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 June 30, 1999
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.)
209 Redwood Shores Parkway
Redwood City, California 94065
(Address of principal executive offices) (Zip Code)
(650) 628-1500
(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 August 4, 1999
--------------------- --------------
$0.01 par value per share 62,316,057
ELECTRONIC ARTS INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
June 30, 1999 and March 31, 1999 3
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
- ----------
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
ASSETS
June 30, March 31,
1999 1999
--------- ---------
Current assets:
Cash, cash equivalents and short-term investments $ 319,667 $ 312,822
Marketable securities 4,327 4,884
Receivables, less allowances of $55,355 and $72,850, respectively 73,297 149,468
Inventories 16,003 22,376
Deferred income taxes 25,833 25,406
Other current assets 76,162 54,509
--------- ---------
Total current assets 515,289 569,465
Property and equipment, net 192,628 181,266
Long-term investments 18,400 18,400
Investments in affiliates 17,086 25,864
Goodwill and other intangibles 88,099 90,682
Long-term deferred taxes 5,733 5,733
Other assets 25,830 10,463
--------- ---------
$ 863,065 $ 901,873
========= =========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,111 $ 63,881
Accrued liabilities 133,264 172,328
--------- ---------
Total current liabilities 177,375 236,209
Minority interest in consolidated joint venture 2,622 2,733
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- --
Common stock, $0.01 par value. Authorized 104,000,000 shares;
Issued 61,885,385 and 61,291,849 shares; outstanding 61,885,385 and
61,169,286 shares, respectively 619 613
Paid-in capital 283,934 267,699
Treasury stock, at cost; 122,563 shares at March 31, 1999 -- (4,926)
Retained earnings 401,943 402,112
Accumulated other comprehensive loss (3,428) (2,567)
--------- ---------
Total stockholders' equity 683,068 662,931
--------- ---------
$ 863,065 $ 901,873
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
1999 1998
--------- ---------
Net revenues $ 186,120 $ 178,221
Cost of goods sold 85,517 87,589
--------- ---------
Gross profit 100,603 90,632
--------- ---------
Operating expenses:
Marketing and sales 33,847 33,644
General and administrative 17,564 15,417
Research and development 47,453 36,242
Amortization of intangibles 2,588 --
Charge for acquired in-process technology -- 2,279
--------- ---------
Total operating expenses 101,452 87,582
--------- ---------
Operating income (loss) (849) 3,050
Interest and other income, net 4,138 2,815
--------- ---------
Income before provision for income taxes
and minority interest 3,289 5,865
Provision for income taxes 1,052 1,935
--------- ---------
Income before minority interest 2,237 3,930
Minority interest in consolidated
joint venture 89 (230)
--------- ---------
Net income $ 2,326 $ 3,700
========= =========
Net income per share:
Basic $ 0.04 $ 0.06
========= =========
Diluted $ 0.04 $ 0.06
========= =========
Number of shares used in computation:
Basic 61,455 60,304
========= =========
Diluted 64,119 62,996
========= =========
Total comprehensive income $ 1,465 $ 3,164
========= =========
See accompanying notes to consolidated financial statements.
4
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three Months
Ended June 30,
1999 1998
--------- ---------
Operating activities:
Net income $ 2,326 $ 3,700
Adjustments to reconcile net income to net cash used in operating
activities:
Minority interest in consolidated joint venture (89) 230
Equity in net loss of affiliates 428 134
Gain on sale of affiliate (842) --
Depreciation and amortization 9,897 7,409
Loss on sale of fixed assets 76 496
Gain on sale of marketable securities (1,210) (76)
Provision for doubtful accounts 712 1,162
Charge for acquired in-process technology -- 2,279
Change in assets and liabilities, net of acquisitions:
Receivables 75,459 38,166
Inventories 6,373 616
Other assets (37,020) (1,849)
Accounts payable (19,770) (14,681)
Accrued liabilities (38,578) (41,776)
Deferred income taxes (461) (26)
--------- ---------
Net cash used in operating activities (2,699) (4,216)
--------- ---------
Investing activities:
Proceeds from sale of property and equipment 34 --
Proceeds from sales of marketable securities 1,400 101
Proceeds from sale of affiliate 8,842 --
Capital expenditures (18,781) (11,398)
Investment in affiliates, net (150) (2,628)
Proceeds from maturity of securities -- 6,330
Change in short-term investments, net (47,667) (9,344)
Acquisition of subsidiaries, net of cash acquired -- (2,339)
--------- ---------
Net cash used in investing activities (56,322) (19,278)
--------- ---------
Financing activities:
Proceeds from sales of shares through employee stock
plans and other plans 13,729 6,813
Tax benefit from exercise of stock options 4,943 1,631
Proceeds from minority interest investment in consolidated
joint venture -- 2,109
--------- ---------
Net cash provided by financing activities 18,672 10,553
--------- ---------
Translation adjustment 79 (1,314)
--------- ---------
Decrease in cash and cash equivalents (40,270) (14,255)
Beginning cash and cash equivalents 242,208 215,963
--------- ---------
Ending cash and cash equivalents 201,938 201,708
Short-term investments 117,729 161,611
--------- ---------
Ending cash and short-term investments $ 319,667 $ 363,319
========= =========
5
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(unaudited)
Three Months
Ended June 30,
1999 1998
--------- ---------
Supplemental cash flow information:
Cash paid during the year for income taxes $ 1,670 $ 9,832
========= =========
Non-cash investing activities:
Change in unrealized appreciation of investments and marketable
securities $ (1,414) $ 1,165
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
6
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
period. The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year or any
other period. Certain amounts have been reclassified to conform to the fiscal
2000 presentation.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Electronic Arts
Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended March
31, 1999 as filed with the Securities and Exchange Commission ("Commission") on
June 29, 1999.
