Electronic Arts 2004 Annual Report Download - page 66

Our products are subject to the threat of piracy by a variety of organizations and individuals. If we are
not successful in combating and preventing piracy, our sales and proÑtability could be harmed
signiÑcantly.
In many countries around the world, more pirated copies of our products are sold than legitimate copies.
Though piracy has not had a material impact on our operating results to date, highly organized pirate
operations have been expanding globally. In addition, the proliferation of technology designed to circumvent
the protection measures we use in our products, the availability of broadband access to the Internet, the
ability to download pirated copies of our games from various Internet sites, and the widespread proliferation of
Internet cafes using pirated copies of our products, all have contributed to ongoing and expanding piracy.
Though we take steps to make the unauthorized copying and distribution of our products more diÇcult, as do
the manufacturers of consoles on which our games are played, neither our eÅorts nor those of the console
manufacturers may be successful in controlling the piracy of our products. This could have a negative eÅect
on our growth and proÑtability in the future.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including changes in foreign currency exchange rates and interest
rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange
forward and option contracts used to either mitigate or hedge foreign currency exposures and short-term
investments are subject to market risk. We do not consider our cash and cash equivalents to be subject to
interest rate risk due to their short maturities. We do not enter into derivatives or other Ñnancial instruments
for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign
currency denominated assets and liabilities, primarily certain intercompany receivables and payables. Our
foreign exchange forward contracts are accounted for as derivatives whereby the gains and losses on these
contracts are reÖected in the Consolidated Statements of Operations. Gains and losses on open contracts at
the end of each accounting period resulting from changes in the forward rate are recognized in earnings and
are designed to oÅset gains and losses on the underlying foreign-currency-denominated assets and liabilities.
As of March 31, 2004, we had foreign exchange forward contracts, all with maturities of less than one month,
to sell approximately $189.6 million in foreign currencies, consisting primarily of British Pounds, Euros,
Japanese Yen and other currencies. Of this amount, $172.3 million represents contracts to sell foreign
currency in exchange for U.S. dollars and $17.3 million represents contracts to sell foreign currency in
exchange for British Pounds.
From time to time, we hedge some of our foreign currency risk related to anticipated future sales transactions
by purchasing option contracts that generally have maturities of 15 months or less. If qualiÑed, these
transactions are designated as cash Öow hedges. For the year ended March 31, 2004, we recognized a loss of
$1.6 million in earnings associated with the time value of these option contracts.
The counterparties to these forward and options contracts are creditworthy multinational commercial banks.
The risks of counterparty nonperformance associated with these contracts are not considered to be material.
Notwithstanding our eÅorts to mitigate some foreign exchange risks, there can be no assurances that our
mitigating activities will adequately protect us against the risks associated with foreign currency Öuctuations.
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