<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 June 30, 1997
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)
(650) 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 July 29, 1997
--------------------- --------------
$0.01 par value per share 54,382,794
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Consolidated Financial Statements
<S> <C> <C>
Consolidated Balance Sheets at
June 30, 1997 and March 31, 1997 3
Consolidated Statements of Income for
the Three Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
- ----------
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, March 31,
1997 1997
------------------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and short-term investments $222,612 $230,096
Marketable securities 9,439 5,548
Receivables, less allowances of $31,550 79,376 95,356
and $35,486, respectively
Inventories 16,595 15,847
Prepaid royalties 13,864 10,311
Deferred income taxes 2,912 3,010
Other current assets 11,254 8,875
-------- --------
Total current assets 356,052 369,043
Property and equipment, net 86,149 85,132
Prepaid royalties 8,860 9,351
Long-term investments 24,200 24,200
Investments in affiliates 24,663 25,657
Other assets 3,334 3,320
-------- --------
$503,258 $516,703
======== ========
</TABLE>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable $ 31,771 $ 41,560
Accrued liabilities 75,535 85,870
-------- --------
Total current liabilities 107,306 127,430
Minority interest in consolidated joint venture - 28
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 54,322,083 and
54,163,398, respectively 543 542
Paid-in capital 138,317 135,510
Retained earnings 254,009 252,525
Unrealized appreciation of investments 3,564 2,593
Translation adjustment (481) (1,925)
-------- --------
Total stockholders' equity 395,952 389,245
-------- --------
$503,258 $516,703
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1996
------------------
<S> <C> <C>
Net revenues $117,758 $80,627
Cost of goods sold 60,601 39,467
-------- -------
Gross profit 57,157 41,160
-------- -------
Operating expenses:
Marketing and sales 22,996 13,965
General and administrative 10,581 8,166
Research and development 23,553 25,329
-------- -------
Total operating expenses 57,130 47,460
-------- -------
Operating income (loss) 27 (6,300)
Interest and other income, net 2,164 6,116
-------- -------
Income (loss) before provision for
income taxes and minority interest 2,191 (184)
Provision (benefit) for income taxes 735 (59)
-------- -------
Income (loss) before minority interest 1,456 (125)
Minority interest in consolidated
joint venture 28 160
-------- -------
Net income $ 1,484 $ 35
======== =======
Net income per share $ 0.03 $ 0.00
======== =======
Number of shares used in computation 55,791 54,930
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
---------------------
1997 1996
---------------------
<S> <C> <C>
Operating activities:
Net income $ 1,484 $ 35
Adjustments to reconcile net income to
net cash used in operating activities:
Minority interest in consolidated joint
venture (28) (160)
Equity in net loss of affiliates 638 400
Depreciation and amortization 5,527 4,480
Gain on sale of fixed assets (7) (56)
Gain on sale of marketable securities (1,293) (4,702)
Change in assets and liabilities:
Receivables 15,980 20,794
Inventories (748) 1,076
Prepaid royalties (3,062) (176)
Other assets (2,402) 1,046
Accounts payable (9,789) (10,999)
Accrued liabilities (10,356) (13,796)
Deferred income taxes (276) 24
-------- --------
Net cash used in operating activities (4,332) (2,034)
-------- --------
Investing activities:
Proceeds from sales of furniture and equipment 25 145
Proceeds from sales of marketable securities 1,530 4,989
Purchase of marketable securities (2,762) -
Capital expenditures (6,553) (7,019)
Investment in affiliates 356 (775)
Change in short-term investments, net 1,372 (10,420)
-------- --------
Net cash used in investing activities (6,032) (13,080)
-------- --------
Financing activities:
Proceeds from issuance of common stock 2,808 5,283
Tax benefit from exercise of stock options - 1,145
-------- --------
Net cash provided by financing activities 2,808 6,428
-------- --------
Translation adjustment 1,444 104
Minority interest on translation adjustment - (23)
-------- --------
Decrease in cash and cash equivalents (6,112) (8,605)
Beginning cash and cash equivalents 125,609 105,628
-------- --------
Ending cash and cash equivalents 119,497 97,023
Short-term investments 103,115 52,775
-------- --------
Ending cash and short-term investments $222,612 $149,798
======== ========
Supplemental cash flow information:
- -----------------------------------
Cash paid during the year for income $ 494 $ 605
taxes ======== ========
Non-cash investing activities:
- ------------------------------
Unrealized gain on investments $ 1,366 $ 4,137
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<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
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.
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, 1997 as filed with the
Securities and Exchange Commission ("Commission") on June 23, 1997 and certain
other information included in the Company's Registration Statement on Form S-4
as filed with the Commission on June 25, 1997.
NOTE 2. CASH AND INVESTMENTS
Cash equivalents consist of highly liquid investments with insignificant
interest rate risk and with maturities of three months or less at the date of
purchase. Short-term investments include securities with maturities greater than
three months and less than one year, except for certain investments with stated
maturities greater than one year. Long-term investments consist of securities
with maturities greater than one year.
The Company accounts for investments under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, ("SFAS 115"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based on
current interest rates. The Company has classified short-term investments as
"available-for-sale" and applicable investments and stated at fair value which
approximates cost. The cost of securities sold is based upon the specific
identification method.
