Electronic Arts 2006 Annual Report Download - page 97

(or increase our reported net loss), which could have an adverse impact on the trading price of our
common stock.
Our reported Ñnancial results could be adversely aÅected by changes in Ñnancial accounting standards or
by the application of existing or future accounting standards to our business as it evolves.
As a result of the enactment of the Sarbanes-Oxley Act and the review of accounting policies by the SEC
and national and international accounting standards bodies, the frequency of accounting policy changes
may accelerate. For example, accounting policies aÅecting software revenue recognition have been the
subject of frequent interpretations, which could signiÑcantly aÅect the way we account for revenue related
to our products. In addition, the rules for tax accounting are in the process of being changed. As we
enhance, expand and diversify our business and product oÅerings, the application of existing or future
Ñnancial accounting standards, particularly those relating to the way we account for revenue and taxes,
could have a signiÑcant adverse eÅect on our reported results although not necessarily on our cash Öows. It
is likely that, as the industry transitions to the next generation of consoles, a more signiÑcant portion of
our business could be generated through online services and, as a result, we would recognize the related
revenue over an extended period of time rather than up front and all at once.
The majority of our sales are made to a relatively small number of key customers. If these customers
reduce their purchases of our products or become unable to pay for them, our business could be harmed.
Over 70 percent of our U.S. sales were made to Ñve key customers during the Ñscal year ended March 31,
2006. In Europe, our top ten customers accounted for approximately 32 percent of our sales in that
territory during the Ñscal year ended March 31, 2006. Worldwide, we had direct sales to one customer,
Wal-Mart Stores, Inc., which represented approximately 13 percent of total net revenue in the Ñscal year
ended March 31, 2006. In addition, we believe it likely that, had GameStop Corp.'s acquisition of
Electronics Boutique Holdings Corp. occurred on April 1, 2005, the combined company would have
represented greater than 10 percent of total net revenue for the Ñscal year ended March 31, 2006. Though
our products are available to consumers through a variety of retailers, the concentration of our sales in one,
or a few, large customers could lead to a short-term disruption in our sales if one or more of these
customers signiÑcantly reduced their purchases or ceased to carry our products, and could make us more
vulnerable to collection risk if one or more of these large customers became unable to pay for our
products. Additionally, our receivables from these large customers increase signiÑcantly in the December
quarter as they stock up for the holiday selling season. Also, having such a large portion of our total net
revenue concentrated in a few customers reduces our negotiating leverage with these customers.
Acquisitions, investments and other strategic transactions could result in operating diÇculties, dilution to
our investors and other negative consequences.
Annual Report
We have engaged in, evaluated, and expect to continue to engage in and evaluate, a wide array of potential
strategic transactions, including (i) acquisitions of companies, businesses, intellectual properties, and other
assets, and (ii) investments in new interactive entertainment businesses (for example, online and mobile
games). Any of these strategic transactions could be material to our Ñnancial condition and results of
operations. Although we regularly search for opportunities to engage in strategic transactions, we may not
be successful in identifying suitable opportunities. We may not be able to consummate potential
acquisitions or investments or an acquisition or investment may not enhance our business or may decrease
rather than increase our earnings. In addition, the process of integrating an acquired company or business,
or successfully exploiting acquired intellectual property or other assets, could divert a signiÑcant amount of
our management's time and focus and may create unforeseen operating diÇculties and expenditures.
Additional risks we face include:
‚ The need to implement or remediate controls, procedures and policies appropriate for a public
company in an acquired company that, prior to the acquisition, lacked these controls, procedures
and policies,
‚ Cultural challenges associated with integrating employees from an acquired company or business
into our organization,
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