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Electronic Arts Inc.
Notice of 2005 Annual Meeting
Proxy Statement and
2005 Annual Report

Table of contents

  • Page 1
    Electronic Arts Inc. Notice of 2005 Annual Meeting Proxy Statement and 2005 Annual Report

  • Page 2

  • Page 3
    ..., EA SPORTSTM titles increased their share of the sports category to a record 63 percent, and we successfully launched two new sports properties Ì FIFA Street and Fight Night. Our Club PogoTM online site continues to grow with more than 840,000 active players, including 780,000 paying members...

  • Page 4
    ... ten games when PSP launched in North America and currently has approximately 15 new titles planned for release in Ã'scal year 2006. Need for SpeedTM Underground Rivals was the best selling game on the new system at launch. We believe the PSP will have a profound impact on the worldwide game market...

  • Page 5
    ..., NBA Live and Tiger Woods PGA TOUR will support the launch of the next-generation consoles and set a stunning new visual standard for sports games. In addition, we will add Arena Football to our industry-leading lineup of sports products. ‚ There will be new properties. EA's Criterion Studio is...

  • Page 6
    ... of North America. Building upon EA's leadership in the next 20 years will require a dramatic change in the way we operate as a company. As the industry leader, we have a responsibility to think beyond the cyclicality of the console platforms. We need to ensure that current and future employees have...

  • Page 7
    Proxy Statement ELECTRONIC ARTS INC. Fiscal Year Ended March 31, 2005 Notice of 2005 Annual Meeting and Proxy Statement

  • Page 8
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  • Page 9
    ... public accounting Ã'rm for Ã'scal 2006. After the meeting, we will report on our performance in the last year and answer your questions. Our products will be on display before and after the meeting. Enclosed with this proxy statement are your proxy card and voting instructions and our 2005 annual...

  • Page 10
    (This page intentionally left blank)

  • Page 11
    ... p.m. ELECTRONIC ARTS HEADQUARTERS Milestone Auditorium 209 Redwood Shores Parkway, Building 250 Redwood City, CA 94065 MATTERS TO BE VOTED UPON: 1. The election of nine Directors to hold oÇce for a one-year term; 2. Amendments to the 2000 Equity Incentive Plan to (a) increase the number of shares...

  • Page 12
    ... 2000 EMPLOYEE STOCK PURCHASE PLAN ÏÏÏ PROPOSAL 4 Ì RATIFICATION OF THE APPOINTMENT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OTHER BUSINESS PRINCIPAL STOCKHOLDERS STOCK PERFORMANCE GRAPH SUMMARY COMPENSATION TABLE OPTIONS GRANTED IN FISCAL 2005 OPTIONS EXERCISED EQUITY...

  • Page 13
    ... 24, 2005. In this proxy statement: ‚ ""EA'', ""we'' and ""the Company'' mean Electronic Arts Inc. ‚ ""2000 Equity Plan'' and ""Equity Plan'' mean EA's 2000 Equity Incentive Plan. ‚ ""2000 Purchase Plan'' and ""Purchase Plan'' mean EA's 2000 Employee Stock Purchase Plan. ‚ Holding shares in...

  • Page 14
    ... options and stock appreciation rights and modify the permissible performance factors currently contained in the Equity Plan, and (f) revise the share-counting methodology used in the Equity Plan; ‚ Approve an amendment to the 2000 Employee Stock Purchase Plan to increase by 1,500,000 the number...

  • Page 15
    ...give my proxy? You may revoke your proxy and change your vote at any time before the polls close at the meeting. You may do this by: ‚ Sending a signed statement to the Company that the proxy is revoked (you may send such a statement to the Company's Secretary at our corporate headquarters address...

  • Page 16
    ... public reference room. You can also get a copy on the Internet at http://investor.ea.com or through the SEC's electronic data system called EDGAR at www.sec.gov. Why are you amending the Equity Plan? First, we are amending the Equity Plan to increase, by 10 million, the number of shares available...

  • Page 17
    ... employees to fully participate in the Purchase Plan through at least Ã'scal 2006, our current Ã'scal year. Who will pay for this proxy solicitation? We have retained Georgeson & Company Inc. to solicit proxies from stockholders at an estimated fee of $7,500 plus expenses and we will pay these costs...

  • Page 18
    ... At the time of Mr. Paul's appointment, the authorized size of our Board was temporarily increased from nine to ten Directors. In May 2005, William J. Byron announced his retirement from the Board, eÃ...ective as of the commencement of the 2005 Annual Meeting, and therefore will not be standing for re...

  • Page 19
    ...co-founded and was Senior Vice President of Electronic Arts, and was a member of the research staÃ... at Xerox PARC. Vivek Paul Director since 2005 Mr. Paul, age 46, has been the Vice Chairman of the Board of Directors of Wipro, Ltd., a provider of integrated business, technology and process solutions...

  • Page 20
    ...Vice President and Director of Business Development, Group Managing Director, and in 1997, was named Chief Executive OÇcer of Y&R's New York oÇce, becoming the Ã'rst female CEO in the company's 75-year history. Ms. Srere also serves on the Board of Directors of aQuantive, Inc., a digital marketing...

  • Page 21
    ... in the Investor Relations section of our website, http://investor.ea.com. The Nominating and Governance Committee met four times in Ã'scal 2005. In evaluating nominees for Director to recommend to the Board, the Nominating and Governance Committee will take into account many factors within the...

