FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ______ to_____ Commission File No. 0-17948 ELECTRONIC ARTS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 94-2838567 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1450 Fashion Island Boulevard San Mateo, California 94404 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (415) 571-7171 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock October 19, 1995 --------------------- ---------------- $0.01 par value per share 52,433,202 ELECTRONIC ARTS INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheets at September 30, 1995 and March 31, 1995 3 Consolidated Statements of Income for the Three Months Ended September 30, 1995 and 1994 and the Six Months Ended September 30, 1995 and 1994 4 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1995 and 1994 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-26 PART II - OTHER INFORMATION Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS September 30, March 31, 1995 1995 ------------- --------- (unaudited) Current assets: Cash and short-term investments $ 80,579 $174,121 Marketable securities 11,042 10,725 Receivables, less allowances of $28,182 and $33,567, respectively 73,449 56,389 Inventories 18,924 12,358 Prepaid royalties 15,757 8,318 Deferred income taxes 3,142 3,142 Other current assets 17,242 6,707 -------- -------- Total current assets 220,135 271,760 Property and equipment, net 62,690 30,528 Prepaid royalties 11,579 6,633 Long-term investments 14,200 14,200 Investments in affiliates 23,894 13,397 Deferred income taxes 657 77 Other assets 8,310 4,644 -------- -------- $341,465 $341,239 -------- -------- -------- -------- LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 36,579 $ 34,247 Accrued liabilities 44,556 68,771 -------- -------- Total current liabilities 81,135 103,018 Minority interest in consolidated joint venture 685 1,148 Stockholders' equity: Preferred stock, $0.01 par value. Authorized 1,000,000 shares Common stock, $0.01 par value. Authorized 70,000,000 shares; issued and outstanding 52,386,148 and 50,863,455 shares, respectively. 525 509 Paid-in capital 95,407 77,144 Retained earnings 165,385 161,512 Unrealized depreciation of investments (889) (1,206) Translation adjustment (783) (886) -------- -------- Total stockholders' equity 259,645 237,073 -------- -------- $341,465 $341,239 -------- -------- -------- -------- See accompanying notes to consolidated financial statements. 3 ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (unaudited) Three Months Ended Six Months Ended September 30, September 30, 1995 1994 1995 1994 --------------------------------------- Net revenues $93,657 $88,845 $173,692 $166,796 Cost of goods sold 47,951 45,516 90,778 85,642 ------- ------- -------- -------- Gross profit 45,706 43,329 82,914 81,154 ------- ------- -------- -------- Operating expenses: Marketing and sales 14,873 12,031 26,563 21,538 General and administrative 7,332 7,745 13,513 13,543 Research and development 20,664 17,024 39,979 31,796 ------- ------- -------- -------- Total operating expenses 42,869 36,800 80,055 66,877 ------- ------- -------- -------- Operating income 2,837 6,529 2,859 14,277 Interest and other income, net 1,150 1,470 2,302 10,816 ------- ------- -------- -------- Income before provision for income taxes and minority interest 3,987 7,999 5,161 25,093 Provision for income taxes 1,276 2,619 1,652 7,834 ------- ------- -------- -------- Income before minority interest 2,711 5,380 3,509 17,259 Minority interest in consolidated joint venture 319 1,330 364 1,384 ------- ------- -------- -------- Net income $ 3,030 $ 6,710 $ 3,873 $ 18,643 ------- ------- -------- -------- ------- ------- -------- -------- Net income per share: $ 0.06 $ 0.13 $ 0.07 $ 0.36 ------- ------- -------- -------- ------- ------- -------- -------- Number of shares used in computation 54,335 51,695 53,809 51,845 ------- ------- -------- -------- ------- ------- -------- -------- See accompanying notes to consolidated financial statements. 4 ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) Six Months Ended September 30, ------------------------ 1995 1994 ------------------------ Operating activities: Net income $ 3,873 $ 18,643 Adjustments to reconcile net income to net cash used by operating activities: Minority interest in consolidated joint venture (364) (1,384) Depreciation and amortization 6,869 4,918 Loss on sale of fixed assets 100 16 Deferred rent (63) (72) Change in operating assets and liabilities: Receivables (17,060) (11,439) Inventories (6,566) (10,985) Prepaid royalties, net (12,385) (5,220) Other assets (14,381) (3,803) Accounts payable 2,332 5,785 Accrued liabilities (24,152) (4,977) Deferred income taxes (580) (12) --------- -------- Net cash used by operating activities (62,377) (8,530) --------- -------- Investing activities: Proceeds from sales of furniture and equipment 83 262 Capital expenditures (39,034) (6,262) Investments in affiliates (10,497) (3,022) Change in short-term investments 16,100 12,150 Adjustment for effects of pooling in prior period - (1,661) --------- -------- Net cash provided/(used) in investing activities (33,348) 1,467 --------- -------- Financing activities: Proceeds from issuance of common stock 17,003 2,996 Tax benefit from exercise of stock options 1,276 201 --------- -------- Net cash provided by financing activities 18,279 3,197 --------- -------- Translation adjustment 103 1,828 Minority interest on translation adjustment (99) 146 --------- -------- Decrease in cash and cash equivalents (77,442) (1,892) Beginning cash and cash equivalents 143,421 93,918 --------- -------- Ending cash and cash equivalents 65,979 92,026 Short-term investments 14,600 24,250 --------- -------- Ending cash and short-term investments $ 80,579 $116,276 --------- -------- --------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 6,604 $ 391 --------- -------- --------- -------- NON-CASH INVESTING ACTIVITIES: Unrealized depreciation of investment $ 317 $ (2,219) --------- -------- --------- -------- See accompanying notes to consolidated financial statements. 5 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for current interim periods are not necessarily indicative of results to be expected for the current year or any other period. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 as filed with the Securities and Exchange Commission on June 28, 1995. Certain amounts in the fiscal 1995 financial statements have been reclassified to conform with fiscal 1996 presentation. NOTE 2. CASH AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. The Company adopted the provisions of SFAS 115 (Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities") for investments held as of or acquired after April 1, 1994. The Company has accounted for investments in debt securities as "available-for-sale" under the provisions of SFAS 115 and has stated applicable investments at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. The cost of securities sold is based upon the specific identification method. Cash and short-term investments at September 30, 1995 and March 31, 1995 consisted of (in thousands): September 30, 1995 March 31, 1995 ------------------ -------------- Cash and cash equivalents $ 65,979 $ 143,421 Short-term investments 14,600 30,700 -------- ------- $ 80,579 $ 174,121 -------- ------- -------- ------- NOTE 3. MARKETABLE SECURITIES Marketable securities consist of equity securities. The Company has accounted for investments in equity securities as "available-for-sale" and has stated applicable investments at fair value, with unrealized losses reported as a separate component of stockholders' equity. 6 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4. SOFTWARE DEVELOPMENT COSTS To date, the Company has not capitalized any software development costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86 since the impact to the financial statements for all periods presented has been immaterial. NOTE 5. INVENTORIES Inventories are stated at the lower of weighted average cost or market. Inventories at September 30, 1995 and March 31, 1995 consisted of (in thousands): September 30, 1995 March 31, 1995 ------------------ -------------- Raw materials and work in process $ 9,707 $ 2,799 Finished goods 9,217 9,559 ------- ------- $18,924 $12,358 ------- ------- ------- ------- NOTE 6. ACCRUED LIABILITIES Accrued liabilities at September 30, 1995 and March 31, 1995 consisted of (in thousands): September 30, 1995 March 31, 1995 ------------------ -------------- Accrued expenses $24,103 $26,138 Accrued income taxes 3,405 16,069 Accrued royalties 8,416 16,040 Accrued compensation and benefits 8,632 10,524 ------- ------- $44,556 $68,771 ------- ------- ------- ------- NOTE 7. NET INCOME PER SHARE Net income per share is computed on the basis of the weighted average number of common shares and common equivalent shares outstanding and is adjusted for shares issuable upon exercise of stock options. The computation assumes the proceeds from the exercise of stock options were used to repurchase common shares at the average market price of the Company's common stock during each period. Such average shares outstanding for the three months ended September 30, 1995 and 1994 were 54,335,000 and 51,695,000, respectively, and for the six months ended September 30, 1995 and 1994 were 53,809,000 and 51,845,000, respectively. There is no significant difference between primary and fully diluted earnings per share. 7 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8. INVESTMENTS IN AFFILIATES AND JOINT VENTURE THE 3DO COMPANY At September 30, 1995, the Company has an approximately 16.2% (4,150,668 shares of 3DO stock) ownership interest in The 3DO Company ("3DO"). Other investors include Time Warner Enterprises, a unit of Time Warner, Inc., Matsushita Electric Industrial Co., Ltd., MCA and two ven- ture capital firms. The Company realized gain before taxes of $792,000 from the sale of 67,500 shares of 3DO stock for the quarter ended September 30, 1995. ELECTRONIC ARTS VICTOR, INC. The Company has a majority interest in a joint venture corporation, Electronic Arts Victor, Inc. ("EAV"), for the development and distribution of entertainment software products in Japan as well as certain Asian countries. EAV is sixty-five percent owned by the Company and thirty-five percent owned by Victor Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical Industries, Inc.), a wholly owned subsidiary of Victor Company of Japan, Limited. The Company has consolidated 100% of the assets, liabilities and results of operations for EAV. VEI's 35% interest in EAV and the loss therefrom have been reflected as "Minority interest in consolidated joint venture" on the Company's Consolidated Financial Statements. CREATIVE WONDERS, INC. In December 1994, the Company and Capital Cities/ABC, Inc. announced the formation of a joint venture company to develop and publish software for personal computers and new generation entertainment machines. The new venture, Creative Wonders, Inc., (formerly ABC/EA Home Software, Inc.) publishes children's edutainment and interactive entertainment multimedia titles as well as reference products under the name Creative Wonders. Under the terms of the agreement, each company will maintain a 50% ownership interest in the joint venture company. The investment is accounted for under the equity method. Electronic Arts is the exclusive distributor of any interactive titles sold by the joint venture in the retail channel. As part of the agreement, the Company contributed assets consisting primarily of inventories, prepaid royalties and certain intangible assets. 8 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9: OPERATIONS BY GEOGRAPHIC AREAS The Company operates in one industry segment. Information about the Company's operations in North America, Europe, South Asia Pacific and Japan for the three months and six months ended September 30, 1995 and 1994 is presented below (in thousands). All intersegment sales among North American entities (EA San Mateo, EA Canada Inc., EA Puerto Rico Inc., EA Productions Inc. and Origin Systems, Inc.) have been eliminated. Therefore, intersegment activity disclosed on this schedule reflects only the transactions that have taken place between the geographic segments disclosed below. South North Asia America Europe Pacific Japan Eliminations Total ------- ------- ------- ------ ------------ ------- THREE MONTHS ENDED SEPTEMBER 30, 1995 Net revenues from unaffiliated customers $ 62,570 $19,763 $4,629 $ 6,695 - $ 93,657 Intersegment net revenues 6,372 2,186 19 65 $ (8,642) - -------- ------- ------ ------- -------- -------- Total net revenues $ 68,942 $21,949 $4,648 $ 6,760 $ (8,642) $ 93,657 -------- ------- ------ ------- -------- -------- -------- ------- ------ ------- -------- -------- Operating income/(loss) $ (348) $ 2,903 $1,139 $ (857) - $ 2,837 Identifiable assets $269,294 $55,380 $6,477 $10,314 - $341,465 SIX MONTHS ENDED SEPTEMBER 30, 1995 Net revenues from unaffiliated customers $109,285 $42,075 $7,916 $14,416 - $173,692 Intersegment net revenues 13,293 3,584 19 65 $(16,961) - -------- ------- ------ ------- -------- -------- Total net revenues $122,578 $45,659 $7,935 $14,481 $(16,961) $173,692 -------- ------- ------ ------- -------- -------- -------- ------- ------ ------- -------- -------- Operating income/(loss) $ (5,601) $ 7,832 $1,749 $(1,121) - $ 2,859 THREE MONTHS ENDED SEPTEMBER 30, 1994 Net revenues from unaffiliated customers $ 62,797 $19,336 $2,570 $ 4,142 - $ 88,845 Intersegment net revenues 6,106 1,003 37 34 $ (7,180) - -------- ------- ------ ------- -------- -------- Total net revenues $ 68,903 $20,339 $2,607 $ 4,176 $ (7,180) $ 88,845 -------- ------- ------ ------- -------- -------- -------- ------- ------ ------- -------- -------- Operating income/(loss) $ 5,661 $ 4,463 $ 443 $(4,038) - $ 6,529 Identifiable assets $220,924 $51,169 $3,997 $16,830 - $292,920 SIX MONTHS ENDED SEPTEMBER 30, 1994 Net revenues from unaffiliated customers $114,701 $34,568 $4,257 $13,270 - $166,796 Intersegment net revenues 10,633 1,564 44 34 $(12,275) - -------- ------- ------ ------- -------- -------- Total net revenues $125,334 $36,132 $4,301 $13,304 $(12,275) $166,796 -------- ------- ------ ------- -------- -------- -------- ------- ------ ------- -------- -------- Operating income/(loss) $ 10,771 $ 6,954 $ 692 $(4,140) - $ 14,277 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the consolidated financial data and the notes thereto included in Item 1 of this Quarterly Report and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 as filed with the Securities and Exchange Commission on June 28, 1995. NET REVENUES - - ------------ September 30, September 30, 1995 1994 % change -------------------------------------- CONSOLIDATED NET REVENUES Three Months Ended $ 93,657,000 $ 88,845,000 5.4% Six Months Ended $173,692,000 $166,796,000 4.1% NORTH AMERICA NET REVENUES Three Months Ended $ 62,570,000 $ 62,797,000 (.4)% as a percentage of net revenues 66.8% 70.7% Six Months Ended $109,285,000 $114,701,000 (4.7)% as a percentage of net revenues 62.9% 68.8% INTERNATIONAL NET REVENUES Three Months Ended $ 31,087,000 $ 26,048,000 19.3% as a percentage of net revenues 33.2% 29.3% Six Months Ended $ 64,407,000 $ 52,095,000 23.6% as a percentage of net revenues 37.1% 31.2% The Company derives revenues from shipments of EA Studio cartridge products, EA Studio CD and floppy-disk personal computer products, EA Studio CD products on dedicated entertainment and educational systems, licenses of EA Studio products and shipments of Affiliated Label and other branded publisher floppy-disk and CD products. Overall, North American net revenues decreased .4% for the three months and 4.7% for the six months ended September 30, 1995 compared to the same periods last year due to the decrease in volume of sales in the Sega 16-bit cartridge and floppy-disk products. This decrease was partially offset by the significant increase in shipments of CD based products for both personal computers and dedicated entertainment systems. International net revenues increased 19.3% for the three months ended September 30, 1995 compared to the same period last year, primarily due to higher sales of CD products in all regions partially offset by a decrease in revenues from the sale of floppy-disk products. International net revenues increased 23.6% for the six months ended September 30, 1995 compared to the same period last year, primarily due to higher sales of CD products, partially offset by a decrease in revenues from the sale of floppy-disk products in all regions and Gameboy products in Japan. 10 EA STUDIO NET REVENUES: 16-BIT VIDEOGAME PRODUCT NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $36,203,000 $50,109,000 (27.8)% as a percent of net revenues 38.7% 56.4% Six Months Ended $62,769,000 $91,370,000 (31.3)% as a percent of net revenues 36.2% 54.8% The Company released three new 16-bit videogame titles during the second quarter of fiscal 1996 consisting of COLLEGE FOOTBALL `96 and NHL HOCKEY `96 for the Sega Genesis and NHL HOCKEY `96 for the SNES. Sega cartridge sales were $28,480,000 for the three months ended September 30, 1995 compared to $49,146,000 for the same period in the prior year when five new titles were released. SNES sales were $7,723,000 for the three months ended September 30, 1995 compared to $963,000 for the same period last year. There were no new SNES titles released in the second quarter of fiscal 1995. Sega cartridge sales were $48,554,000 for the six months ended September 30, 1995 compared to $79,215,000 for the same period in prior year. SNES sales were $14,215,000 for the six months ended September 30, 1995 compared to $12,155,000 for the same period in prior year. Since the 16-bit videogame market has matured, sales of hardware and software have declined and are expected to continue to do so. The Company's net revenues derived from 16-bit videogames declined 27.8% during the second quarter of fiscal 1996 and 31.3% during the first six months compared to the same periods in the prior year. Additionally, as the 16-bit cartridge market has become more "hits-driven", the Company will continue to ship fewer cartridge products in fiscal 1996 than in fiscal 1995 and expects to release a higher percentage of these products in the December quarter. Under the terms of a licensing agreement entered into with Sega Enterprises, Ltd., ("Sega") in July 1992 ("the 16 Bit Sega Agreement"), the Company is authorized to develop and distribute ROM-cartridge software products compatible with the Sega Genesis system through December 1995. Additionally, the Company may continue to distribute remaining products in its inventory or in process of manufacture at December 1995 for an additional six months. Genesis cartridges are manufactured by the Company in Puerto Rico under the terms of the 16 Bit Sega Agreement. A shortage of components, or other factors outside the control of the Company could impair the Company's ability to obtain an adequate supply of cartridges. Under the terms of its licensing agreement with Nintendo, the Company engages Nintendo to manufacture its SNES cartridges for distribution. The Company has little ability to control its supply of cartridges or the timing of their delivery. A shortage of microchips, or other factors outside the control of the Company could impair the Company's ability to obtain an adequate supply of cartridges. Nintendo maintains a policy of not accepting returns. Considering these and other factors, the carrying of an inventory of cartridges entails additional investments and risks. Videogame cartridges, particularly SNES, are more expensive to produce than floppy disks and CD-ROM's and are produced in higher volumes. Accordingly, if Electronic Arts' sales mix of SNES videogame products increases, it will be exposed to greater inventory costs and increased risks of unexpected returns of unsold products. 11 32-BIT VIDEOGAME PRODUCT NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $ 6,462,000 $4,504,000 43.5% as a percentage of net revenues 6.9% 5.1% Six Months Ended $12,336,000 $8,359,000 47.6% as a percentage of net revenues 7.1% 5.0% The Company released two new 32-bit CD titles during the second quarter of fiscal 1996, SPACE HULK: BLOOD ANGELS for the 3DO Interactive Multiplayer and PGA TOUR GOLF `96 for the Sony PlayStation. There were two new 3DO titles released in the second quarter of fiscal 1995; the Sony PlayStation was launched in North America during the second quarter of fiscal 1996. As a result of the videogame market's current transition to 32-bit hardware platforms, particularly the launches of the Sony PlayStation and Sega Saturn, the Company's sales of the related software for CD based dedicated entertainment systems is expected to increase as the Company continues to focus its development efforts on supporting these new platforms. Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America in July 1994 (the "Sony Agreement"), the Company is authorized to develop and distribute CD-ROM software products compatible with the Sony PlayStation. Pursuant to the Sony Agreement, the Company engages Sony to supply its PlayStation CD's for distribution. Accordingly, the Company has limited ability to control its supply of PlayStation CD products or the timing of their delivery. Under the terms of a licensing agreement entered into with Sega Enterprises, Ltd. in January 1995 (the "Sega Saturn Agreement"), the Company is authorized to develop and distribute CD-ROM software products compatible with the Sega Saturn. Pursuant to the Sega Saturn Agreement, the Company engages various third party manufacturers approved by Sega to supply its Saturn CD's for distribution. Accordingly, the Company has limited ability to control its supply of Saturn CD products or the timing of their delivery. The Company expects to release its initial Saturn products during its third fiscal quarter of fiscal 1996. 12 PERSONAL COMPUTER CD PRODUCT NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $28,938,000 $11,677,000 147.8% as a percentage of net revenues 30.9% 13.1% Six Months Ended $50,020,000 $16,580,000 201.7% as a percentage of net revenues 28.8% 9.9% The Company released seven new CD based personal computer titles in the second quarter of the current fiscal year, six for the IBM personal computer and one for the Macintosh, compared to thirteen for the same period last year. As mentioned above and elsewhere in this report, the significant increase in both absolute dollars and as a percentage of total net revenues reflects the market transition from 16-bit cartridge systems to CD platforms and the Company's strategy to focus its development efforts on CD products. The Company expects revenues from CD products to grow but as revenues for CD products increase, the Company does not expect these percentage growth rates to continue. FLOPPY-DISK PRODUCT NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $1,024,000 $ 8,130,000 (87.4)% as a percentage of net revenues 1.1% 9.2% Six Months Ended $2,354,000 $17,079,000 (86.2)% as a percentage of net revenues 1.4% 10.2% The Company released no new floppy-disk based personal computer titles in the second quarter of the current fiscal year, compared to five for the same period in the prior year. The decrease in net revenues derived from shipments of EA Studio floppy-disk based personal computer products reflects the market trend toward CD based personal computer products. LICENSE/OEM NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $ 5,553,000 $4,355,000 27.5% as a percentage of net revenues 5.9% 4.9% Six Months Ended $11,157,000 $6,993,000 59.5% as a percentage of net revenues 6.4% 4.2% The increase in license/OEM net revenues for the three and six months ended September 30, 1995 compared to the same period last year was primarily a result of an increase in licensing of personal computer software products in the United States to third parties. 13 AFFILIATED LABEL NET REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $15,150,000 $ 9,446,000 60.4% as a percentage of net revenues 16.2% 10.6% Six Months Ended $33,080,000 $18,001,000 83.8% as a percentage of net revenues 19.0% 10.8% The increase in Affiliated Label net revenues for the three and six months ended September 30, 1995 compared to the prior year periods reflects the significant expansion of the distribution business, mainly in North America and Europe. Affiliated Label CD based net revenues represented approximately 94% and 95%, respectively, of total Affiliated Label net revenues for the three and six months ended September 30, 1995, compared to 64% and 54%, respectively, for the same periods last year. In addition to the traditional Affiliated Labels distributed by the Company, the Company also derived revenues from the exclusive distribution of CD products to key accounts on behalf of other third party publishers. There were no such sales in the same period of the prior year. OTHER REVENUES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $ 327,000 $ 624,000 (47.6)% as a percentage of net revenues .3% .7% Six Months Ended $1,976,000 $8,414,000 (76.5)% as a percentage of net revenues 1.1% 5.1% Other revenues for the three and six months ended September 30, 1995 consisted of sales of products for Gameboy, GameGear and the Sega 32X platform. The net revenues generated in the comparable periods of the prior year related mainly to products for Gameboy and the Sega CD platform. The Company does not plan to release any new titles for hand-held equipment or the Sega 32X for the remainder of fiscal 1996 and accordingly, revenues for these platforms are expected to continue to decline. 14 COST OF GOODS SOLD September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $47,951,000 $45,516,000 5.3% as a percentage of net revenues 51.2% 51.2% Six Months Ended $90,778,000 $85,642,000 6.0% as a percentage of net revenues 52.3% 51.3% Cost of goods sold, as a percentage of net revenues, remained flat for the three months ended September 30, 1995 compared to the same period last year primarily due to the impact of the significant increase of lower margin Affiliated Label and third party publisher net revenues, as a percentage of total net revenues, together with a move to direct-to-store distribution resulting in higher freight costs, offset by the increase of higher margin EA Studio CD net revenues and license/OEM net revenues. Additionally, margins on 16-bit software were eroded as a result of the maturation of that segment of the business which promoted an overall reduction in sales price of classic videogame titles and higher costs of goods sold resulting from the larger cartridge configurations. Cost of goods sold, as a percentage of net revenues, were slightly higher for the six months ended September 30, 1995 compared to the same period last year primarily due to the impact of the growth in lower margin distribution business offset by the growth in the higher margin CD based business. Overall, the margins in the Affiliated Label business have decreased due to a move towards consignment-based arrangements where the Company no longer bears the costs, or risks, of carrying the related inventory. MARKETING AND SALES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $14,873,000 $12,031,000 23.6% as a percentage of net revenues 15.9% 13.5% Six Months Ended $26,563,000 $21,538,000 23.3% as a percentage of net revenues 15.3% 12.9% The increase in marketing and sales expenses was primarily attributable to higher retailer service, trade show expenses and increased headcount resulting from the expansion of the worldwide distribution business together with increased co- op advertising. GENERAL AND ADMINISTRATIVE September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $ 7,332,000 $ 7,745,000 (5.3)% as a percentage of net revenues 7.8% 8.7% Six Months Ended $13,513,000 $13,543,000 (.2)% as a percentage of net revenues 7.8% 8.1% The slight decrease in general and administrative expenses for the three and six months ended September 30, 1995 compared to the same periods last year was due to higher bad debt expense incurred by Japan in the prior year. This decrease was offset by higher payroll related to increased headcount resulting from the worldwide expansion of the business. 