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ELECTRONIC ARTS
ANNUAL REPORT
1999

Table of contents

  • Page 1
    ELECTRONIC ARTS ANNUAL REPORT 1999

  • Page 2
    ...28 PC-CD, 1 Online » Established two joint ventures with Square Company Ltd. of Japan » Expanded direct distribution presence to over 75 countries » Signed long-term license agreements with World Championship Wrestling, Formula One Racing, and FIFA » Made three acquisitions: Westwood Studios...

  • Page 3
    ... from EA SPORTS™ such as FIFA 99, World Cup 98, NASCAR® 99, NBA Live 99, and Madden NFL™ 99, the #1 football game on the PlayStation in North America. Each of these illustrates EA's ability to create enduring franchise properties that can generate strong sales with each new updated release...

  • Page 4
    ...League in England, La Liga de Futbol Profesional in Spain, and Die Bundesliga in Germany. EA's soccer-related titles generated $200 million in sales this past fiscal year, and these licensing agreements solidify our position as the world's premier software publisher in the world's most popular sport...

  • Page 5
    ... on pay-for-play web sites. We are also using the Internet as a vehicle to market our products, build brand equity, and develop deeper relationships with our customers. We have a large number of popular sites for EA SPORTS enthusiasts offering game tips, updates and user bulletin boards. These...

  • Page 6
    ... in this important emerging market. Strong Global Distribution EA has been building a strong global presence since its inception and in fiscal 1999 42% of our sales were generated by international territories. We now have direct distribution in 75 countries, including new offices established last...

  • Page 7
    ... leadership on the next-generation PlayStation 2. EA also enjoys a growing array of high-quality licenses and top development talent that promise to keep our products a cut above the competition. We are pioneering an entirely new, emerging market for online content. Our global distribution system is...

  • Page 8
    ...ATA Net revenues Cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Charge for acquired in-process technology Merger...180 $ 908,852 480,766 428,086 128,308 57,838 146,199 1,500 10,792 - 344,637 83,449 24,811 $ 673,028 328,943 ...

  • Page 9
    ... 55,685 58,190 $1.13 $1.06 $1.13 $ 1.07 52,446 55,546 Cash, cash equivalents and short-term investments Marketable securities Working capital Long-term investments Total assets Total liabilities Minority interest Redeemable preferred stock Total stockholders' equity $ 312,822 4,884 333,256 18,400...

  • Page 10
    ...fiscal 1998. The worldwide increase in sales of PC-CD products was primarily attributable to an increase in sales in Europe and North America due to the related releases of key titles for this platform including Sim City 3000. Net revenues derived from N64 video game cartridge products were $152,349...

  • Page 11
    ... video game market has been replaced by 32-bit and 64-bit systems, we did not release any new titles in fiscal 1999. We do not expect to release any new titles in fiscal 2000 and revenues from the sales of 16-bit products are not expected to be significant. Licensing of EA Studio products generated...

  • Page 12
    ... of ABC Software and Westwood Studios. The increase in general and administrative expenses was primarily due to an increase in headcount and occupancy costs to support the increase in growth in North America and Europe operations, including the opening of additional international offices in Europe...

  • Page 13
    ... acquisition of two software development companies in the first quarter. For fiscal 1998, we incurred a charge of $1,500,000 for acquired in-process technology in connection with the acquisition of the remaining 35% minority ownership interest in Electronic Arts Victor, Inc. in December 1997. This...

  • Page 14
    ...software in Japan. Minority interest for fiscal 1999 represents Square's 30% interest in the net income of EA Square KK. For fiscal 1998, the minority interest represented the 35% interest in Electronic Arts Victor, Inc. ("EAV") owned by Victor Entertainment Industries, Inc. ("VEI"). We acquired the...

  • Page 15
    ... 1997. This increase was due to higher sales of AL products in North America, Europe and Asia Pacific. This increase was attributable to the product releases under a worldwide exclusive distribution agreement with DreamWorks Interactive, including The Lost World: Jurassic Park, and due to continued...

  • Page 16
    ... and occupancy costs due to the opening of additional international offices and additional depreciation related to the installation of new management information systems worldwide. This increase was partially offset by lower spending in Japan. The increase in marketing and sales as well as general...