Cash and short-term investments at June 30, 1997 and March 31, 1997 consisted of
(in thousands):
<TABLE>
<CAPTION>
June 30, 1997 March 31, 1997
------------- --------------
<S> <C> <C>
Cash and cash equivalents $119,497 $125,609
Short-term investments 103,115 104,487
-------- --------
$222,612 $230,096
======== ========
</TABLE>
NOTE 3. MARKETABLE SECURITIES
Marketable securities are comprised 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 net unrealized appreciation
reported as a separate component of stockholders' equity. For the three months
ended June 30, 1997 and 1996, the Company realized gains before taxes on sales
of marketable securities of $1,293,000 and $4,702,000, respectively.
<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 cost or market. Inventories at June 30,
1997 and March 31, 1997 consisted of (in thousands):
June 30, 1997 March 31, 1997
------------- --------------
Raw materials and work in process $ 3,375 $ 3,706
Finished goods 13,220 12,141
------- -------
$16,595 $15,847
======= =======
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities at June 30, 1997 and March 31, 1997 consisted of (in
thousands):
June 30, 1997 March 31, 1997
------- -------
Accrued royalties $25,272 $31,841
Accrued expenses 19,814 19,105
Accrued income taxes 15,206 12,611
Accrued compensation and benefits 11,088 18,279
Deferred income taxes 3,398 3,377
Deferred revenue 757 657
------- -------
$75,535 $85,870
======= =======
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7: 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 ended June 30, 1997 and 1996 is presented below (in thousands).
<TABLE>
<CAPTION>
North South Asia
America Europe Pacific Japan Eliminations Total
-------- ------ --------- -------- ------------- ---------
THREE MONTHS ENDED JUNE 30, 1997
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from
unaffiliated customers $ 52,301 $ 51,251 $ 9,846 $ 4,360 $ - $117,758
Intersegment net revenues 7,974 2,430 646 - (11,050) -
-------- -------- ------- ------- ------------ --------
Total net revenues $ 60,275 $ 53,681 $10,492 $ 4,360 $(11,050) $117,758
======== ======== ======= ======= ============ ========
Operating income (loss) $ (6,949) $ 6,879 $ 2,442 $(2,345) $ - $ 27
Identifiable assets $345,578 $128,855 $16,444 $12,381 $ - $503,258
THREE MONTHS ENDED JUNE 30, 1996
- ---------------------------
Net revenues from
unaffiliated customers $ 38,154 $ 30,322 $ 4,862 $ 7,289 $ - $ 80,627
Intersegment net revenues 7,046 739 - 11 (7,796) -
-------- -------- ------- ------- ------------ --------
Total net revenues $ 45,200 $ 31,061 $ 4,862 $ 7,300 $ (7,796) $ 80,627
======== ======== ======= ======= ============ ========
Operating income (loss) $ (9,133) $ 2,369 $ 924 $ (460) $ - $ (6,300)
Identifiable assets $300,349 $ 89,401 $ 8,940 $11,279 $ - $409,969
</TABLE>
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8. FOREIGN CURRENCY
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency market exposures of underlying assets, liabilities and other
obligations, primarily intercompany receivables that are denominated in foreign
currencies. The Company does not use forward exchange contracts for speculative
or trading purposes. The Company transacts business in various foreign
currencies, including European and Canadian currencies. At June 30, 1997, the
Company had foreign exchange contracts, all having maturities of 90 days or
less, to purchase and sell approximately $11,700,000 in foreign currencies,
primarily German Deutschmarks and British Pounds. Gains and losses on currency
forward contracts that are designated and effective as hedges of existing
transactions are recognized in income in the same period as losses and gains on
the underlying transactions are recognized and generally offset.
The difference between the face value and market value of these contracts is not
significant. The counterparties to these contracts are substantial and credit
worthy multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be material.
NOTE 9 - ACQUISITION OF MAXIS, INC.
On July 25, 1997, the Company completed a merger with Maxis, Inc. ("Maxis"), a
California-based interactive software developer. Under the transaction,
approximately 4.1 million shares of Electronic Arts' stock were exchanged for
all outstanding Maxis common stock. The transaction will be accounted for as a
pooling of interests.
<PAGE>
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 THE FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES DISCUSSED IN
"FACTORS AFFECTING FUTURE PERFORMANCE" BELOW AT PAGES 18 TO 23, AS WELL AS IN
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31,
1997 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997 AND
THE COMPANY'S REGISTRATION STATEMENT ON FORM S-4 FILED WITH THE COMMISSION ON
JUNE 25, 1997. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY
DIFFER MATERIALLY FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND
UNCERTAINTIES.
