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SECURITIES AND EXCHANGE COMMISSION
(Exact name of registrant as specified in its charter)
Delaware | 94-2838567 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
209 Redwood Shores Parkway Redwood City, California | 94065 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YESS NOo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding as of | ||||
Par Value | November 8, 2005 | |||
Common Stock | $0.01 | 300,578,539 |
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
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EXHIBIT 10.1 | ||||||||
EXHIBIT 15.1 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 | ||||||||
EXHIBIT 32.2 |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | September 30, | March 31, | ||||||
(In millions, except par value data) | 2005 | 2005 (a) | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 575 | $ | 1,270 | ||||
Short-term investments | 1,655 | 1,688 | ||||||
Marketable equity securities | 182 | 140 | ||||||
Receivables, net of allowances of $137 and $162, respectively | 328 | 296 | ||||||
Inventories | 74 | 62 | ||||||
Deferred income taxes | 85 | 86 | ||||||
Other current assets | 208 | 164 | ||||||
Total current assets | 3,107 | 3,706 | ||||||
Property and equipment, net | 364 | 353 | ||||||
Investments in affiliates | 10 | 10 | ||||||
Goodwill | 155 | 153 | ||||||
Other intangibles, net | 30 | 36 | ||||||
Deferred income taxes | 16 | 19 | ||||||
Other assets | 72 | 93 | ||||||
TOTAL ASSETS | $ | 3,754 | $ | 4,370 | ||||
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 171 | $ | 134 | ||||
Accrued and other liabilities | 558 | 694 | ||||||
Total current liabilities | 729 | 828 | ||||||
Other liabilities | 29 | 33 | ||||||
Total liabilities | 758 | 861 | ||||||
Commitments and contingencies | – | – | ||||||
Minority interest | 12 | 11 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value. 10 shares authorized | – | – | ||||||
Common stock, $0.01 par value. 1,000 shares authorized; 300 and 310 shares issued and outstanding, respectively | 3 | 3 | ||||||
Paid-in capital | 877 | 1,434 | ||||||
Retained earnings | 1,998 | 2,005 | ||||||
Accumulated other comprehensive income | 106 | 56 | ||||||
Total stockholders’ equity | 2,984 | 3,498 | ||||||
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY | $ | 3,754 | $ | 4,370 | ||||
(a) | Derived from audited financial statements. |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Six Months Ended | |||||||||||||||
(Unaudited) | September 30, | September 30, | ||||||||||||||
(In millions, except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net revenue | $ | 675 | $ | 716 | $ | 1,040 | $ | 1,147 | ||||||||
Cost of goods sold | 284 | 284 | 434 | 460 | ||||||||||||
Gross profit | 391 | 432 | 606 | 687 | ||||||||||||
Operating expenses: | ||||||||||||||||
Marketing and sales | 107 | 107 | 182 | 171 | ||||||||||||
General and administrative | 52 | 42 | 103 | 77 | ||||||||||||
Research and development | 182 | 157 | 365 | 288 | ||||||||||||
Amortization of intangibles | 1 | 1 | 2 | 1 | ||||||||||||
Total operating expenses | 342 | 307 | 652 | 537 | ||||||||||||
Operating income (loss) | 49 | 125 | (46 | ) | 150 | |||||||||||
Interest and other income, net | 13 | 12 | 30 | 21 | ||||||||||||
Income (loss) before provision for (benefit from) income taxes and minority interest | 62 | 137 | (16 | ) | 171 | |||||||||||
Provision for (benefit from) income taxes | 9 | 40 | (13 | ) | 50 | |||||||||||
Income (loss) before minority interest | 53 | 97 | (3 | ) | 121 | |||||||||||
Minority interest | (2 | ) | – | (4 | ) | – | ||||||||||
Net income (loss) | $ | 51 | $ | 97 | $ | (7 | ) | $ | 121 | |||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.17 | $ | 0.32 | $ | (0.02 | ) | $ | 0.40 | |||||||
Diluted | $ | 0.16 | $ | 0.31 | $ | (0.02 | ) | $ | 0.38 | |||||||
Number of shares used in computation: | ||||||||||||||||
Basic | 302 | 304 | 305 | 303 | ||||||||||||
Diluted | 314 | 316 | 305 | 316 |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended | ||||||||
(Unaudited) | September 30, | |||||||
(In millions) | 2005 | 2004 | ||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (7 | ) | $ | 121 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 46 | 33 | ||||||
Minority interest | 4 | — | ||||||
Realized (gains) losses on investments and on sale of property and equipment | 2 | (4 | ) | |||||
Tax benefit from exercise of stock options | 92 | 25 | ||||||
Change in assets and liabilities: | ||||||||
Receivables, net | (20 | ) | (168 | ) | ||||
Inventories | (9 | ) | (24 | ) | ||||
Other assets | (16 | ) | 27 | |||||
Accounts payable | 34 | 58 | ||||||
Accrued and other liabilities | (145 | ) | (45 | ) | ||||
Net cash provided by (used in) operating activities | (19 | ) | 23 | |||||
INVESTING ACTIVITIES | ||||||||
Capital expenditures | (56 | ) | (45 | ) | ||||
Proceeds from sale of property and equipment | — | 15 | ||||||
Proceeds from sale of marketable equity securities | 4 | 3 | ||||||
Purchase of short-term investments | (281 | ) | (1,658 | ) | ||||
Proceeds from maturities and sales of short-term investments | 321 | 812 | ||||||
Acquisition of subsidiary, net of cash acquired | (3 | ) | — | |||||
Other investing activities | (1 | ) | — | |||||
Net cash used in investing activities | (16 | ) | (873 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Proceeds from sales of common stock through employee stock plans and other plans | 60 | 86 | ||||||
Repurchase and retirement of common stock | (709 | ) | — | |||||
Net cash provided by (used in) financing activities | (649 | ) | 86 | |||||
Effect of foreign exchange on cash and cash equivalents | (11 | ) | — | |||||
Decrease in cash and cash equivalents | (695 | ) | (764 | ) | ||||
Beginning cash and cash equivalents | 1,270 | 2,150 | ||||||
Ending cash and cash equivalents | 575 | 1,386 | ||||||
Short-term investments | 1,655 | 1,104 | ||||||
Ending cash, cash equivalents and short-term investments | $ | 2,230 | $ | 2,490 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for income taxes | $ | 10 | $ | 43 | ||||
Non-cash investing activities: | ||||||||
Change in unrealized gains (losses) on investments, net | $ | 54 | $ | (7 | ) | |||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Number of Shares Repurchased and Retired | Approximate Amount | |||||||
