Electronic Arts 2002 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    It's all about the games.

  • Page 3
    Madden N FLâ„¢ 2002 T h e S imsâ„¢ Ho t Da t e T h e L o rd o f t h e Ri n g sâ„¢ , T h e Tw o Towe r sâ„¢ Ha r r y Po t t e r a n d t h e So r c e r e r 's St o n eâ„¢

  • Page 4
    Ne e d Fo r S p e e d â„¢ Ho t Pu rs uit 2 J a me s B o nd 0 0 7 in ...A g e nt U n d e r Fir eâ„¢ NBA St r e e t 2 0 0 2 FI FA Wo rld Cu pâ„¢

  • Page 5
    ... units sold) 15 In Fiscal 2002, 14 14 Madden NFLâ„¢ 2002 EA had 16 titles sell FIFA Soccer 2002 over one million units. We sold more games, 12 The Simsâ„¢ captured more market share and generated more revenue than The Simsâ„¢ Hot Date James Bond 007 in...Agent Under Fireâ„¢ NBA Live 2002...

  • Page 6
    ... NET REVENUE Fiscal Year 2002 by Geography 3% Asia Pacific 4% Japan WORLDWIDE NET REVENUE Fiscal Year 2002 by Platform 2% Other 3% Nintendo GameCube 4% EA.com 5% Xbox 5% Game Boy Advance/ Game Boy Color 11% PlayStation 30% Europe 16% Affiliated Labels 63% North America 28% PlayStation 2 26% PC

  • Page 7
    ... as the industry leader. EA sold more games, captured more market share and generated more revenue than ever before. We capitalized on our strong start in the new console cycle, enhanced our PC business, focused our online operation and grew our portfolio of game franchises. Most importantly, we...

  • Page 8
    ..., we could help insulate our business by generating greater revenue from our PC games and our global distribution capability. We made it a priority to build and acquire new intellectual properties that would drive market share growth on the PC. Our strategic planning and effective execution...

  • Page 9
    ..., EA was the number one publisher with 28 percent market share and five of the top ten titles in the U.S. in fiscal 2002. Standout titles included Madden NFL 2002, NBA Street, James Bond 007 in...Agent Under Fire™ , FIFA Soccer 2002 and Final Fantasy ® X, which we distribute in North America for...

  • Page 10
    ...#2: LEADERSHIP ON THE PC EA is the number one entertainment software publisher on the PC in North America, Europe and Asia Pacific, and number two in Japan. We earned a 22 percent market share on the PC in the U.S. and had four of the top five titles in fiscal 2002. The key driver of this success...

  • Page 11
    ... like FIFA Soccer, Madden NFL Football and NBA Live. | ••• » Games will be inspired by films like Harry Potter and the Chamber of Secrets, The Lord of the Rings and James Bond. | ••• » Stunning new versions of classics like SimCity™ , Need for Speed ™ and Command & Conquer...

  • Page 12
    .... 1986 EA ships our first 16-bit games for the IBM PC and Commodore Amiga. EA becomes the #1 software producer for the Amiga. EA's development tool, DeluxePaint, becomes an instant best-seller on the Amiga and standard among graphic designers. g ...» 1990 1988 EA further expands our world presence...

  • Page 13
    ...in revenue. EA finishes fiscal 2002 as the #1 independent publisher on the PlayStation 2, Xbox and Nintendo GameCube. The Sims becomes the #1 selling PC game of all time. 1998 EA acquires Tiburon Entertainment and Westwood Studios, developer of the bestselling Command & Conquer series. ABC Software...

  • Page 14
    Medal of Honor Frontlin e™ N BA L i ve 2 0 0 2 Ti g e r Wo o d s PGA TOUR ® 2 0 0 2 S i m C ity ™ 4

  • Page 15
    ... Financial Data 12 Management's Discussion and Analysis of Financial Condition and Results of Operations Independent Auditors' Report Consolidated Balance Sheets 14 41 42 43 44 46 47 70 Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity...

  • Page 16
    ..., except per share data) YEARS ENDED MARCH 31, 2002 2001 2000 1999 1998 Income Statement 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...

  • Page 17
    ...per share: Basic Diluted Number of shares used in computation: Basic Diluted Balance Sheet Data at Fiscal Year End Cash, cash equivalents and short-term investments Marketable securities Working capital Long-term investments Total assets Total liabilities Minority interest Total stockholders' equity...

  • Page 18
    ...DEBT RESERVES We derive revenues from sales of our packaged goods product, subscriptions of online service, sales of packaged goods through our online store and website advertising. Product revenue is recognized net of an allowance for returns. We also have stock-balancing programs for our personal...