NET REVENUES
- ------------ June 30, June 30,
CONSOLIDATED NET REVENUES 1997 1996 % change
---------------------------------------
Three Months Ended $117,758,000 $80,627,000 46.1%
INTERNATIONAL NET REVENUES
Three Months Ended $ 65,457,000 $42,473,000 54.1%
as a percentage of net revenues 55.6% 52.7%
NORTH AMERICA NET REVENUES
Three Months Ended $ 52,301,000 $38,154,000 37.1%
as a percentage of net revenues 44.4% 47.3%
The Company derives revenues from shipments of EA Studio Compact Disk ("CD")
products for dedicated entertainment systems ("CD- video game"), EA Studio CD
personal computer products ("PC CD") (primarily entertainment software), EA
Studio cartridge products, licensing of EA Studio products, distribution of EA
Studio and Affiliated Label ("AL") products through hardware companies ("OEMs")
and shipments of AL CD products that are created by third parties.
Overall, North American net revenues increased 37.1% for the three months ended
June 30, 1997 compared to the same period last year primarily due to increased
sales of Sony PlayStation ("PlayStation") and PC CD titles and increased
Affiliated Label revenues resulting from the addition of a key affiliate in the
fourth quarter of fiscal 1997 and the releases of new products from certain
affiliates. The mix of North American sales reflected the increase in installed
base of multimedia personal computers and the PlayStation and the release of
key titles for these platforms. Total North American PC CD and 32-bit CD-video
game revenue increased $14,729,000 or 57.1% to $40,515,000 for the three months
ended June 30, 1997 in comparison to the same period in the prior year, while
Affiliated Label net revenues increased $4,732,000 or 97.6% to $9,580,000. The
increase in North America net revenue was offset by a decrease in net revenues
from the sales of 16-bit cartridge titles. Though North America net revenues are
expected to grow in fiscal 1998, they may not grow at as high a rate as compared
to this quarter.
<PAGE>
International net revenues increased $22,984,000 or 54.1% for the three months
ended June 30, 1997 compared to the same period last year. The increase resulted
from worldwide growth in installed base of the PlayStation, the continued growth
in the PC CD market and increased distribution of Affiliated Label titles. For
the three months ended June 30, 1997, net revenue from the sale of PC CD and
PlayStation products increased $13,496,000 or 49.5% over all regions while
Affiliated Label sales grew $8,216,000 or 99.5%. Though international revenues
are expected to grow in fiscal 1998, they may not grow at as high a rate as in
prior periods.
The increase in international revenues was primarily due to a 69.0% increase in
European net revenues consisting of higher sales of PC CD, AL and PlayStation
products offset by a decrease in license/OEM and 16-bit revenues. Total net
revenues in Europe were $51,251,000 for the three months ended June 30, 1997
compared to $30,322,000 in the same period last year. European PC CD sales
increased $8,548,000 or 86.7% for the quarter ending June 30, 1997 while
PlayStation sales increased $5,219,000 or 71.0%. European AL sales increased
$6,238,000 due to continued distribution under an exclusive international
agreement with Twentieth Century Fox Home Entertainment and other affiliates and
key releases during the quarter.
Sales in the South Asia Pacific region increased by 102.5% to $9,846,000
compared to $4,862,000 in the prior year due to increased sales of Affiliated
Label, PC CD and PlayStation titles as a result of the growth in sales offices
throughout the region, including Singapore, New Zealand and Hong Kong. Revenues
from the sale of Affiliated Label titles increased $2,488,000 or 357.5% to
$3,184,000 as a result of distribution of local affiliated label titles and
Twentieth Century Fox Home Entertainment titles, as noted above.
The increase in European and South Asia Pacific net revenues was offset by a
decrease in net revenue of $2,929,000 or 40.2% in Japan. Net revenues in Japan
for the first fiscal quarter 1998 were $4,360,000 compared to $7,289,000 for the
corresponding period in the prior year. Revenues in the current fiscal quarter
were comprised primarily of sales of PlayStation products and to a lesser
degree PC CD titles. The decline in Japan net revenues is attributable to
releasing fewer PlayStation titles in the current quarter in comparison to the
same period in the prior year.
EA STUDIO NET REVENUES:
- -----------------------
32-BIT VIDEOGAME PRODUCT NET REVENUES
June 30, June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $42,813,000 $27,173,000 57.6%
as a percentage of net revenues 36.4% 33.7%
The Company released six 32-bit CD-video game products during the first quarter
of fiscal 1998 comprised of four for the PlayStation, including Triple Play 98
--------------
and Overblood and two for the Saturn, Darklight Conflict and Battlestations. The
--------- ------------------ --------------
increase in sales is attributable to the greater installed base of PlayStation
consoles and the release of key titles during the quarter.
<PAGE>
For the three months ended June 30, 1997, total 32-bit video game revenue
increased $15,640,000 compared to the same period in the prior year. The
majority of this increase was attributable to PlayStation sales which were
$38,600,000, compared to $23,047,000 for the three months ended June 30, 1996.
The Company expects revenues from PlayStation products to continue to grow in
fiscal 1998, but as revenues for these products increase, the Company does not
expect to maintain these growth rates.
Net revenue from the sale of other 32-bit products, primarily from sales of
products for the Saturn, were $4,213,000 for the quarter ended June 30, 1997
compared to $4,126,000 for the same period in the prior year. As the installed
base of Saturn consoles has not achieved the growth rates of PlayStation
consoles, the Company's revenues from sales of Saturn products are not expected
to grow as in the prior year. The Company plans fewer releases of Saturn
products in fiscal 1998 than fiscal 1997 and expects to release a higher
percentage of these products in the December quarter.
Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended, the
Company is authorized to develop and distribute CD-based software products
compatible with the PlayStation. Pursuant to the Sony Agreement, the Company
engages Sony to supply PlayStation CDs for distribution by the Company.
Accordingly, the Company has limited ability to control its supply of
PlayStation CD products or the timing of their delivery. See Hardware
--------
Companies, below.
- ----------
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-based 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 CDs for
distribution. Accordingly, the Company has limited ability to control its
supply of Saturn CD products or the timing of their delivery. See Hardware
--------
Companies, below.
- ----------
PERSONAL COMPUTER CD PRODUCT NET REVENUES
June 30, June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $40,253,000 $27,064,000 48.7%
as a percentage of net revenues 34.2% 33.6%
The Company released six PC CD titles in the first quarter of the current fiscal
year for the IBM personal computer and compatibles including Need for Speed 2,
----------------
Dungeon Keeper and Triple Play 98, compared to five for the same period last
- -------------- --------------
year. The increase in sales of PC CD products is attributable to growth in the
PC CD market worldwide, expansion of the Company's direct distribution worldwide
and the release of "hit" products during the quarter. The primary increase in
PC CD sales for the quarter ended June 30, 1997 was in Europe and North America
which increased $8,548,000 and $3,275,000, respectively. Though PC CD revenues
are expected to grow in fiscal 1998, they may not grow at as high a rate as in
prior periods.
<PAGE>
LICENSE/OEM NET REVENUES
June 30, June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $2,665,000 $4,980,000 (46.5%)
as a percentage of net revenues 2.3% 6.2%
The decrease in license/OEM net revenues for the three months ended June 30,
1997 compared to the same period last year was primarily a result of a decrease
in the licensing of its products in the United States and Europe.
16-BIT VIDEO GAME PRODUCT NET REVENUES June 30, June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $2,763,000 $8,154,000 (66.1%)
as a percent of net revenues 2.3% 10.2%
The Company released no new 16-bit video games for the Sega Genesis ("Genesis")
or the Super Nintendo Entertainment System ("SNES") during the first quarter of
fiscal 1998. Sega Genesis cartridge sales were $1,618,000 for the three months
ended June 30, 1997 compared to $6,974,000 for the same period in the prior
year. SNES sales were $1,145,000 for the three months ended June 30, 1997
compared to $1,180,000 for the same period last year.
The Company's net revenues derived from 16-bit video games declined 66.1% during
the first quarter of fiscal 1998 compared to the same period in the prior year.
Since the 16-bit video game market has made the transition to next generation
32-bit and 64-bit systems, the Company does not expect to release any new 16-bit
titles in fiscal 1998 and revenues from the sales of 16-bit products in fiscal
1998 are not expected to be significant.
<PAGE>
64-BIT VIDEO GAME PRODUCT NET REVENUES June 30, June 30,
1997 1996 % change
---------------------------------
Three Months Ended $2,333,000 $ - n/m
as a percent of net revenues 2.0% n/m
For the quarter ended June 30, 1997, 64-bit revenue was comprised of sales of
FIFA Soccer 64 for the Nintendo 64 ("N64"), which was released in the fourth
quarter of fiscal 1997. The Company released no new titles for the N64 for the
quarter ended June 30, 1997. In March 1997, the Company signed a licensing
agreement with Nintendo to develop, publish and market certain sports products
for the N64. Due to the development time necessary for these products, the
Company does not anticipate shipping more than one or two products for the N64
in any significant quantities until calendar year 1998.
Under the terms of its licensing agreement with Nintendo, the Company engages
Nintendo to manufacture its N64 cartridges for distribution. Accordingly, 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. In connection with the Company's purchases of N64 cartridges for
distribution in North America, Nintendo requires that the Company provide it
irrevocable letters of credit prior to Nintendo's acceptance of purchase orders
from the Company for purchases of these cartridges. For purchases of N64
cartridges for distribution in Japan and Europe, Nintendo requires the Company
to make cash deposits. Furthermore, Nintendo maintains a policy of not
accepting returns. Because of these and other factors, the carrying of an
inventory of cartridges entails significant investment and risk. See Hardware
--------
Companies, below.
- ----------
AFFILIATED LABEL NET REVENUES
- -----------------------------
June 30, June 30,
1997 1996 % change
----------------------------------------
Three Months Ended $26,055,000 $13,107,000 98.8%
as a percentage of net revenues 22.1% 16.2%
The increase in Affiliated Label net revenues for the three months ended June
30, 1997 compared to the prior year period was due to higher sales of Affiliated
Label products in Europe, North America and South Asia Pacific. The increase is
due to the addition of Accolade, Inc. as an Affiliate in March 1997, the
continued distribution under an exclusive international agreement with Twentieth
Century Fox Home Entertainment and other affiliates and the release of key
titles worldwide, as noted above.
