Electronic Arts 2000 Annual Report Download - page 29

COST OF GOODS SOLD Cost of goods sold as a percentage of revenues decreased in fiscal 1999 primarily due to lower artist
royalties, including savings related to an acquisition of a software development company during fiscal 1999, partially offset by
higher sales of lower margin N64 products.
MARKETING AND SALES Marketing and sales expenses increased 27% primarily attributed to:
•Increased print, Internet and television advertising to support new releases.
•Increased cooperative advertising associated with higher revenues in North America and Europe as compared to the prior year.
•Additional headcount related to the continued expansion of our worldwide distribution business.
•The acquisitions of ABC Software and Westwood Studios.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 32% 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 addi-
tional international offices in Europe and the acquisition of ABC Software.
RESEARCH AND DEVELOPMENT The increase in absolute dollars for research and development expenses (including Network
Development and Support) was due to:
•Additional headcount-related expenses attributable to the acquisition of Westwood Studios, Inc. and certain assets of the Irvine,
California-based Virgin Studio (collectively “Westwood”) in September 1998 and Tiburon Entertainment, Inc. in April 1998.
•Higher development costs per title, as products are including more content and are more complex and time consuming to develop.
•An increase in development costs for
Ultima Online.
•Ahigher number of projects in development in fiscal 1999 as compared to fiscal 1998 for EA.com
We released a total of 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-PROCESS TECHNOLOGY In connection with the purchase of Westwood in September 1998, we allo-
cated and expensed $41,836,000 of the $122,688,000 purchase price to in-process research and development projects. This
allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete research and develop-
ment projects. At the date of acquisition, this amount was expensed as a non-recurring charge as the in-process technology had
not yet reached technological feasibility and had no alternative future uses. Westwood had three major PC projects in progress at
the time of the acquisition including two in the best-selling franchise Command and Conquer and one in the critically acclaimed
Lands of Lore™ series. As of the acquisition date, costs to complete the Westwood projects acquired were expected to be approx-
imately $9.1 million in fiscal 1999, $10.6 million in fiscal 2000 and $1.0 million in fiscal 2001. We believe there have been no
significant changes to these estimates. We currently expect to complete the development of these projects at various dates
through fiscal 2001 and to publish the products upon completion.
EA 2000 AR
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MD&A