Electronic Arts 2000 Annual Report Download

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EA 2000
AR

Table of contents

  • Page 1
    EA 2 0 0 0 A R

  • Page 2
    ...* (In millions) FISCAL 2000 OPERATING HIGHLIGHTS • 16 percent increase in EA core net revenues • 37 percent increase in EA core net • 69 titles released: • Signed agreement to be exclusive provider of games income* on AOL properties • Acquired: - - - - 30 PC 30 PlayStation 8 N64 1 Mac...

  • Page 3
    ... revenues and profits in a challenging (1) market environment. Including the results of our new online division, EA.com, consolidated net revenues increased 16 percent to $1,420 million. Consolidated net income, on an as-reported basis, including goodwill and one-time acquisition related charges...

  • Page 4
    ... the company, and to clearly establish EA as the market leader of the future. INVESTING FOR ONLINE LEADERSHIP ple successes on the PC platform in fiscal year 2000. SimCity 3000â„¢ and Command & Conquerâ„¢: Tiberian Sunâ„¢ each achieved No. 1 status on the PC best-seller list. For calendar year...

  • Page 5
    ... in our Studios and our new EA.com division, along with the unparalleled distribution and reach provided through our partnership with AOL, uniquely positions us for success in this environment. We plan to launch the EA.comSM site in summer 2000, with the full service operational in calendar 2001...

  • Page 6
    ... has revolutionized the art of interactive story telling and challenged the imagination of every artist, writer, engineer, designer and producer in our company. Our goal is to create software that adds a brand new dimension to gaming-faces that convey real emotion, sports characters that match...

  • Page 7
    ... than other games created by EA; in fact, 25 percent of registered users are women. By expanding our audience to include more women and a wider range of age groups, The Sims has again proven that EA designs for mass-market success. To develop F1 2000, EA secured the rights to one of the world's most...

  • Page 8
    ... advantage in the development of our online site, EA.com. We are re-engineering some of our most popular franchises to build a strong online offering of accessible games for all levels of consumers. The Studio is developing original fiction specifically designed for online play. Ultimaâ„¢ Online...

  • Page 9
    ... for the PC and console (PlayStation and Nintendo® 64) markets, EA drives our products to market like no other company. EA localizes, manufactures, packages, distributes, markets and sells titles created by our Studios, as well as by some third-party game developer partners, in over 75 countries on...

  • Page 10
    ... new market. Japan: Japan is one of the few markets where EA's market share has been historically weak. This is changing. We have restructured operations in Japan, by hiring new management, building a direct PC distribution business and forming a new partnership with a leading Japanese video game...

  • Page 11
    ...it on affiliated AOL sites including Netcenter™ , AOL.com and CompuServe . The online audience ® brings new consumers into the EA family and, by using a logo so clearly linked to and identified with our EA SPORTS and EA GAMES logos, we stand to build the overall EA brand to great new heights. At...

  • Page 12
    ... offer a diverse array of interactive entertainment online that suits almost every taste, from those customers seeking simple, easy-to-play card games, to those wanting skill-oriented sports and adventure experiences, to those that revel in deeply immersive, persistent-world fantasies. EA.COM 10

  • Page 13
    ... ladders and great chat forums. • Build and maintain a highly reliable network and infrastructure with high levels of customer service. THE BUSINESS MODEL EA.com will generate revenues from Origin™ studio pio- While online gaming is currently both subscriptions and advertising. EA's in its...

  • Page 14
    FINANCIAL CONTENTS 13 S E L E C T E D F I V E - Y E A R F I N A N C I A L D ATA 14 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S 35 I N D E P E N D E N T AU D I T O R S ' R E P O R T 36 C O N...

  • Page 15
    ...IN CONNECTION WITH THE ACQUISITION OF CINEMATRONICS LLC MADE BY MAXIS PRIOR TO THE MAXIS MERGER WITH ELECTRONIC ARTS. PLEASE REFER TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR DISCUSSIONS OF EA CORE AND EA.COM PROFORMA FINANCIAL STATEMENTS. EA 2000 AR

  • Page 16
    ... our Annual Report on Form 10-K for the year ended March 31, 2000. RESULTS OF OPERATIONS Comparison of Fiscal 2000 to 1999: Revenues We derive revenues primarily from shipments of entertainment software, which includes EA Studio products for dedicated entertainment systems (that we call video game...

  • Page 17
    ... to strong sales of FIFA: Road to World Cup and World Cup 98 in the prior year. Information about our net revenues by product line for fiscal 2000 and 1999 is presented below (in thousands): Increase/ (Decrease) 2000 1999 % change EA Studio: PlayStation PC N64 Online Subscriptions License, OEM...