COST OF GOODS SOLD
- ------------------
June 30, June 30,
1997 1996 % change
----------------------------------------
Three Months Ended $60,601,000 $39,467,000 53.5%
as a percentage of net revenues 51.5% 49.0%
The increase in costs of goods sold as a percentage of net revenues, for the
three months ended June 30, 1997 compared to the same period last year was
primarily due to the increase in sales of lower margin Affiliated Label titles,
lower licensing revenues and higher professional, celebrity and manufacturing
royalties on PC CD and CD-video game titles partially offset by increased sales
of higher margin PC CD products.
<PAGE>
MARKETING AND SALES
- -------------------
June 30, June 30,
1997 1996 % change
---------------------------------------
Three Months Ended $22,996,000 $13,965,000 64.7%
as a percentage of net revenues 19.5% 17.3%
The increase in marketing and sales expenses was primarily attributable to
increased television advertising worldwide to support new titles released during
the quarter and increased cooperative advertising associated with higher
revenues. Marketing and sales expenses also increased due to additional
headcount related to the continued expansion of the Company's worldwide
distribution business and increased expenses related to the Electronic
Entertainment Exposition trade show.
GENERAL AND ADMINISTRATIVE
- --------------------------
June 30, June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $10,581,000 $8,166,000 29.6%
as a percentage of net revenues 9.0% 10.1%
The increase in general and administrative expenses resulted primarily from an
increase in payroll and occupancy costs due to the opening of additional
international offices and additional depreciation related to the installation of
new management information systems worldwide.
RESEARCH AND DEVELOPMENT
- ------------------------
June 30, June 30,
1997 1996 % change
----------------------------------------
Three Months Ended $23,553,000 $25,329,000 (7.0%)
as a percentage of net revenues 20.0% 31.4%
The decrease in research and development expenses was due to lower royalty
write-offs against artists advances due to more successful releases of products
into the market. The decrease was offset by additional headcount relating to
increased in-house development capacity and depreciation of computer equipment
compared to the prior year.
OPERATING INCOME (LOSS)
- -----------------------
June 30, June 30,
1997 1996 % change
-------------------------------------
Three Months Ended $27,000 $(6,300,000) 100.4%
as a percentage of net revenues 0.0% (7.8%)
Operating income increased for the three months ended June 30, 1997 compared to
the same period last year due to an increase in revenue and related gross profit
margins partially offset by increases in operating expenses, as noted above.
<PAGE>
INTEREST AND OTHER INCOME, NET
- ------------------------------
June 30 June 30,
1997 1996 % change
--------------------------------------
Three Months Ended $2,164,000 $6,116,000 (64.6%)
as a percentage of net revenues 1.8% 7.6%
Interest and other income, net, decreased for the three months ended June 30,
1997 compared to the same period last year primarily due to lower gains on sale
of marketable securities of $1,293,000 compared to $4,702,000 for the comparable
prior year period.
INCOME TAXES
- ------------
June 30, June 30,
1997 1996 % change
--------------------------------
Three Months Ended $735,000 $(59,000) N/M
effective tax rate 33.5% 32.1%
The Company's effective tax rate for the three months ended June 30, 1997 was
higher than the comparable prior year period as a result of higher reported
losses in Japan for which no tax benefit could be currently realized.
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE
- -----------------------------------------------
June 30, June 30,
1997 1996 % change
--------------------------------
Three Months Ended $28,000 $160,000 (82.5%)
as a percentage of net revenue 0.0% 0.2%
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. As VEI's interest in
the net equity of EAV has fallen below zero, minority interest for the three
months ended June 30, 1997 reflects only a portion of EAV's reported losses.
NET INCOME
- ----------
June 30, June 30,
1997 1996 % change
-----------------------------------
Three Months Ended $1,484,000 $35,000 N/M
as a percentage of net revenue 1.3% 0.0%
The increase in net income as compared to the prior year period was primarily
related to higher revenues and gross profit margins, offset by higher operating
expenses and lower gains on sale of marketable securities.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1997, the Company's working capital was $248,746,000 compared to
$241,613,000 at March 31, 1997. Cash and short term investments decreased by
approximately $7,484,000 during the quarter as the Company used $4,332,000 of
cash in operations offset by proceeds from the exercise of stock options.
Reserves for bad debts and sales returns decreased from $35,486,000 at March 31,
1997 to $31,550,000 at June 30, 1997. 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 June 30, 1997 increased slightly compared to March 31, 1997
to support growth of business worldwide.
In connection with the Company's purchases of Sony products to be distributed in
Japan, Sony of Japan requires cash deposits totaling one-third of purchase
orders. Additionally, Nintendo of Japan requires cash deposits on all orders of
N64 cartridge products. EAV utilizes a line of credit to fund these deposits for
purchases of Sony and Nintendo products and for other operating requirements. At
June 30, 1997, EAV had approximately $3,055,000 outstanding on this line.
The Company's principal source of liquidity is $222,612,000 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.
<PAGE>
FACTORS AFFECTING FUTURE PERFORMANCE
- ------------------------------------
Future operating results of the Company depend upon many factors and are subject
to various risks and uncertainties. Some of those important risks and
uncertainties which may cause the Company's operating results to vary or which
may materially and adversely affect EA's operating results are as follows:
THE INDUSTRY AND COMPETITION. The interactive software business has
historically been a volatile and highly dynamic industry affected by changing
technology, limited hardware platform life cycles, hit products, competition,
component supplies, seasonality, consumer spending and other economic trends.