  • Page 19
    ... which contained certain browser-based entertainment games, were launched with a monthly subscription pricing model and obtained only limited commercial success. Accordingly, we did not realize our projected cash flows and discontinued these offerings as part of EA.com's restructuring plan. EA 2002...

  • Page 20
    ... of uncertainty and judgment involved. For example, as part of a restructuring plan to reduce EA.com's workforce and consolidate facilities in the fiscal year ended March 31, 2002, we recorded impairment charges to write down certain of EA.com's depreciable assets and certain intangibles to their...

  • Page 21
    ... 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 America...

  • Page 22
    ... our worldwide net revenues by product line for fiscal 2002 and 2001 is presented below (in thousands): 2002 2001 INCREASE/ (DECREASE) % CHANGE EA STUDIO: PlayStation 2 PC PlayStation Xbox Nintendo GameCube Game Boy Advance Game Boy Color Advertising Online Subscriptions License, OEM and Other...

  • Page 23
    ... strong sales of The Sims, which shipped over two years ago. Key current year releases were Harry Potter and the Sorcerer's Stone, The Sims Hot Date Expansion Pack, Medal of Honor Allied Assault, Command & Conquer Renegade and Madden NFL 2002. We released 16 PC titles in the twelve months ended...

  • Page 24
    ... businesses. EA.com's business includes subscription revenues collected for Internet game play 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. The Consolidated Statements of Operations...

  • Page 25
    ..., 2002 EA.COM Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Network...

  • Page 26
    ...of intercompany sales of EA Core packaged goods products to EA.com, and represents elimination of royalties paid to EA Core by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support and Customer Relationship Management to Research and Development...

  • Page 27
    ....COM) MARCH 31, 2001 ELECTRONIC ARTS EA.COM EA.COM Net income (loss) - GAAP Net loss related to retained interest in EA.com (note 1) Pro forma allocation of income taxes (note 2) Pro forma net income (loss) Amortization of intangibles Restructuring and asset impairment charges Charge for acquired...

  • Page 28
    ..., customer relationship management expenses associated with Electronic Arts' product and online games and write-offs of prepaid royalties. EA.com has research and development expenses incurred by Electronic Arts' studios consisting of direct development costs and related overhead costs (facilities...

  • Page 29
    ... in North America. » Increase in bad debt expense of $1,820,000 due to higher product sales. % OF NET REVENUES % OF NET REVENUES Research and Development 2002 2001 % CHANGE Research and development Network development and support Customer relationship management Total research and development...

  • Page 30
    ... fiscal 2002, we announced a restructuring plan for EA.com to reduce its workforce and consolidate facilities.These restructuring and resulting asset impairment charges were necessary in order to focus on key online priorities and reduce EA.com's operating cost structure. A pre-tax charge of $20...

  • Page 31
    ...net income (loss) and operating profit (loss), which does not include unusual events or transactions, such as restructuring and asset impairment costs and charge for acquired in-process technology, and also excludes amortization of intangibles and non-cash stock compensation charges, helps investors...

  • Page 32
    ...in North America which generated $171,034,000 in revenue for fiscal 2001 from titles such as Madden NFL 2001, SSX, NBA Live 2001 and NHL 2001. PlayStation 2 revenues in fiscal 2001 did not offset the decrease in PlayStation revenues due to a reduced number of hardware units reaching the market due...

  • Page 33
    ...Consolidated Net Revenues Personal Computer Product Net Revenues The increase in sales of PC products for fiscal 2001 was primarily attributable to the continued strong sales of The Sims, which shipped in fiscal 2000. Key fiscal 2001 releases were Command & Conquer Red Alert 2 and The Sims Livin...

  • Page 34
    ...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.com in fiscal...

  • Page 35
    ...of intercompany sales of EA Core packaged goods products to EA.com, and represents elimination of royalties paid to EA Core by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support and Customer Relationship Management to Research and Development...

  • Page 36
    ... non-cash stock compensation charges are included in Research and Development in GAAP financials, and excluded in the pro forma. COSTS AND EXPENSES, INTEREST AND OTHER INCOME, NET, INCOME TAXES AND NET INCOME (LOSS) FOR BOTH EA CORE AND EA.COM SEGMENTS Cost of Goods Sold 2001 % OF NET REVENUES...