Note 2. Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
original equipment manufacturer (OEM) fees and license fees paid to celebrities
and professional sports organizations for use of their trade name. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. Prepaid
royalties are expensed at the contractual royalty rate as cost of goods sold
based on actual net product sales. Management evaluates the future realization
of prepaid royalties quarterly and charges to income any amounts that management
deems unlikely to be realized through product sales. Royalty advances are
classified as current and non-current assets based upon estimated net product
sales for the following year. The current portion of prepaid royalties, included
in other current assets, was $44,259,000 and $35,057,000 at June 30, 1999 and
March 31, 1999, respectively. The long-term portion of prepaid royalties,
included in other assets, was $16,343,000 and $7,602,000 at June 30, 1999 and
March 31, 1999, respectively.
Note 3. Inventories
Inventories are stated at the lower of cost or market. Inventories at June 30,
1999 and March 31, 1999 consisted of (in thousands):
June 30, March 31,
1999 1999
------- -------
Raw materials and work in process $ 1,265 $ 2,983
Finished goods 14,738 19,393
------- -------
$16,003 $22,376
======= =======
Note 4. Accrued Liabilities
Accrued liabilities at June 30, 1999 and March 31, 1999 consisted of (in
thousands):
June 30, March 31,
1999 1999
-------- --------
Accrued expenses $ 48,595 $ 46,595
Accrued compensation and benefits 28,875 46,541
Accrued royalties 28,741 36,429
Accrued income taxes 16,067 23,724
Warranty reserve 6,515 7,900
Deferred income taxes 2,447 2,933
Deferred revenue 2,024 8,206
-------- --------
$133,264 $172,328
======== ========
7
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5. Segment Information
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
product lines, geographic areas and major customers. The Company has four
reportable segments: North America, Europe, Asia Pacific and Japan, which are
organized, managed and analyzed geographically and operate in one industry
segment: the creation, marketing and distribution of entertainment software.
Information about the Company's operations in the North America and foreign
areas for the three months ended June 30, 1999 and 1998 is presented below:
Asia
(in thousands) Pacific
North (excluding
America Europe Japan) Japan Eliminations Total
--------- --------- --------- --------- ------------ ---------
Three months ended June 30, 1999
- --------------------------------
Net revenues from unaffiliated
customers $ 102,050 $ 67,870 $ 10,869 $ 5,331 $ -- $ 186,120
Intersegment revenues 3,632 4,436 771 -- (8,839) --
--------- --------- --------- --------- --------- ---------
Total net revenues $ 105,682 $ 72,306 $ 11,640 $ 5,331 $ (8,839) $ 186,120
========= ========= ========= ========= ========= =========
Operating income (loss) $ 6,537 $ (8,028) $ 1,022 $ (380) $ -- $ (849)
Interest income $ 2,563 $ 362 $ 27 $ -- $ -- $ 2,952
Depreciation and amortization $ 7,584 $ 2,017 $ 137 $ 159 $ -- $ 9,897
Identifiable assets $ 580,339 $ 249,242 $ 20,494 $ 12,990 $ -- $ 863,065
Capital expenditures $ 7,489 $ 10,911 $ 294 $ 87 $ -- $ 18,781
Three months ended June 30, 1998
- --------------------------------
Net revenues from unaffiliated
customers $ 69,114 $ 86,794 $ 8,363 $ 13,950 $ -- $ 178,221
Intersegment revenues 5,836 2,512 -- 13 (8,361) --
--------- --------- --------- --------- --------- ---------
Total net revenues $ 74,950 $ 89,306 $ 8,363 $ 13,963 $ (8,361) $ 178,221
========= ========= ========= ========= ========= =========
Operating income (loss) $ (10,184) $ 10,263 $ 268 $ 2,703 $ -- $ 3,050
Interest income $ 3,393 $ 849 $ 68 $ -- $ -- $ 4,310
Depreciation and amortization $ 6,071 $ 904 $ 51 $ 383 $ -- $ 7,409
Identifiable assets $ 480,843 $ 187,790 $ 16,416 $ 18,096 $ -- $ 703,145
Capital expenditures $ 7,830 $ 2,548 $ 212 $ 808 $ -- $ 11,398
8
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Information about the Company's net revenues by product line for the three
months ended June 30, 1999 and 1998 is presented below (in thousands):
Three Months Ended
June 30,
1999 1998
-------- --------
PlayStation $ 69,251 $ 95,957
PC-CD 63,596 39,210
Affiliated label 33,432 14,814
N64 11,842 20,947
License, OEM, Online and Other 7,999 7,293
-------- --------
$186,120 $178,221
======== ========
Note 6. Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and the display of
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. SFAS 130 requires classification of other comprehensive
income in a financial statement and display of other comprehensive income
separately from retained earnings and additional paid-in capital. Other
comprehensive income includes primarily foreign currency translation adjustments
and unrealized gains (losses) on investments.