Three months ended September 30, 2005 | 6.3 | $ | 372 | |||||
Six months ended September 30, 2005 | 12.6 | $ | 709 | |||||
From the inception of the program through September 30, 2005 | 13.4 | $ | 750 |
Fiscal Years Ended | Number of Weeks | Fiscal Period End Date | ||
March 31, 2006 | 53 weeks | April 1, 2006 | ||
March 31, 2005 | 52 weeks | March 26, 2005 |
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Fiscal Period | Number of Weeks | Fiscal Period End Date | ||
Three months ended September 30, 2005 | 13 weeks | October 1, 2005 | ||
Six months ended September 30, 2005 | 27 weeks | October 1, 2005 | ||
Three months ended September 30, 2004 | 13 weeks | September 25, 2004 | ||
Six months ended September 30, 2004 | 26 weeks | September 25, 2004 |
Three Months Ended | Six Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
Risk-free interest rate | 3.9 | % | 3.0 | % | 3.8 | % | 3.0 | % | |||||||||
Expected volatility | 33.9 | % | 37.5 | % | 34.4 | % | 38.4 | % | |||||||||
Expected life of stock options (in years) | 3.49 | 2.96 | 3.38 | 3.04 | |||||||||||||
Expected life of employee stock purchase plans (in months) | 6 | 6 | 6 | 6 | |||||||||||||
Assumed dividends | None | None | None | None |
Three Months Ended | Six Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
(In millions, except per share data) | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income (loss): | |||||||||||||||||
As reported | $ | 51 | $ | 97 | $ | (7 | ) | $ | 121 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects | (26 | ) | (23 | ) | (51 | ) | (42 | ) | |||||||||
Pro forma | $ | 25 | $ | 74 | $ | (58 | ) | $ | 79 | ||||||||
Net income (loss) per share: | |||||||||||||||||
As reported – basic | $ | 0.17 | $ | 0.32 | $ | (0.02 | ) | $ | 0.40 | ||||||||
Pro forma – basic | $ | 0.08 | $ | 0.24 | $ | (0.19 | ) | $ | 0.26 | ||||||||
As reported – diluted | $ | 0.16 | $ | 0.31 | $ | (0.02 | ) | $ | 0.38 | ||||||||
Pro forma – diluted | $ | 0.08 | $ | 0.24 | $ | (0.19 | ) | $ | 0.25 |
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Effects of | ||||||||||||||||
As of | Foreign | As of | ||||||||||||||
March 31, | Goodwill | Currency | September 30, | |||||||||||||
2005 | Acquired | Translation | 2005 | |||||||||||||
Goodwill | $ | 153 | $ | 3 | $ | (1 | ) | $ | 155 | |||||||
As of September 30, 2005 | ||||||||||||||||||||
Gross | Other | |||||||||||||||||||
Carrying | Accumulated | Intangibles, | ||||||||||||||||||
Amount | Amortization | Impairment | Other | Net | ||||||||||||||||
Developed/Core Technology | $ | 47 | $ | (26 | ) | $ | (9 | ) | $ | – | $ | 12 | ||||||||
Tradename | 37 | (20 | ) | (1 | ) | – | 16 | |||||||||||||
Subscribers and Other Intangibles | 12 | (7 | ) | (2 | ) | (1 | ) | 2 | ||||||||||||
Total | $ | 96 | $ | (53 | ) | $ | (12 | ) | $ | (1 | ) | $ | 30 | |||||||
As of March 31, 2005 | ||||||||||||||||||||
Gross | Other | |||||||||||||||||||
Carrying | Accumulated | Intangibles, | ||||||||||||||||||
Amount | Amortization | Impairment | Other | Net | ||||||||||||||||
Developed/Core Technology | $ | 47 | $ | (22 | ) | $ | (9 | ) | $ | 1 | $ | 17 | ||||||||
Tradename | 37 | (18 | ) | (1 | ) | – | 18 | |||||||||||||
Subscribers and Other Intangibles | 11 | (7 | ) | (2 | ) | (1 | ) | 1 | ||||||||||||
Total | $ | 95 | $ | (47 | ) | $ | (12 | ) | $ | – | $ | 36 | ||||||||
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Fiscal Year Ending March 31, | ||||
2006 (remaining six months) | $ | 5 | ||
2007 | 10 | |||
2008 | 6 | |||
2009 | 3 | |||
2010 | 2 | |||
Thereafter | 4 | |||
Total | $ | 30 | ||
Accrual | Accrual | |||||||||||||||
Beginning | Charges Utilized | Adjustments | Ending | |||||||||||||
Balance | in Cash | to Operations | Balance | |||||||||||||
Six Months Ended September 30, 2005 | ||||||||||||||||
Facilities-related | $ | 10 | $ | (2 | ) | $ | – | $ | 8 | |||||||
Year Ended March 31, 2005 | ||||||||||||||||
Workforce | $ | 2 | $ | (2 | ) | $ | – | $ | – | |||||||
Facilities-related | 12 | (4 | ) | 2 | 10 | |||||||||||
Total | $ | 14 | $ | (6 | ) | $ | 2 | $ | 10 | |||||||
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As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
Other current assets | $ | 114 | $ | 59 | ||||
Other assets | 56 | 76 | ||||||
Royalty-related assets | $ | 170 | $ | 135 | ||||
As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
Accrued liabilities | $ | 76 | $ | 88 | ||||
Other liabilities | 29 | 33 | ||||||
Accrued royalties | $ | 105 | $ | 121 | ||||
Inventories as of September 30, 2005 and March 31, 2005 consisted of (in millions):
As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
Raw materials and work in process | $ | 5 | $ | 2 | ||||
Finished goods (including manufacturing royalties) | 69 | 60 | ||||||
Inventories | $ | 74 | $ | 62 | ||||
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Property and equipment, net, as of September 30, 2005 and March 31, 2005 consisted of (in millions):
As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
Computer equipment and software | $ | 404 | $ | 381 | ||||
Buildings | 125 | 106 | ||||||
Leasehold improvements | 77 | 73 | ||||||
Land | 58 | 60 | ||||||
Office equipment, furniture and fixtures | 56 | 53 | ||||||
Warehouse equipment and other | 12 | 12 | ||||||
Construction in progress | 42 | 43 | ||||||
774 | 728 | |||||||
Less: Accumulated depreciation and amortization | (410 | ) | (375 | ) | ||||
Property and equipment, net | $ | 364 | $ | 353 | ||||
Accrued and other liabilities as of September 30, 2005 and March 31, 2005 consisted of (in millions):
As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
Other accrued expenses | $ | 190 | $ | 172 | ||||
Accrued income taxes | 147 | 267 | ||||||
Accrued compensation and benefits | 91 | 132 | ||||||
Accrued royalties | 76 | 88 | ||||||
Deferred revenue | 54 | 35 | ||||||
Accrued and other liabilities | $ | 558 | $ | 694 | ||||
Change in Effective Income Tax Rate
We lease certain of our current facilities and certain equipment under non-cancelable operating lease agreements. We are required to pay property taxes, insurance and normal maintenance costs for certain of our facilities and will be required to pay any increases over the base year of these expenses on the remainder of our facilities.
