Electronic Arts 2007 Annual Report Download - page 91

on occasion reacted to the discovery of such hidden content by removing these games from their shelves,
refusing to sell them, and demanding that their publishers accept them as product returns. Likewise, consumers
have reacted to the revelation of hidden content by refusing to purchase such games, demanding refunds for
games they’ve already purchased, and refraining from buying other games published by the company whose
game contained the objectionable material.
We have implemented preventative measures designed to reduce the possibility of hidden, objectionable
content from appearing in the video games we publish. Nonetheless, these preventative measures are subject to
human error, circumvention, overriding, and reasonable resource constraints. If a video game we published
were found to contain hidden, objectionable content, the ESRB could demand that we recall a game and
change its packaging to reflect a revised rating, retailers could refuse to sell it and demand we accept the
return of any unsold copies or returns from customers, and consumers could refuse to buy it or demand that
we refund their money. This could have a material negative impact on our operating results and financial
condition. In addition, our reputation could be harmed, which could impact sales of other video games we sell.
If any of these consequences were to occur, our business and financial performance could be significantly
harmed.
If we ship defective products, our operating results could suffer.
Products such as ours are extremely complex software programs, and are difficult to develop, manufacture and
distribute. We have quality controls in place to detect defects in the software, media and packaging of our
products before they are released. Nonetheless, these quality controls are subject to human error, overriding,
and reasonable resource constraints. Therefore, these quality controls and preventative measures may not be
effective in detecting defects in our products before they have been reproduced and released into the
marketplace. In such an event, we could be required to recall a product, or we may find it necessary to
voluntarily recall a product, and/or scrap defective inventory, which could significantly harm our business and
operating results.
Our international net revenue is subject to currency fluctuations.
For the fiscal year ended March 31, 2007, international net revenue comprised 46 percent of our total net
revenue. We expect foreign sales to continue to account for a significant portion of our total net revenue. Such
sales may be subject to unexpected regulatory requirements, tariffs and other barriers. Additionally, foreign
sales are primarily made in local currencies, which may fluctuate against the U.S. dollar. While we utilize
foreign exchange forward contracts to mitigate some foreign currency risk associated with foreign currency
denominated assets and liabilities (primarily certain intercompany receivables and payables) and, from time to
time, foreign currency option contracts to hedge foreign currency forecasted transactions (primarily related to
a portion of the revenue and expenses denominated in foreign currency generated by our operational
subsidiaries), our results of operations, including our reported net revenue and net income, and financial
condition would be adversely affected by unfavorable foreign currency fluctuations, particularly the Euro,
British pound sterling and Canadian dollar.
Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and
financial condition.
We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment
is required in determining our worldwide provision for income taxes, and, in the ordinary course of our
business, there are many transactions and calculations where the ultimate tax determination is uncertain.
We are also required to estimate what our taxes will be in the future. Although we believe our tax estimates
are reasonable, the estimation process and applicable laws are inherently uncertain, and our estimates are not
binding on tax authorities. Our effective tax rate could be adversely affected by our profit level, by changes in
our business, including the mix of earnings in countries with differing statutory tax rates, changes in the
elections we make, changes in applicable tax laws as well as other factors. Further, our tax determinations are
regularly subject to audit by tax authorities and developments in those audits could adversely affect our
income tax provision. Should our ultimate tax liability exceed our estimates, our income tax provision and net
income or loss could be materially affected.
Annual Report
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