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, 1998
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 25, 1998
--------------------- -------------
$0.01 par value per share 60,563,038
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
June 30, 1998 and March 31, 1998 3
Consolidated Statements of Income for
the Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for
the Three Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
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
Exhibit Index 27
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
ASSETS
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
Current assets:
<S> <C> <C>
Cash and short-term investments $363,319 $374,560
Marketable securities 4,861 3,721
Receivables, less allowances of $56,008 and $51,575, respectively 100,046 139,374
Inventories 19,010 19,626
Prepaid royalties 22,024 20,470
Deferred income taxes 17,405 17,792
Other current assets 14,130 14,268
-------- ---------
Total current assets 540,795 589,811
Property and equipment, net 108,681 105,095
Prepaid royalties 3,363 2,289
Long-term investments 24,200 24,200
Investments in affiliates 23,035 20,541
Other assets 3,071 3,745
-------- ---------
$703,145 $745,681
======== =========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $41,552 $56,233
Accrued liabilities 83,678 125,480
-------- ---------
Total current liabilities 125,230 181,713
Minority interest in consolidated joint venture 2,339 -
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares - -
Common stock, $0.01 par value. Authorized 104,000,000 shares;
issued and outstanding 60,487,598 and 60,159,601, respectively 605 602
Paid-in capital 242,735 234,294
Retained earnings 334,240 330,540
Accumulated other comprehensive income (loss) (2,004) (1,468)
-------- ---------
Total stockholders' equity 575,576 563,968
-------- ---------
$703,145 $745,681
======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
1998 1997
-----------------------------
Net revenues $178,221 $123,712
Cost of goods sold 87,589 62,312
-------- --------
Gross profit 90,632 61,400
-------- --------
Operating expenses:
Marketing and sales 33,644 26,636
General and administrative 15,417 11,889
Research and development 36,242 27,682
Charge for acquired in-process technology 2,279 -
-------- --------
Total operating expenses 87,582 66,207
-------- --------
Operating income (loss) 3,050 (4,807)
Interest and other income, net 2,815 2,550
-------- --------
Income (loss) before provision for income
taxes and minority interest 5,865 (2,257)
Provision (benefit) for income taxes 1,935 (778)
-------- --------
Income (loss) before minority interest 3,930 (1,479)
Minority interest in consolidated
joint venture (230) 28
-------- --------
Net income (loss) $ 3,700 $ (1,451)
======== =========
Net income (loss) per share:
Basic $ 0.06 $ (0.02)
======== =========
Diluted $ 0.06 $ (0.02)
======== =========
Number of shares used in computation:
Basic 60,304 58,317
======== =========
Diluted 62,996 58,317
======== =========
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<CAPTION>
Three Months
Ended June 30,
1998 1997
------------------------
Operating activities:
<S> <C> <C>
Net income (loss) $ 3,700 $ (1,451)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Minority interest in consolidated joint venture 230 (28)
Equity in net loss of affiliates 134 638
Depreciation and amortization 7,409 5,972
Loss on sale of fixed assets 496 114
Gain on sale of marketable securities (76) (1,293)
Provision for doubtful accounts 1,162 1,006
Charge for acquired in-process technology 2,279 -
Change in assets and liabilities:
Receivables 38,166 19,284
Inventories 616 (827)
Prepaid royalties (2,628) (3,062)
Other assets 779 (3,252)
Accounts payable (14,681) (10,589)
Accrued liabilities (41,776) (13,665)
Deferred income taxes (26) (276)
--------- ---------
Net cash used in operating activities (4,216) (7,429)
--------- ---------
Investing activities:
Proceeds from sales of furniture and equipment - 25
Proceeds from sales of marketable securities 101 1,530
Purchase of marketable securities - (2,762)
Capital expenditures (11,398) (7,093)
Investment in affiliates (2,628) 356
Proceeds from maturity of securities 6,330 2,556
Change in short-term investments, net (9,344) (10,130)
Acquisition of subsidiaries (2,339) -
--------- ---------
Net cash used in investing activities (19,278) (15,518)
--------- ---------
Financing activities:
Proceeds from sales of shares through employee stock
plans and other plans 6,813 2,888
Tax benefit from exercise of stock options 1,631 -
Proceeds from minority interest investment in consolidated
joint venture 2,109 -
--------- ---------
Net cash provided by financing activities 10,553 2,888
--------- ---------
Translation adjustment (1,314) 1,483
--------- ---------
Decrease in cash and cash equivalents (14,255) (18,576)
Beginning cash and cash equivalents 215,963 141,996
--------- ---------
Ending cash and cash equivalents 201,708 123,420
Short-term investments 161,611 136,458
--------- ---------
Ending cash and short-term investments $363,319 $259,878
========= =========
</TABLE>
5
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(unaudited)
Three Months
Ended June 30,
1998 1997
------ -------
Supplemental cash flow information:
Cash paid during the year for income taxes $9,832 $ 494
====== =======
Non-cash investing activities:
Change in unrealized appreciation of investments $1,165 $1,366
====== ======
See accompanying notes to consolidated financial statements.