  • Page 22
    ...and the length of time the stockholder has held such stock. Stockholders wishing to submit candidates for consideration by the Nominating and Governance Committee may do so by writing to EA's Corporate Secretary at 209 Redwood Shores Parkway, Redwood City, CA 94065, Attn: Director Nominations. To be...

  • Page 23
    ..., with a committee of the Board, or with an individual Director by sending a letter to EA's Corporate Secretary at Electronic Arts Inc., 209 Redwood Shores Parkway, Redwood City, CA 94065, or by sending an email to [email protected]. All stockholder communications received will be...

  • Page 24
    ... annual option grant to purchase 10,000 shares upon his or her re-election to the Board. In Ã'scal 2005, annual option grants to purchase 10,000 shares of common stock were made under the Equity Plan to each of the non-employee Directors who was re-elected at the 2004 Annual Meeting of Stockholders...

  • Page 25
    ...responsibility, creativity and stockholder returns. We also believe that delivering a portion of their total compensation in the form of long-term equity compensation helps encourage a long-term view in an industry that is subject to lengthy business cycles. Stock options also play an important role...

  • Page 26
    ...sell the entire number of shares underlying the stock option and use the proceeds to pay the exercise price and applicable withholding taxes. Thus, under the current provisions of the Equity Plan, if a person had a stock option to purchase 100 shares of common stock at a $30 per share exercise price...

  • Page 27
    ...margin; (e) net income; (f) earnings per share; (g) total stockholder return; (h) the Company's stock price; (i) growth in stockholder value relative to a pre-determined index; (j) return on equity; (k) return on invested capital; (l) operating cash Ã-ow; (m) free cash Ã-ow; (n) economic value added...

  • Page 28
    ..., 2005. Participants have the right to withdraw from the 2000 Purchase Plan at any time prior to a purchase date. The number of participants may increase or decrease prior to February 2006, the last purchase date in Ã'scal 2006. The proposed amendment would increase the number of shares authorized...

  • Page 29
    ... Company's Ã'nancial statements and management's assessment of internal control over Ã'nancial reporting, (including required quarterly reviews of Ã'nancial statements included in the Company's quarterly reports on Form 10-Q) and services normally provided by the independent auditors in connection...

  • Page 30
    ... of services is provided by the Audit Committee for up to a year, subject to a speciÃ'c budget and to regular management reporting. In other cases, the Chairman of the Audit Committee has the delegated authority from the Audit Committee to pre-approve additional services up to a speciÃ'ed dollar...

  • Page 31
    ..., the address for each of our Directors and executive oÇcers is c/o Electronic Arts Inc., 209 Redwood Shores Parkway, Redwood City, CA 94065. Stockholder Name Shares Owned(1) Right to Acquire(2) Percent of Outstanding Shares(3) Alliance Capital Management(4 Wellington Management Company, LLP...

  • Page 32
    ... 31, 2005, for our common stock, the Nasdaq Market Composite Index, the S&P 500 Index (to which EA was added in July 2002), the RDG Technology Index and the S&P Application Software Index (to which EA was added in July 2002), each of which assumes an initial value of $100. Each measurement point is...

  • Page 33
    ... McMillan(4 Executive Vice President, Worldwide Studios Warren C. Jenson Executive Vice President, Chief Financial and Administrative OÇcer Gerhard Florin(4 Senior Vice President and General Manager, European Publishing (1) (2) 2005 2004 2003 2005 2004 2003 2005 2004 2005 2004 2003 2005 2004...

  • Page 34
    ... options to purchase 8,881,515 shares of common stock to all employees (excluding non-employee Directors) in Ã'scal 2005. The exercise price is equal to the fair market value on the date of grant. Options will Ã'rst vest and become exercisable as to 24% of the shares underlying the option 12 months...

  • Page 35
    ... the option exercise price from $55.17 (the fair market value of EA's common stock at the close of business on the last trading day of Ã'scal 2005, March 24, 2005) to get the value per share subject to option, and (b) multiplying the value per share subject to option by the number of shares...

  • Page 36
    ... and 2000 Employee Stock Purchase Plans, which are proposed to be amended at the 2005 Annual Meeting as described in ""Proposals To Be Voted On'' and Appendices A and B. Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of...

  • Page 37
    ...Committee meets at scheduled times throughout the year and also takes action by written consent, often after informal telephone discussions amongst the members of the Committee. The Compensation Committee met seven times in Ã'scal 2005. The Company's Human Resources and Legal Departments support the...

  • Page 38
    ... from three broad industry segments: entertainment, high technology and consumer packaged goods. EA has continued to build its senior management team and has been successful in attracting talent from the entertainment software industry and other market segments to add management depth and experience...

  • Page 39
    ...connection with a signiÃ'cant change in responsibilities, annually to provide incentives for continued performance and retention of employment and occasionally, to achieve internal equity between diÃ...erent positions within EA. The number of shares subject to each stock option granted to an executive...

  • Page 40
    ... of EA's stockholders and executive oÇcers. As of March 31, 2005, each of EA's executive oÇcers had met their then-applicable stock ownership requirements. Other Company-provided air travel for EA's executives is for business purposes only. EA's use of non-commercial aircraft on a time share or...

  • Page 41
    ... stock appreciation rights) with their high-potential risks and rewards are vital to EA's growth, provide the strongest incentive for employee performance in a growth company, and best meet the Company's philosophy of aligning employee compensation with stockholder value. Tax Law Limits on Executive...

  • Page 42
    ... the Board of Directors in its oversight responsibilities relating to the integrity of EA's accounting policies, internal controls and Ã'nancial reporting. The Audit Committee reviews EA's quarterly and annual Ã'nancial statements prior to public earnings releases and submission to the SEC; reviews...

