Electronic Arts 2001 Annual Report Download

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ELECTRONIC ARTS
2001 AR

Table of contents

  • Page 1
    ELECTRONIC ARTS 20 01 AR

  • Page 2

  • Page 3
    ...for Electronic Arts to drive revenue and profit growth as we move through the next technology cycle. In conjunction with steady increases in the PC market, plus the significant new opportunity in online gaming, we believe Electronic Arts is poised to achieve new levels of success and leadership in...

  • Page 4
    ... we had great success with products like Command & Conquerâ„¢ : Red Alertâ„¢ 2 and Black & Whiteâ„¢ , both of which have sold more than one million units worldwide to date. Strategic Initiative #3 - Be the Leading Provider of Interactive Entertainment on the Internet In the online space we launched...

  • Page 5
    ...our EA SPORTS™ brand - Madden NFL™ , FIFA Soccer, NHL , ™ Formula One, Knockout Kings™ and NASCAR® - NBA Live, Tiger Woods PGA TOUR® Golf, Triple Play Baseball, inspired loyal consumers and drew new audiences to the fun of video games. In FY02 we will release a full slate of potential new...

  • Page 6
    ... Developers Association and the Gama Network Game of the Year Excellence in Programming The Sims international awards since its release in 1989. Excellence in Level Design American McGee's Alice Best in Art Direction Best in Animation Best in Console Role Playing FOURTH ANNUAL Final Fantasy...

  • Page 7
    ... cunning may not be enough to catch it; you'll need magic to win. Whether you play games on a PC or on a console, technology is redefining, broadening and brightening the experience. But it's the games that make the magic - and the best game makers in the world work for EA. EL ECT RONI C ARTS 5

  • Page 8
    AT THE CORE OF EA'S GLOBAL LEADERSHIP IS OUR PEOPLE AND THE POWERFUL PA RTNERSHIP BETWEEN OUR STUDIO AND PUBLISHING DIVISIONS. THE DYNAMIC BETWEEN THE QUALITY OF OUR GAMES AND THE GLOBAL REACH OF OUR DISTRIBUTION CHANNEL IS THE ENVY OF OUR INDUSTRY AND THE ENTERTAINMENT INDUSTRY.

  • Page 9
    ... market appeal. Globally recognized games can provide a powerful bond - a 15-year old gamer in Japan and a 15-year old in France may share an experience that is foreign to nongaming classmates. EA Distribution (EAD) is a division of our company that offers smaller developers access to our worldwide...

  • Page 10
    ... WORK, LONG HOURS AND THE BEST CREAT I V E , TECHNICAL AND MANAGEMENT TALENT IN THE INDUSTRY, EA.COM WAS BUILT AND LAUNCHED IN JUST 11 MONTHS. OUR TEAM BUILT A BUSINESS FROM THE GROUND UP, WITH QUICKACCESS GAMES THAT APPEAL TO A BROAD DEMOGRAPHIC AND A QUALITY THAT STRETCHES THE TECHNOLOGICAL LIMITS...

  • Page 11
    ... who like to build and race cars; a space-based fantasy called Earth and Beyond and another persistent world based on the most popular PC game in EA history: The Sims Online. We also offer subscription content based on the most powerfully branded trademark in video gaming: EA SPORTS. At EA.com, we...

  • Page 12
    ... 64 27.7 % PC By Platform 16.8 % AL 1.5 % License/OEM/Other 3.2 % EA.com 19.4 % AL 1.6 % License/OEM/Other 1.5 % EA.com FISCAL 2001 FISCAL 2000 62.9 % North America 29.2 % Europe 59.6 % North America 34.3 % Europe By Geography 4.0 % Japan 3.9 % Asia Pacific 2.4 % Japan 3.7 % Asia Pacific

  • Page 13
    FINANCIAL CONTENTS 12 Selected Five-year Financial Data 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Independent Auditors' Report 34...' Equity 38 Consolidated Statements of Cash Flows 40 Notes to Consolidated Financial Statements 68 Corporate Information

  • Page 14
    ...DATA Net revenues Cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Amortization of intangibles Charge for acquired in-process technology Merger... venture ... per share amounts: Basic Diluted Number of shares used in computation:...

