Electronic Arts 2001 Annual Report Download - page 22

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20
2001 AR
Research and Development
Research and development expenses consist of personnel related costs, consulting
and equipment depreciation. In addition, research and development includes customer relationship management
expenses associated with the supervision of online play and the operation of Ultima Online. EA.com has research
and development expenses incurred by Electronic Arts’ studios consisting of direct development costs and related
overhead costs (facilities, network and development management and supervision) in connection with the devel-
opment and production of EA.com online games.
Network Development and Support
Network development and support costs consist of expenses associated with
development of web content, depreciation on server equipment to support online games, network infrastructure,
software licenses and maintenance, and network and management overhead.
COST OF GOODS SOLD Cost of goods sold as a percentage of revenues decreased in fiscal 2001 due to:
• An increase in sales of higher margin PC titles as a percentage of revenues. The current year included sales on
titles such as The Sims, Command & Conquer: Red Alert 2 and The Sims: Livin’ Large.
• The introduction of higher margin PlayStation 2 products in the current year.
• A decrease in sales of lower margin AL and N64 titles.
• An increase in higher margin Online and Advertising revenue.
• Offset by a decrease in sales of PlayStation titles combined with the decrease in average margins on PlayStation
products due to a decrease in the 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 and
advertising campaigns run on the AOL service promoting the Games Channel. In future periods, EA.com intends
to further increase marketing and advertising spending in order to promote our game site and the Games
Channel on AOL.
• The amortization of the AOL carriage fee, which began with the launch of EA.com in October of the current fiscal year.
• Offset by lower television and print advertising in North America and Europe due to fewer number of releases
compared to last year.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 12.6% for fiscal 2001, primarily
attributed to:
• The expansion of the EA.com staff and additional administrative-related costs required to support the growth of
the EA.com business.
• Increase in bad debts due to a write off of a receivable as a result of the default of payment from a customer in
Europe for approximately $1,000,000.
• Increase in depreciation expense for Europe due to the implementation of a new transaction processing system.
RESEARCH AND DEVELOPMENT (EXCLUDING NETWORK DEVELOPMENT AND SUPPORT) Research and devel-
opment expenses increased in absolute dollars by 38.2% for fiscal 2001, primarily attributed to:
• Increase in research and development expenses by EA.com (including expenses incurred by EA Core on behalf
of EA.com) due to an increase in the number of online projects in development and increased development staff
to support these products. The type of games that will be in development will most likely increase in complexity
and depth.