  • Page 18
    .... ONLINE SUBSCRIPTION REVENUES Online subscription revenues are revenues collected for Internet game play on our web- sites. The increase in online revenues for fiscal 2000 as compared to fiscal 1999 was attributable to the following: • The average number of paying customers for Ultima Online...

  • Page 19
    ... and distribution of entertainment software which can be played or sold online. EA.com, a division of Electronic Arts Inc., represents Electronic Arts' online and e-Commerce businesses. EA.com's business includes subscription revenues collected for Internet game play on our websites, sales of...

  • Page 20
    .... EA.com) EA.com Adjustments and Eliminations Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and...

  • Page 21
    ... of Net Revenues 2000 1999 Cost of goods sold Marketing and sales General and administrative Research and development (includes network development and support) Charge for acquired in-process technology Amortization of intangibles Interest and other income, net Income taxes - effective tax rate Net...

  • Page 22
    ... City 3000 and The Sims. • Partially offset by a decrease, as a percentage of revenues, of PlayStation products. MARKETING AND SALES Marketing and sales expenses increased in absolute dollars by 15% primarily attributed to: • Increased print, Internet and television advertising to support new...

  • Page 23
    ... of the purchase price to acquired in-process technology. • Additionally, in connection with the acquisition of two software development companies by EA Core, in the first quarter of fiscal 1999, we incurred a total charge of $2,279,000 for acquired in-process technology. These charges were made...

  • Page 24
    ... revenues and gross profits as compared to the same period last year. The increase was also due to significant one-time charges for acquired in-process technology in the prior year. This was partially offset by higher costs incurred by EA.com for the development of online projects, the network...

  • Page 25
    ...Ultima Online: The Second Age added features such as new worlds, monsters and in-game chat features. • EA.com established servers providing local dial-in capability for Ultima Online in Japan in the third quarter of fiscal 1999. We 23 only had servers in North America in fiscal 1998. EA 2000 AR

  • Page 26
    .... EA.com) EA.com Adjustments and Eliminations Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and...

  • Page 27
    .... EA.com) EA.com Adjustments and Eliminations Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and...

  • Page 28
    ... of Net Revenues 1999 1998 Cost of goods sold Marketing and sales MD&A 51.4 % 13.4 6.2 16.3 3.6 0.5 - 1.1 38.3 6.0 % 52.9 % 14.1 6.4 16.0 0.2 - 1.2 2.7 33.0 8.0 % General and administrative Research and development (includes network development and support) 26 Charge for acquired in-process...

  • Page 29
    ... 59 new products in fiscal 1999 compared to 71 in fiscal 1998. NETWORK DEVELOPMENT AND SUPPORT The increase in network development and support expenses for EA.com was due to higher design, engineering and software maintenance costs associated with the Ultima Online worlds. CHARGE FOR ACQUIRED IN...

  • Page 30
    ... include cost of goods sold and sales, marketing and general and administrative expenses and taxes forecasted based on historical operating characteristics. In addition, net cash flow estimates were adjusted to allow for fair return on working capital and fixed assets, charges for franchise and...

  • Page 31
    ... Online: The Second Age, and higher network infrastructure costs associated with Ultima Online worlds. MD&A • For fiscal 1998, net income included a one-time gain on sale of Creative Wonders, LLC in the amount of $8,459,000, net of taxes, offset by Maxis merger costs and a charge for acquired...

  • Page 32
    ... customer account management and building in e-Commerce functionality and interfaces. As of March 31, 2000, EA.com has capitalized approximately $26,318,000 of these costs. EA.com expects to incur additional costs in the next year in connection with their effort to build and support the game sites...

  • Page 33
    ... by Electronic Arts as Electronic Arts intends to continue to fund the cash requirements of EA.com for the foreseeable future. YEAR 2000 Year 2000 Status READINESS DISCLOSURE As of the date of this filing, we have not incurred any significant business disruptions as a result of Year 2000 issues...

  • Page 34
    ... market for videogame software until new platforms achieve a wide market acceptance. • New video game platforms create additional technical and business model uncertainties. • Our significant investment in EA.com may not be successful or generate profits. • Product development schedules are...

  • Page 35
    ... value. WeightedAverage Contract Rate Contract Amount (In thousands) Fair Value (In thousands) Foreign currency to be sold under contract: British Pound Euro Japanese Yen Canadian Dollar Australian Dollar South African Rand Swedish Krona Norwegian Krone Danish Krone Brazilian Real Swiss Franc New...

