determinable. |
|
|
|
Collection is deemed probable: At the time of the transaction,
we conduct a credit review of each customer involved in a
significant transaction to determine the creditworthiness of the
customer. Collection is deemed probable if we expect the
customer to be able to pay amounts under the arrangement as
those amounts become due. If we determine that collection is not
probable, we recognize revenue when collection becomes probable
(generally upon cash collection). |
Determining whether and when some of these criteria have been
satisfied often involves assumptions and judgments that can have
a significant impact on the timing and amount of revenue we
report. For example, for multiple element arrangements, we must
make assumptions and judgments in order to: (1) determine
whether and when each element has been delivered;
(2) determine whether undelivered products or services are
essential to the functionality of the delivered products and
services; (3) determine whether vendor-specific objective
evidence of fair value (VSOE) exists for each
undelivered element; and (4) allocate the total price among
the various elements we must deliver. Changes to any of these
assumptions or judgments, or changes to the elements in a
software arrangement, could cause a material increase or
decrease in the amount of revenue that we report in a particular
period.
Product Revenue: Product revenue, including sales to
resellers and distributors (channel partners), is
recognized when the above criteria are met. We reduce product
revenue for estimated future returns, price protection, and
other offerings, which may occur with our customers and channel
partners.
Shipping and Handling: In accordance with Emerging Issues
Task Force (EITF) Issue
No. 00-10,
Accounting for Shipping and Handling Fees and
Costs, we recognize amounts billed to customers for
shipping and handling as revenue. Additionally, shipping and
handling costs incurred by us are included in cost of goods sold.
Online Subscription Revenue: Online subscription revenue
is derived principally from subscription revenue collected from
customers for online play related to our massively multiplayer
online games and Pogo-branded online games services. These
customers generally pay on an annual basis or a
month-to-month basis
and prepaid subscription revenue, including revenue collected
from credit card sales, are recognized ratably over the period
for which the services are provided.
Software Licenses: We license software rights to
manufacturers of products in related industries (for example,
makers of personal computers or computer accessories) to include
certain of our products with the manufacturers product, or
offer our products to consumers who have purchased the
manufacturers product. We call these combined products
OEM bundles. These OEM bundles generally require the
customer to pay us an upfront nonrefundable fee, which
represents the guaranteed minimum royalty amount. Revenue is
generally recognized upon delivery of the product master or the
first copy. Per-copy royalties on sales that exceed the minimum
guarantee are recognized as earned.
74
|
|
(l) |
Sales Returns and Allowances and Bad Debt Reserves |
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, we monitor
the volume of sales to our channel partners and their
inventories as substantial overstocking in the distribution
channel could result in high returns or higher price protection
costs in subsequent periods.
Similarly, significant judgment is required to estimate our
allowance for doubtful accounts in any accounting period. We
analyze customer concentrations, customer credit-worthiness,
current economic trends, and historical experience when
evaluating the adequacy of the allowance for doubtful accounts.
We generally expense advertising costs as incurred, except for
production costs associated with media campaigns which are
recognized as prepaid assets (to the extent paid in advance) and
expensed at the first run of the advertisement. Cooperative
advertising with our channel partners is accrued when revenue is
recognized and such amounts are included in marketing and sales
expense if there is a separate identifiable benefit for which we
can reasonably estimate the fair value of the benefit
identified. Otherwise, they are recognized as a reduction of net
revenue. We then reimburse the channel partner when qualifying
claims are submitted. We sometimes receive reimbursements for
advertising costs from our vendors, and such amounts are
recognized as a reduction of marketing and sales expense if the
advertising (1) is specific to the vendor,
(2) represents an identifiable benefit to us and
(3) represents an incremental cost to us. Otherwise, vendor
reimbursements are recognized as a reduction of cost of goods
sold as the related revenue is recognized. Vendor reimbursements
of advertising expenses of $41 million, $42 million
and $45 million reduced marketing and sales expense for the
fiscal years ended March 31, 2006, 2005 and 2004,
respectively. For the fiscal years ended March 31, 2006,
2005 and 2004, advertising expenses, net of vendor
reimbursements, totaled approximately $180 million,
$174 million and $183 million, respectively.
|
|
(n) |
Software Development Costs |
Research and development costs, which consist primarily of
software development costs, are expensed as incurred.
