Electronic Arts 2009 Annual Report Download - page 137

Annual Report
Related Person Transaction
Prior to becoming Chief Executive Officer of Electronic Arts, John Riccitiello was a Founder and Managing
Director of Elevation Partners, L.P., and also served as Chief Executive Officer of VGH, which we acquired in
January 2008. At the time of the acquisition, Mr. Riccitiello held an indirect financial interest in VGH resulting
from his interest in the entity that controlled Elevation Partners, L.P. and his interest in a limited partner of
Elevation Partners, L.P. Elevation Partners, L.P. was a significant stockholder of VGH. As a result of the
acquisition, Mr. Riccitiello’s financial returns related to these interests, including returns of deemed capital
contributions, were $2.4 million through May 2008 (some of which Mr. Riccitiello could be required to return
depending on the performance of the Elevation entities). Mr. Riccitiello has not received any additional payments
related to the VGH acquisition to date. However, he could receive up to an additional $1.6 million plus any
interest or other amounts earned thereon. This amount could be reduced, however, by a variety of factors,
including investment losses of Elevation, if any, as well as certain expenses of Elevation that could offset
partnership profits. Upon his separation from Elevation Partners, L.P., Mr. Riccitiello ceased to have any further
control or influence over these factors.
From the commencement of negotiations with VGH, at the direction of EA’s Board of Directors, EA’s Audit
Committee engaged directly with EA management (independently from Mr. Riccitiello) to analyze and consider
the potential benefits, risks and material terms of the acquisition. EA’s Board of Directors approved the
acquisition after reviewing with EA’s management and members of the Audit Committee the terms of the
acquisition and the potential benefits and risks thereof, as well as Mr. Riccitiello’s personal financial interest in
VGH and the acquisition. Mr. Riccitiello recused himself from the Board of Directors meeting during the
Board’s deliberation of the acquisition and he did not vote on the acquisition.
OFF-BALANCE SHEET COMMITMENTS
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”) 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. 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 or if we chose to exercise our option to purchase the
facility.
The lessor has extended its loan financing underlying the Phase One Lease with its lenders on several occasions.
The financing currently extends through July 2009. On February 2, 2009, the Phase One Lease was amended to
modify the Fixed Charge Coverage Ratio, the Quick Ratio and the Consolidated EBIDTA definitions used in the
covenants. Had we not entered into this amendment, which covered the quarter ended December 31, 2008, as
well as future quarters, we would have been unable to meet the Fixed Charge Coverage Ratio for such quarter.
We were in compliance with each of the other financial covenants.
Upon the expiration of the lease financing arrangement, the terms of the Phase One Lease provide for our
purchase of the Phase One Facilities for a purchase price of $132 million. However, at any time prior to the
expiration of the financing in July 2009, we may re-negotiate the lease and the related financing arrangement or
negotiate an alternative 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 the event that we were to purchase the Phase One Facilities, we would be
required to classify the property on our Consolidated Balance Sheet. We would also be required to recognize the
depreciation expense for the property, excluding the land.
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