The business is also intensely competitive. A variety of companies offer
products that compete directly with one or more of the Company's products.
These direct competitors vary in size from very small companies to companies
with financial, managerial and technical resources comparable to or greater than
those of the Company. Typically, the Company's chief competitor on dedicated
game platforms is the hardware manufacturer/licensor itself, to which the
Company must pay royalties, and in the case of Sony and Nintendo, manufacturing
charges. For example, Sony has aggressively launched sports product lines that
directly compete with the Company's sports products on the PlayStation. In
addition, competition for creative talent has intensified, and the attraction
and retention of key personnel by the Company is increasingly difficult.
PRODUCTS. Interactive entertainment software products typically have life spans
of only 3 to 12 months. In addition, the market is crowded with a large number
of titles competing for limited shelf space at retail. The Company's future
success will depend in large part on its ability to develop and introduce new
competitive products on a timely basis and to get those products distributed
widely at retail. To compete successfully, new products must adapt to new
hardware platforms and emerging industry standards, provide additional
functionality and be successfully distributed in numerous changing worldwide
markets. If the Company were unable, due to resource constraints or
technological or other reasons, to successfully develop and distribute such
products in a timely manner, this inability would have a material adverse effect
on its operating results and financial condition.
DEVELOPMENT. 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. CD-ROM products frequently include more content and are
more complex, time-consuming and costly to develop than 16-bit cartridge
products and, accordingly, cause additional development and scheduling risk.
For example, Dungeon Keeper for PC-CD, originally scheduled to ship in the
-------------
quarter ended June 1996, shipped in the quarter ended June 1997. In addition,
Need for Speed II for PC-CD, a high margin product scheduled for shipment in the
- -----------------
quarter ended March 1997, did not ship until the quarter ended June 1997 due to
last minute development delays. Likewise, Warcraft 2 on 32-bit platforms
----------
originally scheduled to ship in the quarter ended June 1997 was delayed until
the quarter ending September 1997. In addition, 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. Manufacturing lead times during the year for
CD-based products have been as brief as one to three weeks; cartridge products
more typically have had a six to twelve week lead
<PAGE>
time for manufacture. The Company's revenues and earnings are dependent on its
ability to meet its product release schedule and its 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.
PLATFORM CHANGES. A large portion of the Company's revenues are derived from
the sale of products designed to be played on proprietary video game platforms
such as the PlayStation, Sega Saturn, and the N64. The interdependent nature of
the Company's business and that of its hardware licensors brings significant
risks to the Company's business. The success of the Company's products is
significantly affected by market acceptance of the new video game hardware
systems and the life span of older hardware platforms, and the Company's ability
to accurately predict these factors with respect to each platform. In many
cases, the Company will have expended a large amount of development and
marketing resources on products designed for new video game systems (such as the
new 32-bit systems) that have not yet achieved large installed bases or will
have continued product development for older hardware platforms that may have
shorter life cycles than the Company expected. Conversely, if the Company does
not choose to develop for a platform that achieves significant market
acceptance, or discontinues development for a platform that has a longer life
cycle than expected, the Company's revenue growth may be adversely affected.
For example, the Company signed an agreement with Nintendo to develop and
publish a line of EA SPORTS products for the N64 in March of 1997, nearly seven
months after introduction of that platform in North America. Due to long
development times associated with this platform, the Company will not ship more
than one or two N64 products in significant quantities until calendar year 1998.
The Company believes that investment in products for the 32-bit market,
including both PC-CD and CD-video game platforms (particularly the PlayStation)
has been strategically important in positioning the Company for the now
completed transition to 32-bit machines. The Company continues to believe that
such investment is important and will continue its aggressive development
activities for 32-bit platforms. Although the PlayStation has achieved
significant market acceptance in all geographic territories, there can be no
assurance that its growth will continue at the present rates, particularly with
the introduction of the N64 by Nintendo. The introduction and market acceptance
of the N64, particularly in North America, may adversely affect the growth rate
of the 32-bit CD-platforms. While the Company has a broad range of products
available and under development for the PlayStation and for PC-CD, the Company
will not ship more than one or two products for the N64 in any significant
quantities until calendar year 1998, as noted above.
HARDWARE COMPANIES. The Company's contracts with hardware licensors, which are
also some of the Company's chief competitors, often grant significant control to
the licensor over the manufacturing of the Company's products. This fact could,
in certain circumstances, leave the Company unable to get its products
manufactured and shipped to customers. In most events, control of the
manufacturing process by hardware companies increases both the manufacturing
lead times and the expense to the Company as compared to the lead times and
costs that the Company can achieve independently. For example, the Company, in
prior years, experienced delays in the manufacturing of PlayStation products
which caused delays in shipping those products. The results of future periods
may be affected by similar delays. Finally, the Company's contracts with its
hardware licensors often require the Company to take significant risks in
holding or
<PAGE>
prepaying for its inventory of products. In particular, the Company's agreement
with Nintendo for N64 products requires prepayment of costly cartridge-based
inventory, minimum orders and no rights of return.
