Electronic Arts 2005 Annual Report Download - page 111

Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting our
existing stockholders, the incurrence of debt, contingent liabilities or amortization expenses, or write-oÅs of
goodwill, any of which could harm our Ñnancial condition. Our stockholders may not have the opportunity to
review, vote on or evaluate future acquisitions or investments.
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.
Our stock price has been volatile and may continue to Öuctuate signiÑcantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to
signiÑcant Öuctuations. These Öuctuations may be due to factors speciÑc to us (including those discussed in
the risk factors above as well as others not currently known to us or that we currently do not believe are
material), to changes in securities analysts' earnings estimates, to our results falling below the expectations of
analysts and investors, to factors aÅecting the computer, software, Internet, entertainment, media or
electronics industries, or to national or international economic conditions.
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, interest rates,
and market prices. Market risk is the potential loss arising from changes in market rates and market prices.
Foreign currency option and foreign exchange forward contracts are used to either hedge anticipated exposures
or mitigate some existing exposures subject to market risk. We do not enter into derivatives or other Ñnancial
instruments for trading or speculative purposes (see Note 3 to the Consolidated Financial Statements).
Annual Report
Interest rate risk is the potential loss arising from changes in interest rates and credit ratings. We do not
consider our cash and cash equivalents to be exposed to signiÑcant interest rate risk because our portfolio
consists of highly liquid investments with original maturities of three months or less (see Note 2 to the
Consolidated Financial Statements).
Foreign Currency Exchange Rate Risk
From time to time, we hedge some of our foreign currency risk related to anticipated foreign-currency-
denominated sales transactions by purchasing option contracts that generally have maturities of 15 months or
less. These transactions are designated and qualify as cash Öow hedges. The derivative assets associated with
our hedging activities are recorded at fair value in other current assets in the Consolidated Balance Sheets.
The eÅective portion of gains or losses resulting from changes in fair value is initially reported as a component
of accumulated other comprehensive income (loss), net of any tax eÅects, in stockholders' equity and
subsequently reclassiÑed into net revenue in the period when the forecasted transaction actually occurs. The
ineÅective portion of gains or losses resulting from changes 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 other current assets was $1 million as of both March 31, 2005 and 2004.
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