SFAS No. 86, Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise
Marketed, provides for the capitalization of certain
software development costs incurred after technological
feasibility of the software is established or for development
costs that have alternative future uses. Under our current
practice of developing new products, the technological
feasibility of the underlying software is not established until
substantially all product development is complete, which
generally includes the development of a working model. The
software development costs that have been capitalized to date
have been insignificant.
|
|
(o) |
Stock-based Compensation |
We account for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees. We
have adopted the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended.
Had compensation cost for our stock-based compensation plans
been measured based on the estimated fair value at the grant
dates in accordance with the provisions of
SFAS No. 123, as amended, we estimate that our
reported net income and net income per share would have been the
pro forma amounts indicated below. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
75
option-pricing model. The following weighted-average assumptions
were used for grants made under our stock-based compensation
plans in fiscal 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
4.3 |
% |
|
|
3.5 |
% |
|
|
2.3 |
% |
Expected volatility
|
|
|
33 |
% |
|
|
36 |
% |
|
|
50 |
% |
Expected life of stock options (in years)
|
|
|
3.20 |
|
|
|
3.30 |
|
|
|
3.09 |
|
Expected life of employee stock purchase plans (in months)
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Assumed dividends
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
Our stock-based compensation calculations are based on a
multiple option valuation approach and forfeitures are
recognized when they occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
(In millions, except per share data) |
|
| |
|
| |
|
| |
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
236 |
|
|
$ |
504 |
|
|
$ |
577 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of
related tax effects
|
|
|
(85 |
) |
|
|
(83 |
) |
|
|
(97 |
) |
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
153 |
|
|
$ |
425 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic
|
|
$ |
0.78 |
|
|
$ |
1.65 |
|
|
$ |
1.95 |
|
|
Pro forma basic
|
|
$ |
0.50 |
|
|
$ |
1.39 |
|
|
$ |
1.63 |
|
|
As reported diluted
|
|
$ |
0.75 |
|
|
$ |
1.59 |
|
|
$ |
1.87 |
|
|
Pro forma diluted
|
|
$ |
0.49 |
|
|
$ |
1.35 |
|
|
$ |
1.58 |
|
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004)
(SFAS No. 123R), Share-Based
Payment. SFAS No. 123R requires that the
cost resulting from all share-based payment transactions be
recognized in the financial statements using a fair-value-based
method. The statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation,
supersedes APB No. 25, Accounting for Stock Issued
to Employees, and amends SFAS No. 95,
Statement of Cash Flows. While the fair value
method under SFAS No. 123R is similar to the fair
value method under SFAS No. 123 with regards to
measurement and recognition of stock-based compensation, there
are several key differences between the two standards. For
example, SFAS No. 123 permits us to recognize
forfeitures as they occur while SFAS No. 123R will
require us to estimate future forfeitures and adjust our
estimate on a quarterly basis. SFAS No. 123R will also
require a classification change in the statement of cash flows,
whereby a portion of the income tax benefit from stock options
will move from operating cash flow activities to financing cash
flow activities (total cash flows will remain unchanged).
In March 2005, the Securities and Exchange Commission
(SEC) released SAB No. 107,
Share-Based Payment, which provides the
SECs views regarding the interaction between
SFAS No. 123R and certain SEC rules and regulations
for public companies. In April 2005, the SEC adopted a rule that
amends the compliance dates of SFAS No. 123R. Under
the revised compliance dates, we are required to adopt the
provisions of SFAS No. 123R no later than our first
quarter of fiscal 2007. The expensing of stock-based
compensation will have a material adverse impact on our
Consolidated Statements of Operations which may not be similar
to our pro forma disclosure under SFAS No. 123, as
amended.
In October 2005, the FASB issued FASB Staff Position
(FSP) Financial Accounting Standard
(FAS)
No. 123(R)-2,
Practical Accommodation to the Application of Grant
Date As Defined in FASB
76
Statement No. 123(R). The FASB provides
companies with a practical accommodation when
determining the grant date of an award subject to
SFAS No. 123R. If (1) the award is a unilateral
grant, that is, the recipient does not have the ability to
negotiate the key terms and conditions of the award with the
employer, (2) the key terms and conditions of the award are
expected to be communicated to an individual recipient within a
relatively short time period, and (3) as long as all other
criteria in the grant date definition have been met, then a
mutual understanding of the key terms and conditions of an award
is presumed to exist at the date the award is approved.