  • Page 15
    ... ownership interest in Electronic Arts Victor, Inc. as well as merger costs of $7.2 million, net of taxes, associated with the merger with Maxis, offset by a one-time gain on sale of Creative Wonders, LLC in the amount of $8.5 million, net of taxes. Please refer to Management's Discussion and...

  • Page 16
    ... revenues from licensing of EA Studio products and AL products through hardware companies (or OEM), selling subscriptions on our online gaming service, selling advertisements on our online web pages and selling our packaged goods through our online store. Information about our net revenues for North...

  • Page 17
    ... World Championship, FIFA 2001 and SSX. Information about our net revenues by product line for fiscal 2001 and 2000 is presented below (in thousands): Increase/ (Decrease) 2001 EA STUDIO: 2000 % Change PC PlayStation PlayStation 2 N64 Online Subscriptions License, OEM and Other Advertising...

  • Page 18
    ... sales of Ultima Online, the addition of new events and parties within the Ultima worlds and the release of Ultima Online Renaissance in April 2000. • We generated over $5,100,000 in subscription revenues for Kesmai and Worldplay online games for fiscal 2001. These products were not part of EA...

  • Page 19
    ... Electronic Arts' online and e-Commerce businesses. EA.com's business includes subscription revenues collected for Internet gameplay on our websites, website advertising, sales of packaged goods for Internet-only based games and sales of Electronic Arts games sold through the EA.com web store...

  • Page 20
    ...sales of Electronic Arts packaged goods products to EA.com; and represents elimination of royalties paid to Electronic Arts by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support and Customer Relationship Management to Research and Development...

  • Page 21
    ... hosting our websites, credit card fees and intercompany royalties for use of EA properties for subscription games. Marketing and Sales Marketing and sales expenses consist of personnel related costs, advertising and marketing and promotional expenses. In addition, marketing and sales includes the...

  • Page 22
    ... average sales price on front line and catalogue products. MARKETING AND SALES Marketing and sales expenses for fiscal 2001 increased as a percentage of revenue, pri- marily attributed to: • Higher EA.com marketing and sales expenses due to increased staff required to support the live game site...

  • Page 23
    ... management organization for the live game site. We released a total of 55 new packaged goods products in fiscal 2001 compared to 69 new products in fiscal 2000. In addition, the EA.com website launched in October 2000, and has over 80 live games. The increase in network development and support...

  • Page 24
    ... in expenses was primarily due to increases in development of next generation console products in the Core business and the investment in EA.com, including expenses to build network and online game products and to launch our game sites in October 2000. Excluding goodwill, non-cash compensation...

  • Page 25
    ... Product Net Revenues We released 31 PC titles in fiscal 2000 compared to 29 PC titles in fiscal 1999. The worldwide increase in sales of PC revenues was primarily attributable to an increase in sales in North America and Europe due to the success of Command & Conquer: Tiberian Sun released...

  • Page 26
    ... in paying customers was due to continued strong sales of Ultima Online, the addition of new events within the Ultima worlds and the release of Ultima Online: The Second Ageâ„¢ in October 1998. Ultima Online: The Second Age added features including new worlds, monsters and an in-game chat feature...

  • Page 27
    ...sales of Electronic Arts packaged goods products to EA.com; and represents elimination of royalties paid to Electronic Arts by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support and Customer Relationship Management to Research and Development...

  • Page 28
    .... 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 releases. • Increased cooperative advertising associated with higher revenues in North America and Europe as...

  • Page 29
    ... for new online products and the EA.com game site. In addition, we incurred higher infrastructure costs related to increased server capacity for Ultima Online, allowing EA.com to serve a higher number of active subscribers. NETWORK DEVELOPMENT AND SUPPORT CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY...

  • Page 30
    ... the EA.com business: • With the exception of the proceeds from the sale of stock to AOL in fiscal 2000 in the amount of $20,000,000, to date, EA.com has been funded solely by Electronic Arts. This funding has been accounted for as capital contributions from Electronic Arts. Excess cash generated...

  • Page 31
    ...revenue share payment of $5,000,000. EA.com also made a commitment to spend $15,000,000 in ofï¬,ine media advertisements promoting our online games, including those on the AOL service, during the term of the AOL agreement. Future liquidity needs of EA.com will be met by Electronic Arts as Electronic...

  • Page 32
    ... be successful or generate profits. • Acceptance of our online products by paying subscribers is unproven. • The business models and technology for e-Commerce and online gaming are unproven. • Product development schedules are frequently unreliable, particularly for products for new platforms...