  • Page 17
    ... Operating income increased due to higher net revenues and related gross profit partially offset by increased operating expenses including the charge for acquired in-process technology as well as merger costs related to the acquisition of Maxis. 1998 1997 % change Interest and other income, net As...

  • Page 18
    ... and gross margins offset by higher operating expenses. The impact of the gain on sale of Creative Wonders, LLC was offset by the charge for acquired in-process technology and merger costs. L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S As of March 31, 1999, our working capital was $333,256...

  • Page 19
    ... systems are in place and currently support daily operations in the United States and in Europe. Based on representations made by Oracle Corporation and upon our limited tests, we believe these systems to be Year 2000 compliant. We believe our software products are Year 2000 compliant; however...

  • Page 20
    ... difficult. • New video game platforms create additional technical and business model uncertainties. • The business models and technology for e-commerce and online gaming are unproven. • Our business, our products and our distribution are subject to increasing regulation in key territories...

  • Page 21
    ... of Maxis, Inc., a company acquired by Electronic Arts Inc. in a business combination accounted for as a pooling of interests as described in Note 11 to the consolidated financial statements, which statements reflect total revenues constituting 7% for the year ended March 31, 1997, of the related...

  • Page 22
    ...: Cash, cash equivalents and short-term investments Marketable securities Receivables, less allowances of $72,850 and $51,575, respectively Inventories Other current assets Total current assets Property and equipment, net Long-term investments Investment in affiliates Goodwill and other intangibles...

  • Page 23
    ... Marketing and sales General and administrative Research and development Charge for acquired in-process technology Merger costs...60,748 63,272 $ 908,852 480,766 428,086 128,308 57,838 146,199 1,500 10,792 - 344,637 83,449 24,811 108,260 35,726 72,534 28 $ ... notes to consolidated financial statements.

  • Page 24
    ...31, 1996 Net income Change in unrealized appreciation of investments, net Reclassification adjustment for gains realized in net income, net Translation adjustment Comprehensive income Proceeds from sales of shares through stock plans Tax benefit related to stock options Repayment of notes receivable...

  • Page 25
    Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Shares Amount Total $ 158,144 $ 206,651 51,327 $ 14,189 (8,176) (5,497) 152 - $ - $ 379,551 51,327 (8,176) (5,497) 152 37,806 ...

  • Page 26
    ... joint venture Equity in net loss of affiliates Gain on sale of affiliate Depreciation and amortization Loss on sale of fixed assets Loss on disposition of assets related to merger Gain on sale of marketable securities Provision for doubtful accounts Charge for acquired in-process technology Change...

  • Page 27
    ...minority interest investment in consolidated joint venture Net cash provided by financing activities Translation ...investments Supplemental cash flow information: Cash paid during the year for income taxes Non-cash investing activities: Change in unrealized appreciation of investments and marketable...

  • Page 28
    ...206,000, and $2,797,000, respectively. Product Sales: Revenue is generally recognized when the product is shipped. Subject to certain limitations, the Company permits customers to obtain exchanges within certain specified periods and provides price protection on certain unsold merchandise. Revenue...

  • Page 29
    ... as available-for-sale and are stated at fair value. Securities sold is based on the specific identification method. (d) Prepaid Royalties Prepaid royalties consist primarily of prepayments for manufacturing royalties, original equipment manufacturer (OEM) fees and license fees paid to celebrities...

  • Page 30
    ...stated at the lower of cost or market. Inventories at March 31, 1999 and 1998 consisted of: (In thousands) 1999 1998 Raw materials and work in process Finished goods $ 2,983 19,393 $ 22,376 $ 2,392 17,234 $ 19,626 (g) Advertising Costs The Company generally expenses advertising costs as incurred...

  • Page 31
    ...-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). (o) Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued...

  • Page 32
    ... 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and...

  • Page 33
    ...000 and gross unrealized losses of $7,000. (b) Marketable Securities Marketable securities are comprised of equity securities. The Company has accounted for investments in equity securities as "available-for-sale" and has stated applicable investments at fair value, with net unrealized appreciation...

  • Page 34
    ...foreign currency market exposures of underlying assets, liabilities and other obligations, primarily certain intercompany receivables that are denominated in foreign currencies. The Company does not use forward exchange contracts for speculative or trading purposes. The Company's accounting policies...