6
<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. Certain amounts have been reclassified to conform to the fiscal
1999 presentation.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Electronic Arts
Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended March
31, 1998 as filed with the Securities and Exchange Commission ("Commission") on
June 26, 1998.
Note 2. Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
original equipment manufacturer (OEM) fees and license fees paid to celebrities
and professional sports organizations for use of their trade name. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. Prepaid
royalties are expensed at the contractual royalty rate as cost of goods sold
based on actual net product sales. Management evaluates the future realization
of prepaid royalties quarterly and charges to income any amounts that management
deems unlikely to be realized through product sales. Royalty advances are
classified as current and non-current assets based upon estimated net product
sales for the following year.
Note 3. Inventories
Inventories are stated at the lower of cost or market. Inventories at June 30,
1998 and March 31, 1998 consisted of (in thousands):
June 30, 1998 March 31, 1998
------------- --------------
Raw materials and work in process $ 2,817 $ 2,392
Finished goods 16,193 17,234
------- -------
$19,010 $19,626
======= =======
Note 4. Accrued Liabilities
Accrued liabilities at June 30, 1998 and March 31, 1998 consisted of (in
thousands):
June 30, 1998 March 31, 1998
------------- --------------
Accrued royalties $21,065 $36,830
Accrued compensation and benefits 18,667 29,318
Accrued expenses 18,275 25,872
Accrued income taxes 16,857 26,095
Deferred revenue 4,375 2,797
Warranty reserve 3,359 3,462
Deferred income taxes 1,080 1,106
------- --------
$83,678 $125,480
======= ========
7
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5. Operations by Geographic Areas
<TABLE>
The Company operates in one industry segment. Information about the Company's
operations in North America, Europe, Asia Pacific and Japan for the three months
ended June 30, 1998 and 1997 is presented below (in thousands).
<CAPTION>
North Asia
America Europe Pacific Japan Eliminations Total
------- ------ ------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Three months ended June 30, 1998
Net revenues from unaffiliated
customers $ 69,114 $ 86,794 $ 8,363 $13,950 $ - $178,221
Intersegment net revenues 5,836 2,512 - 13 (8,361) -
--------- --------- --------- ------- -------- --------
Total net revenues $ 74,950 $ 89,306 $ 8,363 $13,963 $ (8,361) $178,221
========= ========= ========= ======= ======== ========
Operating income (loss) $ (10,184) $ 10,263 $ 268 $ 2,703 $ - $ 3,050
Identifiable assets $ 480,843 $ 187,790 $ 16,416 $18,096 $ - $703,145
Three months ended June 30, 1997
Net revenues from unaffiliated
customers $ 56,252 $ 52,680 $ 9,846 $ 4,934 $ - $123,712
Intersegment net revenues 7,975 2,430 646 - (11,051) -
--------- --------- --------- ------- -------- --------
Total net revenues $ 64,227 $ 55,110 $ 10,492 $ 4,934 $(11,051) $123,712
========= ========= ========= ======= ======== ========
Operating income (loss) $ (11,618) $ 6,594 $ 2,443 $(2,226) $ - $ (4,807)
Identifiable assets $ 400,643 $ 133,089 $ 16,444 $13,496 $ - $563,672
</TABLE>
8
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6. Comprehensive Income
During the first quarter the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires items of other comprehensive income be classified, net of income taxes,
by their nature in the financial statements. Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130. For the
Company, other comprehensive income includes primarily foreign currency
translation adjustments and unrealized gains on investments. Total comprehensive
income for the three months ended June 30, 1998 and 1997 was as follows (in
thousands):
Three Months Ended
June 30,
1998 1997
------------------
Net income (loss) $3,700 $(1,451)
Other comprehensive income (loss), net of tax
Unrealized appreciation of investments 778 971
Foreign currency translation adjustment (1,314) 1,483
------ -------
Total other comprehensive income (loss) (536) 2,454
------ -------
Total comprehensive income $3,164 $ 1,003
====== =======
Note 7. Investments
In May 1998, the Company and Square Co., Ltd. ("Square"), a third-party video
game console software publisher in Japan, completed the formation of two new
joint ventures in North America and Japan. In North America, the companies
formed Square Electronic Arts, LLC, which has exclusive publishing rights in
North America for future interactive entertainment titles created by Square.