  • Page 43
    ..., Directors and greater-than-ten-percent stockholders were complied with on a timely basis. STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING If you would like us to consider a proposal to be included in our 2006 proxy statement and proxy card, you must deliver it to the Company's Corporate Secretary...

  • Page 44
    ... within one (1) business day of receipt of such request, a copy of the 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan requested. Any such request should be directed as follows: Stock Administration Department, Electronic Arts Inc., 209 Redwood Shores Parkway, Redwood City, CA 94065...

  • Page 45
    ...of the net settlement of a stock option or stock appreciation right; (b) shares that are used to pay the exercise price or withholding taxes related to an award granted under the Equity Plan; and (c) shares that are repurchased by us with the proceeds of a stock option exercise. The number of shares...

  • Page 46
    ... EA (a ""Ten Percent Stockholder''), the exercise price for each such incentive stock option must be no less than 110% of the fair market value of a share of common stock at the time the incentive stock option is granted. Pursuant to an amendment to the Equity Plan approved by the Board of Directors...

  • Page 47
    ...of Directors following each annual meeting of our stockholders, each non-employee Director is automatically granted an additional option to purchase 10,000 shares of common stock. If a non-employee Director has not served on our Board of Directors for a full year at the time of the annual meeting of...

  • Page 48
    ...margin; (e) net income; (f) earnings per share; (g) total stockholder return; (h) the Company's stock price; (i) growth in stockholder value relative to a pre-determined index; (j) return on equity; (k) return on invested capital; (l) operating cash Ã-ow; (m) free cash Ã-ow; (n) economic value added...

  • Page 49
    ... the fair market value of the ISO Shares on the date of exercise (or, if less, the amount realized on a sale of such shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be capital gain, taxed at a rate that depends upon the amount of time the ISO...

  • Page 50
    ...restricted stock or restricted stock unit award, to the extent that the participant recognizes ordinary income and the Company properly reports such income to the Internal Revenue Service (the ""IRS''). The Company will be entitled to a deduction in connection with the disposition of ISO Shares only...

  • Page 51
    ...the Company's authorized common stock has been reserved for issuance under the Equity Plan. Proposed Amendments to the Equity Plan At the 2005 Annual Meeting, stockholders will be asked to approve amendments to the Equity Plan as follows: ‚ Increase the number of shares authorized and reserved for...

  • Page 52
    ... the purchase price were determined by using 85% of the fair market value of a share of the Company's common stock on the OÃ...ering Date or (b) the maximum number of shares set by the Board. In addition, no employee may purchase shares at a rate that, when aggregated with all other rights to purchase...

  • Page 53
    ... the closing bid price of the common stock on the immediately preceding business day as quoted on the Nasdaq National Market. On June 1, 2005, the closing bid price of the Company's common stock was $51.14. Purchase of Stock. The number of whole shares an employee may purchase in any Purchase Period...

  • Page 54
    ... Company in writing of the date and terms of any disposition of shares purchased under the Purchase Plan. Proposed amendment of the 2000 Employee Stock Purchase Plan. At the meeting, stockholders will be asked to approve an amendment to the Purchase Plan to increase by 1,500,000 the number of shares...

  • Page 55
    ELECTRONIC ARTS INC. Fiscal Year Ended March 31, 2005 Annual Report Annual Report on Form 10-K

  • Page 56
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  • Page 57
    ...94-2838567 (I.R.S. Employer IdentiÃ'cation No.) 209 Redwood Shores Parkway Redwood City, California (Address of principal executive oÇces) 94065 (Zip Code) Annual Report Registrant's telephone number, including area code: (650) 628-1500 Securities registered pursuant to Section 12(b) of the Act...

  • Page 58
    ELECTRONIC ARTS INC. 2005 FORM 10-K ANNUAL REPORT Table of Contents Page Item Item Item Item 1. 2. 3. 4. PART I Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 3 15 17 17 PART II Market for Registrant's Common Equity, Related Stockholder Matters ...

  • Page 59
    ...Item 1: Business Overview Electronic Arts develops, markets, publishes and distributes interactive software games (we sometimes refer to them as ""titles'') that are playable by consumers on the following devices: ‚ In-home video game players (such as the Sony PlayStation» 2, Microsoft Xbox» and...

  • Page 60
    ...North America and Europe, our largest markets, these packaged goods products are sold primarily to retailers that may be mass market retailers (such as Wal-Mart), electronics specialty stores (such as Best Buy) or game software specialty stores (such as GameStop). We also maintain a smaller business...

  • Page 61
    ... strategy. We currently develop or publish products for eleven diÃ...erent hardware platforms. In Ã'scal 2005, we released games designed to play on the PlayStation 2, Xbox, Nintendo GameCube, PlayStation, PC, Game Boy Advance, Nokia N-GageTM, Sony PSP, Nintendo DS and the Internet. In Ã'scal 2006...

  • Page 62
    ...Live friends list, voice communication and EA messenger service. We have published and are currently developing numerous products for the Microsoft Xbox. Mobile Video Game Platforms While Nintendo has been the leading manufacturer of mobile video game platforms, Sony has recently entered this market...

