<PAGE>
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
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1995 1995
------------- ---------
(unaudited)
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------------------------
<S> <C> <C> <C> <C>
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
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended September 30,
------------------------
1995 1994
------------------------
<S> <C> <C>
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.
</TABLE>
5
<PAGE>
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):
<TABLE>
<CAPTION>
September 30, 1995 March 31, 1995
------------------ --------------
<S> <C> <C>
Cash and cash equivalents $ 65,979 $ 143,421
Short-term investments 14,600 30,700
-------- -------
$ 80,579 $ 174,121
-------- -------
-------- -------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
September 30, 1995 March 31, 1995
------------------ --------------
<S> <C> <C>
Raw materials and work in
process $ 9,707 $ 2,799
Finished goods 9,217 9,559
------- -------
$18,924 $12,358
------- -------
------- -------
</TABLE>
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities at September 30, 1995 and March 31, 1995
consisted of (in thousands):
<TABLE>
<CAPTION>
September 30, 1995 March 31, 1995
------------------ --------------
<S> <C> <C>
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
------- -------
------- -------
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION> South
North Asia
America Europe Pacific Japan Eliminations Total
------- ------- ------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
9
<PAGE>
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.
<TABLE>
<CAPTION>
NET REVENUES
- - ------------
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
EA STUDIO NET REVENUES:
<TABLE>
<CAPTION>
16-BIT VIDEOGAME PRODUCT NET REVENUES September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
32-BIT VIDEOGAME PRODUCT NET REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
PERSONAL COMPUTER CD PRODUCT NET REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
FLOPPY-DISK PRODUCT NET REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
LICENSE/OEM NET REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
AFFILIATED LABEL NET REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
OTHER REVENUES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
COST OF GOODS SOLD
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
MARKETING AND SALES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
OPERATING INCOME
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
INTEREST AND OTHER INCOME, NET
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
INCOME TAXES
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
NET INCOME
September 30, September 30,
1995 1994 % change
--------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 80,579
<SECURITIES> 11,042
<RECEIVABLES> 101,631
<ALLOWANCES> 28,182
<INVENTORY> 18,924
<CURRENT-ASSETS> 220,135
<PP&E> 93,181
<DEPRECIATION> 30,491
<TOTAL-ASSETS> 341,465
<CURRENT-LIABILITIES> 81,135
<BONDS> 0
<COMMON> 525
0
0
<OTHER-SE> 259,120
<TOTAL-LIABILITY-AND-EQUITY> 341,465
<SALES> 173,692
<TOTAL-REVENUES> 173,692
<CGS> 90,778
<TOTAL-COSTS> 90,778
<OTHER-EXPENSES> 80,055
<LOSS-PROVISION> 493
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 5,161
<INCOME-TAX> 1,652
<INCOME-CONTINUING> 3,509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,873<F1>
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>Includes minority interest in consolidated joint venture of 364.
</FN>
</TABLE>