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Actual as of | ||||||||||||
Financial Covenants | Requirement | September 30, 2005 | ||||||||||
Consolidated Net Worth (in millions) | equal to or greater than | $ | 2,099 | $ | 2,984 | |||||||
Fixed Charge Coverage Ratio | equal to or greater than | 3.00 | 13.42 | |||||||||
Total Consolidated Debt to Capital | equal to or less than | 60% | 7.6% | |||||||||
Quick Ratio – Q1 & Q2 | equal to or greater than | 1.00 | 10.36 | |||||||||
Q3 & Q4 | equal to or greater than | 1.75 | N/A |
In July 2002, we provided an irrevocable standby letter of credit to Nintendo of Europe. The standby letter of credit guarantees performance of our obligations to pay Nintendo of Europe for trade payables. The original letter of credit guaranteed our trade payable obligations to Nintendo of Europe of up to€18 million. In April 2005, we reduced the guarantee to€8 million and in September 2005 we increased the guarantee to€15 million. This standby letter of credit expired in July 2005 and was renewed through July 2006. As of September 30, 2005, we had€8 million payable to Nintendo of Europe covered by this standby letter of credit.
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The products produced by our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones.
Contractual Obligations | Commercial Commitments | |||||||||||||||||||||||
Developer/ | Letters | |||||||||||||||||||||||
Fiscal Year | Licensor | Bank and | of | |||||||||||||||||||||
Ending March 31, | Leases | Commitments(1) | Marketing | Other Guarantees | Credit | Total | ||||||||||||||||||
2006 (remaining six months) | $ | 30 | $ | 72 | $ | 19 | $ | 2 | $ | 10 | $ | 133 | ||||||||||||
2007 | 31 | 146 | 34 | – | – | 211 | ||||||||||||||||||
2008 | 24 | 135 | 30 | – | – | 189 | ||||||||||||||||||
2009 | 17 | 145 | 30 | – | – | 192 | ||||||||||||||||||
2010 | 13 | 128 | 30 | – | – | 171 | ||||||||||||||||||
Thereafter | 34 | 837 | 198 | – | – | 1,069 | ||||||||||||||||||
Total | $ | 149 | $ | 1,463 | $ | 341 | $ | 2 | $ | 10 | $ | 1,965 | ||||||||||||
On July 29, 2004, a class action lawsuit,Kirschenbaum v. Electronic Arts Inc., was filed against us in Superior Court in San Mateo, California, alleging that we improperly classified “Image Production Employees” in California as exempt employees. In early October 2005, we reached a settlement to resolve these claims. Under the terms of the settlement, we will make a lump sum payment of $15.6 million to cover (a) all claims allegedly suffered by the class members, (b) plaintiffs’ attorneys’ fees, not to exceed 25% of the total settlement amount, (c) plaintiffs’ costs and expenses, (d) any incentive payments to the named plaintiffs that may be authorized by the court, and (e) all costs of administration of the settlement. On October 17, 2005, the court granted its preliminary approval of the settlement. The court has scheduled a hearing to consider its final approval of the settlement for January 27, 2006.
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We have entered into indemnification agreements with the members of our Board of Directors at the time they join 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 as a result of their service as members of our Board of Directors.
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Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income (loss) | $ | 51 | $ | 97 | $ | (7 | ) | $ | 121 | |||||||
Other comprehensive income (loss): | ||||||||||||||||
Change in unrealized gains (losses) on investments, net of tax expense (benefit) of $0, $3 and $0, $(2), respectively | 7 | 5 | 54 | (3 | ) | |||||||||||
Adjustment for gains realized in net income, net of tax expense of $0, $1 and $0, $1, respectively | – | (1 | ) | – | (1 | ) | ||||||||||
Change in unrealized gains on derivative instruments, net of tax expense of $0, $0 and $1, $0, respectively | – | – | 4 | – | ||||||||||||
Foreign currency translation adjustments | 3 | 5 | (8 | ) | – | |||||||||||
Total other comprehensive income (loss) | $ | 10 | $ | 9 | $ | 50 | $ | (4 | ) | |||||||
Total comprehensive income | $ | 61 | $ | 106 | $ | 43 | $ | 117 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In millions, except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net income (loss) | $ | 51 | $ | 97 | $ | (7 | ) | $ | 121 | |||||||
Shares used to compute net income (loss) per share: | ||||||||||||||||
Weighted-average common stock outstanding – basic | 302 | 304 | 305 | 303 | ||||||||||||
Dilutive potential common shares | 12 | 12 | – | 13 | ||||||||||||
Weighted-average common stock outstanding – diluted | 314 | 316 | 305 | 316 | ||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.17 | $ | 0.32 | $ | (0.02 | ) | $ | 0.40 | |||||||
Diluted | $ | 0.16 | $ | 0.31 | $ | (0.02 | ) | $ | 0.38 |
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Three Months Ended | Six Months Ended | ||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||||
Consoles | |||||||||||||||||||
PlayStation 2 | $ | 304 | $ | 312 | $ | 421 | $ | 474 | |||||||||||
Xbox | 136 | 142 | 180 | 199 | |||||||||||||||
Nintendo GameCube | 27 | 38 | 49 | 65 | |||||||||||||||
Other Consoles | – | 1 | – | 3 | |||||||||||||||
Total Consoles | 467 | 493 | 650 | 741 | |||||||||||||||
PC | 91 | 141 | 165 | 207 | |||||||||||||||
Mobility | |||||||||||||||||||
PSP | 45 | – | 77 | – | |||||||||||||||
Nintendo DS | 8 | – | 20 | – | |||||||||||||||
Game Boy Advance | 7 | 10 | 13 | 28 | |||||||||||||||
Cellular Handsets | 2 | – | 3 | – | |||||||||||||||
Total Mobility | 62 | 10 | 113 | 28 | |||||||||||||||
Co-publishing and Distribution | 32 | 49 | 62 | 116 | |||||||||||||||
Internet Services, Licensing and Other | |||||||||||||||||||
Subscription Services | 14 | 13 | 29 | 25 | |||||||||||||||
Licensing, Advertising and Other | 9 | 10 | 21 | 30 | |||||||||||||||
Total Internet Services, Licensing and Other | 23 | 23 | 50 | 55 | |||||||||||||||
Total Net Revenue | $ | 675 | $ | 716 | $ | 1,040 | $ | 1,147 | |||||||||||
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North | ||||||||||||||||