The components of comprehensive income, net of tax, for the three months ended
June 30, 1999 and 1998 were as follows (in thousands):
Three Months Ended
June 30,
1999 1998
------- -------
Net income $ 2,326 $ 3,700
Other comprehensive loss:
Change in unrealized appreciation of investments, net
of a tax provision (benefit) of $(65) and $408 (139) 829
Reclassification adjustment for gains realized in net
income, net of a tax benefit of $(387) and $(25) (823) (51)
Foreign currency translation adjustments 101 (1,314)
------- -------
Total other comprehensive loss (861) (536)
Total comprehensive income $ 1,465 $ 3,164
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
9
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7. Acquisitions
During the quarter ended June 30, 1998, the Company acquired two software
development companies. In connection with these acquisitions, the Company
incurred a charge of $2,279,000 for acquired in-process technology. The charge
was made after the Company concluded that the in-process technology had not
reached technological feasibility and had no alternative future use after taking
into consideration the potential for usage of the software in different products
and resale of the software.
Note 8. Earnings Per Share
The following summarizes the computations of Basic Earnings Per Share ("EPS")
and Diluted EPS. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method (in thousands except per share amounts):
Three Months Ended
June 30,
1999 1998
------- -------
Net income $ 2,326 $ 3,700
Shares used to compute net income per share:
Weighted-average common shares 61,455 60,304
Dilutive stock options 2,664 2,692
------- -------
Dilutive potential common shares 64,119 62,996
======= =======
Net income per share:
Basic $ 0.04 $ 0.06
Diluted $ 0.04 $ 0.06
10
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Excluded from the above computation of weighted-average shares for diluted EPS
for the three months ended June 30, 1999 and 1998 were options to purchase
193,808, and 18,810 shares of common stock, respectively, as the options'
exercise price was greater than the average market price of the common shares.
For the three months ended June 30, 1999, the weighted-average exercise price of
the respective options was $52.81.
Note 9. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 15, 2000. The Company is determining the effect of SFAS 133
on its financial statements.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q and in particular Management's Discussion and
Analysis of Financial Condition and Results of Operations contains forward
looking statements regarding future events or our future financial performance
that involve certain risks and uncertainties including those discussed in "Risk
Factors" below at pages 20 to 22, as well as in our Annual Report on Form 10-K
for the fiscal year ended March 31, 1999 as filed with the Securities and
Exchange Commission on June 29, 1999 and other documents filed with the
Commission. Actual events or actual future results may differ materially from
any forward looking statements due to such risks and uncertainties.
We derive revenues primarily from shipments of entertainment software, which
includes EA Studio CD products for dedicated entertainment systems ("CD-video
games"), EA Studio CD personal computer products ("PC-CD"), EA Studio cartridge
products and Affiliated Label ("AL") products that are published by third
parties and distributed or co-published by us. We also derive revenues from
licensing of EA Studio products and AL products through hardware companies
("OEMs") and online subscription revenues.
Information about our net revenues for North America and foreign areas for the
three months ended June 30, 1999 and 1998 is summarized below:
Net Revenues As a Percent As a Percent
June 30, of Total Net June 30, of Total Net Increase/ %
1999 Revenues 1998 Revenues (Decrease) change
------------ -------- ------------ -------- ------------ -------
North America $102,050,000 54.8% $ 69,114,000 38.8% $ 32,936,000 47.7%
------------ -------- ------------ -------- ------------ -------
Europe $ 67,870,000 36.5% $ 86,794,000 48.7% $(18,924,000) (21.8%)
Asia Pacific $ 10,869,000 5.8% $ 8,363,000 4.7% $ 2,506,000 30.0%
Japan $ 5,331,000 2.9% $ 13,950,000 7.8% $ (8,619,000) (61.8%)
------------ -------- ------------ -------- ------------ -------
International $ 84,070,000 45.2% $109,107,000 61.2% $(25,037,000) (22.9%)
------------ -------- ------------ -------- ------------ -------
Consolidated Net
Revenues $186,120,000 100.0% $178,221,000 100.0% $ 7,899,000 4.4%
------------ -------- ------------ -------- ------------ -------
North America Net Revenues
North America net revenues increased compared to the same period last year
primarily due to increased sales of PC-CD and PlayStation titles as well as the
distribution of AL products. PC-CD revenues increased due to the continued
strong sales of Sim City 3000 as well as current titles released for this
platform including Need for Speed: High Stakes. Total North America PlayStation
revenues increased due to the greater installed base of this console, strong
catalog sales and the release of three titles for this platform. Affiliated
label revenues increased due to the distribution of products published by Square
EA, which began in the second quarter last year.
12
International Net Revenues
The decrease in international net revenues compared to the same period last year
was mainly attributable to decreases in sales for Europe and Japan partially
offset by an increase in Asia Pacific revenues. European net revenues decreased
due to decreases in PlayStation and N64 sales, mainly attributable to the
shipment of World Cup 98 in the prior year. This was partially offset by an
increase in AL revenues, primarily due to sales of products published by ABC
Software, which was acquired in July 1998. Net revenues for Japan decreased
primarily due to decreases in sales of PlayStation and N64 titles, mainly
attributable to the shipment of FIFA: Road to World Cup 98 in the prior year,
partially offset by an increase in PC-CD sales, due to sales of Sim City 3000.