  • Page 63
    ... a major competitive factor in developing and marketing software games. Competition is also based on product quality and features, timing of product releases, brand-name recognition, quality of in-game content, access to distribution channels, eÃ...ectiveness of marketing and price. 7 Annual Report

  • Page 64
    ... Ã'scal 2005 were Need for Speed Underground 2, Madden NFL 2005, FIFA Soccer 2005, Burnout 3: Takedown and NBA LIVE 2005. Microsoft. Under the terms of a license agreement we entered into with Microsoft, we are authorized to develop and distribute DVD-based software products compatible with the Xbox...

  • Page 65
    ... retail selling prices of our titles outside of North America vary widely depending on factors such as local market conditions. Our goal is to maintain our position as a leading publisher of games sold for play on the current-generation of 128-bit video game consoles and to extend our success into...

  • Page 66
    ... and Need for Speed. ‚ EA SPORTS and EA SPORTS BIG. In Ã'scal 2005, six PC, 12 PlayStation 2 and 12 Xbox titles of our EA SPORTS and EA SPORTS BIG brands had online gameplay capability. In addition, we provided 18 free online games on our Pogo web site under the EA SPORTS and EA SPORTS BIG brands...

  • Page 67
    ... to provide sales, marketing and distribution services on a global basis. EA Partners currently has relationships with Lionhead, Crytek, Free Radical Design and Eurocom Entertainment Software, among others. EA Partners also distributes Ã'nished goods on behalf of other publishers. These titles are...

  • Page 68
    ... ""Marketing and Distribution'' and in ""Management's Discussion and Analysis of Financial Condition and Results of Operations'', we have practices in place with our customers (such as stock balancing and price protection) that reduce product returns. International Operations We conduct business and...

  • Page 69
    ... Publishing Senior Vice President, General Counsel and Corporate Secretary Senior Vice President and General Manager, European Publishing Senior Vice President, International Publishing Vice President and Chief Accounting OÇcer Annual Report Mr. Probst has been a director of Electronic Arts...

  • Page 70
    ... held the position of Senior Vice President of North American Sales and Distribution from July 1993 to October 1996 and as Vice President of Sales from 1988 to 1993. Ms. Smith has also served as Western Regional Sales Manager and National Sales Manager since she joined Electronic Arts in 1984. Ms...

  • Page 71
    ... Director of European Sales and Marketing and Managing Director of EA Europe. Mr. Gardner has also held various positions at Electronic Arts in the sales, marketing and customer support departments since joining the company in 1983. Mr. Barker has served as Vice President and Chief Accounting...

  • Page 72
    headquarters in Redwood City, California, our studios in Los Angeles, California and Orlando, Florida, and our distribution center in Louisville, Kentucky. Our leased space is summarized as follows (in square feet): Purpose North America Europe Asia PaciÃ'c Total Distribution Sales & ...

  • Page 73
    ... our future needs. Item 3: Legal Proceedings On July 29, 2004, a class action lawsuit, Kirschenbaum v. Electronic Arts Inc., was Ã'led against us in Superior Court in San Mateo, California. The complaint alleges that we improperly classiÃ'ed ""Image Production Employees'' in California as exempt...

  • Page 74
    ... common stock from time to time in the open market or through privately negotiated transactions over the course of a twelve-month period. The following table summarizes the number of shares repurchased between January 1, 2005 and March 31, 2005: Total Number of Shares Purchased as Part of Publicly...

  • Page 75
    ... per share data) STATEMENTS OF OPERATIONS DATA 2005 Year Ended March 31, 2004 2003 2002 2001 Net revenue Cost of goods sold Gross proÃ't Operating expenses: Marketing and sales General and administrative Research and development Amortization of intangibles(1 Acquired in-process technology...

  • Page 76
    ELECTRONIC ARTS INC. AND SUBSIDIARIES SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA (Continued) (In millions) BALANCE SHEET DATA 2005(1) Year Ended March 31, 2004(1) 2003(1) 2002 2001 Cash and cash equivalents Short-term investments Marketable equity securities Working capital Total assets ...

  • Page 77
    ... proprietary online networks. Some of our games are based on content that we license from others (e.g., Madden NFL Football, Harry Potter and FIFA Soccer), and some of our games are based on our own whollyowned intellectual property (e.g., The Sims and Need for Speed). Our goal is to develop titles...

  • Page 78
    ...diverse, (4) the cost of licensing the third-party intellectual property we use in many of our titles increases, and (5) we develop new methods to distribute our content via the Internet and on hand-held and wireless devices. Software Prices. As current-generation console prices continue to decrease...

  • Page 79
    ... with other sports partners. While we expect to generate increased revenue as a result of these agreements, it may not be enough to oÃ...set the impact of the associated costs on our gross proÃ't, which could negatively aÃ...ect our gross margin on these products. CRITICAL ACCOUNTING POLICIES AND...

  • Page 80
    ... to exchange products or give credits, rather than give cash refunds. In certain countries, from time to time, we decide to provide price protection for both our PC and video game system products. In our decision, we analyze historical returns, current sell-through of distributor and retailer...

  • Page 81
    ...by evaluating future business prospects and estimated cash Ã-ows. Our future net cash Ã-ows are primarily dependent on the sale of products for play on proprietary video game consoles, hand-held game players and PCs (collectively referred to as ""platforms''). The success of our products is aÃ...ected...

  • Page 82
    ...-party interactive software games through our established distribution network. We also derive net revenue from selling subscriptions to some of our online games, programming third-party web sites with our game content, allowing other companies to manufacture and sell our products in conjunction...

  • Page 83
    ... exchange rates, we estimate that European net revenue increased by approximately $18 million, or 2 percent, for the year ended March 31, 2005. From a franchise perspective, the net revenue increase was primarily due to (1) higher sales of products in our Need for Speed and The Sims franchises...