Additionally, the Company has the exclusive right to distribute in North America
products published by this joint venture. The Company contributed $3,000,000 and
owns a 30% minority interest in this joint venture while Square owns 70%. This
joint venture is accounted for under the equity method.
In Japan, the companies established Electronic Arts Square KK ("EA Square KK"),
which will localize and publish in Japan the Company's properties originally
created in North America and Europe, as well as develop and publish original
video games in Japan. The Company contributed cash and other assets and owns a
70% majority ownership interest, while Square owns 30%. Accordingly, the assets,
liabilities and results of operations for EA Square KK are included in the
Company's Consolidated Balance Sheets and Results of Operations since June 1,
1998, the date of formation. Square's 30% interest in EA Square KK has been
reflected as "Minority interest in consolidated joint venture" on the Company's
Consolidated Financial Statements.
Additionally, during the quarter ended June 30, 1998, the Company acquired two
software development companies. In connection with these acquisitions, the
Company incurred a charge of $2,279,000 for acquired in-process technology. The
charge was made after the Company concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
9
<PAGE>
Note 8. Earnings Per Share
The following summarizes the computation of Basic Earnings Per Share ("EPS") and
Diluted EPS. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method. Due to the loss reported for the three months ended June 30, 1997,
dilutive stock options have been excluded from the Diluted EPS calculation (in
thousands except per share amounts):
Three Months Ended
June 30,
1998 1997
------- --------
Net income (loss) $ 3,700 $ (1,451)
Shares used to compute net income
(loss) per share:
Weighted average common shares 60,304 58,317
Dilutive stock options 2,692 -
------- --------
Dilutive potential common shares 62,996 58,317
======= ========
Net income (loss) per share:
Basic $0.06 $ (0.02)
Diluted $0.06 $ (0.02)
Note 9. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. The Company is determining the effect of SFAS 133 on its financial
statements.
Note 10. Subsequent Event
In July 1998, the Company completed the acquisition of ABC Software AG, an
independent distributor of entertainment, edutainment and application software
in Switzerland and Austria for approximately $16.5 million in cash and other
consideration. The transaction will be accounted for under the purchase method.
10
<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 19 to 23, as well as in
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1998 as filed with the Securities and Exchange Commission on June 26, 1998.
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,
1998 1997 % change
---------------------------------------
Consolidated Net Revenues
Three Months Ended $178,221,000 $123,712,000 44.1%
International Net Revenues
Three Months Ended $109,107,000 $67,460,000 61.7%
as a percentage of net revenues 61.2% 54.5%
North America Net Revenues
Three Months Ended $69,114,000 $56,252,000 22.9%
as a percentage of net revenues 38.8% 45.5%
The Company derives revenues primarily from shipments of entertainment software,
which includes EA Studio Compact Disk ("CD") products for dedicated
entertainment systems ("CD-video games"), EA Studio CD personal computer
products ("PC-CD"), EA Studio cartridge products and Affiliated Label ("AL")
products that are published by third parties and distributed by EA. The Company
also derives revenues from licensing of EA Studio products and AL products to
hardware companies ("OEMs") and online subscription revenues.
International net revenues increased $41,647,000, or 61.7% for the three months
ended June 30, 1998 compared to the same period last year. The increase in
international revenues for this period was primarily due to growth in European
net revenues consisting of higher sales of PlayStation and Nintendo 64 ("N64")
products. This increase was partially offset by a decrease in international AL
sales. Total net revenues in Europe were $86,794,000 for the three months ended
June 30, 1998 compared to $52,680,000 in the same period last year.
