Electronic Arts 2008 Annual Report Download - page 161

(d) Deferred Net Revenue (Packaged Goods and Digital Content)
Deferred net revenue (packaged goods and digital content), was $387 million as of March 31, 2008 and
$32 million as of March 31, 2007. Deferred net revenue (packaged goods and digital content), includes the
deferral of (1) the total net revenue from the sale of certain online-enabled packaged goods and PC digital
downloads for which we do not have VSOE for the online service we provide in connection with the sale of
the software, and (2) revenue from the sale of certain incremental content associated with our core subscription
services that can only be played online, which are types of “micro-transactions”. We recognize revenue from
sales of online-enabled software products for which we do not have VSOE for the online service on a straight-
line basis over an estimated six month period beginning in the month after shipment. In addition, we expense
the cost of goods sold related to these transactions during the period in which the product is delivered (rather
than on a deferred basis).
(9) COMMITMENTS AND CONTINGENCIES
Lease Commitments and Residual Value Guarantees
We lease certain of our current facilities, furniture and equipment under non-cancelable operating lease
agreements. We are required to pay property taxes, insurance and normal maintenance costs for certain of
these facilities and will be required to pay any increases over the base year of these expenses on the remainder
of our facilities.
In February 1995, we entered into a build-to-suit lease (“Phase One Lease”) with a third-party lessor for our
headquarters facilities in Redwood City, California (“Phase One Facilities”). The Phase One Facilities
comprise a total of approximately 350,000 square feet and provide space for sales, marketing, administration
and research and development functions. In July 2001, the lessor refinanced the Phase One Lease with
Keybank National Association through July 2006. The Phase One Lease expires in January 2039, subject to
early termination in the event the underlying financing between the lessor and its lenders is not extended.
Subject to certain terms and conditions, we may purchase the Phase One Facilities or arrange for the sale of
the Phase One Facilities to a third party.
Pursuant to the terms of the Phase One Lease, we have an option to purchase the Phase One Facilities at any
time for a purchase price of $132 million. In the event of a sale to a third party, if the sale price is less than
$132 million, we will be obligated to reimburse the difference between the actual sale price and $132 million,
up to a maximum of $117 million, subject to certain provisions of the Phase One Lease, as amended.
On May 26, 2006, the lessor extended its loan financing underlying the Phase One Lease with its lenders
through July 2007, and on May 14, 2007, the lenders extended this financing again for an additional year
through July 2008. On April 14, 2008, the lenders extended the financing for another year through July 2009.
At any time prior to the expiration of the financing in July 2009, we may re-negotiate the lease and the related
financing arrangement. We account for the Phase One Lease arrangement as an operating lease in accordance
with SFAS No. 13, “Accounting for Leases”, as amended.
In December 2000, we entered into a second build-to-suit lease (“Phase Two Lease”) with Keybank National
Association for a five and one-half year term beginning in December 2000 to expand our Redwood City,
California headquarters facilities and develop adjacent property (“Phase Two Facilities”). Construction of the
Phase Two Facilities was completed in June 2002. The Phase Two Facilities comprise a total of approximately
310,000 square feet and provide space for sales, marketing, administration and research and development
functions. Subject to certain terms and conditions, we may purchase the Phase Two Facilities or arrange for
the sale of the Phase Two Facilities to a third party.
Pursuant to the terms of the Phase Two Lease, we have an option to purchase the Phase Two Facilities at any
time for a purchase price of $115 million. In the event of a sale to a third party, if the sale price is less than
$115 million, we will be obligated to reimburse the difference between the actual sale price and $115 million,
up to a maximum of $105 million, subject to certain provisions of the Phase Two Lease, as amended.
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