  • Page 84
    Our total net revenue by product line for Ã'scal years 2005 and 2004 was as follows (in millions): Year Ended March 31, 2005 2004 Increase/ (Decrease) % Change Consoles PlayStation 2 Xbox Nintendo GameCube Other consoles Total Consoles PC Mobility Game Boy Advance Nintendo DS PSP Game Boy ...

  • Page 85
    ... for use of third-party properties. Cost of goods sold for our web site advertising business primarily consists of ad-serving costs. Costs of goods sold for Ã'scal years 2005 and 2004 were (in millions): March 31, 2005 % of Net Revenue March 31, 2004 % of Net Revenue % Change Annual Report $1,197...

  • Page 86
    ... expect cost of goods sold as a percentage of total net revenue to remain Ã-at during Ã'scal 2006 as compared to Ã'scal 2005. We expect margin pressure as a result of a decrease in average selling prices as currentgeneration platforms mature and our industry transitions to next-generation technology...

  • Page 87
    ... business include expenses incurred by our studios consisting of direct development costs and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with development of web site content, network...

  • Page 88
    ... to approximately $896 million as of March 31, 2005. Our eÃ...ective income tax rates for Ã'scal 2006 and future periods will depend on a variety of factors. For example, changes in our business, including acquisitions, changes in our international structure, changes in the geographic location of...

  • Page 89
    ...19.5% $(73) (12.7%) Reported net income decreased in Ã'scal 2005 as compared to Ã'scal 2004 primarily due to growth in our expenses, especially research and development, as we prepared for the adoption of next-generation technology within our industry while at the same time we continued to devote...

  • Page 90
    ... perspective, the net revenue increase was primarily driven by higher sales of products released during the year ended March 31, 2004 in the following eleven franchises: Need for Speed, The Sims, FIFA Soccer, Lord of the Rings, Medal of Honor, Final Fantasy, SSX, Football Manager, Freedom Fighters...

  • Page 91
    Our net revenue by product line for Ã'scal years 2004 and 2003 is as follows (in millions): Year Ended March 31, 2004 2003 Increase/ (Decrease) % Change Consoles PlayStation 2 Xbox Nintendo GameCube Other consoles Total Consoles PC Mobility Game Boy Advance Game Boy Color Total Mobility Co...

  • Page 92
    ... products and services into reporting for the overall development and publication of our core products for all reporting periods ending after that date. This change better reÃ-ected the way in which our Chief Executive OÇcer (our chief operating decision maker) reviews and manages our business...

  • Page 93
    ...and The Lord of the Rings; The Return of the King. We estimate that lower development royalties increased gross margin by 1.9 percent, which was spread across multiple platforms. ‚ Lower license royalties, as a percentage of net revenue, as Need for Speed Underground, our highest grossing title of...

  • Page 94
    ... in average regular full-time employee headcount. ‚ An overall increase in external development expenses of $23 million related to development of new products. The increase in research and development expenses was partially oÃ...set by a decrease in depreciation and other operating expenses due to...

  • Page 95
    ... Los Angeles, California, Irvine, California and Las Vegas, Nevada, studios into one major game studio in Los Angeles. We recorded a total pre-tax restructuring charge of $5 million, including $2 million for the shutdown of facilities and associated costs, $2 million for the write-oÃ... of non-current...

  • Page 96
    ... of the operations of our EA.com business segment into our core business had occurred at the beginning of the period (in millions, except per share data): Year Ended March 31, 2003 Net income: As reported Pro forma Earnings per share: As reported Pro forma Number of shares used in computation...

  • Page 97
    ... 2003, net income as a percentage of net revenue increased to 19.5 percent as compared to 12.8 percent in Ã'scal 2003 as expenses, including our cost of goods sold, grew at a slower rate than did our net revenue. Impact of Recently Issued Accounting Standards In March 2004, the Financial Accounting...

  • Page 98
    ... of the tax beneÃ't from stock options will move from operating cash Ã-ow activities to Ã'nancing cash Ã-ow activities (total cash Ã-ows will remain unchanged). In March 2005, the Securities and Exchange Commission (""SEC'') released SAB No. 107, ""Share-based Payment'', which provides the views...

  • Page 99
    ... 2006. For the year ended March 31, 2005, our primary use of cash in nonoperating activities consisted of net purchases of $1,446 million in short-term investments, $126 million in capital expenditures, primarily related to the expansions of our Los Angeles and Vancouver studios as well as upgrades...

  • Page 100
    ... to fund our operations in the United States, we would accrue and pay additional taxes in connection with their repatriation. We are in the process of evaluating whether we will repatriate foreign earnings under the repatriation provisions of the Jobs Act. On October 18, 2004, our Board of Directors...

  • Page 101
    ...our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, the impact of competition, the economic conditions in the domestic and international markets, seasonality in operating results, risks of product returns and...

  • Page 102
    ... content in EA SPORTS games beginning in calendar 2006. While our commitments with ESPN are not contractually due until Ã'scal 2011 and beyond and are presented as such in the table above, we anticipate paying these commitments earlier as we publish titles associated with the agreement. (2) The...

  • Page 103
    ... Keybank National Association for a Ã've and one-half year term beginning December 2000 to expand our Redwood City, California headquarters facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this...

  • Page 104
    ...for a studio facility in Orlando, Florida, which commenced in January 2005 and expires in June 2010, with one Ã've-year option to extend the lease term. The campus facilities comprise a total of 117,000 square feet, which we intend to use for research and development functions. We have accounted for...