European PlayStation sales increased $31,501,000, or 244.0% for the three months
ended June 30, 1998 compared to the prior year due to the increase in the
installed base of this platform and the release of a key title during the
quarter. N64 net revenues increased $11,141,000 to $12,615,000 for the three
months ended June 30, 1998. Both PlayStation and N64 revenues increased due to
sales of World Cup 98. This increase was offset by a decrease in AL product
sales of $4,814,000 due to the release of successful titles from two affiliates
in the prior year. Additionally, 16-bit product revenues decreased
11
<PAGE>
$2,836,000 as a result of the completed transition to 32-bit and 64-bit
platforms. Though Europe's net revenues are expected to grow in fiscal 1999, the
Company does not expect to maintain these growth rates.
Net revenues for Japan increased in the first quarter of 1999 by 182.7% to
$13,950,000 compared to $4,934,000 in the same period last year due to sales of
FIFA: Road to World Cup 98 on both the PlayStation and N64 platforms. Though
Japan's net revenues are expected to grow in fiscal 1999, the Company does not
expect to maintain these growth rates.
Sales in the Asia Pacific region decreased by 15.1% to $8,363,000 for the three
months ended June 30, 1998 compared to $9,846,000 in the same period last year.
The decrease was attributable to lower sales of PC-CD and Affiliated Label
titles partially offset by an increase in PlayStation sales. PC-CD sales
decreased $1,701,000 due to fewer releases for this platform in the quarter
ended June 1998 compared to two key releases in the same period last year. AL
revenues decreased $1,238,000 due to the loss of revenues from Creative Wonders,
LLC ("Creative Wonders") products which was sold in the third quarter of fiscal
1998 and a decrease in sales of other affiliates. PlayStation revenues increased
$1,299,000 due to sales of new releases during the quarter.
North America net revenues increased $12,862,000, or 22.9% for the three months
ended June 30, 1998 compared to the same period last year primarily due to
increased sales of PlayStation titles, a key release for the N64 and, to a
lesser degree, online subscription revenues. This increase was offset by
decreases in Affiliated Label, PC-CD and Sega Saturn ("Saturn") net revenues.
North America PlayStation sales reflected the increase in installed base of this
console, the release of three titles for this platform and strong catalog sales.
Total North America PlayStation revenues increased $15,917,000 or 73.9% for the
three month period. N64 net revenues in North America were $6,050,000, or 8.8%
for the three months ended June 30, 1998 and were primarily comprised of sales
of World Cup 98 which was released in the first quarter of fiscal 1999. Online
subscription revenues were $2,312,000 for the three months ended June 30, 1998.
The Company released its first online product, Ultima Online, in the quarter
ended September 30, 1997.
The increase in North America net revenues was partially offset by a decrease in
Affiliated Label, PC-CD and Saturn net revenues. Affiliated Label revenues
decreased $4,957,000, or 51.8% for the three months ended June 30, 1998
primarily due to the loss of revenues from Creative Wonders products as well as
decreased sales of NovaLogic, Inc. titles, which had a key release in the
comparable prior year period. For the quarter ended June 30, 1998, PC-CD
revenues decreased $4,146,000, or 21.0% primarily due to fewer releases compared
to the same period last year as well as a decline in sales of Maxis titles.
12
<PAGE>
EA Studio Net Revenues:
32-bit Video Game Product Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $96,244,000 $43,230,000 122.6%
as a percentage of net revenues 54.0% 34.9%
The Company released three 32-bit CD-video game products during the first
quarter of fiscal 1999 comprised solely of titles for the PlayStation, including
World Cup 98, Road Rash 3D and NASCAR 98 50th Anniversary, compared to four
PlayStation and two Saturn games in the same period last year. The increase in
32-bit sales for the three months ended June 30, 1998 compared to the prior year
was attributable to the greater installed base of PlayStation consoles, the
related release of key titles for this platform during the quarter and strong
catalog sales.
For the three months ended June 30, 1998, the 32-bit videogame revenue increase
was primarily attributable to PlayStation sales which were $95,957,000, compared
to $39,017,000 for the three months ended June 30, 1997. The Company expects
revenues from PlayStation products to continue to grow in fiscal 1999, but as
revenues for these products increase, the Company does not expect to maintain
these growth rates.