In November 2005, the FASB issued FSP
FAS No. 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards. The FASB allows
for a practical exception in calculating the additional paid-in
capital pool of excess tax benefits upon adoption that is
available to absorb tax deficiencies recognized subsequent to
adoption SFAS No. 123R. Accordingly, we may adopt
either the method prescribed under SFAS No. 123R or
the one prescribed under FSP
FAS No. 123(R)-3.
We have not yet determined which method to adopt.
In February 2006, the FASB issued FSP
FAS No. 123(R)-4,
Classification of Options and Similar Instruments
Issued As Employee Compensation That Allow for Cash Settlement
upon the Occurrence of a Contingent Event, which
amends certain paragraphs in SFAS No. 123R. FSP
FAS No. 123(R)-4
addresses situations when a company has option plans that
require the company to settle outstanding options in cash upon
the occurrence of certain contingent events. Although we are
required to apply FSP
FAS No. 123(R)-4
when we initially adopt SFAS No. 123R, we do not
expect it to impact our Consolidated Financial Statements.
|
|
(p) |
Foreign Currency Translation |
For each of our foreign operating subsidiaries the functional
currency is generally its local currency. Assets and liabilities
of foreign operations are translated into U.S. dollars
using month-end exchange rates, and revenue and expenses are
translated into U.S. dollars using average exchange rates.
The effects of foreign currency translation adjustments are
included as a component of accumulated other comprehensive
income in stockholders equity.
Foreign currency transaction gains and losses are a result of
the effect of exchange rate changes on transactions denominated
in currencies other than the functional currency. Foreign
currency transaction gains (losses) of $(1) million,
$25 million and $44 million for the fiscal years ended
March 31, 2006, 2005 and 2004, respectively, are included
in interest and other income, net, in our Consolidated
Statements of Operations.
|
|
(q) |
Impact of Recently Issued Accounting Standards |
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB
No. 43, Chapter 4. SFAS No. 151
amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be
recognized as current-period charges. SFAS No. 151
also requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 changes the
requirements for the accounting and reporting of a change in
accounting principle. Under previous guidance, changes in
accounting principle were recognized as a cumulative effect in
the net income of the period of the change. The new statement
requires retrospective application of changes in accounting
principle, limited to the direct effects of the change, to prior
periods financial statements, unless it is impracticable
to determine either the period-specific effects or the
cumulative effect of the change. Additionally, this Statement
requires that a change in depreciation, amortization or
depletion method for
77
long-lived, nonfinancial assets be accounted for as a change in
accounting estimate affected by a change in accounting principle
and that correction of errors in previously issued financial
statements should be termed a restatement.
SFAS No. 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after
December 15, 2005. We do not believe that, upon adoption,
SFAS No. 154 will have a material impact on our
Consolidated Financial Statements, however, after adoption, if a
change in accounting principle is made, SFAS No. 154
could have a material impact on our Consolidated Financial
Statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments An Amendment of FASB Statements
No. 133 and 140. SFAS No. 155
(1) permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, (2) clarifies that interest-only
strips and principal-only strips are not subject to the
requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(3) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (4) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (5) amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities A Replacement of FASB
Statement 125 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest
other than another derivative financial instrument.
SFAS No. 155 is effective for all financial
instruments acquired or issued for fiscal years beginning after
September 15, 2006. We do not believe the adoption of
SFAS No. 155 will have a material impact on our
Consolidated Financial Statements.
|
|
(2) |
FINANCIAL INSTRUMENTS |
|
|
(a) |
Fair Value of Financial Instruments |
Cash, cash equivalents, receivables, accounts payable and
accrued and other liabilities are valued at their carrying
amounts as they approximate their fair value due to the short
maturity of these financial instruments.