Sales in the Asia Pacific region increased due to higher PC-CD and PlayStation
title sales, primarily due to the shipment of two locally developed products.
Information about our net revenues by product line for the three months ended
June 30, 1999 and 1998 is presented below:
Net Revenues As a Percent As a Percent
June 30, of Total Net June 30, of Total Net Increase/ %
1999 Revenues 1998 Revenues (Decrease) change
-------------- ------------ -------------- ------------ ------------- ------------
EA Studio:
PlayStation $ 69,251,000 37.2% $ 95,957,000 53.8% $ (26,706,000) (27.8%)
PC-CD $ 63,596,000 34.1% $ 39,210,000 22.0% $ 24,386,000 62.2%
N64 $ 11,842,000 6.4% $ 20,947,000 11.8% $ (9,105,000) (43.5%)
License, OEM,
Online and Other $ 7,999,000 4.3% $ 7,293,000 4.1% $ 706,000 9.7%
-------------- ------------ -------------- ------------ ------------- ------------
$ 152,688,000 82.0% $ 163,407,000 91.7% $ (10,719,000) (6.6%)
-------------- ------------ -------------- ------------ ------------- ------------
Affiliated Label: $ 33,432,000 18.0% $ 14,814,000 8.3% $ 18,618,000 125.7%
-------------- ------------ -------------- ------------ ------------- ------------
$ 186,120,000 100.0% $ 178,221,000 100.0% $ 7,899,000 4.4%
-------------- ------------ -------------- ------------ ------------- ------------
PlayStation Product Net Revenues
We released three PlayStation titles during the first quarter of fiscal 2000 and
fiscal 1999. The decrease in PlayStation sales for the three months ended June
30, 1999 compared to the prior year was primarily attributable to the shipment
of World Cup 98 and Road Rash 3D in the prior year. We expect revenues from
PlayStation products to grow in fiscal 2000, but as revenues for these products
increase, we do not expect to maintain the same growth rates as those in the
prior years.
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended, we are
authorized to develop and distribute CD-based software products compatible with
the PlayStation. Pursuant to the Sony Agreement, we engage Sony to supply
PlayStation CDs for distribution by us. Accordingly, we have limited ability to
control our supply of PlayStation CD products or the timing of their delivery.
See Risk Factors - "Our platform licensors are our chief competitors and
frequently control the manufacturing of our video game products", below.
13
Personal Computer CD Product Net Revenues
We released five PC-CD titles in the first quarter of the current fiscal year
for the IBM personal computer and compatibles including Need for Speed: High
Stakes and Dungeon Keeper 2, compared to two for the same period last year. The
increase in sales of PC-CD products for the three months ended June 30, 1999 was
attributable to the shipment of key titles released during the quarter as well
as strong catalog sales of titles such as Sim City 3000 and Triple Play 2000
released in the prior quarter. This increase was partially offset by the prior
year shipment of World Cup 98. We expect revenues from PC-CD products to
continue to grow in fiscal 2000, but as revenues for these products increase, we
do not expect to maintain these growth rates.
N64 Product Net Revenues
The decrease in N64 revenues was due to the prior year release of World Cup 98
compared to no new releases in the current period. This decrease was partially
offset by strong catalog sales for the three months ended June 30, 1999. We do
not expect significant growth in revenues for N64 products in fiscal 2000.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture our N64
cartridges for distribution by us. Accordingly, we have little ability to
control our supply of N64 cartridges or the timing of their delivery. A shortage
of microchips or other factors outside our control could impair our ability to
obtain an adequate supply of cartridges.
In connection with our purchases of N64 cartridges for distribution in North
America, Nintendo requires us to provide irrevocable letters of credit prior to
Nintendo's acceptance of purchase orders from us for purchases of these
cartridges. For purchases of N64 cartridges for distribution in Japan and
Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo
maintains a policy of not accepting returns of N64 cartridges. Because of these
and other factors, the carrying of an inventory of cartridges entails
significant capital and risk. See Risk Factors--"Our platform licensors are our
chief competitors and frequently control the manufacturing of our video game
products", below.
Affiliated Label Product Net Revenues
The increase in Affiliated Label net revenues for the three months ended June
30, 1999 compared to the same period last year was primarily due to higher sales
of AL products in Europe and North America. The increase was primarily
attributable to the distribution of products by ABC Software in Switzerland and
Square EA in North America. We expect revenues from AL products to continue to
grow in fiscal 2000, but as revenues for these products increase, we do not
expect to maintain these growth rates.
Cost of Goods Sold
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 85,517,000 $ 87,589,000 (2.4%)
as a percentage of net revenues 45.9% 49.1%
The decrease in costs of goods sold as a percentage of net revenues for the
three months ended June 30, 1999 compared to the same period last year was
primarily due to
14
increased sales of higher margin PC-CD products and higher sales of internally
developed titles such as Sim City 3000 and Dungeon Keeper 2.