Net revenues from the sale of other 32-bit products were $287,000 for the
quarter ended June 30, 1998 compared to $4,213,000 for the same period in the
prior year.
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.
Personal Computer CD Product Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $39,210,000 $45,100,000 (13.1%)
as a percentage of net revenues 22.0% 36.5%
The Company released two PC-CD titles in the first quarter of the current fiscal
year for the IBM personal computer and compatibles including World Cup 98 and
Dungeon Keeper Gold, compared to six for the same period last year. The decrease
in sales of PC-CD products for the three months ended June 30, 1998 is
attributable to fewer releases in the first quarter of fiscal 1999 compared to
three key releases in the same period last year. PC-CD revenues also decreased
due to a decline in sales of Maxis titles.
13
<PAGE>
64-bit Video Game Product Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $20,947,000 $2,333,000 N/M
as a percent of net revenues 11.8% 1.9%
The increase in N64 revenues is due to the release of World Cup 98 in the
quarter ended June 30, 1998 compared to no new releases in the comparable prior
year quarter. In March 1997, the Company signed a licensing agreement with
Nintendo (the "N64 Agreement") to develop, publish and market certain sports
products for the N64. Sales of N64 products are expected to grow in fiscal 1999,
but as revenues for these products increase, they may not grow at the current
rate.
Under the terms of the N64 Agreement, the Company engages Nintendo to
manufacture its N64 cartridges for distribution by the Company. Accordingly, the
Company has little ability to control its supply of N64 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 the Company to provide 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 of N64
cartidges. Because of these and other factors, the carrying of an inventory of
cartridges entails significant capital and risk. See Hardware Companies, below.
License/OEM Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 4,757,000 $ 3,368,000 41.2%
as a percentage of net revenues 2.7% 2.7%
The increase in license/OEM net revenues for the three months ended June 30,
1998 compared to the same period last year was primarily a result of an increase
in the licensing of the Company's products in Europe and North America.
Other Product Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 2,249,000 $ 3,639,000 (38.2%)
as a percentage of net revenues 1.3% 2.9%
The decrease in other product revenues is primarily due to the transition of the
16-bit video game market to the next generation of 32-bit and 64-bit systems
offset by an increase in online subscription revenues. As 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 1999 and
revenues from the sales of 16-bit products
14
<PAGE>
in fiscal 1999 are not expected to be significant. This decrease was offset by
Ultima Online subscription revenues, the Company's first online game introduced
in the second quarter of fiscal 1998.
Affiliated Label Net Revenues
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 14,814,000 $ 26,042,000 (43.1%)
as a percentage of net revenues 8.3% 21.1%
The decrease in Affiliated Label net revenues for the three months ended June
30, 1998 compared to the same period last year was due to lower sales of
Affiliated Label products worldwide. The decrease was primarily due to decreases
in sales of AL products from NovaLogic, Inc. which had a key release in the
prior comparable period, and Creative Wonders, LLC, which was sold in the third
fiscal quarter of 1998.
Cost of Goods Sold
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 87,589,000 $ 62,312,000 40.6%
as a percentage of net revenues 49.1% 50.4%
The decrease in costs of goods sold as a percentage of net revenues for the
three months ended June 30, 1998 compared to the same period last year was
primarily due to lower AL revenues as well as lower third party artist
royalties.
Marketing and Sales
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 33,644,000 $ 26,636,000 26.3%
as a percentage of net revenues 18.9% 21.5%
The increase in marketing and sales expenses for the three months ended June 30,
1998 was primarily attributable to increased television, print and online
advertising to support new releases and increased cooperative advertising
associated with higher revenues in North America and Europe as compared to the
prior year period. Marketing and sales expenses also increased due to additional
headcount related to the continued expansion of the Company's worldwide
distribution business. Increases were partially offset by savings attributable
to the integration of Maxis in July 1997.
General and Administrative
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 15,417,000 $ 11,889,000 29.7%
as a percentage of net revenues 8.7% 9.6%
The increase in general and administrative expenses for the three months ended
June 30, 1998 was due primarily to an increase in payroll and occupancy costs
due to the opening of additional international offices and to support the
increase in growth in North America operations.