  • Page 33
    ... of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed our obligations as these contracts can be settled on a net basis at our option. We control credit risk through credit approvals, limits and monitoring procedures. ELECTRONIC ARTS 31

  • Page 34
    ...instruments of high credit quality and relatively short average maturities. We also manage our interest ...Dollars in thousands) Average Interest Rate Cost Fair Value Cash equivalents(1) Fixed rate Variable rate Short-term investments(1)(2) Fixed rate Variable rate Long-term investments(1) Fixed...

  • Page 35
    ...supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management... generally accepted in the United States of America. KPMG LLP Mountain View, California May 4, 2001 ELECTRONIC ARTS 33

  • Page 36
    ...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 and outstanding 134,714,464 and 128,869...

  • Page 37
    ..., except per share data) Years Ended March 31, 2001 2000 1999 Net revenues Cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Amortization of intangibles Charge for acquired in-process technology Total operating expenses...

  • Page 38
    ...Translation adjustment Comprehensive income Proceeds from sales of shares through stock plans 6,285 Issuance of Class B common stock Issuance of Class B stock warrant Tax benefit related to stock options Balances at March 31, 2000...288 6,000 60 412,038 516,368 (6,361) - - 923,393 36 2001 AR

  • Page 39
    ... from sales of shares through stock plans 5,845 59 Issuance of Class B common stock Notes receivable in connection with issuance of Class B stock Tax benefit related to stock options ... (1,618) 25,750 $ - $1,034,347 See accompanying notes to consolidated financial statements. ELECTRONIC ARTS 37

  • Page 40
    ... and amortization Carriage fee amortization Loss on sale of fixed assets Gain on sale of marketable securities Provision for doubtful accounts Charge for acquired in-process technology Tax benefit from exercise of stock options Change in assets and liabilities, net of acquisitions: Receivables...

  • Page 41
    ... stock issued in connection with the Kesmai acquisition Change in unrealized appreciation of investments and marketable securities See accompanying notes to consolidated financial statements. $ 13,556 $ 15,525 $ 43,050 $ - $ 9,353 $ - $ 4,488 $ (5,008) $ 1,805 ELECTRONIC ARTS...

  • Page 42
    ... PRODUCT SALES 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 43
    ... 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 have been capitalized to date have been insignificant. ELECTRONIC ARTS...

  • Page 44
    ... thousands) 2001 2000 Raw materials and work in process Finished goods $ $ 976 14,710 15,686 $ $ 920 22,066 22,986 (h) Advertising Costs The Company generally expenses advertising costs as incurred, except for production costs associated with media campaigns which are deferred and charged to...

  • Page 45
    ... each of the Company's foreign subsidiaries the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using current exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates. The effects...

  • Page 46
    ... includes the remaining 15% interest in EA.com, which is directly attributable to outstanding Class B shares owned by third parties, which would be included in the Class A common stock EPS calculation in the event that the initial public offering for Class B common stock does not occur. Due to the...

  • Page 47
    ... division ("EA.com"). As a result of the approval of the Tracking Stock Proposal, Electronic Arts' existing common stock has been re-classified as Class A common stock ("Class A Stock") and that stock reï¬,ects the performance of Electronic Arts' other businesses ("EA Core"). ELECTRONIC ARTS 45

  • Page 48
    ...market funds Municipal securities Commercial paper Cash and cash equivalents Short-term investments: Available-for-sale Municipal securities Corporate bonds U.S. Agency bonds...Notes which enable the Company to take advantage of certain tax incentives from its Puerto Rico operation. These investments ...

  • Page 49
    ... and construction of three buildings and a parking structure 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...

  • Page 50
    ...November 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. The Company is required to pay $50...

  • Page 51
    ...condition of the Company. (8) STOCK SPLIT On August 14, 2000, the Company's Board of Directors authorized a two-for-one stock split of its Class A common stock which was distributed on September 8, 2000 in the form of a stock dividend for shareholders of record at the close of business on August 25...

  • Page 52
    ... restricted shares issued under the Class B equity plan. In the fiscal year 2001, the Board of Directors approved the Key Partner Class B Equity Incentive Program which allows for the issuance of warrants to key business partners to purchase up to 750,000 shares of Class B common stock. The options...