Marketing and Sales
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 33,847,000 $ 33,644,000 0.6%
as a percentage of net revenues 18.2% 18.9%
Marketing and sales expenses for the three months ended June 30, 1999 was
comparable with the same period last year. Although we had additional headcount
expenses related to the continued expansion of our worldwide distribution
business, this was offset by lower advertising spending.
General and Administrative
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 17,564,000 $ 15,417,000 13.9%
as a percentage of net revenues 9.4% 8.7%
The increase in general and administrative expenses for the three months ended
June 30, 1999 was due primarily to an increase in payroll and occupancy costs to
support the increased growth in North America and Europe operations, including
expenses relating to the acquisition of ABC in July 1998.
Research and Development
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 47,453,000 $ 36,242,000 30.9%
as a percentage of net revenues 25.5% 20.3%
The increase in research and development expenses for the three months ended
June 30, 1999 was due to: the acquisition of Westwood in September 1998; an
increase in online development; additional headcount related expenses
attributable to increased in-house development capacity due to a higher number
of SKUs to be released in fiscal 2000; and spending for next generation console
products.
Charge for Acquired In-Process Technology
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ -- $ 2,279,000 (100.0%)
as a percentage of net revenues N/A 1.3%
In connection with the acquisition of two software development companies, in the
first quarter of fiscal 1999, we incurred a total charge of $2,279,000 for
acquired in-process technology. This charge was made after we concluded that the
in-process technology had not reached technological feasibility and had no
alternative future use after taking into
15
consideration the potential for usage of the software in different products and
resale of the software.
Amortization of Intangibles
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 2,588,000 $ -- N/M
as a percentage of net revenues 1.4% N/A
Amortization of intangibles results from the acquisitions of Westwood, ABC
Software and other acquisitions made in prior periods.
Interest and Other Income, Net
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 4,138,000 $ 2,815,000 47.0%
as a percentage of net revenues 2.2% 1.6%
Interest and other income, net, increased for the three months ended June 30,
1999 compared to the same period last year primarily due to the gain on sale of
marketable securities and a gain on sale of a minority interest in an affiliate
in the current year. This was partially offset by lower interest income
attributable to lower cash balances as compared to the prior year period.
Income Taxes
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 1,052,000 $ 1,935,000 (45.6%)
effective tax rate 32.0% 33.0%
The Company's effective tax rate for the three months ended June 30, 1999 was
lower than the comparable prior year period primarily as a result of a projected
higher portion of international income for fiscal 2000 subject to a lower
foreign tax rate as compared to the prior year.
Minority Interest in Consolidated Joint Venture
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 89,000 $ (230,000) 138.7%
as a percentage of net revenues 0.0% (0.1%)
In the first quarter of fiscal 1999, we formed EA Square KK, which is seventy
percent owned by us and thirty percent owned by Square Co. Ltd. ("Square"), a
leading developer and publisher of entertainment software in Japan. Minority
interest for the three months
16
ended June 30, 1999 and June 30, 1998 represents Square's 30% interest in the
net loss (income) of EA Square KK.
Net Income (Loss)
June 30, June 30, %
1999 1998 change
------------- ------------- ---------
Three Months Ended $ 2,326,000 $ 3,700,000 (37.1%)
as a percentage of net revenues 1.2% 2.1%
The decrease in net income for the three months ended June 30, 1999 as compared
to the prior year period was primarily related to higher revenues and gross
profits offset by higher operating expenses.
Liquidity and Capital Resources
As of June 30, 1999, our working capital was $337,914,000 compared to
$333,256,000 at March 31, 1999. Cash, cash equivalents and short-term
investments increased by approximately $6,845,000 during the three months ended
June 30, 1999 as we used $2,699,000 of cash in operations and $18,781,000 in
capital expenditures, offset by $13,729,000 provided through the sale of equity
securities under our stock plans as well as proceeds from the sale of an
affiliate and the sale of marketable securities.
Reserves for bad debts and sales returns decreased from $72,850,000 at March 31,
1999 to $55,355,000 at June 30, 1999. 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.
Our principal source of liquidity is $319,667,000 in cash, cash equivalents 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 on both a short-term
and long-term basis.
Year 2000 Readiness Disclosure
Background of Year 2000 Issues
Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates because such systems may have been developed using two digits rather than
four to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
State of Readiness
Our business is dependent on the operation of numerous systems that
could potentially be impacted by Year 2000 related problems. Those systems
include, among others: hardware and software systems used to deliver products to
our customers; communications networks such
17
as the Internet and private intranets, upon which we depend to receive orders
from our customers; the internal systems of our customers and suppliers;
products sold to customers; the hardware and software systems used internally in
the management of our business; and non-information technology systems and
services used in the management of our business, such as power, telephone
systems and building systems.
Based on an analysis of the systems potentially impacted by conducting
business in the twenty-first century, we are applying a phased approach to
making such systems, and accordingly, our operations, ready for the year 2000.
Beyond awareness of the issues and scope of systems involved, the phases of
activities in progress include: an assessment of specific underlying computer
systems, programs and hardware; renovation, replacement or redeployment of Year
2000 non-compliant technology; validation and testing of technologically
compliant Year 2000 solutions; and implementation of the Year 2000 compliant
systems.