  • Page 37
    ... to support the live game site and advertising campaigns run on the AOL service promoting the Games Channel. » The amortization of the AOL Carriage Fee, which began with the launch of EA.com in October 2000. » Offset by lower television and print advertising in North America and Europe due...

  • Page 38
    ...under Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", associated with the pre-launch network infrastructure build. CUSTOMER RELATIONSHIP MANAGEMENT Customer relationship management increased due to increased headcount-related costs...

  • Page 39
    ... 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 and one-time charges in the amount...

  • Page 40
    ..., network infrastructure, internal use software and related third party software, $43,333,000 for the acquisition of Pogo, excluding cash received of $762,000, offset by $245,141,000 provided through the capital contributions from Electronic Arts. As a result of the net operating loss generated...

  • Page 41
    ..., PGA TOUR,Tiger Woods, National Hockey League, Formula One, Warner Bros. (Harry Potter), MGM/Danjaq (James Bond) and National Football League. These minimum guarantee payments and marketing commitments are included in the table below. Summary of minimum contractual obligations and commercial...

  • Page 42
    ...the formation of a new joint venture with Square Co., Ltd. ("Square"), a leading developer and publisher of entertainment software in Japan. In North America, the companies formed Square Electronic Arts, LLC ("Square EA"), which has exclusive publishing rights in North America for future interactive...

  • Page 43
    ...Our significant investment in EA.com may not be successful or generate profits. Acceptance of our online products by paying subscribers is still unproven. The business models and technology for e-Commerce and online gaming are still unproven. Product development schedules are frequently unreliable...

  • Page 44
    ... protected against the risks associated with interest rate ï¬,uctuations. The table below presents the amounts and related weighted average interest rates of our investment portfolio at March 31, 2002: (Dollars in thousands) AVERAGE INTEREST RATE (1) COST FAIR VALUE Cash equivalents Fixed rate...

  • Page 45
    .... AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of Electronic Arts Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the...

  • Page 46
    ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) AS OF MARCH 31, 2002 2001 Assets Current assets: Cash, cash equivalents and short-term investments Marketable securities Receivables, less allowances of $115,870 and $89,833, respectively Inventories,...

  • Page 47
    ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) YEARS ENDED MARCH 31, 2002 2001 2000 Net revenues Cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development ...

  • Page 48
    ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) YEARS ENDED MARCH 31, 2002,2001 AND 2000 CLASS A COMMON STOCK SHARES AMOUNT CLASS B COMMON STOCK SHARES AMOUNT PAID-IN CAPITAL RETAINED EARNINGS ACCUMULATED OTHER COMPRETREASURY STOCK HENSIVE LOSS ...

  • Page 49
    ... income Proceeds from sales of shares through stock plans 3,995 40 - - 98,701 Sale of stock under stock purchase agreement 8 - 100 Purchase of treasury stock Retirement of treasury stock (280) (3) (11,919) Other (25) (1) Tax benefit related to stock options 22,541 Balances at March 31, 2002...

  • Page 50
    ... Equity in net income of affiliates Gain on sale of affiliate Depreciation and amortization Non-cash restructuring and asset impairment charges Loss on sale of fixed assets (Gain) loss on marketable securities Bad debt expense Charge for acquired in-process technology Tax benefit from exercise...

  • Page 51
    ... of the related receivable is probable. Advertising revenue generated on the AOL Games Channel is recorded net of the applicable revenue share owed to AOL under the AOL agreement (see Note 5 of the Notes to Consolidated Financial Statements). SOFTWARE LICENSES: For those agreements which provide...

  • Page 52
    ...'s products, current trends in the video game market and the overall economy, changes in customer demand and acceptance of the Company's products and other related factors when evaluating the adequacy of the sales returns and price protection allowances. In addition, the Company monitors and manages...

  • Page 53
    ...of the lease terms or the estimated useful lives of the improvements Under the provisions of SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", the Company capitalizes costs associated with customized internal-use software systems that have reached the...

  • Page 54
    ... Financial Statements). Net income (loss) per share is computed individually for Class A common stock and Class B common stock. Please see the discussion regarding segment reporting in the Management's Discussion and Analysis of Financial Condition and Results of Operations. 50 EA 2002 AR

  • Page 55
    ... 31, 2002 CLASS A COMMON STOCKBASIC CLASS A COMMON STOCKDILUTED CLASS B COMMON STOCK Net income (loss) before retained interest in EA.com Net loss related to retained interest in EA.com Net income (loss) Shares used to compute net income (loss) per share: Weighted-average common shares Dilutive...