America | Europe | Asia | Total | |||||||||||||
Three months ended September 30, 2005 | ||||||||||||||||
Net revenue from unaffiliated customers | $ | 443 | $ | 191 | $ | 41 | $ | 675 | ||||||||
Interest income, net | 12 | 3 | – | 15 | ||||||||||||
Depreciation and amortization | 15 | 7 | 1 | 23 | ||||||||||||
Total assets | 2,435 | 1,246 | 73 | 3,754 | ||||||||||||
Capital expenditures | 17 | 5 | 1 | 23 | ||||||||||||
Long-lived assets | 334 | 205 | 10 | 549 | ||||||||||||
Three months ended September 30, 2004 | ||||||||||||||||
Net revenue from unaffiliated customers | $ | 473 | $ | 210 | $ | 33 | $ | 716 | ||||||||
Interest income, net | 7 | 2 | – | 9 | ||||||||||||
Depreciation and amortization | 12 | 5 | – | 17 | ||||||||||||
Total assets | 2,765 | 867 | 71 | 3,703 | ||||||||||||
Capital expenditures | 14 | 5 | – | 19 | ||||||||||||
Long-lived assets | 263 | 138 | 6 | 407 | ||||||||||||
Six months ended September 30, 2005 | ||||||||||||||||
Net revenue from unaffiliated customers | $ | 627 | $ | 335 | $ | 78 | $ | 1,040 | ||||||||
Interest income, net | 25 | 10 | – | 35 | ||||||||||||
Depreciation and amortization | 29 | 15 | 2 | 46 | ||||||||||||
Capital expenditures | 43 | 10 | 3 | 56 | ||||||||||||
Six months ended September 30, 2004 | ||||||||||||||||
Net revenue from unaffiliated customers | $ | 684 | $ | 399 | $ | 64 | $ | 1,147 | ||||||||
Interest income, net | 14 | 3 | – | 17 | ||||||||||||
Depreciation and amortization | 21 | 11 | 1 | 33 | ||||||||||||
Capital expenditures | 35 | 9 | 1 | 45 |
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Electronic Arts Inc.:
November 9, 2005
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• | Evidence of an arrangement: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue. | ||
• | Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer. For online games and services, revenue is recognized as the service is provided. | ||
• | Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable. | ||
• | Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection). |
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Fiscal Years Ended | Number of Weeks | Fiscal Period End Date | ||
March 31, 2006 | 53 weeks | April 1, 2006 | ||
March 31, 2005 | 52 weeks | March 26, 2005 |
Fiscal Period | Number of Weeks | Fiscal Period End Date | ||
Three months ended September 30, 2005 | 13 weeks | October 1, 2005 | ||
Six months ended September 30, 2005 | 27 weeks | October 1, 2005 | ||
Three months ended September 30, 2004 | 13 weeks | September 25, 2004 | ||
Six months ended September 30, 2004 | 26 weeks | September 25, 2004 |
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Three Months Ended September 30, | Increase / | % | ||||||||||||||||||||||
2005 | 2004 | (Decrease) | Change | |||||||||||||||||||||
North America | $ | 443 | 66 | % | $ | 473 | 66 | % | $ | (30 | ) | (6 | %) | |||||||||||
Europe | 191 | 28 | % | 210 | 29 | % | (19 | ) | (9 | %) | ||||||||||||||
Asia | 41 | 6 | % | 33 | 5 | % | 8 | 24 | % | |||||||||||||||
International | 232 | 34 | % | 243 | 34 | % | (11 | ) | (5 | %) | ||||||||||||||
Total Net Revenue | $ | 675 | 100 | % | $ | 716 | 100 | % | $ | (41 | ) | (6 | %) | |||||||||||
Six Months Ended September 30, | Increase / | % | ||||||||||||||||||||||
2005 | 2004 | (Decrease) | Change | |||||||||||||||||||||
North America | $ | 627 | 60 | % | $ | 684 | 60 | % | $ | (57 | ) | (8 | %) | |||||||||||
Europe | 335 | 32 | % | 399 | 35 | % | (64 | ) | (16 | %) | ||||||||||||||
Asia | 78 | 8 | % | 64 | 5 | % | 14 | 22 | % | |||||||||||||||
International | 413 | 40 | % | 463 | 40 | % | (50 | ) | (11 | %) | ||||||||||||||
Total Net Revenue | $ | 1,040 | 100 | % | $ | 1,147 | 100 | % | $ | (107 | ) | (9 | %) | |||||||||||
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Three Months Ended September 30, | Increase/ | % | ||||||||||||||||||||||
2005 | 2004 | (Decrease) | Change | |||||||||||||||||||||
Consoles | ||||||||||||||||||||||||
PlayStation 2 | $ | 304 | 45 | % | $ | 312 | 44 | % | $ | (8 | ) | (3 | %) | |||||||||||
Xbox | 136 | 20 | % | 142 | 20 | % | (6 | ) | (4 | %) | ||||||||||||||
Nintendo GameCube | 27 | 4 | % | 38 | 5 | % | (11 | ) | (29 | %) | ||||||||||||||
Other Consoles | – | 0 | % | 1 | 0 | % | (1 | ) | (100 | %) | ||||||||||||||
Total Consoles | 467 | 69 | % | 493 | 69 | % | (26 | ) | (5 | %) | ||||||||||||||
PC | 91 | 14 | % | 141 | 20 | % | (50 | ) | (35 | %) | ||||||||||||||
Mobility | ||||||||||||||||||||||||
PSP | 45 | 7 | % | – | 0 | % | 45 | N/A | ||||||||||||||||
Nintendo DS | 8 | 1 | % | – | 0 | % | 8 | N/A | ||||||||||||||||
Game Boy Advance | 7 | 1 | % | 10 | 1 | % | (3 | ) | (30 | %) | ||||||||||||||
Cellular Handsets | 2 | 0 | % | – | 0 | % | 2 | N/A | ||||||||||||||||
Total Mobility | 62 | 9 | % | 10 | 1 | % | 52 | 520 | % | |||||||||||||||
Co-publishing and Distribution | 32 | 5 | % | 49 | 7 | % | (17 | ) | (35 | %) | ||||||||||||||
Internet Services, Licensing and Other | ||||||||||||||||||||||||
Subscription Services | 14 | 2 | % | 13 | 2 | % | 1 | 8 | % | |||||||||||||||
Licensing, Advertising and Other | 9 | 1 | % | 10 | 1 | % | (1 | ) | (10 | %) | ||||||||||||||
Total Internet Services, Licensing and Other | 23 | 3 | % | 23 | 3 | % | – | 0 | % | |||||||||||||||
Total Net Revenue | $ | 675 | 100 | % | $ | 716 | 100 | % | $ | (41 | ) | (6 | %) | |||||||||||
Six Months Ended September 30, | Increase/ | % | ||||||||||||||||||||||
2005 | 2004 | (Decrease) | Change | |||||||||||||||||||||
Consoles | ||||||||||||||||||||||||
PlayStation 2 | $ | 421 | 40 | % | $ | 474 | 41 | % | $ | (53 | ) | (11 | %) | |||||||||||
Xbox | 180 | 17 | % | 199 | 17 | % | (19 | ) | (10 | %) | ||||||||||||||
Nintendo GameCube | 49 | 5 | % | 65 | 6 | % | (16 | ) | (25 | %) | ||||||||||||||
Other Consoles | – | 0 | % | 3 | 0 | % | (3 | ) | (100 | %) | ||||||||||||||
Total Consoles | 650 | 62 | % | 741 | 64 | % | (91 | ) | (12 | %) | ||||||||||||||
PC | 165 | 16 | % | 207 | 18 | % | (42 | ) | (20 | %) | ||||||||||||||
Mobility | ||||||||||||||||||||||||
PSP | 77 | 8 | % | – | 0 | % | 77 | N/A | ||||||||||||||||