78
|
|
(b) |
Cash, Cash Equivalents and Short-term Investments |
Cash, cash equivalents and short-term investments consisted of
the following as of March 31, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses | |
|
|
|
|
|
|
Unrealized Losses | |
|
12 Months or | |
|
|
|
|
Less Than 12 Months | |
|
Greater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
|
|
Gross | |
|
|
|
Gross | |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
260 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
260 |
|
|
$ |
|
|
|
Money market funds
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
819 |
|
|
|
|
|
|
Commercial paper
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
U.S. agency securities
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
Asset-backed securities
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,242 |
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities
|
|
|
187 |
|
|
|
(1 |
) |
|
|
388 |
|
|
|
(3 |
) |
|
|
575 |
|
|
|
(4 |
) |
|
U.S. Treasury securities
|
|
|
202 |
|
|
|
(1 |
) |
|
|
10 |
|
|
|
|
|
|
|
212 |
|
|
|
(1 |
) |
|
Corporate bonds
|
|
|
106 |
|
|
|
(1 |
) |
|
|
72 |
|
|
|
(1 |
) |
|
|
178 |
|
|
|
(2 |
) |
|
Asset-backed and other debt securities
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
560 |
|
|
|
(3 |
) |
|
|
470 |
|
|
|
(4 |
) |
|
|
1,030 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
1,802 |
|
|
$ |
(3 |
) |
|
$ |
470 |
|
|
$ |
(4 |
) |
|
$ |
2,272 |
|
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments consisted of
the following as of March 31, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses | |
|
|
|
|
|
|
Unrealized Losses | |
|
12 Months or | |
|
|
|
|
Less Than 12 Months | |
|
Greater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
|
|
Gross | |
|
|
|
Gross | |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
342 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
342 |
|
|
$ |
|
|
|
Money market funds
|
|
|
928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,270 |
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities
|
|
|
692 |
|
|
|
(8 |
) |
|
|
476 |
|
|
|
(7 |
) |
|
|
1,168 |
|
|
|
(15 |
) |
|
U.S. Treasury securities
|
|
|
298 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
(4 |
) |
|
Corporate bonds
|
|
|
180 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
180 |
|
|
|
(3 |
) |
|
Asset-backed securities
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
1,212 |
|
|
|
(15 |
) |
|
|
476 |
|
|
|
(7 |
) |
|
|
1,688 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
2,482 |
|
|
$ |
(15 |
) |
|
$ |
476 |
|
|
$ |
(7 |
) |
|
$ |
2,958 |
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses in each of these investment
categories were primarily caused by a decrease in the fair value
of the investments as a result of an increase in interest rates.
The contractual terms of these securities do not permit the
issuer to call, prepay or otherwise settle the securities at
prices less than the
79
stated par value of the security. Accordingly, we do not
consider these investments to be other-than-temporarily impaired
as of March 31, 2006.
Gross unrealized gains in short-term investments were less than
$1 million as of March 31, 2006 and 2005.
Realized losses of $9 million were recognized from the sale
of short-term investments for the year ended March 31,
2006. No material gains or losses were recognized from the sale
of short-term investments for the years ended March 31,
2005 and 2004.
The following table summarizes the amortized cost and fair value
of our short-term investments, classified by stated maturity as
of March 31, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Amortized | |
|
Fair | |
|
|
Cost | |
|
Value | |
|
|
| |
|
| |
Due in 1 year or less
|
|
$ |
510 |
|
|
$ |
506 |
|
Due in 1-2 years
|
|
|
245 |
|
|
|
243 |
|
Due in 2-3 years
|
|
|
282 |
|
|
|
281 |
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$ |
1,037 |
|
|
$ |
1,030 |
|
|
|
|
|
|
|
|
|
|
(c) |
Marketable Equity Securities |
Marketable equity securities consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross |
|
|
|
|
|
|
Unrealized | |
|
Unrealized |
|
|
|
|
Cost | |
|
Gains | |
|
Losses |
|
Fair Value | |
|
|
| |
|
| |
|
|
|
| |
As of March 31, 2006
|
|
$ |
91 |
|
|
$ |
69 |
|
|
$ |
|
|
|
$ |
160 |
|
As of March 31, 2005
|
|
$ |
93 |
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
140 |
|
Our investments in marketable equity securities consist of
investments in common stock of publicly traded companies. On
February 3, 2005, we purchased approximately
19.9 percent of the outstanding ordinary shares
(18.4 percent of the voting rights) of Ubisoft
Entertainment for $91 million. As the fair value of our
marketable equity securities exceed the cost basis of those
investments as of March 31, 2006, we do not consider these
investments to be other-than-temporarily impaired. During fiscal
2005, no other-than-temporary impairment charges were
recognized. During fiscal 2004, we recognized a $1 million
other-than-temporary impairment charge to write-down certain
investments to their fair market value.
Realized gains from the sale of marketable equity securities
were $1 million and $2 million for the years ended
March 31, 2006 and 2005, respectively. No material gains or
losses were recognized from the sale of marketable equity
securities for the year ended March 31, 2004.
|
|
(d) |
Investments in Affiliates |
As of March 31, 2006 and 2005, the total investment in
affiliates reflected on our Consolidated Balance Sheets was
$11 million and $10 million, respectively.