15 RESEARCH AND DEVELOPMENT September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $20,664,000 $17,024,000 21.4% as a percentage of net revenues 22.1% 19.2% Six Months Ended $39,979,000 $31,796,000 25.7% as a percentage of net revenues 23.0% 19.1% The increase in research and development expenses was primarily due to additional headcount, continued investment in development for new CD platforms, the higher average development costs for these platforms, and more in-house development. OPERATING INCOME September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $2,837,000 $ 6,529,000 (56.5)% as a percentage of net revenues 3.0% 7.3% Six Months Ended $2,859,000 $14,277,000 (80.0)% as a percentage of net revenues 1.6% 8.6% Operating income decreased for the three months and six months ended September 30, 1995 compared to the same period last year due to increased research and development, increased marketing and sales expenses and a slight decrease in gross profit margins, as noted above. INTEREST AND OTHER INCOME, NET September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $1,150,000 $ 1,470,000 (21.8)% as a percentage of net revenues 1.2% 1.7% Six Months Ended $2,302,000 $10,816,000 (78.7)% as a percentage of net revenues 1.3% 6.5% Interest and other income, net, decreased for the three months ended September 30, 1995 compared to the same period last year primarily due to lower cash balances resulting in less interest income, together with the amortization of intangibles related to the acquisition of DROSoft and EA's share of losses from Creative Wonders. Interest and other income, net, decreased for the six months ended September 30, 1995 compared to the same period last year primarily due to a one time payment of $8,600,000 associated with the termination of a merger agreement in the comparable period of the prior year. 16 INCOME TAXES September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $1,276,000 $2,619,000 (51.3)% effective tax rate 32.0% 32.7% Six Months Ended $1,652,000 $7,834,000 (78.9)% effective tax rate 32.0% 31.2% The Company's effective tax rate for the three months ended September 30, 1995 compared to the same period last year, decreased due to the impact of the prior year loss generated by the Company's joint venture in Japan. The Company's effective tax rate for the six months ended September 30, 1995 compared to the same period last year, increased as a result of the reduced level of manufacturing in Puerto Rico and the June 30, 1995 expiration of the U.S. tax statute providing a credit for research and experimental expenditures. However, this increase was partially offset by expected utilization of the loss carryforward in Japan mentioned above. MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $319,000 $1,330,000 (76.0)% as a percentage of net revenues .3% 1.5% Six Months Ended $364,000 $1,384,000 (73.7)% as a percentage of net revenues .2% .8% The Company has a majority interest in a joint venture corporation, Electronic Arts Victor, Inc. ("EAV"), in Japan for the development and distribution of entertainment software products in Japan as well as certain Asian countries. EAV is sixty-five percent owned by the Company and thirty-five percent owned by Victor Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical Industries, Inc.) a wholly owned subsidiary of Victor Company of Japan, Limited. The minority interest represents VEI's 35% interest in EAV. The decrease in impact from the minority interest for the three and six months ended September 30, 1995 is due to lower reported losses for EAV compared to the same periods in the prior year, which resulted from the write-off of bad debt by EAV. 17 NET INCOME September 30, September 30, 1995 1994 % change -------------------------------------- Three Months Ended $3,030,000 $ 6,710,000 (54.8)% as a percentage of net revenues 3.2% 7.6% Six Months Ended $3,873,000 $18,643,000 (79.2)% as a percentage of net revenues 2.2% 11.2% The decrease in net income for the three months ended September 30, 1995 as compared to the prior year period was primarily related to higher distribution and development expenses, offset by slightly higher revenues. The decrease in net income for the six months ended September 30, 1995 as compared to the prior year period was primarily related to higher selling and development expenses combined with the prior year impact of the after-tax net gain of approximately $6,000,000 from a one-time payment of a merger termination fee. 18 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1995, the Company's working capital was $139,000,000 compared to $168,742,000 at March 31, 1995. Cash and short term investments decreased by approximately $93,542,000 during the six months as the Company used $62,377,000 of cash in operations primarily due to payments of accrued liabilities and royalties. During the six months ended September 30, 1995, the Company invested approximately $21,200,000 in the purchase of land and buildings in Austin, Texas in which it plans to house its expanding Texas-based development group. Additionally, the Company made a strategic investment in Novalogic, a Southern California based developer of entertainment software. Reserves for bad debts and sales returns decreased from $33,567,000 at March 31, 1995 to $28,182,000 at September 30, 1995. Reserves have been charged for returns of product and price protection credits issued for products sold in prior periods. Management believes these reserves are adequate based on historical experience and its current estimate of potential returns and allowances. Inventory levels at September 30, 1995 increased compared to March 31, 1995 due to a build-up in videogame cartridge components in Puerto Rico in anticipation of the upcoming holiday season. In connection with the Company's purchases of cartridges to be distributed in North America, Nintendo of America, Inc. requires irrevocable Letters of Credit ("LC") prior to accepting purchase orders from the Company. At September 30, 1995, the Company had three LC's totaling approximately $16,250,000, issued and outstanding. In connection with the Company's purchases of cartridges to be distributed in Japan and Europe, Nintendo of Japan requires cash deposits in lieu of letters of credit. At September 30, 1995, EAV had no remaining cash deposits and Electronic Arts European operation had cash deposits totaling $9,000,000 for purchases of Nintendo cartridges. In lieu of letters of credit, EAV utilizes a line of credit to fund these deposits and purchases of Nintendo cartridges. At September 30, 1995, EAV had an outstanding balance on this line of approximately $3,998,000. The Company's principal source of liquidity is $80,579,000 in cash and short-term investments. Management believes the existing cash, cash equivalents, short-term investments, marketable securities and cash generated from operations will be sufficient to meet cash and investment requirements for the foreseeable future. 