  • Page 105
    ... products for play on video game platforms manufactured by third parties, such as Sony's PlayStation 2 and Microsoft's Xbox. The success of our business is driven in large part by the availability of an adequate supply of current-generation video game platforms, the timely release and success of new...

  • Page 106
    ... Xbox and PlayStation 2, respectively, over the course of the next eighteen months. In order to publish products for a new game machine, we must take a license from the platform licensor which gives the platform licensor the opportunity to set the fee structure that we must pay in order to publish...

  • Page 107
    ... property owned by others. For example, our EA SPORTS products include rights licensed from major sports leagues and players' associations. Similarly, many of our hit EA GAMESTM franchises, such as Bond, Harry Potter and Lord of the Rings, are based on key Ã'lm and literary licenses. Competition...

  • Page 108
    ... we cannot successfully recruit and retain the employees we need, or replace key employees following their departure, our ability to develop and manage our businesses will be impaired. We annually review and evaluate with the Compensation Committee of our Board of Directors the compensation and bene...

  • Page 109
    ... in the process of examining our worldwide operating structure in light of changing tax laws, our current and anticipated business operations, and the pending expiration of an oÃ...shore advance pricing agreements with a foreign tax authority in December 2005 under which our current business operates...

  • Page 110
    ..., procedures and policies, ‚ Cultural challenges associated with integrating employees from an acquired company or business into our organization, ‚ Retaining key employees from the businesses we acquire, ‚ The need to integrate an acquired company's accounting, management information, human...

  • Page 111
    ... in fair value is reported in interest and other income, net in the Consolidated Statements of Operations. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements. The fair value of our foreign currency option contracts purchased and included in...

  • Page 112
    ... and other income, net in the Consolidated Statements of Operations. The gains and losses on these forward contracts generally oÃ...set the gains and losses on the underlying foreign-currencydenominated assets and liabilities. As of March 31, 2005 we had foreign exchange contracts to purchase and sell...

  • Page 113
    ... in publicly traded companies are subject to market price volatility. As of March 31, 2005, our marketable equity securities were classiÃ'ed as available-for-sale and, consequently, were recorded in the Consolidated Balance Sheets at fair market value with unrealized gains or losses reported as...

  • Page 114
    ... of Securities Given an X Percentage Decrease in Each Stock's Market Price (75%) (50%) (25%) Fair Value as of March 31, 2005 Valuation of Securities Given an X Percentage Increase in Each Stock's Market Price 25% 50% 75% (In millions) Marketable Equity Securities $35 $70 $105 $140 $175 $210...

  • Page 115
    ... Financial Statements Reports of Independent Registered Public Accounting Firm Financial Statement Schedule: The following Ã'nancial statement schedule of Electronic Arts Inc. and Subsidiaries for the years ended March 31, 2005, 2004 and 2003 is Ã'led as part of this report and should be read...

  • Page 116
    ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except share data) ASSETS Current assets: Cash and cash equivalents Short-term investments Marketable equity securities Receivables, net of allowances of $162 and $155, respectively Inventories Deferred income taxes...

  • Page 117
    ...data) Net revenue Cost of goods sold Gross proÃ't Operating expenses: Marketing and sales General and administrative Research and development Amortization of intangibles Acquired in-process technology Restructuring charges Asset impairment charges Total operating expenses Operating income...

  • Page 118
    ... Change in unrealized gain (loss) on investments, net Translation adjustment Comprehensive income Proceeds from sales of shares through stock plans Repurchase of Class B shares Stock-based compensation Tax beneÃ't from exercise of stock options ÏÏÏ Balances as of March 31, 2004 Components...

  • Page 119
    ... (gains) losses on investments and sale of property and equipment 8) 2 1 Stock-based compensation 6 1 1 Tax beneÃ't from exercise of stock options 75 69 75 Acquired in-process technology 13 ÃŒ ÃŒ Other operating activities 2) (6) Change in assets and liabilities: Receivables, net 80) (194) 110...

  • Page 120
    ... FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Electronic Arts Inc. develops, markets, publishes and distributes interactive software games that are playable by consumers on home video game consoles (such as the Sony PlayStation» 2, Microsoft Xbox...

  • Page 121
    ... to 10 years Annual Report Under the provisions of American Institute of CertiÃ'ed Public Accountants Statement of Position (""SOP'') 98-1, ""Accounting for the Costs of Computer Software Developed or Obtained for Internal Use'', we capitalize costs associated with customized internal-use software...

  • Page 122
    ...its intended purpose. The net book value of capitalized costs associated with internal-use software amounted to $28 million and $30 million as of March 31, 2005 and 2004, respectively, and are being depreciated on a straight-line basis over each project's estimated useful life that ranges from three...

  • Page 123
    ..., including revenue collected from credit card sales as well as sales of Gametime subscription cards, are recognized ratably over the period for which the services are provided. Software Licenses: We license software rights to manufacturers of products in related industries (for example, makers of...

  • Page 124
    ... returns, current sell-through of channel partner inventory of our products, current trends in the software games business segment and the overall economy, changes in customer demand and acceptance of our products and other related factors when evaluating the adequacy of the sales returns and price...

  • Page 125
    ...method for all awards, net of related tax eÃ...ects Add: Stock-based employee compensation expense included in reported net income, net of related tax eÃ...ects Pro forma Net income per share: $329 (84) ÃŒ $245 $317 (84) ÃŒ $233 Year Ended March 31, 2005 2004 2003 As reported ÃŒ basic Pro forma...