As a third party providing software products, we are dependent on the
hardware and software products used to deliver such products and services. If
such products are inoperable due to Year 2000 issues, our business, financial
condition and results of operations could be adversely affected. An inventory of
our internal business systems, and software and hardware upgrades have been
completed to ensure Year 2000 compliance.
Costs
To date we have not incurred significant costs directly related to Year
2000 issues, even in cases where non-compliant information technology systems
were redeployed or replaced.
We believe that future expenditures to upgrade internal systems and
applications will not have a material adverse effect on our business, financial
condition and results of operations and are primarily included within our
ongoing system development plan. In addition, while the potential costs of
redeploying personnel and of any delays in implementing other projects are not
known, the costs are anticipated to be immaterial.
Risks of the Year 2000 Issues
Our financial information systems include an integrated suite of business
applications developed and supported by Oracle Corporation. These applications
systems are in place and currently support daily operations in the United States
and in Europe. Based on representations made by Oracle Corporation and upon our
limited tests, we believe these systems to be Year 2000 compliant.
We believe our software products are Year 2000 compliant; however, success
of our Year 2000 compliance efforts may depend on the success of our customers
dealing with their Year 2000 issues. Customer difficulties with Year 2000 issues
might require us to devote additional resources to resolve underlying problems.
Failures of our computer systems or third parties' computer systems could have a
material adverse impact on our ability to conduct business. For example, a
significant percentage of purchase orders received from our customers are
computer generated and electronically transmitted. In addition, the Year 2000
could affect the ability of consumers to use our PC based products. If the
computer systems on which the consumers use our products are not Year 2000
compliant, such noncompliance could affect the consumers' ability to use such
products.
Contingency Plans
We continue to assess certain of our Year 2000 exposure areas in order to
determine what additional steps beyond those identified by our internal review
in the United States are advisable.
18
We have developed a contingency plan for handling Year 2000 problems that are
not detected and corrected prior to their occurrence. We believe that the
systems, which represent the principal exposures, have been identified, and to
the extent necessary, are in the process of being modified to become Year 2000
compliant. Additionally, we have conducted tests of our principal business
systems to verify that those systems are Year 2000 compliant. Any failure to
address any unforeseen Year 2000 issues could adversely affect our business,
financial condition and results of operations.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies (the
"legacy currency") and the one common legal currency known as the "Euro". From
January 1, 1999 through June 30, 2002 the countries will be able to use their
legacy currencies or the Euro to transact business. By July 1, 2002, at the
latest, the conversion to the Euro will be complete at which time the legacy
currencies will no longer be legal tender. The fixed conversion rates between
their existing currencies have eliminated exchange rate risk between the member
countries.
The conversion to the Euro has reduced the number of forward contracts that we
use to hedge the exchange rate risk. The forward contracts that were used to
hedge the individual legacy currencies have been replaced by a single Euro hedge
contract and the intercompany transactions among subsidiaries within the
European Union are no longer subject to exchange rate risk.
We do not anticipate any material impact from the Euro conversion on our
financial information systems which currently accommodate multiple currencies.
Computer software changes necessary to comply with the Year 2000 issues are
generally compliant to the Euro conversion issue. Due to numerous uncertainties,
we cannot reasonably estimate the effect that the Euro conversion issue will
have on our pricing or market strategies, and the impact, if any, it will have
on our financial condition and results of operations.
19
Risk Factors
EA's business is subject to many risks and uncertainties which may affect our
future financial performance. Some of those important risks and uncertainties
which may cause our operating results to vary or which may materially and
adversely affect our operating results are as follows:
- - Product development schedules are frequently unreliable and make predicting
quarterly results difficult. Product development schedules, particularly for new
hardware platforms and high-end multimedia PCs are difficult to predict because
they involve creative processes, use of new development tools for new platforms
and the learning process, research and experimentation associated with
development for new technologies. For example, SimCity 3000, the follow on
product to SimCity 2000, was expected to ship in fiscal 1998, at the time of the
merger with Maxis. Due to additional development delays, that product did not
ship until the fourth quarter of fiscal year 1999. Also, Tiberian Sun, which was
expected to ship in fiscal 1999 at the time of the acquisition of Westwood
Studios, is not expected to be released until the second quarter of fiscal 2000
due to development delays. Additionally, development risks for CD-ROM products
can cause particular difficulties in predicting quarterly results because brief
manufacturing lead times allow finalizing products and projected release dates
late in a quarter. Our revenues and earnings are dependent on our ability to
meet our product release schedules, and our failure to meet those schedules
could result in revenues and earnings which fall short of analysts' expectations
for any individual quarter and the fiscal year.
- - New video game platforms create additional technical and business model
uncertainties. A large portion of our revenues are derived from the sale of
products for play on proprietary video game platforms such as the PlayStation
and the N64. The success of our products is significantly affected by acceptance
of the new video game hardware systems and the life span of older hardware
platforms and our ability to accurately predict which platforms will be most
successful.
Sometimes we will spend development and marketing resources on products designed
for new video game systems that have not yet achieved large installed bases or
will continue product development for older hardware platforms that may have
shorter life cycles than we expected. Conversely, if we do not develop for a
platform that achieves significant market acceptance, or discontinue development
for a platform that has a longer life cycle than expected, our revenue growth
may be adversely affected.