15
<PAGE>
Research and Development
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 36,242,000 $ 27,682,000 30.9%
as a percentage of net revenues 20.3% 22.4%
The increase in research and development expenses for the three months ended
June 30, 1998 was due to additional headcount related expenses attributable to
increased in-house development capacity, higher development costs per title and
an increase in support for Ultima Online. This increase was partially offset by
a decrease in Maxis' development expenses.
Charge for Acquired In-Process Technology
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 2,279,000 $-- N/M
as a percentage of net revenues 1.3% N/A
In connection with the acquisition of two software development companies, in the
first quarter of fiscal 1999, the Company incurred a total charge of $2,279,000
for acquired in-process technology. This charge was made after the Company
concluded that the in-process technology had not reached technological
feasibility and had no alternative future use after taking into consideration
the potential for usage of the software in different products and resale of the
software.
Operating Income (Loss)
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 3,050,000 $ (4,807,000) N/M
as a percentage of net revenues 1.7% (3.9%)
Operating income was higher for the three months ended June 30, 1998 compared to
the same period last year due to increased revenue and related gross profit
margins partially offset by increased operating expenses including the charge
for acquired in-process technology.
Interest and Other Income, Net
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 2,815,000 $ 2,550,000 10.4%
as a percentage of net revenues 1.6% 2.1%
Interest and other income, net, increased for the three months ended June 30,
1998 compared to the same period last year primarily due to higher interest
income attributable to higher cash balances as compared to the prior year
period. This increase was offset by a decrease in the gain on sale of marketable
securities.
16
<PAGE>
Income Taxes
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 1,935,000 $ (778,000) N/M
effective tax rate 33.0% 34.5%
The Company's effective tax rate for the three months ended June 30, 1998 was
lower than the comparable prior year period as a result of the higher proportion
of international income subject to a lower foreign effective tax rate.
Minority Interest in Consolidated Joint Venture
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ (230,000) $ 28,000 N/M
as a percentage of net revenues (0.1%) (0.0%)
In the first quarter of fiscal 1999, the Company formed EA Square KK, a new
joint venture which will publish and distribute the Company's products in Japan.
EA Square KK is seventy percent owned by the Company and thirty percent owned by
Square Co. Ltd. ("Square"), a third party video game console software publisher
in Japan. The minority interest for the three months ended June 30, 1998
represents Square's 30% interest in the net income of EA Square KK since its
inception.
For the three months ended June 30, 1997, the minority interest represented the
35% interest in Electronic Arts Victor ("EAV") owned by Victor Entertainment
Industries, Inc. ("VEI"). The Company acquired the remaining 35% minority
ownership interest in EAV held by VEI in December 1997. VEI's interest in the
net equity of EAV had fallen below zero in the three months ended June 30, 1997,
therefore the minority interest reflected only a portion of EAV's reported
losses.
Net Income (Loss)
June 30, June 30,
1998 1997 % change
-----------------------------------------
Three Months Ended $ 3,700,000 $ (1,451,000) N/M
as a percentage of net revenues 2.1% (1.2%)
The increase in net income for the three months ended June 30, 1998 as compared
to the prior year period was primarily related to higher revenues and gross
profits, offset by higher operating expenses.
17
<PAGE>
Liquidity and Capital Resources
As of June 30, 1998, the Company's working capital was $415,565,000 compared to
$408,098,000 at March 31, 1998. Cash and short-term investments decreased by
approximately $11,241,000 during the three months ended June 30, 1998 as the
Company used $4,216,000 of cash in operations and $11,398,000 in capital
expenditures offset by proceeds from the Company's employee stock programs.
Reserves for bad debts and sales returns increased from $51,575,000 at March 31,
1998 to $56,008,000 at June 30, 1998. 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.
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 in Japan. In lieu of letters of credit, EA Japan utilizes
a line of credit to fund these deposits for purchases of Sony and Nintendo
products in Japan and for other operating requirements. At June 30, 1998, EA
Japan had no outstanding balance on this line.
The Company's principal source of liquidity is $363,319,000 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.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is complex and pervasive as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties with which the Company deals
on financial transactions worldwide. Failures of the Company's and/or third
parties' computer systems could have a material adverse impact on the Company's
ability to conduct business. For example, a significant percentage of purchase
orders received from the Company's customers are computer generated and
electronically transmitted. A failure of the computer systems of the Company's
customers to be Year 2000 compliant could significantly impact the orders
received by the Company from such customer.