  • Page 126
    ... of the tax beneÃ't from stock options will move from operating cash Ã-ow activities to Ã'nancing cash Ã-ow activities (total cash Ã-ows will remain unchanged). In March 2005, the Securities and Exchange Commission (""SEC'') released SAB No. 107, ""Share-based Payment'', which provides the views...

  • Page 127
    ...): As of March 31, 2005 Gross Unrealized Losses Total Gross Less than More than Unrealized 1 Year 1 Year Losses Annual Report Amortized Cost Fair Value Fair Value as of March 31, 2004 Cash and cash equivalents: Cash Money market fundsÏÏÏÏÏ Municipal securities ÏÏÏÏÏ U.S. agency...

  • Page 128
    ... in common stock of publicly traded companies. On February 3, 2005, we purchased approximately 19.9 percent of the outstanding ordinary shares (18.4 percent of the voting rights) of Ubisoft Entertainment for $90 million. As the fair value of our marketable equity securities exceed the cost basis of...

  • Page 129
    ... generally is not signiÃ'cant at each month-end. We do not use foreign currency option or foreign exchange forward contracts for speculative or trading purposes. Annual Report Cash Flow Hedging Activities Our foreign currency option contracts are designated and qualify as cash Ã-ow hedges under...

  • Page 130
    ...to acquire an additional 2,327,602 shares of to-be-issued Class A common stock at an exercise price of SEK 43.23. Based in Sweden, DICE develops games for personal computers and video game consoles. DICE's products are primarily sold through co-publishing agreements with us. The transactions between...

  • Page 131
    ... Sheets. In Japan, the companies established Electronic Arts Square K.K. (""EA Square KK'') in 1998, which localized and published in Japan a selection of EA's properties originally created in North America and Europe, as well as developed and published original video games in Japan. We contributed...

  • Page 132
    ... trade names and developed technologies. Amortization of intangibles for the Ã'scal years ended March 31, 2005, 2004 and 2003 was $6 million (of which $3 million was recognized in cost of goods sold), $3 million and $8 million, respectively. Finite-lived intangible assets are amortized using...

  • Page 133
    ... recorded in cost of goods sold and operating expenses is estimated as follows (in millions): Fiscal Year Ended March 31, 2006 2007 2008 2009 2010 Thereafter Total 6) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES Restructuring and asset impairment information as of March 31, 2005 was as follows...

  • Page 134
    ... Los Angeles, California, Irvine, California and Las Vegas, Nevada, studios into one major game studio in Los Angeles. We recorded a total pre-tax restructuring charge of $5 million, including $2 million for the shutdown of facilities and associated costs, $2 million for the write-oÃ... of non-current...

  • Page 135
    ... publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for delivery of product...

  • Page 136
    ... Financial Statements. (8) BALANCE SHEET DETAILS (a) Inventories Inventories as of March 31, 2005 and 2004 consisted of (in millions): As of March 31, 2005 2004 Raw materials and work in process Finished goods (including manufacturing royalties Inventories b) Property and Equipment, Net Property...

  • Page 137
    ... Keybank National Association for a Ã've and one-half year term beginning December 2000 to expand our Redwood City, California headquarters facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this...

  • Page 138
    ... in Los Angeles, California, which commenced in October 2003 and expires in September 2013 with two Ã've-year options to extend the lease term. Additionally, we have options to purchase the property after Ã've and ten years based on the fair market value of the property at the date of sale, a right...

  • Page 139
    ... and Superman); MGM/Danjaq (James Bond); New Line Productions (The Lord of the Rings); National Football League, Arena Football League and PLAYERS Inc. (professional football); Collegiate Licensing Company (collegiate football and basketball); ISC (stock car racing); Island Def Jam (Ã'ghting); and...

  • Page 140
    ... judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of our Board of Directors. (10) INCOME TAXES Our pretax income from operations for the Ã'scal years ended March 31, 2005, 2004 and 2003 consisted of the following components...

  • Page 141
    Income tax expense (beneÃ't) for the Ã'scal years ended March 31, 2005, 2004 and 2003 consisted of (in millions): Current Deferred Total March 31, 2005 Federal State Foreign Charge in association with disposition from employee stock plans $115 4 9 75 $203 $ 4 11 3 ÃŒ $119 15 12 75 $221 $...

  • Page 142
    ...years. The components of the net deferred tax assets as of March 31, 2005 and 2004 consisted of (in millions): As of March 31, 2005 2004 Deferred tax assets: Accruals, reserves and other expenses Tax credit carryforwards Amortization Unrealized loss on marketable equity securities Net operating...

  • Page 143
    ...to EA.com Inc., a wholly-owned subsidiary of Electronic Arts. In March 2003, we consolidated the operations of EA.com back into our core operations in order to increase eÇciency, simplify our reporting structure and more directly integrate our online activities into our core console and PC business...

  • Page 144
    ... International Employee Stock Purchase Plan. At our Annual Meeting of Stockholders, held on July 29, 2004, our stockholders approved an amendment to the 2000 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance under the ESPP by 1.5 million. Information...

  • Page 145
    ... awards of restricted stock and restricted stock units to 3 million, (d) provide that the exercise price of nonqualiÃ'ed stock options may not be less than 100% of the fair market value of a share of common stock, (e) reduce the size of initial and annual option grants to directors under the Equity...

  • Page 146
    The following summarizes the activity under our common stock option plans during the Ã'scal years ended March 31, 2005, 2004 and 2003: (In thousands, except weighted-average exercise price) Options Outstanding WeightedAverage Number Exercise of Shares Price Balance as of April 1, 2002 Granted ...