19 RISK FACTORS The Company's business is subject to a number of risks. Some of those risks are described below. Other risks are presented elsewhere in this report. RAPID TECHNOLOGICAL CHANGE Currently, the interactive software industry is undergoing another significant change due in part to the introduction or planned introduction of new hardware platforms, as well as remote and electronic delivery systems. The new generation of systems are based on 32-bit and 64-bit microprocessors that incorporate dedicated graphics chipsets. Many of these systems utilize CD-ROM drives. The Company began development of 32-bit software products over three years ago by creating the original software development system for the first of these advanced products, the 3DO Interactive Multiplayer, which began selling in calendar 1993. Sega and Sony each began distribution of their next generation hardware systems (named the "Saturn" and "PlayStation", respectively) in Japan during the quarter ended December 1994. Sega began limited shipment of the Saturn in North America in May 1995 and Sony commenced shipping the PlayStation in North America in September 1995. The team of Nintendo and Silicon Graphics has announced plans to manufacture and distribute the Ultra 64 advanced system for initial shipment in the spring of 1996. In October 1995, the 3DO Company announced an agreement to license its next generation system, the M2, to Matsushita Electric Industrial Co., Ltd. ("MEI"). New entrants in the interactive entertainment and multimedia industries, such as cable television, telephone and diversified media and entertainment companies, and a proliferation of new technologies, such as on-line networks and the Internet, are making market forecasting and prediction of financial results increasingly difficult for the Company. However, in the near term, the Company expects that the transition from 16-bit cartridge-based game machines to the advanced systems described above will continue to adversely affect the near term financial results of the Company. An increasing portion of the Company's new product releases in its 1996 fiscal year will be for advanced platforms, including the IBM PC-CD and compatibles, the Sega Saturn and Sony PlayStation, which will, in the near term, have substantially smaller installed bases than the current 16-bit videogame systems. In the near term, the increase in unit sales of advanced platforms may be less than the decline in unit sales of 16-bit systems. As a result, while the Company expects to release more titles during fiscal 1996 than during fiscal 1995, the majority of these new products will be directed to the PC-CD and 32-bit systems and the Company's potential market during this transition period may be smaller. This set of circumstances will continue to adversely affect the financial results of the Company in fiscal 1996, while Sega and Sony continue the North American roll-out of the Saturn and the PlayStation, respectively. 20 As the 16-bit cartridge market has matured, hardware sales have declined and will continue to decline. Accordingly, software sales for the 16-bit cartridge systems are declining rapidly as a percentage of the Company's business and are expected to continue to decline in fiscal 1996. In addition, sales in the 16-bit software market have become more "hits" driven. Fewer products in that market are successful and publishers of these games, including the Company, must incur additional marketing and sales expenses to promote retailers' sales of their 16-bit cartridge products. In fiscal 1996, the Company is planning to release even fewer products for these platforms and to concentrate releases during the holiday season, while focusing marketing efforts on promoting hit products. The interactive software market has historically been a volatile and highly dynamic industry affected by seasonality, changing technology, limited hardware platform life cycles, hit products, competition, component supplies, consumer spending and other economic trends. Each of these factors affect the operating results of the Company, often in combinations that make predicting those operating results difficult. In particular, the Company believes that consumer spending trends are adversely affecting the interactive software market at this time, and that retailers, in reaction to the rapidly declining 16-bit cartridge market, are attempting to reduce their inventories by buying more cautiously. These factors can be expected to continue to depress sales of the Company's software products for the 16- bit market as it is succeeded by the 32-bit market. The Company believes that early investment in products for the 32-bit market is strategically important and the Company is therefore continuing its aggressive development activities for 32-bit platforms. This investment in advanced technology development, together with declining revenues in 16-bit products during this period may result in slow or insignificant growth in revenue and earnings for the 1996 fiscal year. The eventual increase in the 32-bit market will in large part depend on the successful launch of the new hardware platforms. Delays by the hardware companies in the launch of these hardware platforms in key territories, or slower than anticipated acceptance by consumers, will slow the growth and prolong the transition from the 16-bit to 32- bit platforms. 