The Company's financial information systems include an Oracle system in the
United States and Europe, which the Company believes to be Year 2000 compliant.
The Company is analyzing its remaining computer systems to identify any
potential Year 2000 issues and will take appropriate corrective action based on
the results of such analysis. Management has not yet determined the cost related
to achieving Year 2000 compliance.
In addition, the Year 2000 could affect the ability of consumers to use the PC
based products sold by the Company. If the computer systems on which the
consumers use the Company's products are not Year 2000 compliant, such
noncompliance could affect the consumers ability to use such products.
18
<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 the Company'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 packaged goods market is crowded with a
large number of titles competing for limited retail shelf space. 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, in the packaged goods market, 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 content and 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 and, accordingly, cause
additional development and scheduling risk than earlier generation products. For
example, Dungeon Keeper, originally scheduled to ship in the quarter ended June
1996, shipped during the summer of 1997. In addition Populous 3 for PC-CD and
PlayStation were scheduled for shipment in the fiscal year ended March 31, 1998
and are now expected to ship in the fiscal year ending March 31, 1999. Also,
SimCity 3000, the follow on product to SimCity 2000, was expected to ship in
fiscal 1998, at the time of the merger with Maxis. Due to additional development
delays, it is anticipated that this product may not ship until the fourth
calendar quarter of 1998. Additionally, development risks for CD-ROM products
can cause particular difficulties in predicting quarterly results because brief
manufacturing lead times allow finalizing products and projected release dates
late in a quarter. The Company's revenues and earnings are dependent on its
ability to meet its product release schedule. 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 and the N64. The interdependent nature of the Company's
business and that of its hardware licensors
19
<PAGE>
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 and 64-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 has only released
four products for the N64 through June 1998 since the introduction of this
platform in September 1996. Additionally, the Company is developing a line of EA
SPORTS and other N64 products for release in fiscal 1999. The Company believes
that investment in products for the 32-bit market, including both PC-CD and
CD-video game platforms (particularly the PlayStation) was 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. The market acceptance of the N64, particularly in North
America and Europe, may adversely affect the growth rate of the 32-bit
CD-platforms.
Multiplayer Online Gaming. While the Company does not currently derive
significant revenues from online games, the Company believes that multiplayer
online gaming will become a more significant factor in the Company's business
and in the interactive gaming business generally in the future. Online gaming,
and particularly multiplayer online gaming such as the Company's Ultima Online
product, has at least four general areas of risk not currently associated with
most packaged good sales. First, the speed and reliability of the internet and
the performance of the players' internet service provider are not controlled by
the Company but impact game performance. Second, in "massively multiplayer"
games such as Ultima Online, unanticipated player conduct significantly affects
the performance of the game, and social issues raised by players' conduct
frequently determine player satisfaction. The Company's ability to effectively
proctor such games is uncertain. Third, the current business model is as yet
experimental and maybe unsustainable; whether revenues will continue to be
sufficient to maintain the significant support, service and product enhancement
demands of online users is uncertain. The Company has little experience in
pricing strategies for online games or in predicting usage patterns of its
customers. Finally, the legal standards that may apply to online products are
uncertain; the Company has recently been sued in a class action lawsuit alleging
defects in Ultima Online, regulation of the internet and the content it carries
is regularly proposed by various legislators, and piracy of online games is
difficult to prosecute under existing intellectual property laws. The viability
of this segment, generally, and the Company's ability to compete in the segment
will depend significantly on these and other factors outside the Company's
control.
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 prepaying for its inventory of products. In particular, the Company's
20
<PAGE>
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 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.
Gross Margins. Though gross margins for the Company's products as a whole
increased for the three months ended June 30, 1998, the Company expects that
margins may be comparable to or decline from fiscal 1998 levels for several
reasons. First, the mix in sales of the Company's products has a significant
effect on gross margins. As the Company releases more N64 products, which carry
significantly lower margins due to high cost of goods, overall gross margins may
decline. Similarly, if the proportion of AL revenues increases in relation to
other revenues, margins may also decline. Further, gross margins continue to be
affected by increases in professional and celebrity license fees and royalties.
Also, while the costs of development of new products for 32-bit and 64-bit
systems have increased, overall costs of goods are not declining significantly.