Nintendo DS | 20 | 2 | % | – | 0 | % | 20 | N/A | ||||||||||||||||
Game Boy Advance | 13 | 1 | % | 28 | 3 | % | (15 | ) | (54 | %) | ||||||||||||||
Cellular Handsets | 3 | 0 | % | – | 0 | % | 3 | N/A | ||||||||||||||||
Total Mobility | 113 | 11 | % | 28 | 3 | % | 85 | 304 | % | |||||||||||||||
Co-publishing and Distribution | 62 | 6 | % | 116 | 10 | % | (54 | ) | (47 | %) | ||||||||||||||
Internet Services, Licensing and Other | ||||||||||||||||||||||||
Subscription Services | 29 | 3 | % | 25 | 2 | % | 4 | 16 | % | |||||||||||||||
Licensing, Advertising and Other | 21 | 2 | % | 30 | 3 | % | (9 | ) | (30 | %) | ||||||||||||||
Total Internet Services, Licensing and Other | 50 | 5 | % | 55 | 5 | % | (5 | ) | (9 | %) | ||||||||||||||
Total Net Revenue | $ | 1,040 | 100 | % | $ | 1,147 | 100 | % | $ | (107 | ) | (9 | %) | |||||||||||
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September 30, | % of Net | September 30, | % of Net | |||||||||||||||||
2005 | Revenue | 2004 | Revenue | % Change | ||||||||||||||||
Three months ended | $ | 284 | 42.1 | % | $ | 284 | 39.7 | % | 0.0 | % | ||||||||||
Six months ended | $ | 434 | 41.7 | % | $ | 460 | 40.1 | % | (5.7 | %) | ||||||||||
September 30, | % of Net | September 30, | % of Net | |||||||||||||||||||||
2005 | Revenue | 2004 | Revenue | $ Change | % Change | |||||||||||||||||||
Three months ended | $ | 107 | 16 | % | $ | 107 | 15 | % | $ | – | 0 | % | ||||||||||||
Six months ended | $ | 182 | 18 | % | $ | 171 | 15 | % | $ | 11 | 6 | % | ||||||||||||
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September 30, | % of Net | September 30, | % of Net | |||||||||||||||||||||
2005 | Revenue | 2004 | Revenue | $ Change | % Change | |||||||||||||||||||
Three months ended | $ | 52 | 8 | % | $ | 42 | 6 | % | $ | 10 | 24 | % | ||||||||||||
Six months ended | $ | 103 | 10 | % | $ | 77 | 7 | % | $ | 26 | 34 | % | ||||||||||||
September 30, | % of Net | September 30, | % of Net | |||||||||||||||||||||
2005 | Revenue | 2004 | Revenue | $ Change | % Change | |||||||||||||||||||
Three months ended | $ | 182 | 27 | % | $ | 157 | 22 | % | $ | 25 | 16 | % | ||||||||||||
Six months ended | $ | 365 | 35 | % | $ | 288 | 25 | % | $ | 77 | 27 | % | ||||||||||||
• | An increase of $28 million and $78 million in the three and six months ended September 30, 2005, respectively, in personnel-related costs. This increase primarily relates to an increase in employee headcount in our Canadian and European studios as a result of increased internal development and the development for next-generation tools, technologies and titles, as well as our recent consolidations of DICE and Criterion. This increase was partially offset by a decrease in the allocation of our annual bonus expense during the six months ended September 30, 2005 primarily due to lower net income during the first six months of fiscal 2006. |
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• | An increase of $7 million and $19 million in the three and six months ended September 30, 2005, respectively, in facilities-related expenses to help support the growth of our research and development functions worldwide. |
September 30, | % of Net | September 30, | % of Net | |||||||||||||||||||||
2005 | Revenue | 2004 | Revenue | $ Change | % Change | |||||||||||||||||||
Three months ended | $ | 13 | 2 | % | $ | 12 | 2 | % | $ | 1 | 8 | % | ||||||||||||
Six months ended | $ | 30 | 3 | % | $ | 21 | 2 | % | $ | 9 | 43 | % | ||||||||||||
September 30, | Effective | September 30, | Effective | |||||||||||||||||||||
2005 | Tax Rate | 2004 | Tax Rate | % Change | ||||||||||||||||||||
Three months ended | $ | 9 | 15 | % | $ | 40 | 29 | % | (78 | %) | ||||||||||||||
Six months ended | $ | (13 | ) | (80 | %) | $ | 50 | 29 | % | (126 | %) | |||||||||||||
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As of September 30, | Increase / | |||||||||||
(In millions) | 2005 | 2004 | (Decrease) | |||||||||
Cash, cash equivalents and short-term investments | $ | 2,230 | $ | 2,490 | $ | (260 | ) | |||||
Marketable equity securities | 182 | — | 182 | |||||||||
Total | $ | 2,412 | $ | 2,490 | $ | (78 | ) | |||||
Percentage of total assets | 64 | % | 67 | % |
Six Months Ended | ||||||||||||
September 30, | Increase / | |||||||||||
(In millions) | 2005 | 2004 | (Decrease) | |||||||||
Cash provided by (used in) operating activities | $ | (19 | ) | $ | 23 | $ | (42 | ) | ||||
Cash used in investing activities | (16 | ) | (873 | ) | 857 | |||||||
Cash provided by (used in) financing activities | (649 | ) | 86 | (735 | ) | |||||||
Effect of foreign exchange on cash and cash equivalents | (11 | ) | — | (11 | ) | |||||||
Net decrease in cash and cash equivalents | $ | (695 | ) | $ | (764 | ) | $ | 69 | ||||
During the six months ended September 30, 2005, we used $19 million of cash from operating activities as compared to generating $23 million of cash for the six months ended September 30, 2004. The increase in cash used in operating activities was primarily due to the decline in net income during the six months ended September 30, 2005 as compared to the six months ended September 30, 2004, and an increase in prepaid royalties as we continue to invest in our product development and content partially offset by a lower accounts receivable balance due to a decrease in revenue in the six months ended September 20, 2005 as compared to the six months ended September 30, 2004. We expect to generate significant operating cash flow during the remainder of fiscal 2006. For the six months ended September 30, 2005, our primary use of cash in non-operating activities consisted of $709 million for the repurchase and retirement of our common stock, completing our common stock repurchase program, and $56 million in capital expenditures primarily related to the expansion of our Vancouver studio and upgrades to our worldwide ERP systems. These non-operating expenditures were partially offset by $60 million in proceeds from sales of common stock through our stock plans. We anticipate making continued capital investments in our Vancouver studio during fiscal 2006.