21 COMPETITION The interactive consumer software market is highly competitive. Important factors in marketing both entertainment and educational software include content quality and entertainment value, product features, manufacturing quality and reliability, brand recognition, hardware compatibility, ease of understanding and operation, dealer merchandising, access to existing distribution channels and retail shelf space, advertising, pricing, and availability and quality of support services. A variety of companies offer products that compete directly with one or more of Electronic Arts' products. These direct competitors vary in size from very small companies with limited resources to companies with financial, managerial and technical resources comparable to or greater than those of Electronic Arts. Manufacturers of hardware platform systems, videogame cartridges and CD-ROM's such as Nintendo, Sega and Sony (together with their licensees) diversified media and entertainment companies such as Disney, Viacom and Time-Warner Inc. and publishers of personal computer software such as Microsoft Corporation also compete directly with the Company in providing interactive software products to consumers. In addition, companies in industries such as cable television and telecommunications, many of which have significant financial resources, have begun to diversify or have announced plans to enter the interactive software market. These new entrants have the potential to become significant competitors. PRODUCTS AND PRODUCT DEVELOPMENT Interactive entertainment software products typically have life spans of only 3 to 12 months. Accordingly, the Company must constantly develop and bring to market new products that achieve market acceptance quickly. The Company's future success will depend in large part on its ability to develop and introduce new products on a timely basis. New products must keep pace with competitive offerings, adapt to new hardware platforms and emerging industry standards and provide additional functionality. If the Company were unable, due to resource constraints or technological or other reasons, to develop and introduce such products in a timely manner, this inability would have a material adverse effect on its operating results and financial condition. The Company currently develops or publishes products for 14 different hardware platforms and has from time to time developed and marketed products on 32 different and incompatible platforms in the past. The Company makes substantial investments in research and development of products for operation on new hardware platforms which the Company anticipates will become more popular. Such investment occurs one to two years in advance of shipment of products on such platforms. If the Company invests in a platform that does not achieve significant market penetration, the Company's planned revenues from those products will not be achieved and the Company may not recover its development investment. Conversely, if the Company does not choose to develop for a platform that achieves significant market success, its revenue growth may also be adversely affected. There can be no assurance that the Company will correctly make such platform choices. 22 The Company's current and planned product introductions are predominantly for 32-bit platforms such as the IBM PC and compatibles, the Apple Macintosh, the Sega Saturn and the Sony PlayStation and 16-bit platforms such as the SNES and the Genesis videogame systems. The Company anticipates that compact discs will emerge as the preferred medium for interactive entertainment, education, and information software for the next several years. The Company has continued its investment in the development of CD-ROM tools and technologies and has 88 titles in development for CD-ROM platforms, including the IBM PC and compatibles, the Apple Macintosh, the 3DO Interactive Multiplayer, the Sega Saturn and the Sony PlayStation. Most of these products will be convertible for use on multiple advanced hardware systems. Product development schedules, particularly for new hardware platforms, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process associated with development for new technologies, as well as other factors. CD-ROM products frequently include more content and are more complex, time-consuming and costly to develop than cartridge products and, accordingly, cause additional development and scheduling risk. In addition, these development risks for CD-ROM products can cause particular difficulties in predicting quarterly results because brief manufacturing lead times allow finalization of products and projected release dates late in a quarter. Failure to meet product development schedules may cause a shortfall in shipments in any quarter and may cause the operating results for such quarter to fall significantly below anticipated levels. As noted above, one of the existing 32-bit platforms is the 3DO Interactive Multiplayer. The Company currently owns approximately 16% of the Common Stock of 3DO. The Company has achieved a leading position in 3DO software sales and has generated profits from sales of 3DO products in fiscal 1995 and 1996. However, the Company's 3DO products have not achieved the sales levels of the Company's Genesis products primarily because the 3DO Interactive Multiplayer has not achieved significant market acceptance comparable to the Genesis and SNES platforms and is now competing directly with Sega and Sony new 32-bit systems. However, 3DO has announced its next generation technology, the "M2", that it expects to be in the market in the second half of 1996 and that it claims will run software developed for the 3DO Interactive Multiplayer. 3DO also recently announced the license of the "M2" to MEI for $100,000,000. There can be no assurrance that the "M2" will be actually shipped to the market, that it will be able to run software developed for the 3DO Interactive Multiplayer or that it will be successful in the market. There can be no assurance that 3DO will be successful as a company. Because of the Company's equity stake in and historical association with 3DO, a material adverse effect on the business or prospects of 3DO or a substantial adverse change in the stock price of 3DO could have a material adverse effect on the Company's stock price. 23 Additionally, the Company produces film and videotape to include in certain products utilizing personnel whose services are subject to agreements between certain of the company's subsidiaries with SAG, AFTRA and Equity. However, the costs of film and video production are significantly higher than for software production, and for products which include a substantial amount of video (such as products in the interactive movie category), the costs of producing the video component is significantly higher than the cost of developing the software component, resulting in higher overall development costs for such products. Accordingly, significantly more units of such products must be sold to recoup the development and production costs. Extensive use of film or video in some of the Company's products, particularly its products in the interactive movie category, are experimental product development efforts for the Company and there can be no assurance that the significantly higher sales levels required to make these products successful will be achieved. MARKETING AND DISTRIBUTION As