Electronic Arts 2000 Annual Report Download - page 52

The Company is required to pay $50,000,000 to AOL as a carriage fee (including certain advertising fees of which $604,000
was expensed for the fiscal year ended March 31, 2000) under the AOL agreement. Of this amount, $25,000,000 was paid upon
signing the agreement and the remainder is due in four equal installments on the first four anniversaries of the initial payment.
Payment of the first annual installment of $6,250,000 will be accelerated 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 rev-
enue share for revenues generated by subscriptions and other certain commercial transactions on the EA.com site. Of this
amount $11,000,000 was paid upon signing of the agreement and the remainder is due in four equal annual installments on
the first anniversary of the initial payment. The fair value of the payments made under the AOL agreement was determined by
an independent valuation and the resulting amounts will be amortized (beginning with the site launch) over the remaining term
of the five year agreement. Advances of $35,395,000 are included in other long-term assets as of March 31, 2000.
The Company also committed to spend $15,000,000 in offline media advertisments promoting its games on AOL during the
term of the agreement.
SALE OF CLASS B COMMON STOCK AND WARRANT TO AOL In connection with the agreement with AOL, the Company sold
shares of Class B common stock to AOL (the “AOL Shares”) representing 10 percent of the initial equity value attributable to
EA.com valued at $18,700,000.
In addition to the AOL Shares, the Company sold AOL a warrant (the “AOL Warrant”) to purchase shares of Class B common
stock representing an additional 5 percent of the initial equity value attributable to EA.com for $1,300,000. The aggregate
exercise price of the AOL Warrant will be $40,000,000. The AOL Warrant expires at the latest at the fifth anniversary of its date
of issuance, and under certain conditions may expire at an earlier date.
AOLEXCHANGE RIGHTS If a Qualified Public Offering (as defined in the AOL Agreement) does not occur within 12 months fol-
lowing the initial sale of the AOL Shares to AOL, then AOL may exchange their Class B common stock shares for a number of
Class A common stock based on the ratio of per share price paid by AOL for the Class B stock relative to $83.7958.
(6) CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass merchandising industry. Collection of trade receiv-
ables may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall
credit risk. Although the Company generally does not require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential credit losses are maintained.
Short-term investments are placed with high credit-quality financial institutions or in short-duration high quality securities.
The Company limits the amount of credit exposure in any one institution or type of investment instrument.
(7) LITIGATION
The Company is subject to pending claims and litigation. Management, after review and consultation with counsel, considers
that any liability from the disposition of such lawsuits would not have a material adverse effect upon the consolidated financial
condition of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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