As of September 30, 2005, our portfolio of cash, cash equivalents and short-term investments was comprised of 26 percent cash and cash equivalents and 74 percent short-term investments. As of March 31, 2005, 43 percent of our portfolio consisted of cash and cash equivalents and 57 percent of our portfolio consisted of short-term investments. In absolute dollars, our cash and equivalents decreased from $1,270 million as of March 31, 2005 to $575 million as of September 30, 2005. This decrease was primarily due to $709 million of cash used for our common stock repurchase program during the six months ended September 30, 2005. Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of September 30, 2005, our short-term investments had gross unrealized losses of approximately $15 million, or 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs. Depending on which short-term investments we liquidate to fund these activities, we could recognize a portion of the gross unrealized losses.
Our gross accounts receivable balances were $465 million and $458 million as of September 30, 2005 and March 31, 2005, respectively. The increase in our accounts receivable balance was expected due to higher sales volume in the second quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. We expect our accounts receivable balance to increase during the three months ending December 31, 2005 based on our seasonal product release schedule. Reserves for sales returns, pricing allowances and doubtful accounts decreased from $162 million as of March 31, 2005 to $137 million as of September 30, 2005. Reserves for sales returns, pricing allowances and doubtful accounts decreased in absolute dollars but increased as a percentage of trailing six and nine month net revenue as of September 30, 2005 as compared to March 31, 2005 primarily as a result of the seasonality in our business. Reserves for sales returns, pricing allowances and doubtful accounts increased in both absolute dollars and as a percentage of trailing six and nine month net revenue as compared to the quarter ended September 30, 2004. We believe these reserves are adequate based on historical experience and our current estimate of potential returns and allowances.
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Inventories increased to $74 million as of September 30, 2005, from $62 million as of March 31, 2005, primarily due to the buildup of inventory in connection with the release ofFIFA 06in North America at the beginning of the third quarter of fiscal 2006. Other thanFIFA 06, no single title represented more than $4 million of inventory as of September 30, 2005.
Other current assets increased to $208 million as of September 30, 2005, from $164 million as of March 31, 2005, primarily due to an increase in prepaid royalties as we continue to invest in our product development and content.
Accounts payable increased to $171 million as of September 30, 2005, from $134 million as of March 31, 2005, primarily due to the higher sales volume as well as higher expenditures to support the growth of our business worldwide in the second quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005.
Our accrued and other liabilities decreased to $558 million as of September 30, 2005 from $694 million as of March 31, 2005. The decrease was primarily due to a $77 million reduction in income tax payable we recorded in the three months ended September 30, 2005 following a recent U.S. Tax Court ruling regarding the proper allocation of the tax deduction for stock options between U.S. and foreign entities. Although the case remains subject to appeal, it has precedent value for our situation. Accordingly, we released a reserve of $77 million during the quarter ended September 30, 2005, whereby, we recorded a reduction to our income tax liability and an increase to additional paid in capital. This had no impact on our income statement or on our net operating cash flow in the quarter. We anticipate our accrued and other liabilities balance will increase during the three months ending December 31, 2005 primarily due to an increase in our operations during this period.
We believe that existing cash, cash equivalents, short-term investments, marketable equity securities and cash generated from operations will be sufficient to meet our operating requirements for at least the next twelve months, including working capital requirements, capital expenditures and potential future acquisitions or strategic investments. We may choose at any time to raise additional capital to strengthen our financial position, facilitate expansion, pursue strategic acquisitions and investments or to take advantage of business opportunities as they arise. There can be no guarantee that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders.
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Number of Shares | ||||||||
Repurchased and | Approximate | |||||||
Retired | Amount | |||||||
Three months ended September 30, 2005 | 6.3 | $ | 372 | |||||
Six months ended September 30, 2005 | 12.6 | $ | 709 | |||||
From the inception of the program through September 30, 2005 | 13.4 | $ | 750 |
We have a “shelf” registration statement on Form S-3 on file with the Securities and Exchange Commission. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings up to a total amount of $2.0 billion. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we will use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including for working capital, financing capital expenditures, research and development, marketing and distribution efforts and, if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.
In July 2002, we provided an irrevocable standby letter of credit to Nintendo of Europe. The standby letter of credit guarantees performance of our obligations to pay Nintendo of Europe for trade payables. The original letter of credit guaranteed our trade payable obligations to Nintendo of Europe of up to€18 million. In April 2005, we reduced the guarantee to€8 million and in September 2005 we increased the guarantee to€15 million. This standby letter of credit expired in July 2005 and was renewed through July 2006. As of September 30, 2005, we had€8 million payable to Nintendo of Europe covered by this standby letter of credit.
The products produced by our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones.