Our investments in affiliates included a warrant to acquire
2,327,602 additional shares of Digital Illusions, C.E.
(DICE) common stock. See Note 4 of the Notes to
Consolidated Financial Statements. Prior to April 2005, the
warrant was accounted for as a derivative under
SFAS No. 133. The warrant was amended in April 2005,
such that only subscriptions of 500,000 or more could be
exercised. Due to the limited trading volume of DICEs
common stock, there is no market mechanism for settlement and
the warrant is no longer readily convertible to cash and is
therefore currently accounted for under the cost method as
prescribed by APB No. 18. As of March 31, 2006, the
cost basis of the warrant was $5 million.
For cost method investments we estimated that the fair value
exceeded the cost basis of those investments. Accordingly, we do
not consider these investments to be other-than-temporarily
impaired as of March 31, 2006. During fiscal 2006, 2005 and
2004, no other-than-temporary impairments in investments in
affiliates were recognized.
80
|
|
(3) |
DERIVATIVE FINANCIAL INSTRUMENTS |
We account for our derivative and hedging activities under
SFAS No. 133. The assets or liabilities associated
with our derivative instruments and hedging activities are
recorded at fair value in other current assets or other current
liabilities, respectively, in our Consolidated Balance Sheet. As
discussed below, the accounting for gains and losses resulting
from changes in fair value depends on the use of the derivative
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. Our
policy is to purchase foreign currency option contracts,
generally with maturities of 15 months or less, to reduce
the volatility of cash flows primarily related to forecasted
revenue and expenses denominated in certain foreign currencies.
In addition, we utilize foreign exchange forward contracts to
mitigate foreign currency exchange rate risk associated with
foreign-currency-denominated assets and liabilities, primarily
intercompany receivables and payables. The forward contracts
generally have a contractual term of approximately one month and
are transacted near month-end; therefore, the fair value of the
forward contracts generally is not significant at each
month-end. We do not use foreign currency option or foreign
exchange forward contracts for speculative or trading purposes.
|
|
|
Cash Flow Hedging Activities |
Our foreign currency option contracts are designated and qualify
as cash flow hedges under SFAS No. 133. The
effectiveness of the cash flow hedge contracts, including time
value, is assessed monthly using regression as well as other
timing and probability criteria required by
SFAS No. 133. To receive hedge accounting treatment,
all hedging relationships are formally documented at the
inception of the hedge and the hedges 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 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 fair value of these hedges is subsequently
reclassified into net revenue or operating expenses, as
appropriate, in the period when the forecasted transaction is
recorded in the Consolidated Statements of Operations. The
ineffective portion of gains or losses resulting from changes in
fair value, if any, is reported in each period in interest and
other income, net in our Consolidated Statements of Operations.
The effective portion of hedges recognized in accumulated other
comprehensive income at the end of each year will be
reclassified to earnings within 12 months.
The following table summarizes the activity in accumulated other
comprehensive income, net of related taxes, with regard to the
changes in fair value of derivative instruments, for fiscal 2006
and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
March 31, |
|
|
|
|
|
2006 | |
|
2005 |
|
|
| |
|
|
Beginning balance of unrealized gains (losses), net, on
derivative instruments
|
|
$ |
|
|
|
$ |
|
|
Change in unrealized gains (losses), net, on derivative
instruments
|
|
|
4 |
|
|
|
|
|
Reclassification adjustment for (gains) losses, realized on
derivative instruments to net income, net:
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
(4 |
) |
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unrealized gains (losses), net, on derivative
instruments
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Hedging ineffectiveness for the year ended March 31, 2006
was not significant. The amount of hedging ineffectiveness
recognized in interest and other income, net was a loss of
$1 million and $2 million for the years ended
March 31, 2005 and 2004, respectively.
81
|
|
|
Balance Sheet Hedging Activities |
Our foreign exchange forward contracts are not designated as
hedging instruments under SFAS No. 133. Accordingly,
any gains or losses resulting from changes in the fair value of
the forward contracts are reported in interest and other income,
net. The gains and losses on these forward contracts generally
offset the gains and losses associated with the underlying
foreign-currency-denominated assets and liabilities, which are
also reported in interest and other income, net, in our
Consolidated Statements of Operations.
|
|
(4) |
BUSINESS COMBINATIONS |
|
|
|
JAMDAT Mobile Inc., Criterion Software Group Ltd. and
Digital Illusions C.E. |
The following table summarizes the estimated fair values of
assets acquired and liabilities assumed in connection with our
acquisitions of JAMDAT Mobile Inc. (JAMDAT) and
Criterion Software Group Ltd. (Criterion) and the
preliminary allocation of the Digital Illusions C.E.