For example, while the Sega Dreamcast console is scheduled to launch in the
United States in late calendar 1999 and has already launched in Japan, we have
no products under development for this platform. Accordingly, we will not have
products available should this platform achieve wide market acceptance.
Similarly, we intend to launch a variety of products for the new Sony
PlayStation platform, the PlayStation II, expected to be released in the United
States in September 2000. Should that platform not achieve wide acceptance by
consumers, we will have spent a disproportionate amount of our resources for
this platform. Additionally, we have not negotiated publishing agreements with
Sony, Sega or Nintendo for their next generation platforms, and we do not know
whether the terms of those agreement will be favorable.
- - The business models and technology for e-commerce and online gaming are
unproven. While we do not currently derive significant revenues from online
sales of our packaged products or from games played online, we believe that both
will become a more significant factor in our business and in the interactive
gaming business generally in the future.
E-commerce is becoming an increasingly popular method for conducting business
with consumers. How that form of distribution will affect the more traditional
retail distribution, at
20
which we have historically excelled, and over what time period, is uncertain.
Additionally, technology, staffing and support for sales direct to consumers
differ from that required for sales to resellers.
Online gaming, and particularly multiplayer online gaming such as our Ultima
Online product, has many risks not currently associated with most packaged good
sales including, but not limited to, the following:
In "massively multiplayer" games such as Ultima Online, unanticipated
player conduct significantly affects the performance of the game, and social
issues raised by players' conduct frequently determine player satisfaction.
Our ability to effectively proctor such games is uncertain.
The current business model is as yet experimental and maybe
unsustainable; whether revenues will continue to be sufficient to maintain the
significant support, service and product enhancement demands of online users is
uncertain. We have little experience in pricing strategies for online games or
in predicting usage patterns of our customers.
Additionally, the speed and reliability of the Internet and the
performance of a user's Internet service provider are not controlled by us but
impact both e-commerce and online game performance. Whether the Internet
infrastructure will be adequate to meet increasing demand will affect our
ability to grow our Internet dependent businesses.
- - Our business, our products, and our distribution are subject to increasing
regulation in key territories. Legislation is increasingly introduced which may
affect the content of our products and their distribution. For example, privacy
rules in the United States and Europe impose various restrictions on our web
sites. Those rules vary by territory while of course the Internet recognizes no
geographical boundaries. Other countries such as Germany have adopted laws
regulating content transmitted over the Internet that are stricter than current
United States laws. In the United States, in response to recent events, the
federal and several state governments are considering content restrictions on
products such as those made by us as well as restrictions on distribution of
such products. Any one or more of these factors could harm our business.
- - Our platform licensors are our chief competitors and frequently control the
manufacturing of our video game products. Our agreements with hardware
licensors, which are also our chief competitors, typically give significant
control to the licensor over the approval and manufacturing of our products.
This fact could, in certain circumstances, leave us unable to get our products
approved, manufactured and shipped to customers. In most events, control of the
approval and manufacturing process by the platform licensors increases both our
manufacturing lead times and costs as compared to those we can achieve
independently. For example, in prior years, we experienced delays in obtaining
approvals for and manufacturing of PlayStation products which caused delays in
shipping those products. The potential for additional delay or refusal to
approve or manufacture our products continues with our platform licensors. Such
occurrences would harm our business and adversely affect our financial
performance.
- - We face intense competition for talent from highly valued Internet companies.
Competition for employees in the interactive software business continues to be
intense. Recently, the most intense competition for recruiting and retaining key
employees is from Internet companies. The high market valuations, large equity
positions for key executives and creative talent and fast stock price
appreciation of these companies make their compensation packages attractive to
those who are already working in more mature companies. This situation
21
creates difficulty for us to compete for the attraction and retention of
executive and key creative talent.
- - Foreign Sales and Currency Fluctuations. For the three months ended June 30,
1999, international net revenues comprised 45% of total consolidated net
revenues. For the fiscal year ended March 31, 1999, international net revenues
comprised 42% of total consolidated net revenues. We expect foreign sales to
continue to account for a significant and growing portion of our revenues. Such
sales are subject to unexpected regulatory requirements, tariffs and other
barriers. Additionally, foreign sales are primarily made in local currencies
which may fluctuate. As a result of current economic conditions in Asia, we are
subject to additional foreign currency risk. Though we do not currently derive a
significant portion of revenues and operating profits from sales in Asia and
other developing countries, our foreign currency exposure may increase as
operations in these countries grow and if current economic trends in Asia
continue. Any of these factors may significantly harm our business.
- - Fluctuations in Stock Price. Due to analysts' expectations of continued growth
and other factors, any shortfall in earnings could have an immediate and
significant adverse effect on the trading price of our common stock in any given
period. As a result of the factors discussed in this report and other factors
that may arise in the future, the market price of our common stock historically
has been, and may continue to be subject to significant fluctuations over a
short period of time. These fluctuations may be due to factors specific to us,
to changes in analysts' earnings estimates, or to factors affecting the
computer, software, entertainment, media or electronics industries or the
securities markets in general. For example, during the fiscal year ended March
31, 1999, the price per share of our common stock ranged from $33.88 to $56.00
and from $45.63 to $54.81 during the three months ended June 30, 1999.
Because of these and other factors affecting our 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.