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Contractual Obligations | Commercial Commitments | |||||||||||||||||||||||
Developer/ | Letters | |||||||||||||||||||||||
Fiscal Year | Licensor | Bank and | of | |||||||||||||||||||||
Ending March 31, | Leases(1) | Commitments(2) | Marketing | Other Guarantees | Credit | Total | ||||||||||||||||||
2006 (remaining six months) | $ | 30 | $ | 72 | $ | 19 | $ | 2 | $ | 10 | $ | 133 | ||||||||||||
2007 | 31 | 146 | 34 | — | — | 211 | ||||||||||||||||||
2008 | 24 | 135 | 30 | — | — | 189 | ||||||||||||||||||
2009 | 17 | 145 | 30 | — | — | 192 | ||||||||||||||||||
2010 | 13 | 128 | 30 | — | — | 171 | ||||||||||||||||||
Thereafter | 34 | 837 | 198 | — | — | 1,069 | ||||||||||||||||||
Total | $ | 149 | $ | 1,463 | $ | 341 | $ | 2 | $ | 10 | $ | 1,965 | ||||||||||||
(1) | See discussion on operating leases in the “Off-Balance Sheet Commitments” section below for additional information. | |
(2) | Developer/licensor commitments include $38 million of commitments to developers or licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets in our Condensed Consolidated Balance Sheets as of September 30, 2005 because the developer or licensor does not have any performance obligations to us. |
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Actual as of | ||||||||||||
Financial Covenants | Requirement | September 30, 2005 | ||||||||||
Consolidated Net Worth (in millions) | equal to or greater than | $ | 2,099 | $ | 2,984 | |||||||
Fixed Charge Coverage Ratio | equal to or greater than | 3.00 | 13.42 | |||||||||
Total Consolidated Debt to Capital | equal to or less than | 60% | 7.6% | |||||||||
Quick Ratio - Q1 & Q2 | equal to or greater than | 1.00 | 10.36 | |||||||||
Q3 & Q4 | equal to or greater than | 1.75 | N/A |
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• | 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, | ||
• | Retaining key employees from the businesses we acquire, | ||
• | The need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management, and |
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• | To the extent that we engage in strategic transactions outside of the United States, we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. |
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From time to time, we hedge some of our foreign currency risk related to anticipated foreign-currency-denominated sales transactions by purchasing option contracts that generally have maturities of 15 months or less. These transactions are designated and qualify as cash flow hedges. The derivative assets associated with our hedging activities are recorded at fair value in other current assets in the Condensed Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in fair value is initially reported as a component of accumulated other comprehensive income, net of any tax effects, in stockholders’ equity and subsequently reclassified into net revenue in the period when the forecasted transaction actually occurs. The ineffective portion of gains or losses resulting from changes in fair value is reported in interest and other income, net in the Condensed Consolidated Statements of Operations. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements. The fair value of our foreign currency option contracts purchased and included in other current assets was $8 million as of September 30, 2005.
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. We manage our interest rate risk by maintaining an investment portfolio generally consisting of debt instruments of high credit quality and relatively short average maturities. Additionally, the contractual terms of the securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the securities. We also do not use derivative financial instruments in our short-term investment portfolio.
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As of | As of | |||||||
September 30, | March 31, | |||||||
2005 | 2005 | |||||||
U.S. government agencies | $ | 1,129 | $ | 1,168 | ||||
U.S. government bonds | 333 | 298 | ||||||
Corporate bonds | 182 | 180 | ||||||
Asset-backed securities | 11 | 42 | ||||||
Total short-term investments | $ | 1,655 | $ | 1,688 | ||||
Valuation of Securities Given | Fair Value | Valuation of Securities Given | ||||||||||||||||||||||||||
an Interest Rate Decrease of X | as of | an Interest Rate Increase of X | ||||||||||||||||||||||||||
(In millions) | Basis Points | September 30, | Basis Points | |||||||||||||||||||||||||
(150 BPS) | (100 BPS) | (50 BPS) | 2005 | 50 BPS | 100 BPS | 150 BPS | ||||||||||||||||||||||
U.S. government agencies | $ | 1,137 | $ | 1,134 | $ | 1,132 | $ | 1,129 | $ | 1,126 | $ | 1,123 | $ | 1,121 | ||||||||||||||
U.S. government bonds | 341 | 338 | 336 | 333 | 330 | 327 | 324 | |||||||||||||||||||||
Corporate bonds | 186 | 184 | 183 | 182 | 180 | 179 | 178 | |||||||||||||||||||||
Asset-backed securities | 11 | 11 | 11 | 11 | 11 | 11 | 11 | |||||||||||||||||||||
Total short-term investments | $ | 1,675 | $ | 1,667 | $ | 1,662 | $ | 1,655 | $ | 1,647 | $ | 1,640 | $ | 1,634 | ||||||||||||||
The values of our equity investments in publicly traded companies are subject to market price volatility. As of September 30, 2005, our marketable equity securities were classified as available-for-sale and, consequently, were recorded in the Condensed Consolidated Balance Sheet at fair market value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of any tax effects, in stockholders’ equity. The fair value of our marketable equity securities was $182 million and $140 million as of September 30, 2005 and March 31, 2005, respectively.
Valuation of Securities Given an | Fair Value | Valuation of Securities Given an | ||||||||||||||||||||||||||
X Percentage Decrease in Each | as of | X Percentage Increase in Each | ||||||||||||||||||||||||||
(In millions) | Stock's Market Price | September 30, | Stock's Market Price | |||||||||||||||||||||||||
(75%) | (50%) | (25%) | 2005 | 25% | 50% | 75% | ||||||||||||||||||||||
Marketable Equity Securities | $ | 46 | $ | 91 | $ | 137 | $ | 182 | $ | 228 | $ | 274 | $ | 319 |
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Item 1. | Legal Proceedings | |
On July 29, 2004, a class action lawsuit,Kirschenbaum v. Electronic Arts Inc., was filed against us in Superior Court in San Mateo, California, alleging that we improperly classified “Image Production Employees” in California as exempt employees. In early October 2005, we reached a settlement to resolve these claims. Under the terms of the settlement, we will make a lump sum payment of $15.6 million to cover (a) all claims allegedly suffered by the class members, (b) plaintiffs’ attorneys’ fees, not to exceed 25% of the total settlement amount, (c) plaintiffs’ costs and expenses, (d) any incentive payments to the named plaintiffs that may be authorized by the court, and (e) all costs of administration of the settlement. On October 17, 2005, the court granted its preliminary approval of the settlement. The court has scheduled a hearing to consider its final approval of the settlement for January 27, 2006. | ||
On February 14, 2005, a second employment-related class action lawsuit,Hasty v. Electronic Arts Inc.,was filed against us in Superior Court in San Mateo, California. The complaint alleges that we improperly classified “Engineers” in California as exempt employees and seeks injunctive relief, unspecified monetary damages, interest and attorneys’ fees. On or about March 16, 2005, we received a first amended complaint, which contains the same material allegations as the original complaint. We answered the first amended complaint on April 20, 2005. | ||
On March 24, 2005, a class action lawsuit was filed against us and certain of our officers and directors. The complaint, which asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false and misleading statements, was filed in the United States District Court, Northern District of California, by an individual purporting to represent a class of purchasers of EA common stock. Additional class action lawsuits were filed in the same court by other individuals asserting the same claims against us. On May 9, 2005, the court consolidated the complaints, and on June 13, 2005, the court appointed lead plaintiff and lead counsel pursuant to the requirements of the Private Securities Litigation Reform Act of 1995. An amended consolidated complaint was filed on behalf of the lead plaintiff on August 12, 2005, and on September 27, 2005, we moved to dismiss the consolidated amended complaint for failure to state a claim under the federal securities laws. Separately, there are two shareholder derivative actions pending in the Superior Court, San Mateo County, and one shareholder derivative action pending in the United States District Court, Northern District of California, all of which assert claims based on substantially the same factual allegations as set forth in the federal securities class action. We have not yet responded to any of the derivative action complaints. | ||
