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OPERATING INCOME Operating income increased due to:
•Higher net revenues and related gross profit partially offset by increased operating expenses including the charges for
acquired in-process technology of $44,115,000 in the current fiscal year.
•Partially offset by merger costs of $10,792,000 and a charge for acquired in-process technology of $1,500,000 related to the
acquisitions in the prior fiscal year.
Excluding one-time items in both years, as noted above, operating income would have been $149,393,000 in fiscal 1999 and
$95,741,000 in fiscal 1998.
INTEREST AND OTHER INCOME, NET The decrease in interest and other income, net, was primarily attributable to the sale of
our 50% ownership interest in Creative Wonders, LLC in December 1997. The sale resulted in a gain in the prior year of
$12,625,000.
INCOME TAXES Electronic Arts’ effective tax rate was 38.3% for fiscal 1999 and 33.0% for fiscal 1998. Our effective tax rate for
fiscal 1999 was negatively affected as there was no tax benefit recorded for a portion of the charges related to the acquired in-
process technology. Excluding the effect of these charges, the effective tax rate for fiscal 1999 would have been 32.0% as com-
pared to a 33.0% tax rate for fiscal 1998. The lower rate of 32.0% results primarily from a higher portion of international
income subject to a lower foreign tax rate as compared to the prior year and an increase in the federal research and experi-
mental credit.
MINORITY INTEREST IN CONSOLIDATE JOINT VENTURE.
•In the first quarter of fiscal 1999, we formed EA Square KK which is seventy percent owned by us and thirty percent owned
by Square Co. Ltd. (“Square”), a leading developer and publisher of entertainment 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 remaining 35% minority ownership interest in EAV held by VEI in
December 1997.
NET INCOME In absolute dollars, reported net income was flat due to the one-time charges related to acquisitions offsetting
significantly higher operating income. The increase in net income, excluding one-time charges, was due to higher revenues and
gross profits, partially offset by higher spending on development of online projects, higher support costs for
Ultima Online
and
Ultima Online: The Second Age,
and higher network infrastructure costs associated with
Ultima Online
worlds.
•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 in-process developments of $8,236,000, net of taxes.
•For fiscal 1999, net income included one-time charges for acquired in-process technology of $37,506,000, net of taxes.
Excluding one-time items in both years, as noted above, net income increased to $110,378,000 in fiscal 1999 from
$72,339,000, or 53% over fiscal 1998.
EA 2000 AR
29
MD&A