  • Page 56
    ...March 22, 2000, the stockholders of Electronic Arts authorized the issuance of a new series of common stock, designated as Class B common stock ("Tracking Stock").The Tracking Stock is intended to reï¬,ect the performance of Electronic Arts' online and e-Commerce division, EA.com. As a result of the...

  • Page 57
    ... on hedges of foreign currency assets and liabilities Net loss recognized in other income $ $ 991 (1,403) (412) $ $ (26,104) 25,216 (888) The Company transacts business in various foreign currencies. At March 31, 2002, the Company had foreign exchange contracts, all with maturities of less than...

  • Page 58
    ...In 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...

  • Page 59
    ... six-month purchase period. The program commenced in September 1991. A new Employee Stock Purchase Plan program was approved by the Board of Directors in May 2000 and commenced in August 2000. In fiscal 2002, 313,240 shares were purchased by the Company and distributed to employees at prices ranging...

  • Page 60
    ...The Class B plan includes a provision for automatic option grants to the Company's outside directors. As of March 31, 2002 there were 225,000 restricted shares issued under the Class B equity plan. The options generally expire ten years from the date of grant and are generally exercisable in monthly...

  • Page 61
    ... regarding options outstanding for Class A as of March 31, 2002 is as follows: OPTIONS OUTSTANDING WEIGHTEDAVERAGE REMAINING CONTRACTUAL LIFE WEIGHTEDAVERAGE EXERCISE PRICE OPTIONS EXERCISABLE WEIGHTEDAVERAGE NUMBER EXERCISE OF SHARES PRICE RANGE OF EXERCISE PRICES NUMBER OF SHARES $ 0.995 15.000...

  • Page 62
    ... EA.com acquired Pogo Corporation (now referred to as "Pogo") for $43,333,000, including an initial 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 internet-based family games...

  • Page 63
    ...Net revenues Class A common stock: Net income (loss): Basic Diluted Net income (loss) per share: Basic Diluted Number of shares used in computation: Basic Diluted Class B common stock: Net loss, net of retained interest in EA.com Net loss per share: Basic Diluted Number of shares used in computation...

  • Page 64
    ... future cash ï¬,ows.The Company recorded in restructuring and asset impairment charges a writeoff of $1,014,000 related to certain other intangibles associated with Kesmai. These intangibles had remaining lives ranging from 15 to 39 months. Purchased in-process research and development includes...

  • Page 65
    ... equity method. In Japan, the companies established Electronic Arts Square KK ("EA Square KK"), which will localize and publish in Japan the Company's properties originally created in North America and Europe, as well as develop and publish original video games in Japan.The Company contributed cash...

  • Page 66
    ... included in other current assets and other assets, respectively. At March 31, 2002, the Company had Federal net operating loss carryforwards of approximately $127,000,000 for income tax reporting purposes, which expire in 2021 and 2022. The Company also had state net operating loss carryforwards of...

  • Page 67
    ..., 2002, the Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred 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...

  • Page 68
    ..., 2002 EA.COM Net revenues from unaffiliated customers Group sales Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Network...

  • Page 69
    ...Total net revenues Cost of goods sold from unaffiliated customers Group cost of goods sold Total cost of goods sold Gross profit Operating expenses: Marketing and sales General and administrative Research and development Network development and support Customer relationship management Carriage fee...

  • Page 70
    ...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 71
    ... Electronic Arts' net revenues by product line for the fiscal years ended March 31, 2002, 2001 and 2000 is presented below (in thousands): 2002 2001 2000 PlayStation 2 PC Affiliated label PlayStation Xbox Nintendo GameCube Game Boy Advance Game Boy Color Advertising Online Subscriptions License...

  • Page 72
    ...space offset by estimated future sub-lease income, costs to close or consolidate facilities, and costs to write off a portion of the assets from these facilities. The Company recorded restructuring charges for EA.com in accordance with Emerging Issues Task Force No. 94-03, "Liability Recognition for...

  • Page 73
    ... 2000 Net revenues Operating income (loss) Net income Net income per share - basic Net income per share - diluted Common stock price per share High Low (a) Net loss includes goodwill amortization of $4.5 million, net of taxes. (b) Net income includes restructuring and asset impairment charges of...

  • Page 74
    ...'s headquarters: Electronic Arts Inc. 209 Redwood Shores Parkway Redwood City, CA 94065 © 2002 Electronic Arts Inc. Electronic Arts,"EA" logo, EA SPORTS, EA SPORTS BIG, EA GAMES, Maxis, Origin Systems,Westwood Studios and all associated brand logos, John Madden Football, The Sims,The Sims Online...