REVENUE AND EXPENSES. A substantial majority of the 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
development of products to be released in the future. Certain overhead and
product development expenses do not vary directly in relation to revenues. This
trend is increasing as the Company increases the proportion of products
developed internally. 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 typically receives orders shortly before
shipments, making backlog an unreliable indicator of quarterly results. 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.
FILM AND VIDEOTAPE. The Company produces film and videotape to include in
certain products pursuant to agreements between certain of the Company's
subsidiaries with SAG, AFTRA and Equity. However, the costs of video production
are significantly higher than for software production, and for products which
include a substantial amount of video such as certain interactive movies, the
costs of producing the video component is significantly higher than the cost of
developing the software component. Accordingly, more units of such products
must be sold to recoup the development and production costs. There can be no
assurance that these products which include significant film or videotape
components will be commercially successful enough to recoup development costs.
In addition, the Company's agreements with SAG and AFTRA expire during the
current calendar year, and there can be no assurance that the Company will be
able to renegotiate favorable terms.
GROSS MARGINS. Gross margins for the quarter ended June 30, 1997 decreased
compared to the comparable prior year period, although gross margins for the
Company's products as a whole have increased over the last three fiscal years.
There can be no assurance that the trend of increased gross margins will
continue in the future for several reasons. Potential increases in the mix of
lower margin Affiliated Label revenues due to the expansion of distribution
worldwide may decrease gross margins. Further, professional and celebrity
royalties continue to increase. Also, while the costs of development of new
products for 32- and 64-bit systems have increased, overall costs of goods are
not declining. For products on platforms for which the Company is required to
purchase its goods from the hardware companies, the Company is unable to achieve
cost reductions through manufacturing efficiencies, and royalties to hardware
companies remain fixed or are increasing. As the Company begins to ship N64
products in significant quantities, margins may further decline due to the
higher cost of goods associated with this cartridge-based platform. Similarly,
higher distribution expenses for operations in Europe and North America continue
to put pressure on margins. Finally, retailers continue to require significant
price protection for products, and with an increasing number of titles available
for advanced platforms, such requirements for price protection may increase.
<PAGE>
MARKETING AND DISTRIBUTION. Both the video game and PC businesses have become
increasingly "hits" driven. Additional marketing and advertising funds are
required to drive and support "hit" products, particularly television
advertising. There can be no assurance that the Company will continue to
produce "hit" titles, or that advertising for any product will increase sales
sufficiently to recoup those advertising expenses.
The Company has stock-balancing programs for its personal computer products
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 video game 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.
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
current in-channel inventory. However, there can be no assurance that actual
returns or price protection will not exceed the Company's reserves. See Revenue
-------
and Expenses, above.
- ------------
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 development of remote and
electronic delivery systems will create further changes. 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 the quarter ended September 1996, the Company recorded $2,300,000 in bad debt
expenses related to potentially uncollectible receivables from a customer who
filed for bankruptcy. 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.
EMPLOYEES. Competition for employees in the interactive software business is
intense and increasing as competition in the industry increases. In the last
fiscal year, recruiting of the Company's employees generally, and its executive
officers in particular, has been intense. Large software and media companies
frequently offer significantly larger cash compensation than does the Company,
placing pressure on the Company's base salary and cash bonus compensation.
Small start-up companies such as those proliferating in the online business
areas offer significant potential equity gains which are difficult for
<PAGE>
more mature companies like the Company to match without significant stockholder
dilution. While executive turnover decreased in fiscal 1997 as compared to
fiscal 1996, virtually all of the executives continue to experience intense
recruiting pressure. There can be no assurance that the Company will be able to
continue to attract and retain enough qualified employees in the future.
FOREIGN SALES AND CURRENCY FLUCTUATIONS. For the quarter ended June 30, 1997
and for the fiscal year ended March 31, 1997, international net revenues
comprised 56% and 46% of total consolidated net revenues, respectively. The
Company expects foreign sales to continue to account for a significant and
growing portion of the Company's 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. There can be
no assurance that these or other factors will not have an adverse effect on the
Company's future operating results.
INVESTMENTS IN AFFILIATES AND MARKETABLE SECURITIES. The Company has a number
of equity investments in affiliates, including small developers, such as Firaxis
and Visual Concepts, other publishers, such as NovaLogic, Inc. and Accolade,
Inc., and new ventures such as Mpath Interactive. Additionally, the Company has
equity investments in the 3DO Company and, during the quarter ended June 30,
1997, made an investment in 3Dfx, a developer of advanced graphics microchips
for personal computers. These companies are generally small and without
significant financial resources. Financial difficulties for any of these
companies could cause a reduction in the value of the Company's investment. For
example, in fiscal 1996 the Company wrote off its investment in SportsLab in its
entirety.
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 the Company's Common Stock in
any given period. As a result of the factors discussed in this quarterly report
and other factors that may arise in the future, the market price of the
Company's 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 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. For example,
during the most recently completed fiscal year, the price per share of the
Company's common stock ranged from $24.75 to $39.13 and in the first three
months of the current fiscal year ranged from $20.13 to $35.38.