22
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to various market risks, including the changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from changes in market rates and prices. Foreign exchange contracts
used to hedge foreign currency exposures and short-term investments are subject
to market risk. We do not consider our cash and cash equivalents to be subject
to interest rate risk due to their short maturities. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We utilize foreign exchange contracts to hedge foreign currency exposures of
underlying assets and liabilities, primarily certain intercompany receivables
that are denominated in foreign currencies thereby limiting our risk. Gains and
losses on foreign exchange contracts are reflected in the income statement. At
June 30, 1999, we had foreign exchange contracts, all with maturities of less
than nine months to purchase and sell approximately $174,584,000 in foreign
currencies, primarily British Pounds, Canadian Dollars, German Deutschmarks,
Japanese Yen and other European currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. The
counterparties to these contracts are substantial and creditworthy multinational
commercial banks. The risks of counterparty nonperformance associated with these
contracts are not considered to be material. Notwithstanding our efforts to
manage foreign exchange risks, there can be no assurances that our hedging
activities will adequately protect us against the risks associated with foreign
currency fluctuations.
The table below provides information about our foreign currency forward exchange
contracts at June 30, 1999. The information is provided in U.S. dollar
equivalents and presents the notional amount (forward amount), the weighted
average contractual foreign currency exchange rates and fair value. All
contracts mature within nine months.
Weighted-
Average
Contract Contract
Amount Rate Fair Value
-------- --------- ----------
(in thousands) (in thousands)
Foreign currency to
be sold under
contract:
British Pound $ 91,510 1.59 $ 82
Euro 27,905 1.04 (146)
Canadian Dollar 19,248 1.56 (1,217)
Japanese Yen 8,355 112.20 635
Australian
Dollar 4,102 0.64 (148)
South African
Rand 3,743 6.68 (380)
Danish Krone 1,112 7.20 (10)
Brazilian Real 893 1.79 (2)
23
-------- --------- --------
Total $156,868 $ (1,186)
-------- --------- --------
Foreign currency to
be purchased under
contract:
British Pound $ 17,716 1.59 $ (155)
-------- --------- --------
Total $ 17,716 $ (155)
-------- --------- --------
Grand total $174,584 $ (1,341)
-------- --------- --------
While the contract amounts provide one measurement of the volume of these
transactions, they do not represent the amount of our exposure to credit risk.
The amounts (arising from the possible inabilities of counterparties to meet the
terms of their contracts) are generally limited to the amounts, if any, by which
the counterparties' obligations exceed our obligations as these contracts can be
settled on a net basis at our option. We control credit risk through credit
approvals, limits and monitoring procedures.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We manage our interest rate risk by maintaining an
investment portfolio primarily consisting of debt instruments of high credit
quality and relatively short average maturities. We also manage our interest
rate risk by maintaining sufficient cash and cash equivalent balances such that
we are typically able to hold our investments to maturity. At June 30, 1999, our
cash equivalents, short-term and long-term investments included debt securities
of $254,386,000. Notwithstanding our efforts to manage interest rate risks,
there can be no assurances that we will be adequately protected against the
risks associated with interest rate fluctuations.
The table below presents the amounts and related weighted average interest rates
of our investment portfolio at June 30, 1999:
Average Interest
Rate Cost Fair Value
- --------------------------------------------------------------------------------
(Dollars in thousands)
Cash equivalents
Fixed rate 0.00% $ -- $ --
Variable rate 4.58% $112,456 $112,456
Short-term investments
Fixed rate 4.03% $ 78,203 $ 79,016
Variable rate 2.98% $ 44,250 $ 44,533
Long-term investments
Fixed rate 0.00% $ -- $ --
Variable rate 5.69% $ 18,400 $ 18,381
- --------------------------------------------------------------------------------
Maturity dates for short-term investments range from 0 to 3 years.
24
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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on July 29, 1999,
the stockholders elected the following individuals for one-year terms
to the Board of Directors: M. Richard Asher, William J. Byron, Daniel
H. Case III, Gary M. Kusin, Timothy Mott and Lawrence F. Probst III.
These individuals have received a plurality of the votes eligible to
vote, voting either in person or by proxy.
In addition, the following matters were voted upon by the Stockholders:
To approve an amendment to the Company's 1998 Directors' Stock Option
Plan to increase the number of shares by 100,000 to a total of 235,000
shares of common stock for issuance thereunder.
Votes
----------------------------------------------------------------------
For Against Abstain
41,174,628 15,811,212 39,786
To approve an amendment to the Company's 1991 Stock Option Plan to
increase the number of shares by 2,650,000 to a total of 18,150,000
shares of common stock for issuance thereunder.
Votes
----------------------------------------------------------------------
For Against Abstain
38,998,767 17,992,961 33,898
25
To approve an amendment to the Company's Employee Stock Purchase Plan
to increase the number of shares by 250,000 to a total of 1,500,000
shares of its common stock for issuance thereunder.
Votes
----------------------------------------------------------------------
For Against Abstain
56,725,867 270,125 29,634
To ratify the appointment of KPMG LLP as independent accountants for
the Company for the current fiscal year.
Votes
----------------------------------------------------------------------
For Against Abstain
56,995,814 10,208 19,604
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
26
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
August 12, 1999 Executive Vice President and
Chief Financial and Administrative Officer
27