(DICE) assets acquired and liabilities assumed for
the fiscal years ended March 31, 2006 and 2005 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JAMDAT | |
|
Criterion | |
|
DICE | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Current assets
|
|
$ |
50 |
|
|
$ |
21 |
|
|
$ |
35 |
|
|
$ |
106 |
|
Property and equipment, net
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
5 |
|
Long-term deferred tax asset
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Acquired in-process technology
|
|
|
7 |
|
|
|
9 |
|
|
|
4 |
|
|
|
20 |
|
Stock-based employee compensation
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Goodwill
|
|
|
495 |
|
|
|
23 |
|
|
|
36 |
|
|
|
554 |
|
Finite-lived intangibles
|
|
|
212 |
|
|
|
21 |
|
|
|
2 |
|
|
|
235 |
|
Liabilities
|
|
|
(82 |
) |
|
|
(16 |
) |
|
|
(9 |
) |
|
|
(107 |
) |
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
$ |
684 |
|
|
$ |
68 |
|
|
$ |
62 |
|
|
$ |
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 15, 2006, we acquired all outstanding shares of
JAMDAT. Based in Los Angeles, California, JAMDAT is a global
publisher of wireless games and other wireless entertainment
applications. This acquisition positions us for further growth
in the mobile entertainment market. We paid $27 per share
in cash in exchange for each share of JAMDAT common stock and
assumed outstanding stock options and restricted stock units
under certain JAMDAT equity plans for an aggregate purchase
price of $684 million, including transaction costs.
Prior to our acquisition of JAMDAT, on April 20, 2005,
JAMDAT entered into a purchase agreement with the shareholders
of Blue Lava Wireless, LLC (Blue Lava). In
connection with JAMDATs acquisition of Blue Lava, JAMDAT
stock was placed in escrow to satisfy certain indemnification
provisions under the Blue Lava purchase agreement. Upon
completion of our acquisition of JAMDAT, we assumed
JAMDATs contingent liability and replaced the JAMDAT stock
in escrow with $27 million also placed in escrow. The
$27 million is included in our purchase price of JAMDAT as
a pre-acquisition contingency. We are required to pay
$9 million on each of the three anniversaries beginning on
April 20, 2006, less any claims we may have pursuant to the
indemnification provisions of the Blue Lava purchase agreement.
On April 20, 2006, we made the first payment of
approximately $9 million. The preliminary purchase price
allocation, including the allocation of goodwill, will be
updated in the first quarter of fiscal 2007 as additional
information becomes available related to certain accrued
liabilities.
The results of operations of JAMDAT and the estimated fair
market values of the acquired assets and assumed liabilities
have been included in our Consolidated Financial Statements
since the date of acquisition.
82
Except for acquired in-process technology, which is discussed
below, the acquired finite-lived intangible assets are being
amortized on a straight-line basis over estimated lives ranging
from two to twelve years. The intangible assets that make up
that amount as of the date of the acquisition include:
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carring | |
|
Weighted-Average | |
|
|
Amount | |
|
Useful Life | |
|
|
(in millions) | |
|
(Years) | |
|
|
| |
|
| |
Developed and Core Technology
|
|
$ |
122 |
|
|
|
10 |
|
Carrier Contracts and Related
|
|
|
85 |
|
|
|
5 |
|
Other Intangibles
|
|
|
5 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Total Finite-Lived Intangibles
|
|
$ |
212 |
|
|
|
8 |
|
|
|
|
|
|
|
|
We recorded $495 million of goodwill, substantially none of
which is tax deductible.
Acquired in-process technology includes the value of products in
the development stage that are not considered to have reached
technological feasibility or have alternative future use.
Accordingly, we expensed acquired in-process technology in our
Consolidated Statement of Operations upon consummation of the
acquisition.
On October 19, 2004, we acquired all outstanding shares of
Criterion for an aggregate purchase price of approximately
$68 million, including transaction costs and the assumption
of outstanding stock options under certain Criterion stock
option plans. Based in England, Criterion is a developer of
video games and a provider of middleware solutions for the game
development and publishing industry. The results of operations
of Criterion and the estimated fair market values of the
acquired assets and assumed liabilities have been included in
our Consolidated Financial Statements since the date of
acquisition. Except for acquired in-process technology, which is
discussed below, the acquired finite-lived intangible assets are
being amortized on a straight-line basis over estimated lives
ranging from two to four years.
