Electronic Arts 2006 Annual Report Download - page 134

Litigation
On February 14, 2005, an employment-related class action lawsuit, Hasty v. Electronic Arts Inc., was Ñled
against the company in Superior Court in San Mateo, California. The complaint alleges that we
improperly classiÑed ""Engineers'' in California as exempt employees and seeks injunctive relief, unspeciÑed
monetary damages, interest and attorneys' fees. On May 16, 2006, the court granted its preliminary
approval of a settlement pursuant to which we agreed to make a lump sum payment of $14.9 million, to
be paid to a third-party administrator, to cover (a) all claims allegedly suÅered by the class members,
(b) plaintiÅs' attorneys' fees, not to exceed 25% of the total settlement amount, (c) plaintiÅs' costs and
expenses, (d) any incentive payments to the named plaintiÅs that may be authorized by the court, and
(e) all costs of administration of the settlement. The hearing for the court to consider its Ñnal approval of
the settlement is set for September 22, 2006.
Each of the shareholder actions we have previously disclosed have been voluntarily dismissed by all
plaintiÅs. The federal securities class action complaint has been dismissed with prejudice, by an order
dated January 26, 2006; the federal derivative action has been dismissed, by an order dated March 10,
2006; and the two state derivative actions have been dismissed, by orders dated May 4, 2006 and May 8,
2006.
In addition, we are subject to other claims and litigation arising in the ordinary course of business. We
believe that any liability from any reasonably foreseeable disposition of such other claims and litigation,
individually or in the aggregate, would not have a material adverse eÅect on our consolidated Ñnancial
position or results of operations.
Director Indemnity Agreements
We have entered into indemniÑcation agreements with the members of our Board of Directors at the time
they joined the Board to indemnify them to the extent permitted by law against any and all liabilities,
costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any
lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued or
charged as a result of their service as members of our Board of Directors.
INFLATION
We believe the impact of inÖation on our results of operations has not been signiÑcant for each of the past
three Ñscal years.
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. We employ established policies and practices to manage these risks. 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 included in
Item 8 of this report). Interest rate risk is the potential loss arising from changes in interest rates. 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 included in Item 8 of this report).
Foreign Currency Exchange Rate Risk
From time to time, we hedge some of our foreign currency risk related to forecasted foreign-currency-
denominated sales and expense 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
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