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.
ACQUISITION OF MAXIS, INC. On July 25, 1997, the Company and Maxis, Inc.
("Maxis") completed a merger of the two companies. The expectation is that the
merger will result in long-term benefits and will depend in part on whether the
companies' operations can be integrated in an efficient and effective manner.
There is no assurance that this will occur. The successful integration of Maxis
with the Company will require, among other things, the integration of the
companies' respective product offerings and coordination of the companies' sales
and marketing efforts and research and development efforts. It is possible that
this integration will not be accomplished smoothly or successfully. The
<PAGE>
diversion of the attention of management and any difficulties encountered in the
process of combining the operations of the two organizations could cause the
interruption of, or a loss of momentum in, the activities either or both of the
companies' businesses, which could have an adverse effect on their combined
operations. Furthermore, the process of combining the companies could have a
material adverse effect on employee morale and on the ability of the combined
Company to retain the key technical and sales and marketing personnel who are
critical to the combined companies' future operations. There can be no assurance
that employees of Maxis will continue to work for the Company. In addition, the
consummation of the merger could cause customers or potential customers to delay
or cancel orders for products as a result of uncertainty over the integration
and continued support of Maxis products. Failure to accomplish the integration
of the two companies operations efficiently and effectively could have a
material adverse effect on the Company's business operating results and
financial condition.
If the integration of Electronic Arts' and Maxis' operations is not successful,
if the combined company does not experience business synergies as quickly as may
be expected by financial analysts, if such synergies are not achieved or are at
levels below those expected by financial analysts, or if the accretive/dilutive
effect of the merger is not in line with the expectations of financial analysts,
the market price of the Company's common stock may be significantly or adversely
affected.
The Company estimates that it will incur aggregate direct transaction costs of
approximately $2.5 million associated with the merger, which will result in a
non-recurring charge to operations upon completion of the merger. The Company
expects to incur a non-recurring charge to operations of approximately $3.5
million primarily in the quarter ending September 30, 1997, to reflect the costs
associated with integrating the two companies. Actual costs may substantially
exceed such estimates, unanticipated expenses associated with the integration of
the two companies may arise, or the Company may incur additional material
charges in subsequent quarters to reflect additional costs associated with the
integration of the two companies.
SimCity, its successor SimCity 2000 and related add-on products represented 46%
- ------- ------------
of net revenues of Maxis for fiscal 1997 and 52% of net revenues for fiscal
1996. Maxis originally planned to release SimCity 3000, the follow on product
------------
to SimCity 2000, in March 1997, but later deferred the introduction until the
------------
quarter ending December 1997. The Company believes it is unlikely that Sim City
--------
3000 will ship before the end of calendar year 1997 and it is unclear whether it
- ----
will ship during the fiscal year ending March 31, 1998. Failure to ship SimCity
-------
3000 for the calendar year 1997 holiday season or for the fiscal year ending
- ----
March 31, 1997 could have a material adverse effect on the operating results of
the Company during the current fiscal year and, in particular, the third fiscal
quarter.
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.
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on July 31,
1997, 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 Certificate of Incorporation to
increase the number of authorized shares by 34,000,000 shares from
71,000,000 shares to 105,000,000 shares and to increase the number of
authorized shares of common stock from 70,000,000 to 104,000,000.
Votes
----------------------------------------------------------------------
For Against Abstain
--- ------- -------
49,990,448 815,253 17,738
To approve an amendment to the Company's Directors' Stock Option Plan
to increase the number of shares of the Company's common stock
reserved for issuance under such Plan by 50,000 shares from 600,000
shares to a total of 650,000 shares.
Votes
----------------------------------------------------------------------
For Against Abstain
--- ------- -------
40,532,503 10,004,355 286,581
To approve an amendment to the Company's 1991 Stock Option Plan (the
"1991 Plan") to increase the number of shares of the Company's common
stock reserved for issuance under the 1991 Plan by 2,200,000 shares
from a total of 10,800,000 shares to a total of 13,000,000 shares.
Votes
----------------------------------------------------------------------
For Against Abstain
--- ------- -------
29,600,936 19,253,383 1,969,120
<PAGE>
To approve an amendment to the Company's Employee Stock Purchase Plan
to increase the number of shares of the Company's common stock
reserved for issuance under such Plan by 100,000 shares from 1,050,000
shares to a total of 1,150,000 shares.
Votes
----------------------------------------------------------------------
For Against Abstain
--- ------- -------
49,427,215 1,136,968 259,256
To ratify the appointment of KPMG Peat Marwick LLP as independent
accountants for the Company for the current fiscal year.
Votes
----------------------------------------------------------------------
For Against Abstain
--- ------- -------
50,770,101 15,614 37,724
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 5, 1997, the Company filed a Current Report on Form 8-K
reporting information under Item 2, Acquisition or Disposition of
Assets. In the report, the Company filed information regarding the
completion of the merger between the Company and Maxis, Inc. The
transaction was accounted for as a "pooling of interests".
<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
August 8, 1997 Senior Vice President and
Chief Financial and Administrative Officer
(Duly authorized officer)
<TABLE> <S> <C>
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<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
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