In addition, we are subject to other claims and litigation arising in the ordinary course of business. Our management considers 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 effect on our consolidated financial position or results of operations. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
On October 18, 2004, our Board of Directors authorized a program to repurchase up to an aggregate of $750 million of our common stock. Pursuant to the authorization, we were able to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions over the course of a twelve-month period. Our common stock repurchase program was completed in September 2005. The following table summarizes the number of shares repurchased for the three months ended September 30, 2005: |
Total Number of | Maximum Dollar Value | |||||||||||||||
Shares Purchased | of Shares that May Yet | |||||||||||||||
Total Number | as Part of Publicly | Be Purchased Under the | ||||||||||||||
of Shares | Average Price | Announced | Program | |||||||||||||
Period | Purchased | Paid per Share | Program | (in millions) | ||||||||||||
July 1 - 31, 2005 | 2,277,768 | $ | 59.04 | 2,277,768 | $ | 238 | ||||||||||
August 1 - 31, 2005 | 2,343,600 | $ | 59.25 | 2,343,600 | $ | 99 | ||||||||||
September 1 - 30, 2005 | 1,705,389 | $ | 58.14 | 1,705,389 | $ | 0 |
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Item 4. | Submission of Matters to a Vote of Security Holders | |
At our Annual Meeting of Stockholders, held on July 28, 2005, our stockholders elected the following individuals to the Board of Directors for one-year terms: |
For | Withheld | |||||||
M. Richard Asher | 256,709,482 | 12,997,662 | ||||||
Leonard S. Coleman | 262,851,087 | 6,856,057 | ||||||
Gary M. Kusin | 267,616,645 | 2,090,499 | ||||||
Gregory B. Maffei | 266,905,659 | 2,801,485 | ||||||
Timothy Mott | 163,903,486 | 105,803,658 | ||||||
Vivek Paul | 267,648,602 | 2,058,542 | ||||||
Robert W. Pittman | 259,259,155 | 10,447,989 | ||||||
Lawrence F. Probst III | 264,874,125 | 4,833,019 | ||||||
Linda J. Srere | 258,463,287 | 11,243,857 |
In addition, the following matters were voted on and approved by the stockholders: | ||
To amend our 2000 Equity Incentive Plan to (a) increase the number of shares authorized by 10 million, (b) authorize the issuance of awards of stock appreciation rights, (c) increase by 1 million shares the limit on the total number of shares underlying awards of restricted stock and restricted stock units that may be granted under the Equity Plan — from 3 million to 4 million shares, (d) modify the payment alternatives under the Equity Plan, (e) add flexibility to grant performance-based stock options and stock appreciation rights and modify the permissible performance factors currently contained in the Equity Plan, and (f) revise the share-counting methodology used in the Equity Plan. |
For | Against | Abstain | Broker Non-vote | |||||||||
182,744,255 | 61,131,403 | 1,730,413 | 24,101,073 |
To amend the 2000 Employee Stock Purchase Plan to increase by 1,500,000 the number of shares of common stock reserved for issuance thereunder. |
For | Against | Abstain | Broker Non-vote | |||||||||
217,586,501 | 26,362,630 | 1,656,940 | 24,101,073 |
To ratify the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2006. |
For | Against | Abstain | Broker Non-vote | |||||||||
264,769,119 | 3,326,302 | 1,611,723 | — |
Item 5. | Other Information | |
The following discussion of the reorganization of our international publishing organization contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements about our expectations regarding future restructuring charges, operating expenses and other costs are forward looking. We use words such as “anticipate”, “believe”, “expect”, “intend” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Actual results could differ materially from the expectations set forth in these forward-looking statements. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed above in this report under the heading “Risk Factors”, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 and in other documents we have filed with the Securities and Exchange Commission. | ||
On November 9, 2005, our Board of Directors approved a plan of reorganization in connection with our intention to establish an international publishing headquarters in Geneva, Switzerland. During the next twelve months, we expect to open a new facility in Geneva, relocate certain current employees to Geneva, hire new employees in Geneva, close certain facilities in the UK, and make other related changes in our international publishing business. We intend to treat certain costs that are directly associated with our international publishing reorganization as “restructuring costs” (as defined by Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”). Other costs that are not properly categorized as restructuring costs will generally be treated as normal operating expenses in our consolidated statement of operations. In accordance with SFAS No. 146, we will generally expense the restructuring costs as they are incurred and accrue costs associated with certain facility closures at the time we exit the facility. | ||
In connection with our international publishing reorganization, we anticipate incurring between $55 million and $65 million in total restructuring costs, substantially all of which will result in cash expenditures. We anticipate incurring approximately $15 million of these charges during the remainder of fiscal 2006. We anticipate these restructuring costs will consist primarily of employee-related relocation assistance (approximately $35 million), moving expenses (approximately $15 million), and facility exit costs (approximately $10 million). While we may incur severance costs paid to terminating employees in connection with the reorganization, we do not expect these costs to be significant. | ||
In addition to the restructuring costs discussed above, we also expect to incur increased operating expenses associated with our international publishing reorganization, consisting primarily of costs associated with a new facility and related costs in Geneva, as well as incremental increases in compensation expenses. We expect these costs to result in incremental operating expenses of approximately $10 million during the remainder of fiscal 2006, and between $10 million and $15 million annually thereafter. |
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Item 6. | Exhibits | |||||
The following exhibits (other than exhibits 32.1 and 32.2, which are furnished with this report) are filed as part of this report: | ||||||
Exhibit | ||||||
Number | Title | |||||
10.1 | Electronic Arts Discretionary Bonus Program Plan Document | |||||
15.1 | Awareness Letter of KPMG LLP, Independent Registered Public Accounting Firm. | |||||
31.1 | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
31.2 | Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
Additional exhibits furnished with this report: | ||||||
32.1 | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
32.2 | Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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ELECTRONIC ARTS INC. (Registrant) | |||
/s/ Warren C. Jenson | |||
DATED: | WARREN C. JENSON | ||
November 10, 2005 | Executive Vice President, | ||
Chief Financial and Administrative Officer |
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FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
EXHIBIT | ||
NUMBER | EXHIBIT TITLE | |
10.1 | Electronic Arts Discretionary Bonus Program Plan Document | |
15.1 | Awareness Letter of KPMG LLP, Independent Registered Public Accounting Firm. | |
31.1 | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Additional exhibits furnished with this report: | ||
32.1 | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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