Acquired in-process technology includes the value of products in
the development stage that are not considered to have reached
technological feasibility or have alternative future use.
Accordingly, the acquired in-process technology was expensed in
our Consolidated Statement of Operations upon consummation of
the acquisition. Stock-based employee compensation represents
the intrinsic value of certain unvested employee stock options
that were assumed as part of the transaction. The stock options
were considered modified for accounting purposes and were fully
amortized over the remaining vesting period in our Consolidated
Statement of Operations for the year ended March 31, 2005.
In 2003 we acquired: (1) approximately
1,911,403 shares of Class B common stock representing
a 19 percent equity interest in DICE and (2) a warrant
to acquire an additional 2,327,602 shares of to-be-issued
Class A common stock at an exercise price of SEK 43.23.
Based in Sweden, DICE develops games for personal computers and
video game consoles. DICEs products are primarily sold
through co-publishing agreements with us. The transactions
between DICE and us have been recorded on an arms length
basis. Prior to our tender offer in the fourth quarter of fiscal
2005, we accounted for our Class B common stock investment
in DICE under the equity method of accounting, as prescribed by
APB No. 18. Separately, the warrant valued at
$5 million as of March 31, 2006 was included in
investments in affiliates in our Consolidated Balance Sheets.
See Note 2 of the Notes to Consolidated Financial
Statements.
On January 27, 2005 we completed a tender offer by
acquiring 3,235,053 shares of Class A common stock at
a price of SEK 61 per share, representing 32 percent
of the outstanding Class A common stock of DICE. During the
tender offer period and through the end of fiscal 2005, we
acquired, through open market purchases at an average price of
SEK 60.33, an additional 1,190,658 shares of Class A
common stock, representing approximately 12 percent of the
outstanding Class A common stock of DICE. During
83
fiscal 2006, we acquired, through open market purchases at an
average price of SEK 63.07, an additional 1,071,152 shares
of Class A common stock, representing approximately
10 percent of the outstanding Class A common stock of
DICE. Accordingly, on a cumulative basis as of March 31,
2006 and 2005 we owned approximately 73 percent and
63 percent, respectively, of DICE on an undiluted basis
(excluding the warrant discussed above). As a result, we
included the assets, liabilities and results of operations of
DICE in our Consolidated Financial Statements since
January 27, 2005. The 27 percent and 37 percent
of DICE stock that we did not own was reflected as minority
interest on our Consolidated Balance Sheets as of March 31,
2006 and 2005, respectively, and our Consolidated Statements of
Operations for the years ended March 31, 2006 and 2005,
respectively.
In March 2006, we signed an agreement to fully merge DICE into
EA, which will allow DICE to become a fully integrated studio.
We will pay SEK 67.50 per share in cash to DICE
shareholders at the time of the merger. The merger is subject to
customary closing conditions, including regulatory approvals,
and is expected to close during the second quarter of fiscal
2007. The preliminary purchase price allocation, including the
allocation of goodwill has been and will continue to be updated
as additional information becomes available.
Except for
acquired-in-process
technology, the acquired finite-lived intangible assets are
being amortized on a straight-line basis over estimated lives
ranging from one to four years. The acquired in-process
technology was expensed in our Consolidated Statement of
Operations upon consummation of the acquisition, and in each
period, we increased our ownership percentage.
In May 1998, we completed the formation of two joint ventures in
North America and Japan with Square Co., Ltd.
(Square), a leading developer and publisher of
entertainment software in Japan. In North America, the companies
formed Square Electronic Arts, LLC (Square EA),
which had exclusive publishing rights in North America for
future interactive entertainment titles created by Square.
Additionally, we had the exclusive right to distribute in North
America products published by this joint venture. We contributed
$3 million and owned a 30 percent minority interest in
this joint venture while Square owned 70 percent. This
joint venture was accounted for under the equity method. The
joint venture agreements with Square expired as of
March 31, 2003. Our distribution of Square products in
North America terminated on June 30, 2003. On May 30,
2003, Square acquired our 30 percent ownership interest in
the joint venture for $8 million and the investment was
removed from our Consolidated Balance Sheets.
In Japan, the companies established Electronic Arts Square K.K.