  • Page 147
    ... stock as of March 31, 2005 is as follows: (In thousands, except exercise prices) Options Outstanding WeightedAverage WeightedRemaining Average Contractual Exercise Life Price Options Exercisable WeightedAverage Exercise Price Annual Report Range of Exercise Prices Number of Shares Potential...

  • Page 148
    ... discretionary contributions to employees' accounts based on our Ã'nancial performance. We contributed $4 million, $5 million and $5 million to the 401(k) Plan in Ã'scal 2005, 2004 and 2003, respectively. (13) INTEREST AND OTHER INCOME, NET Interest and other income, net for the years ended March 31...

  • Page 149
    ...for Diluted EPS for the Ã'scal years ended March 31, 2005, 2004 and 2003 were options to purchase 1 million, 3 million and 6 million shares of common stock, respectively, as the options' exercise price was greater than the average market price of the common stock. For Ã'scal 2005, 2004 and 2003, the...

  • Page 150
    ... entertainment software. ‚ EA.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 web site advertising. In March 2003, we consolidated the operations of the EA.com business...

  • Page 151
    ... consolidated our reporting related to online products and services into our reporting for the overall development and publication of our core products for all reporting periods ending after that date. We believe that this better reÃ-ects the way in which the CEO reviews and manages our business and...

  • Page 152
    ... about our operations in North America, Europe and Asia PaciÃ'c for the Ã'scal years ended March 31, 2005, 2004 and 2003 is presented below (in millions): North America Europe Asia PaciÃ'c Total Year ended March 31, 2005 Net revenue from unaÇliated customers Interest income, net Depreciation and...

  • Page 153
    ....89 $28.10 Annual Report (b) (c) (d) Net income includes amortization of intangibles of $1 million, acquired in-process technology of $9 million and employee stock-based compensation of $3 million, all net of taxes, and $3 million of non-deductible acquisition related costs from our 100 percent...

  • Page 154
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the eÃ...ectiveness of Electronic Arts Inc.'s internal control over Ã'nancial reporting as of March 26, 2005, based on criteria established in Internal Control ÃŒ Integrated Framework issued by the...

  • Page 155
    ... REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Electronic Arts Inc.: We have audited management's assessment, included in the accompanying ""Management's Report on Internal Control over Financial Reporting'', that Electronic Arts Inc. maintained eÃ...ective internal...

  • Page 156
    ...our management, including our Chief Executive OÇcer and Executive Vice President, Chief Financial and Administrative OÇcer, as appropriate to allow timely decisions regarding the required disclosure. Management's Report on Internal Control over Financial Reporting Our management is responsible for...

  • Page 157
    ... operating eÃ...ectiveness of our internal control over Ã'nancial reporting. In connection with these eÃ...orts, we implemented a number of enhancements to our internal control over Ã'nancial reporting during the quarter ended March 31, 2005, including increased restrictions on access to our information...

  • Page 158
    ... our deÃ'nitive Proxy Statement for the 2005 Annual Meeting of Stockholders (the ""Proxy Statement'') under the caption ""Proposal No. 1 ÃŒ Election of Directors''. The information regarding executive oÇcers required by Item 10 is included in Item 1 of this report. The information regarding Section...

  • Page 159
    ... 1, 1999.(10) Option agreement, agreement of purchase and sale, and escrow instructions for Zones 2 and 4, Electronic Arts Business Park, Redwood Shores California, dated April 5, 1999.(10) Master Lease and Deed of Trust by and between Registrant and Selco Service Corporation, dated December 6, 2000...

  • Page 160
    Number Exhibit Title 10.29 10.30 10.31 10.32 10.33 10.34 10.35 21.01 23.01 31.1 31.2 32.1 32.2 Licensed Publisher Agreement by and between EA and Sony Computer Entertainment America Inc. dated as of April 1, 2000.(**)(19) Amending Agreement among Ontrea Inc. (the ""Landlord''), Electronic Arts ...

  • Page 161
    ... to exhibits Ã'led with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. (19) Incorporated by reference to exhibits Ã'led with Amendment No. 2 to Registrant's Registration Statement on Form S-3, Ã'led November 12, 2003 (File No. 333-102797). Annual Report 105

  • Page 162
    ... the undersigned, thereunto duly authorized. ELECTRONIC ARTS INC. By: /s/ Lawrence F. Probst III Lawrence F. Probst III, Chairman of the Board and Chief Executive OÇcer Date: June 7, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 163
    ELECTRONIC ARTS INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended March 31, 2005, 2004 and 2003 (In millions) Allowance for Doubtful Accounts, Price Protection and Returns Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts(1) Balance ...

  • Page 164
    ELECTRONIC ARTS INC. 2005 FORM 10-K ANNUAL REPORT EXHIBIT INDEX Exhibit Number Exhibit Title 10.05 10.08 10.35 21.01 23.01 31.1 31.2 Registrant's 2000 Employee Stock Purchase Plan as amended, and related documents. Description of Registrant's FY 2006 Executive OÇcer Bonus Plan. Electronic Arts ...

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  • Page 167
    ...Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available by contacting: Investor Relations Department Electronic Arts Inc. 209 Redwood Shores Parkway Redwood City, CA 94065 (650) 628-7352 ANNUAL MEETING The Company's Annual Meeting of Stockholders is scheduled...

  • Page 168
    209 Redwood Shores Parkway Redwood City, CA 94065