  • Page 35
    ... amended, for land and a building to be constructed in Redwood City, California. The initial term of the lease is for a period of three years from November 30, 1998. Monthly lease payments are based upon the London InterBank Offered Rate. The Company has the option to purchase the property for the...

  • Page 36
    ... stock in fiscal 1998 or fiscal 1997. At March 1999, the Company had 237,444 shares of its Common Stock reserved for future issuance under the Plan. Prior to the Maxis merger in July 1997, Maxis employees were eligible to participate in an employee stock purchase plan. In fiscal 1998 and 1997...

  • Page 37
    ...Option Plans, the Board of Directors may grant non-qualified and incentive stock options to employees and officers and non-qualified options to celebrities, employees of certain companies in which the Company has an equity investment, and directors, at not less than the fair market value on the date...

  • Page 38
    ... 19.36 25.18 29.72 32.96 35.46 40.03 43.71 47.18 $ 22.79 $ 0.720 - $54.250 The following summarizes the activity under the Company's stock option plans during the fiscal years ended March 31, 1999, 1998 and 1997: Options Outstanding Shares Weighted-Average Exercise...

  • Page 39
    ... 1998, the Company completed the acquisition of Westwood Studios, Inc. and certain assets of the Irvine, California-based Virgin Studio (collectively "Westwood") for approximately $122,688,000 in cash, including transaction expenses. The adjusted allocation of the excess purchase price over the net...

  • Page 40
    ... remaining related to these items. In connection with the Westwood acquisition, the purchase price has been allocated to the assets and liabilities assumed based upon the fair values on the date of acquisition, as follows (in thousands): Current assets Property and equipment In-process technology...

  • Page 41
    ... is accounted for under the equity method. In Japan, the companies established Electronic Arts Square KK ("EA Square KK"), which will localize and publish in Japan the Company's properties originally created in North America and Europe, as well as develop and publish original video games in Japan...

  • Page 42
    ... Business Combinations Additionally, during the quarter ended June 30, 1998, the Company acquired two software development companies. In connection with these acquisitions, the Company incurred a charge of $2,279,000 for acquired in-process technology. The charge was made after the Company concluded...

  • Page 43
    ...Maxis Federal and State loss carryforwards Foreign loss...the parent company, ...Internal Revenue Service (IRS). In 1998, the Company received a notice of deficiencies from the IRS. These deficiencies relate primarily to operations in Puerto Rico, which the Company is contesting in Tax Court. The Company...

  • Page 44
    ... investments, receivables, accounts payable and accrued liabilities-the carrying amount approximates fair value because of the short maturity of these instruments. Long-term investments, investments classified as held-to-maturity and marketable securities-fair value is based on quoted market prices...

  • Page 45
    ...Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for...

  • Page 46
    ... sales to any one customer in excess of 10% of total net revenues for fiscal years ended March 31, 1998 and 1997. Information about the Company's net revenues by product line for the fiscal years ended March 31, 1999, 1998 and 1997 is presented below (in thousands): 1999 1998 1997 PlayStation PC-CD...

  • Page 47
    ... 10,617 $ 0.18 $ 0.18 $ $ 36.13 26.25 $ 673,028 62,769 51,327 $ 0.89 $ 0.86 $ $ 39.13 24.75 The Company's common stock is traded in the over-the-counter market under the Nasdaq Stock Market symbol ERTS. The closing prices for the common stock in the table above represent the high and low...

  • Page 48
    ... Systems, the ORIGIN logo, Bullfrog Productions Ltd., the Bullfrog logo, Maxis, the Maxis logo, Westwood Studios, John Madden Football, Triple Play Baseball, Knockout Kings, SimCity 3000, Lands of Lore, Command & Conquer, Red Alert, Tiberian Sun, Ultima, The Second Age, Populous, Road Rash and Need...

  • Page 49
    ... Shores Parkway Redwood City, CA 94065 650-628-1500 NORTH AM E R I CA Walnut Creek, California Burnaby, British Columbia Chicago, Illinois Maitland, Florida Louisville, Kentucky Hunt Valley, Maryland Las Vegas, Nevada New York, New York Santa Isabel, Puerto Rico Austin, Texas Dallas, Texas Bellevue...