  • Page 36
    ... of our investment portfolio at March 31, 2000: Average Interest Rate (Dollars in thousands) Cost Fair Value Cash equivalents(1) Fixed rate Variable rate Short-term investments(1)(2) Fixed rate Variable rate Long-term investments(1) Fixed rate Variable rate (1) SEE DEFINITION IN NOTE 1 OF THE...

  • Page 37
    ...of Electronic Arts Inc. and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2000, in conformity with generally accepted accounting principles. Mountain View, California April 28, 2000...

  • Page 38
    ...: Accounts payable Accrued and other liabilities Total current liabilities Minority interest in consolidated joint venture Stockholders' equity: Preferred stock, $0.01 par value. Authorized 10,000,000 shares Common stock Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued 64...

  • Page 39
    ... C O M E ELECTRONIC ARTS AND SUBSIDIARIES Years Ended March 31, (In thousands, except per share data) 2000 1999 1998 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...

  • Page 40
    ... U I T Y ELECTRONIC ARTS AND SUBSIDIARIES Years Ended March 31, 2000, 1999 and 1998 (In thousands) Class A Common Stock Shares Amount Class B Common Stock Shares ...38 Translation adjustment Comprehensive income Proceeds from sales of shares through stock plans 1,897 Tax benefit related to stock ...

  • Page 41
    ... income Proceeds from sales of shares through stock plans 3,143 Issuance of Class B common stock Issuance of Class B stock warrant Tax benefit related to stock options Balances at March 31, 2000 64,435 31 6,000 60 83,127 27,993 1,300 (2,495) 123 4,926 85,589 28,053 1,300 EA 2000 AR

  • Page 42
    ... 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 in assets and liabilities, net of acquisitions...

  • Page 43
    ...2000 1999 1998 FINANCING ACTIVITIES: Proceeds from sales of Class A shares through employee stock plans and other plans Proceeds from sales of Class...Class B common stock issued in connection with the Kesmai acquisition... M E N TS O F C A S H F LOW S $ (5,008) $ 1,805 $ (1,411) 41 EA 2000 AR

  • Page 44
    ... Revenues: Online subscription revenues are derived principally from subscription revenues collected from customers for online play, who are only contractually obligated for pay on a month-to-month basis. Prepaid monthly subscription revenues, including revenues collected from credit card sales...

  • Page 45
    ...uses. Under the Company's 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...

  • Page 46
    ...and work in process Finished goods $ $ 920 22,066 22,986 $ $ 2,983 19,393 22,376 (G) ADVERTISING COSTS The Company generally expenses advertising costs as incurred, except for production costs associated with media campaigns which are deferred and charged to expense at the first run of the ad...

  • Page 47
    ... March 15, 2000 may report a change in accounting principle no later than the second quarter of fiscal years beginning after December 15, 1999. The Company believes the adoption of SAB 101 will not have a material impact on the Company's financial position and results of operations. 45 EA 2000 AR

  • Page 48
    ... 98-1 is effective for financial statements issued for fiscal years beginning after December 15, 1998. As of March 31, 2000, the Company has capitalized $26,318,000 of these costs associated with the effort to build and support the EA.com game sites at launch. ( P ) U S E O F E S T I M AT E S The...

  • Page 49
    ... issuance of a new series of common stock to be designated as Class B common stock ("Tracking Stock"), intended to reflect the performance of Electronic Arts' online and e-Commerce division ("EA.com"). As a result of the approval of the Tracking Stock Proposal, Electronic Arts' existing common stock...

  • Page 50
    ... U.S. Treasury Notes which enable the Company to take advantage of certain tax incentives from its Puerto Rico operation. These investments are treated as held-to-maturity for financial reporting purposes. The fair value of held-to-maturity securities at March 31, 2000 was $18,162,000 which included...

  • Page 51
    ... 1999, Electronic Arts Inc., EA.com and AOL entered into a five year agreement which establishes the basis for EA.com's production of a games site on the world wide web that will be available to AOL subscribers and to users of other branded AOL properties. Under this agreement, EA.com is required...

  • Page 52
    ... to June 1, 2000 since certain launch requirements will not be met by that date. The Company is also required to pay to AOL $31,000,000 as an advance of a minimum guaranteed revenue share for revenues generated by subscriptions and other certain commercial transactions on the EA.com site. Of this...

  • Page 53
    ... the fair market value of the Common Stock on the date of commencement of the offering or on the last day of the six-month purchase period. The program commenced in September 1991. In fiscal 2000, 245,523 shares were purchased by the Company and distributed to employees at prices ranging from $32.41...

