Electronic Arts 2001 Annual Report Download - page 58

56
2001 AR
(b) Kesmai On February 7, 2000, the Company acquired Kesmai Corporation (now referred to as “Kesmai”) from
News America Corporation (“News Corp”) in exchange for $22,500,000 in cash and approximately 206,000 shares
of the Company’s existing common stock valued at $8,650,000. Kesmai
™
specializes in the design and development
of multiplayer games delivered directly to consumers over the Internet and is a major provider of game content to
the Games Channel on the AOL service. The Company granted 5 percent of the initial equity attributable to EA.com
to News Corp, adjusting the total common stock consideration relating to the acquisition by $703,000 to
$9,353,000. The Company has contributed Kesmai to EA.com.
The Company is also committed to spend $5,000,000 in advertising with News Corp or any of its affiliates.
If a 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 the amount of $9,650,000.
The acquisition has been accounted for under the purchase method. The results of operations of Kesmai and
the estimated fair market values of the acquired assets and liabilities have been included in the consolidated
financial statements from the date of acquisition. The adjusted allocation of the excess purchase price over the net
tangible liabilities assumed was $32,815,000, of which, based on management’s estimates prepared in conjunction
with a third party valuation consultant, $3,869,000 was allocated to purchased in-process research and develop-
ment and $28,946,000 was allocated to other intangible assets. Amounts allocated to other intangibles include
goodwill of $18,932,000, existing technology of $3,992,000, amounts attributed to a prior AOL agreement of
$3,131,000 and other intangibles of $2,891,000. The allocation of intangible assets is being amortized over lives
ranging from two to seven years.
Purchased in-process research and development includes the value of products in the development stage that
are not considered to have reached technological feasibility or to have alternative future use. Accordingly, this
non-recurring item was expensed in the Consolidated Statement of Operations upon consummation of the acquisi-
tion. The non-recurring charge for in-process research and development reduced diluted earnings per share by
$0.02 in the fiscal year 2000.
Kesmai had various projects in progress at the time of the acquisition. As of the acquisition date, costs to com-
plete Kesmai projects acquired were approximately $10,550,000 in future periods. During fiscal 2001, some of
these development projects were completed and launched on the EA.com gamesites. In addition, as certain games
are completed, we expect resources to be redirected to ongoing live game operations or to building the EA.com
publishing platform. As a result, we do not anticipate incurring significant future development costs in relation to
these projects after fiscal 2002. The Company believes there have been no significant changes to these estimates
as of March 31, 2001. The Company currently expects to complete the development of these projects at various
dates through fiscal 2002 and to publish the projects upon completion. In conjunction with the acquisition of
Kesmai, the Company accrued approximately $200,000 related to direct transaction costs and other related costs.
The purchase price for the Kesmai transaction was allocated to assets acquired and liabilities assumed as set forth
below (in thousands):
Current assets $ 605
Fixed assets (net of depreciation) 759
In-process technology 3,869
Goodwill and other intangibles 28,946
Liabilities (2,326)
Total cash and stock paid $ 31,853