discussed above, the 16-bit videogame business has become increasingly "hits" driven, requiring significantly greater expenditures for advertising, particularly for television advertising. There can be no assurance that the Company will continue to produce hit products or that advertising expenditures will increase sales sufficiently to recoup the advertising expenditures. The Company has stock-balancing programs for its personal computer products (whether provided on floppy-disk or CD-ROM) that, under certain circumstances and up to a specified amount, allow for the exchange of personal computer products by resellers. The Company also typically provides for price protection for its personal computer and videogame system products that, under certain conditions, allows the reseller a price reduction from the Company for unsold products. The Company maintains a policy of exchanging products or giving credits, but does not give cash refunds. The risk of price protection requirements is increasing as a result of the maturing and the increasingly hit-based nature of the 16-bit video cartridge market. Moreover, the risk of product returns may increase as new hardware platforms become more popular or market factors force the Company to make changes in its distribution system. The Company monitors and manages the volume of its sales to retailers and distributors and their inventories as substantial overstocking in the distribution channel can result in high returns or the requirement for substantial price protection in subsequent periods. The Company believes that it provides adequate reserves for returns and price protection which are based on estimated future returns of products, taking into account promotional activities, the timing of new product introductions, distributor and retailer inventories of the Company's products and other factors, and that its current reserves will be sufficient to meet return and price protection requirements for the foreseeable future. However, there can be no assurance that actual returns or price protection will not exceed the Company's reserves. 24 The distribution channels through which consumer software products are sold have been characterized by change, including consolidations and financial difficulties of certain distributors and retailers and the emergence of new retailers such as general mass merchandisers. The bankruptcy or other business difficulties of a distributor or retailer could render Electronic Arts' accounts receivable from such entity uncollectible, which could have an adverse effect on the operating results and financial condition of the Company. In addition, an increasing number of companies are competing for access to these channels. Electronic Arts' arrangements with its distributors and retailers may be terminated by either party at any time without cause. Distributors and retailers often carry products that compete with those of the Company. Retailers of Electronic Arts' products typically have a limited amount of shelf space and promotional resources for which there is intense competition. There can be no assurance that distributors and retailers will continue to purchase Electronic Arts' products or provide Electronic Arts' products with adequate levels of shelf space and promotional support. SEASONALITY The Company's business is highly seasonal. The Company typically experiences its highest revenues and profits in the calendar year-end holiday season and a seasonal low in revenues and profits in the quarter ending in June. EMPLOYEES The Company believes that its ability to attract and retain qualified employees is an important factor in its growth and development and that its future success will depend, in large measure, on its ability to continue to attract and retain qualified employees. To date, the Company has been successful in recruiting and retaining sufficient numbers of qualified personnel to conduct its business successfully. However, competition for employees in the interactive software business is intense and increasing as competition in the industry increases and there can be no assurance that the Company will continue to be able to attract and retain enough qualified employees in the future. None of the Company's employees are subject to a collective bargaining agreement, and the Company believes that its employee relations are excellent. 25 OTHER RISK FACTORS In addition to those discussed above, the Company's business is subject to a number of other risks. Some of those risks are described below. Other risks are presented elsewhere in this report. A substantial majority of the total revenue of the Company in any quarter typically results from orders received in that quarter and products introduced in that quarter. The Company's expenses are based, in part, on expected future revenues. Certain overhead and product development expenses do not vary directly in relation to revenues. As a result, the Company's quarterly results of operations are difficult to predict, and small delays in product deliveries may cause quarterly revenues, operating results and net income to fall significantly below anticipated levels. The Company's revenues and net income could also be materially and adversely affected by cancellation of orders, changes in customer base or product mix, delays in processing, acceptance and delivery by manufacturers and increased competition. The Company typically receives orders shortly before shipments, making backlog, particularly early in any quarter, an unreliable indicator of quarterly results. Therefore, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth and other factors, any such shortfall in earnings could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. As a result of the foregoing factors and other factors that may arise in the future, the market price of the Company's common stock may be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer, software, entertainment, media or electronics industries or the securities markets in general. Because of the foregoing factors, as well as other factors affecting the Company's operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to pending claims. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits in the aggregate would not have a material adverse effect upon the consolidated financial position or results of operations of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The following exhibits are filed as part of this report: None Number Exhibit Title - - ------ ------------- (b) No reports on Form 8-K were filed by the Registrant during the three months ended September 30, 1995. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELECTRONIC ARTS INC. (Registrant) /s/E. STANTON MCKEE ------------------- DATED: E. STANTON MCKEE November 14, 1995 Senior Vice President and Chief Financial and Administrative Officer (Duly authorized officer) 28