  • Page 53
    ... 23,026) (23,857) (3.83) (3.97) (3.83) (3.97) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A The fair value of each Class B option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The assumptions used were the same as those for Class A. ELECTRONIC ARTS 51

  • Page 54
    ... 9.57 The following summarizes the activity under the Company's Class A stock option plans during the fiscal years ended March 31, 2001, 2000 and 1999: Options Outstanding Weighted-Average Shares Exercise Price Balance at March 31, 1998 Granted Canceled Exercised Balance at March 31, 1999 (10,188...

  • Page 55
    The following summarizes the activity under the Company's Class B stock option plan during the fiscal year ended March 31, 2001: Options Outstanding Weighted-Average Shares Exercise Price Balance at March 31, 2000 Granted Canceled Exercised Balance at March 31, 2001 Options available for grant at ...

  • Page 56
    ...investment of $42,000,000 and the redemption of Pogo preferred stock of $1,333,000. Pogo operates an ad-supported games service that reaches a broad consumer market. Pogo's internetbased family games focus on easy-to-play card, board and puzzle games. The acquisition has been accounted for under the...

  • Page 57
    ...the Company and Pogo on the basis that the acquisition had taken place on April 1, 1999 (in thousands, except per share data): As Reported Pro Forma FISCAL YEAR ENDED MARCH 31, 2001 Net revenues Class A common stock: Net income (loss): Basic Diluted Net income (loss) per share: Basic Diluted Number...

  • Page 58
    ...qualified public offering of Class B common stock does not occur within twenty-four months of News Corp's purchase of such shares, then News Corp has the right to (1) exchange Class B common stock for approximately 206,000 shares of Class A common stock, and (2) receive cash from Electronic Arts in...

  • Page 59
    ... of the combined companies under the ownership and management of the Company. (c) 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") for approximately...

  • Page 60
    .... ("Square"), a leading developer and publisher of entertainment 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...

  • Page 61
    ...: Undistributed earnings of DISC Prepaid royalty expenses Fixed assets Unrealized gains on marketable securities Total Net deferred tax asset $ 110,331 110,331 (1,189) (44,678) (4,456) - (50,323) 60,008 $ 70,131 70,131 (1,487) (38,562) (3,249) (68) (43,366) 26,765 $ $ ELECTRONIC ARTS 59

  • Page 62
    ... tax assets. The Company's U.S. income tax returns for the years 1992 through 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...

  • Page 63
    ... for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions...

  • Page 64
    ....com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising. Please see the discussion regarding segment reporting in the MD&A. Information about Electronic Arts...

  • Page 65
    ... goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Network development and support Customer relationship management Amortization of intangibles Charge for acquired in-process technology Total operating expenses Operating income (loss...

  • Page 66
    ...sales of Electronic Arts packaged goods products to EA.com; and represents elimination of royalties paid to Electronic Arts by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support and Customer Relationship Management to Research and Development...

  • Page 67
    ... Electronic Arts' operations in the North America and foreign areas for the fiscal years ended March 31, 2001, 2000 and 1999 is presented below: Asia Pacific (Excluding Japan) (In thousands) North America Europe Japan Eliminations Total FISCAL 2001 Net revenues from unaffiliated customers...

  • Page 68
    Information about Electronic Arts' net revenues by product line for the fiscal years ended March 31, 2001, 2000 and 1999 is presented below (in thousands): 2001 2000 1999 PC PlayStation PlayStation 2 Affiliated label N64 Online Subscriptions License, OEM and Other Advertising $ 408,454 309,988 ...

  • Page 69
    ... million, net of taxes. 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 closing prices as reported on the Nasdaq National Market. ELECTRONIC ARTS 67

  • Page 70
    ...Arts Inc. 209 Redwood Shores Parkway Redwood City, CA 94065 © 2001 Electronic Arts Inc. Electronic Arts, the stylized "EA" logo, EA SPORTS, the EA SPORTS logo, EA GAMES, the EA GAMES logo, Westwood Studios, John Madden Football, The Sims, The Sims Online, SimCity 3000, Command & Conquer, Red Alert...

  • Page 71

  • Page 72
    ELECTRONIC ARTS 209 REDWOOD SHORES PARKWAY, REDWOOD CITY, CA 94065-1175 www.ea.com