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 in addition, pays
manufacturing royalties to hardware companies. Additionally, retailers continue
to require significant price protection for products. With an increasing number
of titles available for advanced platforms, such requirements for price
protection may increase. The Company also anticipates that retail and wholesale
prices for interactive entertainment products may decrease and gross margins may
be further adversely affected.
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 expenditures for
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.
21
<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 development of remote and
electronic delivery systems will create further changes. The bankruptcy or other
business difficulties of a distributor or retailer could render the Company's
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. The Company's 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 the
Company's 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 the
Company's products or provide the Company's products with adequate levels of
shelf space and promotional support.
Employees. Competition for employees in the interactive software business
continues to be 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 more mature companies
like the Company to match without significant stockholder dilution. While
executive turnover decreased in fiscal 1998 and for the three months ended June
30, 1998 as compared to prior periods, many key 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 three months ended June 30,
1998 and the fiscal year ended March 31, 1998, international net revenues
comprised 61% and 43% of total consolidated net revenues, respectively. The
Company expects foreign sales to continue to account for a significant 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. As a result of current
economic conditions in Asia, the Company is subject to additional foreign
currency risk. Though the Company does not currently derive a significant
portion of revenues and operating profits from sales in Asia and other
developing countries, the Company's foreign currency exposure may increase as
the Company's operations in these countries grow and if current economic trends
in Asia continue. 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. The Company has a number of equity investments in
affiliates, including small developers, such as Firaxis; other publishers, such
as Accolade, Inc., The 3DO Company and NovaLogic, Inc.; and new ventures such as
Mpath Interactive. Additionally, the Company has a minority investment in Square
Electronic Arts, LLC, a joint venture between the Company and Square Co., Ltd.
These companies are generally small and may not have significant financial
resources. Financial difficulties for any of these companies could cause a
reduction in the value of the Company's investment.
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
22
<PAGE>
general. For example, during the fiscal year ended March 31, 1998 the price per
share of the Company's common stock ranged from $20.13 to $46.94 and from $41.63
to $54.81 during the three months ended June 30, 1998.
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 during the quarters ending
June and September.
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.
23
<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 30, 1998,
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 the adoption of the Company's 1998 Directors' Stock Option
Plan and to reserve 135,000 shares of the Company's Stock for issuance
thereunder.
Votes
-----------------------------------------------------------------------
For Against Abstain
--- ------- -------
52,538,879 3,145,195 75,062
To approve an amendment to the Company's 1991 Stock Option Plan to
increase the number of shares of the Company's common stock reserved
for issuance under such Plan by 2,500,000 shares from 13,000,000 shares
to a total of 15,500,000 shares and to prohibit option grants to
non-employees.
Votes
-----------------------------------------------------------------------
For Against Abstain
--- ------- -------
32,586,139 23,126,644 46,353
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 1,150,000 shares to
a total of 1,250,000 shares.
Votes
-----------------------------------------------------------------------
For Against Abstain
--- ------- -------
55,585,174 141,992 31,970
24
<PAGE>
To ratify the appointment of KPMG Peat Marwick LLP as independent
accountants for the Company for the current fiscal year.
Votes
-----------------------------------------------------------------------
For Against Abstain
--- ------- -------
55,704,408 38,420 16,308
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as part of this
report:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: None
25
<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 10, 1998 Executive Vice President and
Chief Financial and Administrative Officer
(Principal Accounting Officer)
26
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
- ------ ------------- ----
27 Financial Data Schedule 28
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 363,319
<SECURITIES> 4,861
<RECEIVABLES> 156,054
<ALLOWANCES> 56,008
<INVENTORY> 19,010
<CURRENT-ASSETS> 540,795
<PP&E> 115,997
<DEPRECIATION> 7,316
<TOTAL-ASSETS> 703,145
<CURRENT-LIABILITIES> 125,230
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 574,971
<TOTAL-LIABILITY-AND-EQUITY> 703,145
<SALES> 178,221
<TOTAL-REVENUES> 178,221
<CGS> 87,589
<TOTAL-COSTS> 87,589
<OTHER-EXPENSES> 87,582
<LOSS-PROVISION> 1,162
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 5,865
<INCOME-TAX> 1,935
<INCOME-CONTINUING> 3,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,700
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