  • Page 54
    Together with the Tracking Stock Proposal, the stockholders approved the Electronic Arts Inc. 2000 Class B Equity Incentive Plan and the Electronic Arts Inc. 2000 Class A Equity Incentive Plan. The Class B equity plan allows the award of stock options or restricted stock for up to an aggregate of 6,...

  • Page 55
    ... 87.81 91.94 $ 29.86 The following summarizes the activity under the Company's stock option plans during the fiscal years ended March 31, 2000, 1999 and 1998: Options Outstanding Weighted-Average Exercise Price Shares Balance at March 31, 1997 Granted Canceled Exercised Balance at March 31, 1998...

  • Page 56
    ...from News America Corporation ("News Corp") in exchange for $22,500,000 in cash and approximately 103,000 shares of the Company's existing common stock valued at $8,650,000. Kesmaiâ„¢ specializes in the design and development of multiplayer games delivered 54 directly to consumers over the Internet...

  • Page 57
    ... 103,000 shares of Class A common stock, and (2) receive cash from Electronic Arts in the amount of $9,650,000. The acquisition has been accounted for under the purchase method. The results of operations of Kesmai and the estimated fair market values of the acquired assets and liabilities have been...

  • Page 58
    ... or of future operations of the combined companies under the ownership and management of the Company. (B) WESTWOOD STUDIOS In September 1998, the Company completed the acquisition of Westwood Studios, Inc. and certain assets of the Irvine, California - based Virgin Studio (collectively "Westwood...

  • Page 59
    ...developer and publisher of enter- tainment software in Japan, completed the formation of two new joint ventures in North America and Japan. In North America, the companies formed Square Electronic Arts, LLC ("Square EA"), which has exclusive publishing rights in North America for future interactive...

  • Page 60
    ... for usage of the software in different products and resale of the software. 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...

  • Page 61
    ...1995 have been examined by the 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 believes that any additional liabilities, if...

  • Page 62
    ...$ 24,811 (16) COMPREHENSIVE INCOME In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in financial statements. SFAS 130 requires...

  • Page 63
    ...Core") business segment: creation, marketing and distribution of entertainment software. • EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online. Please see the discussion regarding segment reporting in the MD&A. 61 EA 2000 AR

  • Page 64
    ... March 31, 2000 EA.com Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research...

  • Page 65
    .... EA.com) EA.com Adjustments and Eliminations Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and...

  • Page 66
    .... EA.com) EA.com Adjustments and Eliminations Electronic Ar ts Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and...

  • Page 67
    ... Electronic Arts' operations in the North America and foreign areas for the fiscal years ended March 31, 2000, 1999 and 1998 is presented below: Nor th America (in thousands) Europe Asia Pacific (excluding Japan) Japan Eliminations Total FISCAL 2000: Net revenues from unaffiliated customers...

  • Page 68
    ... had no sales to any one customer in excess of 10% of total net revenues for fiscal years ended March 31, 1998. Information about Electronic Arts' net revenues by product line for the fiscal years ended March 31, 2000, 1999 and 1998 is presented below (in thousands): 2000 1999 1998 PlayStation PC...

  • Page 69
    ... PER SHARE INCLUDE ONE-TIME ACQUISITION RELATED CHARGES OF $1.0 MILLION, NET OF TAXES, INCURRED IN CONNECTION WITH THE REMAINING MINORITY OWNERSHIP INTEREST IN ELECTRONIC ARTS VICTOR, INC. NET INCOME AND NET INCOME PER SHARE INCLUDE A ONE-TIME GAIN ON SALE OF CREATIVE WONDERS. LLC IN THE AMOUNT OF...

  • Page 70
    ...Lawrence F. Probst III Chairman and Chief Executive Officer Electronic Arts C O R P O R AT E O F F I C E R S 209 Redwood Shores Parkway Redwood City, CA 94065 (650) 628-1500 NORTH AMERICA KPMG LLP Mountain View, California LEGAL COUNSEL Fenwick & West Palo Alto, California TRANSFER AGENT Burnaby...

  • Page 71
    ... rights reserved. EA.com and the EA.com logo are service marks of EA.com Inc. NFL, FIFA, NBA, NHL, NASCAR, Tiger Woods, PGA TOUR and Major League Soccer are trademarks of their respective owners and used with permission. James Bond TM Danjaq, L.L.C. Black & White is a trademark of Lionhead Studios...

  • Page 72
    ELECTRONIC ARTS 209 Redwood Shores Parkway, Redwood City, CA 94065-1175 www.ea.com