(EA Square KK) in 1998, which localized and
published in Japan a selection of EAs properties
originally created in North America and Europe, as well as
developed and published original video games in Japan. We
contributed cash and had a 70 percent majority ownership
interest, while Square contributed cash and owned
30 percent. Accordingly, the assets, liabilities and
results of operations for EA Square KK were included in our
Consolidated Balance Sheets and Consolidated Statements of
Operations since June 1, 1998, the date of formation.
In May 2003, we acquired Squares 30 percent ownership
interest in EA Square KK for approximately $3 million in
cash. As a result of the acquisition, EA Square KK became our
wholly-owned subsidiary and was renamed Electronic Arts K.K. The
acquisition was accounted for as a step acquisition purchase and
the excess purchase price over fair value of the net tangible
assets acquired, $1 million, was allocated to goodwill.
84
|
|
(5) |
GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Goodwill beginning of year
|
|
$ |
153 |
|
|
$ |
92 |
|
|
Acquired
|
|
|
496 |
|
|
|
58 |
|
|
Effects of Foreign Currency Translation
|
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
Goodwill end of year
|
|
$ |
647 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
We completed our annual impairment test in the fourth quarter of
fiscal 2006, 2005 and 2004 with measurement dates of
January 1, 2006, January 1, 2005 and January 1,
2004, respectively, and found no indicators of impairment of our
recorded goodwill.
Finite-lived intangible assets, net of accumulated amortization,
as of March 31, 2006 and 2005, were $232 million and
$36 million, respectively, and include costs for obtaining
(1) developed technologies, (2) carrier contracts and
related, (3) trade names, and (4) subscribers and
other intangibles. Amortization of intangibles for fiscal 2006,
2005 and 2004 was $16 million (of which $9 million was
recognized in cost of goods sold), $6 million (of which
$3 million was recognized in cost of goods sold) and
$3 million, respectively. Finite-lived 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 twelve years. As of March 31, 2006 and 2005,
the weighted-average remaining useful life for finite-lived
intangible assets was approximately 7.2 years and
4.3 years, respectively.
Finite-lived intangibles consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
Gross | |
|
|
|
Other | |
|
|
Carrying | |
|
Accumulated | |
|
|
|
Intangibles, | |
|
|
Amount | |
|
Amortization | |
|
Impairment | |
|
Other | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Developed and Core Technology
|
|
$ |
169 |
|
|
$ |
(31 |
) |
|
$ |
(9 |
) |
|
$ |
|
|
|
$ |
129 |
|
Carrier Contracts and Related
|
|
|
85 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
83 |
|
Trade Name
|
|
|
37 |
|
|
|
(21 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
15 |
|
Subscribers and Other Intangibles
|
|
|
17 |
|
|
|
(9 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
308 |
|
|
$ |
(63 |
) |
|
$ |
(12 |
) |
|
$ |
(1 |
) |
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
Other | |
|
|
Carrying | |
|
Accumulated | |
|
|
|
Intangibles, | |
|
|
Amount | |
|
Amortization | |
|
Impairment | |
|
Other | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Developed and Core Technology
|
|
$ |
47 |
|
|
$ |
(22 |
) |
|
$ |
(9 |
) |
|
$ |
1 |
|
|
$ |
17 |
|
Trade Name
|
|
|
37 |
|
|
|
(18 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
18 |
|
Subscribers and Other Intangibles
|
|
|
11 |
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
95 |
|
|
$ |
(47 |
) |
|
$ |
(12 |
) |
|
$ |
|
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
As of March 31, 2006, future amortization of finite-lived
intangibles that will be recorded in cost of goods sold and
operating expenses is estimated as follows (in millions):
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
|
|
2007
|
|
$ |
47 |
|
|
2008
|
|
|
44 |
|
|
2009
|
|
|
32 |
|
|
2010
|
|
|
29 |
|
|
2011
|
|
|
26 |
|
|
Thereafter
|
|
|
54 |
|
|
|
|
|
|
|
Total
|
|
$ |
232 |
|
|
|
|
|
|
|
(6) |
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES |
Restructuring and asset impairment information as of
March 31, 2006 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 International | |
|
Fiscal 2006 | |
|
Fiscal 2004, 2003 and | |
|
|
|
|
Publishing Reorganization | |
|
Restructuring | |
|
2002 Restructurings | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
Facilities- | |
|
|
|
|
|
|
|
Facilities- | |
|
|
|
|
Workforce | |
|
related | |
|
Other | |
|
Workforce | |
|
Workforce | |
|
related | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |