EA 06.30.2013 - Q1 FY14 10Q DOC
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
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. 000-17948
ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)
 
Delaware
94-2838567
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
209 Redwood Shores Parkway
Redwood City, California
94065
(Address of principal executive offices)
(Zip Code)
(650) 628-1500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
Accelerated filer                   
¨
Non-accelerated filer
(Do not check if a smaller reporting company)

¨
Smaller reporting company 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  þ
As of July 30, 2013, there were 306,617,854 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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Table of Contents

ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2013
Table of Contents
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 6.

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements (Unaudited)
ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(In millions, except par value data)
June 30, 2013
 
March 31, 2013 (a)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,056

 
$
1,292

Short-term investments
355

 
388

Receivables, net of allowances of $160 and $200, respectively
120

 
312

Inventories
41

 
42

Deferred income taxes, net
51

 
52

Other current assets
261

 
239

Total current assets
1,884

 
2,325

Property and equipment, net
537

 
548

Goodwill
1,722

 
1,721

Acquisition-related intangibles, net
234

 
253

Deferred income taxes, net
50

 
53

Other assets
178

 
170

TOTAL ASSETS
$
4,605

 
$
5,070

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
48

 
$
136

Accrued and other current liabilities
588

 
737

Deferred net revenue (online-enabled games)
590

 
1,044

Total current liabilities
1,226

 
1,917

0.75% convertible senior notes due 2016, net
564

 
559

Income tax obligations
201

 
205

Deferred income taxes, net
1

 
1

Other liabilities
121

 
121

Total liabilities
2,113

 
2,803

Commitments and contingencies (See Note 13)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. 10 shares authorized

 

Common stock, $0.01 par value. 1,000 shares authorized; 306 and 302 shares issued and outstanding, respectively
3

 
3

Paid-in capital
2,190

 
2,174

Retained earnings
243

 
21

Accumulated other comprehensive income
56

 
69

Total stockholders’ equity
2,492

 
2,267

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
4,605

 
$
5,070

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
 
(a)
Derived from audited consolidated financial statements.

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Table of Contents

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
Three Months Ended June 30,
(In millions, except per share data)
2013
 
2012
Net revenue:
 
 
 
Product
$
543

 
$
702

Service and other
406

 
253

Total net revenue
949

 
955

Cost of revenue:
 
 
 
Product
130

 
132

Service and other
64

 
73

Total cost of revenue
194

 
205

Gross profit
755

 
750

Operating expenses:
 
 
 
Research and development
278

 
282

Marketing and sales
147

 
151

General and administrative
85

 
88

Acquisition-related contingent consideration
7

 
(20
)
Amortization of intangibles
4

 
7

Restructuring and other charges
1

 
27

Total operating expenses
522

 
535

Operating income
233

 
215

Interest and other income (expense), net
(5
)
 
(5
)
Income before provision for income taxes
228

 
210

Provision for income taxes
6

 
9

Net income
$
222

 
$
201

Net income per share:
 
 
 
Basic
$
0.73

 
$
0.63

Diluted
$
0.71

 
$
0.63

Number of shares used in computation:
 
 
 
Basic
304

 
317

Diluted
312

 
320

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


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ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)
Three Months Ended June 30,
(In millions)
2013
 
2012
Net income
$
222

 
$
201

Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized gains and losses on available-for-sale securities
(1
)
 
(42
)
Change in unrealized losses on derivative instruments
(2
)
 

Reclassification adjustment for realized losses on derivative instruments
2

 
1

Foreign currency translation adjustments
(12
)
 
(17
)
Total other comprehensive income (loss), net of tax
(13
)
 
(58
)
Total comprehensive income
$
209

 
$
143


See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).


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ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
(In millions)
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
222

 
$
201

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation, amortization and accretion, net
56

 
56

Stock-based compensation
33

 
39

Acquisition-related contingent consideration
7

 
(20
)
Non-cash restructuring charges

 
7

Change in assets and liabilities:
 
 
 
Receivables, net
192

 
254

Inventories
1

 
(2
)
Other assets
(30
)
 
(29
)
Accounts payable
(82
)
 
(157
)
Accrued and other liabilities
(195
)
 
(119
)
Deferred income taxes, net
2

 
(10
)
Deferred net revenue (online-enabled games)
(454
)
 
(464
)
Net cash used in operating activities
(248
)
 
(244
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(29
)
 
(31
)
Proceeds from maturities and sales of short-term investments
133

 
128

Purchase of short-term investments
(101
)
 
(137
)
Acquisition of subsidiaries, net of cash acquired
(5
)
 

Net cash used in investing activities
(2
)
 
(40
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of common stock
22

 

Repurchase and retirement of common stock

 
(71
)
Acquisition-related contingent consideration payment
(1
)
 
(1
)
Net cash provided by (used in) financing activities
21

 
(72
)
Effect of foreign exchange on cash and cash equivalents
(7
)
 
(18
)
Decrease in cash and cash equivalents
(236
)
 
(374
)
Beginning cash and cash equivalents
1,292

 
1,293

Ending cash and cash equivalents
$
1,056

 
$
919

Supplemental cash flow information:
 
 
 
Cash paid during the period for income taxes, net
$
6

 
$
8

Non-cash investing activities:
 
 
 
Change in unrealized gains and losses on available-for-sale securities, net of taxes
$
(1
)
 
$
(42
)
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

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ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We develop, market, publish and distribute game software content and services that can be played by consumers on a variety of platforms, including video game consoles (such as the Sony PLAYSTATION 3 and Microsoft Xbox 360), personal computers, mobile devices (such as the Apple iPhone and Google Android compatible phones), tablets and electronic readers (such as the Apple iPad and Amazon Kindle), and the Internet. Our ability to publish games across multiple platforms, through multiple distribution channels, and directly to consumers (online and wirelessly) has been, and will continue to be, a cornerstone of our product strategy. We have generated substantial growth in new business models and alternative revenue streams (such as subscription, micro-transactions, and advertising) based on the continued expansion of our online and wireless product and service offerings. Some of our games are based on our wholly-owned intellectual property (e.g., Battlefield, Mass Effect, Need for Speed, The Sims, Bejeweled, and Plants v. Zombies), and some of our games are based on content that we license from others (e.g., FIFA and Madden NFL). Our goal is to turn our core intellectual properties into year-round businesses available on a range of platforms. Our products and services may be purchased through physical and online retailers, platform providers such as console manufacturers and mobile carriers via digital downloads, as well as directly through our own online distribution platform Origin.
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal years ending or ended, as the case may be, March 31, 2014 and 2013 contain 52 weeks each, and ends or ended, as the case may be, on March 29, 2014 and March 30, 2013, respectively. Our results of operations for the three months ended June 30, 2013 and 2012 contained 13 weeks each and ended on June 29, 2013 and June 30, 2012, respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
The Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals unless otherwise indicated) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, as filed with the United States Securities and Exchange Commission (“SEC”) on May 22, 2013.
Reclassifications
During the fourth quarter of fiscal year 2013, we reviewed our operating expenses and reclassified certain amounts, primarily headcount and facilities costs, to align with our current operating structure. As a result, we also reclassified the related prior year amounts within our Condensed Consolidated Statements of Operations for comparability purposes. These reclassifications did not affect the Company’s consolidated net revenue, gross profit, operating income, or net income. The effect of the reclassifications on the previously-reported Condensed Consolidated Statement of Operations is reflected in the table below:
 
Three Months Ended June 30, 2012
 
As Previously Reported
 
Change
 
Reclassified Balance
Operating expenses:
 
 
 
 
 
Research and development
$
290

 
$
(8
)
 
$
282

Marketing and sales
145

 
6

 
151

General and administrative
86

 
2

 
88


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Recently Adopted Accounting Standards
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to address concerns expressed by preparers while still providing useful information about certain transactions involving master netting arrangements. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. There was no material impact on our Condensed Consolidated Financial Statements with the adoption of ASU 2011-11 and ASU 2013-01.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, effective prospectively for fiscal years beginning after December 15, 2012. The amendments of this ASU require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the statement where net income (loss) is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. There was no material impact on our Condensed Consolidated Financial Statements with the adoption of ASU 2013-02. See Note 5 for details of amounts reclassified out of accumulated other comprehensive income.
Impact of Recently Issued Accounting Standards
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 220): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments of this ASU require that entities that have an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset for the loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the loss or tax credit carryforward under the tax law. The disclosure requirements will be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2013, and will require prospective application. Early adoption is permitted. We expect to adopt this new standard in the first quarter of fiscal year 2015. While not yet quantified, we anticipate the adoption may have a material impact on the balance sheet only, resulting in equal reductions to both deferred tax assets and noncurrent income tax obligations.

(2) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2013 and March 31, 2013, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions): 
 
 
 
Fair Value Measurements at Reporting Date Using
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
June 30,
2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
353

 
$
353

 
$

 
$

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
193

 

 
193

 

 
Short-term investments
U.S. agency securities
69

 

 
69

 

 
Short-term investments
Commercial paper
55

 

 
55

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
53

 
53

 

 

 
Short-term investments
Deferred compensation plan assets (a)
11

 
11

 

 

 
Other assets
Foreign currency derivatives
5

 

 
5

 

 
Other current assets
Total assets at fair value
$
739

 
$
417

 
$
322

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
47

 
$

 
$

 
$
47

 
Accrued and other current 
liabilities and other liabilities
Total liabilities at fair value
$
47

 
$

 
$

 
$
47

 
 
 
 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2013
 
 
 
 
 
 
$
43

 
 
Change in fair value (c)
 
 
 
 
 
 
7

 
 
Payments (d)
 
 
 
 
 
 
(3
)
 
 
Balance as of June 30, 2013
 
 
 
 
 
 
$
47

 
 


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Table of Contents

 
 
 
 
Fair Value Measurements at Reporting Date Using
 
  
 
 
 
Quoted Prices in
Active Markets 
for Identical
Financial
Instruments
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
As of
March 31,
2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Balance Sheet Classification
Assets
 
 
 
 
 
 
 
 
 
Money market funds
$
469

 
$
469

 
$

 
$

 
Cash equivalents
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
178

 

 
178

 

 
Short-term investments
U.S. agency securities
91

 

 
91

 

 
Short-term investments and cash equivalents
U.S. Treasury securities
88

 
88

 

 

 
Short-term investments and cash equivalents
Commercial paper
73

 

 
73

 

 
Short-term investments and cash equivalents
Deferred compensation plan assets (a)
11

 
11

 

 

 
Other assets
Foreign currency derivatives
6

 

 
6

 

 
Other current assets
Total assets at fair value
$
916

 
$
568

 
$
348

 
$

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Contingent consideration (b)
$
43

 
$

 
$

 
$
43

 
Accrued and other current liabilities and other liabilities
Total liabilities at fair value
$
43

 
$

 
$

 
$
43

 
 

 
 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
 
 
Contingent
Consideration
 
 
Balance as of March 31, 2012
 
 
 
 
 
 
$
112

 
 
Change in fair value (c)
 
 
 
 
 
 
(64
)
 
 
Payment (d)
 
 
 
 
 
 
(5
)
 
 
Balance as of March 31, 2013
 
 
 
 
 
 
$
43

 
 

(a)
The deferred compensation plan assets consist of various mutual funds.

(b)
The contingent consideration as of June 30, 2013 and March 31, 2013 represents the estimated fair value of the additional variable cash consideration payable primarily in connection with our acquisitions of PopCap Games, Inc. (“PopCap”), KlickNation Corporation (“KlickNation”), and Chillingo Limited (“Chillingo”) that are contingent upon the achievement of certain performance milestones. We estimated the fair value of the acquisition-related contingent consideration payable using probability-weighted discounted cash flow models, and applied a discount rate that appropriately captures the risk associated with the obligation. The weighted average of the discount rates used during the three months ended June 30, 2013 was 12 percent. The weighted average of the discount rates used during the fiscal year 2013, was 13 percent. The significant unobservable input used in the fair value measurement of the contingent consideration payable are forecasted earnings. Significant changes in forecasted earnings would result in a significantly higher or lower fair value measurement. At June 30, 2013 and March 31, 2013, the fair market value of acquisition-related contingent consideration totaled $47 million and $43 million, respectively, compared to a maximum potential payout of $560 million and $566 million, respectively.

(c)
The change in fair value is reported as acquisition-related contingent consideration in our Condensed Consolidated Statements of Operations.

(d)
During the three months ended June 30, 2013, we made payments totaling $3 million to settle certain performance milestones achieved in connection with one of our acquisitions. During fiscal year 2013, we made payments totaling $5 million to settle certain performance milestones achieved in connection with two of our acquisitions.

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months ended June 30, 2013, our assets that were measured and recorded at fair value on a nonrecurring basis and the related impairments on those assets were as follows (in millions):
 
 
 
Fair Value Measurements Using
 
 
 
Net Carrying
Value as of
June 30, 2013
 
Quoted Prices in
Active Markets 
for Identical Assets
 
Significant
Other Observable Inputs
 
Significant
Unobservable
Inputs
 
Total Impairments for the Three Months Ended June 30, 2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Assets
 
 
 
 
 
 
 
 
 
Royalty-based asset
$

 
$

 
$

 
$

 
$
17

Total impairments recorded for non-recurring measurements on assets held as of June 30, 2013
 
 
 
 
 
 
 
$
17

During the three months ended June 30, 2013, we became aware of facts and circumstances that indicated that the carrying value of one of our royalty-based assets was not recoverable. The impairment charge is included in cost of revenue on our Condensed Consolidated Statements of Operations.
During the three months ended June 30, 2012, there were no material impairment charges for assets and liabilities measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.

(3) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of June 30, 2013 and March 31, 2013, our cash and cash equivalents were $1,056 million and $1,292 million, respectively. Cash equivalents were valued at their carrying amounts as they approximate fair value due to the short maturities of these financial instruments.
Short-Term Investments
Short-term investments consisted of the following as of June 30, 2013 and March 31, 2013 (in millions): 
 
As of June 30, 2013
 
As of March 31, 2013
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Cost or
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Corporate bonds
$
194

 
$

 
$
1

 
$
193

 
$
177

 
$
1

 
$

 
$
178

U.S. agency securities
69

 

 

 
69

 
76

 

 

 
76

U.S. Treasury securities
53

 

 

 
53

 
85

 

 

 
85

Commercial paper
40

 

 

 
40

 
49

 

 

 
49

Short-term investments
$
356

 
$

 
$
1

 
$
355

 
$
387

 
$
1

 
$

 
$
388

We evaluate our investments for impairment quarterly. Factors considered in the review of investments with an unrealized loss include the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process. Based on our review, we did not consider these investments to be other-than-temporarily impaired as of June 30, 2013 and March 31, 2013.

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The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of June 30, 2013 and March 31, 2013 (in millions): 
 
As of June 30, 2013
 
As of March 31, 2013
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Short-term investments
 
 
 
 
 
 
 
Due in 1 year or less
$
147

 
$
146

 
$
160

 
$
160

Due in 1-2 years
96

 
96

 
126

 
127

Due in 2-3 years
113

 
113

 
101

 
101

Short-term investments
$
356

 
$
355

 
$
387

 
$
388


0.75% Convertible Senior Notes Due 2016
The following table summarizes the carrying value and fair value of our 0.75% Convertible Senior Notes due 2016 as of June 30, 2013 and March 31, 2013 (in millions): 
 
As of June 30, 2013
 
As of March 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
0.75% Convertible Senior Notes due 2016
$
564

 
$
659

 
$
559

 
$
614

The carrying value of the 0.75% Convertible Senior Notes due 2016 excludes the fair value of the equity conversion feature, which was classified as equity upon issuance, while the fair value is based on quoted market prices for the 0.75% Convertible Senior Notes due 2016, which includes the equity conversion feature. The fair value of the 0.75% Convertible Senior Notes due 2016 is classified as Level 2 within the fair value hierarchy. See Note 12 for additional information related to our 0.75% Convertible Senior Notes due 2016.
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets or accrued and other current liabilities, respectively, on our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward and option contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling and Canadian dollar. In addition, we utilize foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts generally have a contractual term of approximately three months or less and are transacted near month-end. At each quarter-end, the fair value of the foreign currency forward contracts generally is not significant. We do not use foreign currency option or foreign currency forward contracts for speculative or trading purposes.
Cash Flow Hedging Activities
Our foreign currency option and forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Condensed Consolidated Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income to interest and

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other income (expense), net, in our Condensed Consolidated Statements of Operations. During the three months ended June 30, 2013 and 2012, we reclassified an immaterial amount of losses into interest and other income (expense), net. Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows:
 
As of June 30, 2013
 
As of March 31, 2013
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Asset
 
Liability
 
 
Asset
 
Liability
Option contracts to purchase
$
40

 
$

 
$

 
$
84

 
$

 
$

Forward contracts to purchase
8

 

 

 

 

 

Total
$
48

 
$

 
$

 
$
84

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Option contracts to sell
$
184

 
$
5

 
$

 
$
149

 
$
6

 
$

Forward contracts to sell
47

 

 

 

 

 

Total
$
231

 
$
5

 
$

 
$
149

 
$
6

 
$

The net impact of the gains and losses from our cash flow hedging activities in our Condensed Consolidated Statements of Operations as of June 30, 2013 and June 30, 2012 was immaterial.
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Condensed Consolidated Statements of Operations. As of June 30, 2013, we had foreign currency forward contracts to purchase and sell approximately $391 million in foreign currencies. Of this amount, $241 million represented contracts to sell foreign currencies in exchange for U.S. dollars, $144 million to purchase foreign currency in exchange for U.S. dollars, and $6 million to sell foreign currency in exchange for British pounds sterling. As of March 31, 2013, we had foreign currency forward contracts to purchase and sell approximately $306 million in foreign currencies. Of this amount, $213 million represented contracts to sell foreign currencies in exchange for U.S. dollars, $87 million to purchase foreign currency in exchange for U.S. dollars, and $6 million to sell foreign currency in exchange for British pounds sterling. The fair value of our foreign currency forward contracts was measured using Level 2 inputs and was immaterial as of June 30, 2013 and March 31, 2013.

For the three months ended June 30, 2013, the effect of our balance sheet hedging activities in our Condensed Consolidated Statements of Operations was immaterial, and is included in interest and other income (expense), net. For the three months ended June 30, 2012, the effect of our balance sheet hedging activities resulted in an $8 million gain in our Condensed Consolidated Statements of Operations included in interest and other income (expense), net.


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(5) ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive income by component, net of related tax effects for the three months ended June 30, 2013 are as follows (in millions):

Unrealized Gains (Losses) on Available-for-Sale Securities
 
Unrealized Gains (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Balances as of March 31, 2013
$
(4
)
 
$

 
$
73

 
$
69

Other comprehensive income (loss) before reclassifications
(1
)
 
(2
)
 
(12
)
 
(15
)
Amounts reclassified from accumulated other comprehensive income

 
2

 

 
2

Net current-period other comprehensive income (loss)
(1
)
 

 
(12
)
 
(13
)
Balances as of June 30, 2013
$
(5
)
 
$

 
$
61

 
$
56

The effects on net income of amounts reclassified from accumulated other comprehensive income for the three months ended June 30, 2013 was immaterial and included in net revenue and research and development.

(6) BUSINESS COMBINATIONS
During the three months ended June 30, 2013, we completed one acquisition that did not have a significant impact on our Condensed Consolidated Financial Statements.
(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the three months ended June 30, 2013 are as follows (in millions):
 
As of
March 31, 2013
 
Activity
 
Effects of Foreign Currency Translation
 
As of
June 30, 2013
Goodwill
$
2,089

 
$
5

 
$
(4
)
 
$
2,090

Accumulated impairment
(368
)
 

 

 
(368
)
Total
$
1,721

 
$
5

 
$
(4
)
 
$
1,722

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. Goodwill is not amortized, but rather subject to at least an annual assessment for impairment by applying a fair value-based test. Our goodwill is fully attributed to the EA Labels segment.
Acquisition-related intangibles consisted of the following (in millions):
 
As of June 30, 2013
 
As of March 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Acquisition-
Related
Intangibles, Net
Developed and core technology
$
527

 
$
(339
)
 
$
188

 
$
527

 
$
(324
)
 
$
203

Trade names and trademarks
130

 
(101
)
 
29

 
130

 
(99
)
 
31

Registered user base and other intangibles
87

 
(85
)
 
2

 
87

 
(84
)
 
3

Carrier contracts and related
85

 
(74
)
 
11

 
85

 
(73
)
 
12

In-process research and development
4

 

 
4

 
4

 

 
4

Total
$
833

 
$
(599
)
 
$
234

 
$
833

 
$
(580
)
 
$
253


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Amortization of intangibles for the three months ended June 30, 2013 and 2012 are classified in the Condensed Consolidated Statement of Operations as follows (in millions):
 
Three Months Ended June 30,
 
2013
 
2012
Cost of product
$
9

 
$
9

Cost of service and other
6

 
6

Operating expenses
4

 
7

Total
$
19

 
$
22

Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from two to 14 years. As of June 30, 2013 and March 31, 2013, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 3.7 years and 3.9 years, respectively.
As of June 30, 2013, future amortization of acquisition-related intangibles that will be recorded in the Condensed Consolidated Statement of Operations is estimated as follows (in millions): 
Fiscal Year Ending March 31,
 
2014 (remaining nine months)
$
55

2015
66

2016
53

2017
32

2018
13

2019
8

Thereafter
7

Total
$
234


(8) RESTRUCTURING AND OTHER CHARGES
Restructuring and other restructuring plan-related information as of June 30, 2013 was as follows (in millions): 
 
Fiscal 2013
Restructuring
 
Fiscal 2011
Restructuring
 
Other
Restructurings and Reorganization
 
 
 
Workforce
 
Facilities-
related
 
Other
 
Other
 
Facilities-
related
 
Total
Balances as of March 31, 2012
$

 
$

 
$

 
$
75

 
$
3

 
$
78

Charges to operations
10

 
3

 
9

 
6

 
(1
)
 
27

Charges settled in cash
(10
)
 

 
(1
)
 
(24
)
 
(1
)
 
(36
)
Changes settled in non-cash

 
(1
)
 
(7
)
 

 
1

 
(7
)
Balances as of March 31, 2013

 
2

 
1

 
57

 
2

 
62

Charges to operations

 

 

 
1

 

 
1

Charges settled in cash

 
(1
)
 

 
(1
)
 

 
(2
)
Balances as of June 30, 2013
$

 
$
1

 
$
1

 
$
57

 
$
2

 
$
61


Fiscal 2013 Restructuring

In fiscal year 2013, we announced a restructuring plan to align our cost structure with our ongoing digital transformation. Under this plan, we reduced our workforce, terminated licensing agreements, and consolidated or closed various facilities. We completed all actions under this restructuring plan during fiscal year 2013.

Since the inception of the fiscal 2013 restructuring plan through June 30, 2013, we have incurred charges of $22 million, consisting of (1) $10 million in employee-related expenses, (2) $9 million related to license termination costs, and (3) $3 million related to the closure of certain of our facilities. Substantially all of these costs were settled in cash by March 31, 2013, with the exception of approximately $2 million of license and lease termination costs, which will be settled by August 2016. We do not expect to incur any additional restructuring charges under this plan.

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Fiscal 2011 Restructuring
In fiscal year 2011, we announced a plan focused on the restructuring of certain licensing and developer agreements in an effort to improve the long-term profitability of our packaged goods business. Under this plan, we amended certain licensing and developer agreements. To a much lesser extent, as part of this restructuring we had workforce reductions and facilities closures through March 31, 2011. Substantially all of these exit activities were completed by March 31, 2011.
Since the inception of the fiscal 2011 restructuring plan through June 30, 2013, we have incurred charges of $175 million, consisting of (1) $132 million related to the amendment of certain licensing agreements and other intangible asset impairment costs, (2) $31 million related to the amendment of certain developer agreements, and (3) $12 million in employee-related expenses. The $57 million restructuring accrual as of June 30, 2013 related to the fiscal 2011 restructuring is expected to be settled by June 2016. We currently estimate recognizing in future periods through June 2016, approximately $7 million for the accretion of interest expense related to our amended licensing and developer agreements, of which $3 million will be recognized during the remainder of fiscal year 2014. This interest expense will be included in restructuring and other charges in our Condensed Consolidated Statement of Operations.
Overall, including $175 million in charges incurred through June 30, 2013, we expect to incur total cash and non-cash charges between $180 million and $185 million by June 2016. These charges will consist primarily of (1) charges, including accretion of interest expense, related to the amendment of certain licensing and developer agreements and other intangible asset impairment costs (approximately $170 million) and (2) employee-related costs ($12 million).
Other Restructurings and Reorganization
We also engaged in various other restructurings and a reorganization based on management decisions made prior to fiscal 2011. We do not expect to incur any additional restructuring charges under these plans. The $2 million restructuring accrual as of June 30, 2013 related to our other restructuring plans is expected to be settled by September 2016.

(9) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product, and therefore, we are generally subject to development risk prior to the release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract. Royalty liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the next 12 months.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any impairments or losses determined before the launch of a product are charged to research and development expense. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment generally using undiscounted cash flows when impairment indicators exist. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated. During the three months ended June 30, 2013, we recognized impairment charges of $17 million on royalty-based assets. During the three months ended June 30, 2012, we recognized losses of $9 million on previously unrecognized minimum

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royalty-based commitments related to our fiscal 2013 restructuring. The losses related to restructuring and other plan-related activities are presented in Note 8.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions): 
 
As of
June 30, 2013
 
As of
March 31, 2013
Other current assets
$
102

 
$
63

Other assets
95

 
93

Royalty-related assets
$
197

 
$
156

At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors, and/or independent software developers, we recognize unpaid royalty amounts owed to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other current liabilities and other liabilities, consisted of (in millions): 
 
As of
June 30, 2013
 
As of
March 31, 2013
Accrued royalties
$
85

 
$
103

Other accrued expenses
21

 
21

Other liabilities
46

 
46

Royalty-related liabilities
$
152

 
$
170

As of June 30, 2013, $1 million of restructuring accruals related to the fiscal 2013 restructuring plan, and $57 million of restructuring accruals related to the fiscal 2011 restructuring plan are included in royalty-related liabilities in the table above. See Note 8 for details of restructuring and other restructuring plan-related activities and Note 10 for the details of our accrued and other current liabilities.
In addition, as of June 30, 2013, we were committed to pay approximately $1,276 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 13 for further information on our developer and licensor commitments.

(10) BALANCE SHEET DETAILS
Inventories
Inventories as of June 30, 2013 and March 31, 2013 consisted of (in millions): 
 
As of
June 30, 2013
 
As of
March 31, 2013
Raw materials and work in process
$

 
$
1

Finished goods
41

 
41

Inventories
$
41

 
$
42


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Property and Equipment, Net
Property and equipment, net, as of June 30, 2013 and March 31, 2013 consisted of (in millions): 
 
As of
June 30, 2013
 
As of
March 31, 2013
Computer equipment and software
$
673

 
$
660

Buildings
332

 
336

Leasehold improvements
130

 
129

Office equipment, furniture and fixtures
71

 
72

Land
63

 
64

Warehouse equipment and other
10

 
10

Construction in progress
9

 
8

 
1,288

 
1,279

Less: accumulated depreciation
(751
)
 
(731
)
Property and equipment, net
$
537

 
$
548

Depreciation expense associated with property and equipment was $30 million and $28 million for the three months ended June 30, 2013 and 2012, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of June 30, 2013 and March 31, 2013 consisted of (in millions): 
 
As of
June 30, 2013
 
As of
March 31, 2013
Other accrued expenses
$
257

 
$
338

Accrued compensation and benefits
163

 
217

Accrued royalties
85

 
103

Deferred net revenue (other)
83

 
79

Accrued and other current liabilities
$
588

 
$
737

Deferred net revenue (other) includes the deferral of subscription revenue, deferrals related to our Switzerland distribution business, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred Net Revenue (Online-Enabled Games)
Deferred net revenue (online-enabled games) was $590 million and $1,044 million as of June 30, 2013 and March 31, 2013, respectively. Deferred net revenue (online-enabled games) generally includes the unrecognized revenue from bundled sales of certain online-enabled games for which we do not have VSOE for the obligation to provide unspecified updates. We recognize revenue from the sales of online-enabled games for which we do not have VSOE for the unspecified updates on a straight-line basis, generally over an estimated six-month period beginning in the month after shipment. However, we expense the cost of revenue related to these transactions during the period in which the product is delivered (rather than on a deferred basis).

(11) INCOME TAXES
We estimate our annual effective tax rate at the end of each quarterly period, and we record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. In addition, jurisdictions with a projected loss for the year, jurisdictions with a year-to-date loss where no tax benefit can be recognized, and jurisdictions where we are unable to estimate an annual effective tax rate are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is

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not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results, particularly in light of the economic environment. Therefore, cumulative losses weigh heavily in the overall assessment. Based on the assumptions and requirements noted above, we have recorded a valuation allowance against most of our U.S. deferred tax assets. In addition, we expect to provide a valuation allowance on future U.S. tax benefits until we can sustain a level of profitability or until other significant positive evidence arises that suggest that these benefits are more likely than not to be realized.

The provision for income taxes reported for the three months ended June 30, 2013 is based on our projected annual effective tax rate for fiscal year 2014, and also includes certain discrete tax benefits recorded during the period. Our effective tax rate for the three months ended June 30, 2013 was a tax expense of 2.6 percent, as compared to a tax expense of 4.3 percent, for the same period in fiscal year 2013. The effective tax rate for the three months ended June 30, 2013 and June 30, 2012 differs from the statutory rate of 35.0 percent primarily due to the utilization of U.S. deferred tax assets which were subject to a valuation allowance and non-U.S. profits subject to a reduced or zero tax rate. The effective tax rate for the three months ended June 30, 2013 differs from the same period in fiscal year 2012 primarily due to tax benefits related to the expiration of statutes of limitation recorded during the three months ended June 30, 2013.
During the three months ended June 30, 2013, we recorded a net decrease of $2 million in gross unrecognized tax benefits. The total gross unrecognized tax benefits as of June 30, 2013 is $295 million, of which approximately $46 million is offset by prior cash deposits to tax authorities for issues pending resolution. A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of June 30, 2013, if recognized, approximately $102 million of the unrecognized tax benefits would affect our effective tax rate and approximately $180 million would result in adjustments to deferred tax assets with corresponding adjustments to the valuation allowance.
During the three months ended June 30, 2013, we recorded a net increase in taxes of $1 million for accrued interest and penalties related to tax positions taken on our tax returns. As of June 30, 2013, the combined amount of accrued interest and penalties related to uncertain tax positions included in income tax obligations on our Condensed Consolidated Balance Sheet was approximately $24 million.
The IRS has completed its examination of our federal income tax returns through fiscal year 2008. As of June 30, 2013, the IRS had proposed certain adjustments to our tax returns. The effects of these adjustments have been considered in estimating our future obligations for unrecognized tax benefits and are not expected to have a material impact on our financial position or results of operations. Some of these proposed adjustments are pending resolution by the Appeals division of the IRS. Furthermore, the IRS is currently examining our returns for fiscal years 2009 through 2011.
We are also currently under income tax examination in Canada for fiscal years 2004 and 2005, in Germany for fiscal years 2008 through 2012, and in Italy for fiscal years 2008 through 2011. We remain subject to income tax examination for several other jurisdictions including Canada for fiscal years after 2005, in France for fiscal years after 2011, in Germany for fiscal years after 2012, in the United Kingdom for fiscal years after 2011, and in Switzerland for fiscal years after 2007.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $80 million of the reserves for unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect our income tax provision (benefit) and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

(12) FINANCING ARRANGEMENTS
0.75% Convertible Senior Notes Due 2016
In July 2011, we issued $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016 (the “Notes”). The Notes are senior unsecured obligations which pay interest semiannually in arrears at a rate of 0.75 percent per annum on January 15 and July 15 of each year, beginning on January 15, 2012 and will mature on July 15, 2016, unless earlier purchased or converted in accordance with their terms prior to such date. The Notes are senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Notes.

The Notes are convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.74 per

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share). Upon conversion of the Notes, holders will receive cash up to the principal amount of each Note, and any excess conversion value will be delivered in shares of our common stock. Prior to April 15, 2016, the Notes are convertible only if (1) the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 percent of the conversion price ($41.26 per share) on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of notes falls below 98 percent of the last reported sale price of our common stock multiplied by the conversion rate on each trading day; or (3) specified corporate transactions, including a change in control, occur. On or after April 15, 2016, a holder may convert any of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate is subject to customary anti-dilution adjustments (for example, certain dividend distributions or tender or exchange offer of our common stock), but will not be adjusted for any accrued and unpaid interest. The Notes are not redeemable prior to maturity except for specified corporate transactions and events of default, and no sinking fund is provided for the Notes. The Notes do not contain any financial covenants.
We separately account for the liability and equity components of the Notes. The carrying amount of the equity component representing the conversion option is equal to the fair value of the Convertible Note Hedge, as described below, which is a substantially identical instrument and was purchased on the same day as the Notes. The carrying amount of the liability component was determined by deducting the fair value of the equity component from the par value of the Notes as a whole, and represents the fair value of a similar liability that does not have an associated convertible feature. A liability of $525 million as of the date of issuance was recognized for the principal amount of the Notes representing the present value of the Notes’ cash flows using a discount rate of 4.54 percent. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for $15 million of issuance costs related to the Notes issuance, we allocated $13 million to the liability component and $2 million to the equity component. Debt issuance costs attributable to the liability component are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
The carrying values of the liability and equity components of the Notes are reflected in our Condensed Consolidated Balance Sheet as follows (in millions): 
  
As of
June 30, 2013
 
As of
March 31, 2013
Principal amount of Notes
$
633

 
$
633

Unamortized discount of the liability component
(69
)
 
(74
)
Net carrying amount of Notes
$
564

 
$
559

Equity component, net
$
105

 
$
105


As of June 30, 2013, the remaining life of the Notes is 3.0 years.
Convertible Note Hedge and Warrants Issuance
In addition, in July 2011, we entered into privately negotiated convertible note hedge transactions (the “Convertible Note Hedge”) with certain counterparties to reduce the potential dilution with respect to our common stock upon conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock at a strike price of $31.74, which corresponds to the conversion price of the Notes and is equal to the number of shares of our common stock that notionally underlie the Notes. As of June 30, 2013, we have not purchased any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note Hedge, which was recorded as an equity transaction.
Separately, in July 2011 we also entered into privately negotiated warrant transactions with the certain counterparties whereby we sold to independent third parties warrants (the “Warrants”) to acquire, subject to customary anti-dilution adjustments that are substantially the same as the anti-dilution provisions contained in the Notes, up to 19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that notionally underlie the Notes), with a strike price of $41.14. The Warrants could have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeds $41.14 on or prior to the expiration date of the Warrants. We received proceeds of $65 million from the sale of the Warrants.

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Credit Facility
On August 30, 2012, we entered into a $500 million senior unsecured revolving credit facility with a syndicate of banks. The credit facility terminates on February 29, 2016 and contains an option to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $250 million in additional commitments for revolving loans. Proceeds of loans made under the credit facility may be used for general corporate purposes.

The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our consolidated leverage ratio for the preceding fiscal quarter. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on February 29, 2016.

The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, dispose of all or substantially all assets and pay dividends or make distributions, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a capitalization ratio and maintain a minimum level of total liquidity and a minimum level of domestic liquidity.

The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, bankruptcy and insolvency defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the credit agreement, an obligation by any guarantors to repay the obligations in full and an increase in the applicable interest rate.

As of June 30, 2013, no amounts were outstanding under the credit facility. During the three months ended September 30, 2012, we paid $2 million of debt issuance costs in connection with obtaining this credit facility. These costs are deferred and are being amortized to interest expense over the 3.5 years term of the credit facility.   

The following table summarizes our interest expense recognized for the three months ended June 30, 2013 and 2012 that is included in interest and other income (expense), net on our Condensed Consolidated Statements of Operations (in millions): 
 
Three Months Ended June 30,
 
2013
 
2012
Amortization of debt discount
$
5

 
$
5

Amortization of debt issuance costs
1

 
1

Coupon interest expense
1

 
1

Total interest expense
$
7

 
$
7


(13) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of June 30, 2013, we leased certain facilities, furniture and equipment under non-cancelable operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include: FIFA, FIFPRO Foundation, FAPL (Football Association Premier League Limited), and DFL Deutsche

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Fußball Liga GmbH (German Soccer League) (professional soccer); National Basketball Association (professional basketball); PGA TOUR, Tiger Woods and Augusta National (professional golf); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties, PLAYERS Inc., and Red Bear Inc. (professional football); Collegiate Licensing Company (collegiate football); Zuffa, LLC (Ultimate Fighting Championship); ESPN (content in EA SPORTS games); Hasbro, Inc. (most of Hasbro’s toy and game intellectual properties); and Disney (Star Wars). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.

The following table summarizes our minimum contractual obligations as of June 30, 2013 (in millions): 
 
 
 
Fiscal Year Ending March 31,
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Remaining
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
nine mos.)
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Unrecognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developer/licensor commitments
$
1,276

 
$
114

 
$
186

 
$
280

 
$
105

 
$
93

 
$
62

 
$
436

Marketing commitments
219

 
29

 
50

 
35

 
20

 
20

 
21

 
44

Operating leases
161

 
38

 
43

 
33

 
18

 
12

 
8

 
9

0.75% Convertible Senior Notes due 2016 interest (a)
17

 
5

 
5

 
5

 
2

 

 

 

Other purchase obligations
32

 
20

 
10

 
2

 

 

 

 

Total unrecognized commitments
1,705

 
206

 
294

 
355

 
145

 
125

 
91

 
489

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.75% Convertible Senior Notes due 2016 principal (a)
633

 

 

 

 
633

 

 

 

Licensing and lease obligations (b)
67

 
21

 
17

 
5

 
22

 
1

 
1

 

Total recognized commitments
700

 
21

 
17

 
5

 
655

 
1

 
1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commitments
$
2,405

 
$
227

 
$
311

 
$
360

 
$
800

 
$
126

 
$
92

 
$
489

(a)
Included in the $17 million coupon interest on the 0.75% Convertible Senior Notes due 2016 is $2 million of accrued interest recognized as of June 30, 2013. We will be obligated to pay the $632.5 million principal amount of the 0.75% Convertible Senior Notes due 2016 in cash and any excess conversion value in shares of our common stock upon redemption of the Notes at maturity on July 15, 2016 or upon earlier redemption. The $632.5 million principal amount excludes $69 million of unamortized discount of the liability component. See Note 12 for additional information regarding our 0.75% Convertible Senior Notes due 2016.
(b)
See Note 8 for additional information regarding recognized commitments resulting from our restructuring plans. Lease commitments have not been reduced for approximately $7 million due in the future from third parties under non-cancelable sub-leases.
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Condensed Consolidated Financial Statements. In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of June 30, 2013; however, certain payment obligations may be accelerated depending on the performance of our operating results.
In addition to what is included in the table above, as of June 30, 2013, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $256 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Also, in addition to what is included in the table above as of June 30, 2013, primarily in connection with our PopCap, KlickNation, and Chillingo acquisitions, we may be required to pay an additional $560 million of cash consideration based upon the achievement of certain performance milestones through March 31, 2015. As of June 30, 2013, we have accrued $47

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million of contingent consideration on our Condensed Consolidated Balance Sheet representing the estimated fair value of the contingent consideration.
Legal Proceedings
In June 2008, Geoffrey Pecover filed an antitrust class action in the United States District Court for the Northern District of California, alleging that EA obtained an illegal monopoly in a discreet antitrust market that consists of “league-branded football simulation video games” by bidding for, and winning, exclusive licenses with the NFL, Collegiate Licensing Company and Arena Football League. In December 2010, the district court granted the plaintiffs’ request to certify a class of plaintiffs consisting of all consumers who purchased EA’s Madden NFL, NCAA Football or Arena Football video games after 2005. In May 2012, the parties reached a settlement in principle to resolve all claims related to this action. As a result, we recognized a $27 million accrual for the fourth quarter of fiscal 2012 associated with the potential settlement. In May 2013, the district court granted its final approval of the settlement, following which we paid $27 million into a settlement fund. The district court's decision has been appealed by a class member. None of the $27 million paid into the settlement fund will be disbursed until this appeal is resolved.
In March 2011, Robin Antonick filed a complaint in the United States District Court for the Northern District of California, alleging that he wrote the source code for the original John Madden Football game published by EA in 1988 and that EA used certain parts of that source code in later editions in the Madden franchise without compensating him. On July 23, 2013, a jury found in favor of Mr. Antonick with respect to John Madden Football games released on the Sega Genesis platform between 1990 and 1996. Mr. Antonick seeks compensatory damages for those games in the amount of approximately $3.5 million, plus an additional $8 million in prejudgment interest. The district court will decide the amount of damages owed by EA to Mr. Antonick. We intend to appeal the verdict.
We are a defendant in several actions that allege we misappropriated the likenesses of various college athletes in certain of our college-themed sports games.
We are defending a putative class action lawsuit brought by Ryan Hart, a former college football player, in the United States District Court for the District of New Jersey in June 2009, which alleges that we misappropriated his likeness in our college-themed football game. The complaint seeks actual damages and other unspecified damages, which have not been quantified. In September 2011, the district court granted our motion to dismiss the complaint. On May 21, 2013, the Third Circuit Court of Appeal reversed the district court's decision and remanded the case back to the district court.
The In re NCAA Student-Athlete Name & Likeness Licensing litigation pending in United States District Court for the Northern District of California involves two groups of common claims brought by several different former collegiate student-athletes in 2009. These various actions were consolidated into one action in February 2010. The first group of claims is a class action against us, the NCAA and the Collegiate Licensing Company (CLC) alleging that our college-themed videogames misappropriated the likenesses of collegiate student-athletes without their authorization. This group of claims seeks actual damages, statutory damages and other unspecified damages, which have not been quantified. On July 31, 2013, the Ninth Circuit Court of Appeals affirmed the trial court’s denial of our motion to strike the complaint. We intend to appeal this decision. The second group of claims is a federal antitrust class action against us, the NCAA and the CLC that challenges NCAA/CLC licensing practices and the NCAA By-Laws and regulations. This group of claims seeks unspecified damages, which have not been quantified. In June 2013, the plaintiffs in this second group of claims have asked the district court to certify the case as a class action. The district court has not ruled on their request.
We are also subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Condensed Consolidated Financial Statements.
(14) STOCK-BASED COMPENSATION
Valuation Assumptions
We are required to estimate the fair value of share-based payment awards on the date of grant. We recognize compensation costs for stock-based payment awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest.

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We determine the fair value of our share-based payment awards as follows:

Restricted Stock Units, Restricted Stock, and Performance-Based Restricted Stock Units. The fair value of restricted stock units, restricted stock, and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant. Performance-based restricted stock units include grants made (1) to certain members of executive management primarily granted in fiscal year 2009 and (2) in connection with certain acquisitions.

Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determined using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”), respectively, is determined using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends.
The determination of the fair value of market-based restricted stock units, stock options and ESPP is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes.
There were no significant stock options granted and no ESPP shares issued during the three months ended June 30, 2013.
The estimated assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows: 
 
Three Months Ended June 30,
 
2013
 
2012
Risk-free interest rate
0.4
%
 
0.2 - 0.4%

Expected volatility
16 - 58%

 
17 - 116%

Weighted-average volatility
31
%
 
36
%
Expected dividends
None

 
None

Stock-Based Compensation Expense
Employee stock-based compensation expense recognized during the three months ended June 30, 2013 and 2012 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment to stock-based compensation expense will be recognized at that time.
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock, restricted stock units and the ESPP included in our Condensed Consolidated Statements of Operations (in millions):
 
Three Months Ended June 30,
 
2013
 
2012
Cost of revenue
$

 
$
1

Research and development (a)
20

 
21

Marketing and sales (a) 
7

 
7

General and administrative (a)
6

 
10

Stock-based compensation expense
$
33

 
$
39

(a)
During the fourth quarter of fiscal year 2013, we reviewed our operating expenses and reclassified certain amounts, primarily headcount and facilities costs, to align with our current operating structure.  As a result, we also reclassified the related prior year stock-based compensation expense amounts within our Condensed Consolidated Statements of Operations for comparability purposes. These reclassifications did not affect the Company’s total stock-based compensation expense.

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During the three months ended June 30, 2013 and 2012, we did not recognize any provision for or benefit from income taxes related to our stock-based compensation expense.
As of June 30, 2013, our total unrecognized compensation cost related to stock options was $4 million and is expected to be recognized over a weighted-average service period of 2.1 years. As of June 30, 2013, our total unrecognized compensation cost related to restricted stock and restricted stock units (collectively referred to as “restricted stock rights”) was $330 million and is expected to be recognized over a weighted-average service period of 2.0 years. Of the $330 million of unrecognized compensation cost, $23 million relates to market-based restricted stock units.
Stock Options
The following table summarizes our stock option activity for the three months ended June 30, 2013:
 
Options
(in thousands)
 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic Value
(in millions)
Outstanding as of March 31, 2013
7,802

 
$
34.17

 
 
 
 
Granted
4

 
17.30

 
 
 
 
Exercised
(1,227
)
 
17.55

 
 
 
 
Forfeited, cancelled or expired
(383
)
 
46.39

 
 
 
 
Outstanding as of June 30, 2013
6,196

 
36.70

 
4.11
 
$
13

Vested and expected to vest
6,165

 
36.79

 
4.08
 
$
12

Exercisable as of June 30, 2013
5,844

 
37.89

 
3.89
 
$
10

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of June 30, 2013, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.
Restricted Stock Rights
The following table summarizes our restricted stock rights activity, excluding performance-based and market-based restricted stock unit activity discussed below, for the three months ended June 30, 2013:
 
Restricted Stock
Rights
(in thousands)
 
Weighted-
Average Grant
Date Fair Value
Balance as of March 31, 2013
15,918

 
$
16.85

Granted
5,980

 
22.31

Vested
(4,424
)
 
17.46

Forfeited or cancelled
(637
)
 
16.90

Balance as of June 30, 2013
16,837

 
18.63

The weighted-average grant date fair values of restricted stock rights granted during the three months ended June 30, 2013 and 2012 were $22.31 and $12.53, respectively.
Performance-Based Restricted Stock Units
The following table summarizes our performance-based restricted stock unit activity for the three months ended June 30, 2013: 
 
Performance-
Based Restricted
Stock Units
(in thousands)
 
Weighted-
Average Grant
Date Fair Value
Balance as of March 31, 2013
1,324

 
$
51.54

Vested
(36
)
 
15.39

Forfeited or cancelled
(125
)
 
49.60

Balance as of June 30, 2013
1,163

 
52.87


The performance period for substantially all of the performance-based restricted stock units ended on June 30, 2013. These awards were cancelled subsequent to quarter end.

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Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be received at vesting will range from zero percent to 200 percent of the target number of stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over a three year period. We present shares granted at 100 percent of target of the number of stock units that may potentially vest. The maximum number of common shares that could vest is approximately 1.1 million for market-based restricted stock units granted during the three months ended June 30, 2013. As of June 30, 2013, the maximum number of shares that could vest is approximately 2.1 million for market-based restricted stock units outstanding.
The following table summarizes our market-based restricted stock unit activity for the three months ended June 30, 2013.
 
Market-Based
Restricted Stock
Units
(in thousands)
 
Weighted-
Average Grant
Date Fair Value
Balance as of March 31, 2013
925

 
$
19.16

Granted
555

 
29.52

Vested
(304
)
 
16.01

Forfeited or cancelled
(114
)
 
24.93

Balance as of June 30, 2013
1,062

 
24.86

The weighted-average grant date fair values of market-based restricted stock units granted during the three months ended June 30, 2013 and 2012 were $29.52 and $10.45, respectively.
Stock Repurchase Program
In February 2011, our Board of Directors authorized a program to repurchase up to $600 million of our common stock over the following 18 months. We completed that program in April 2012. We repurchased approximately 32 million shares in the open market under that program, including pursuant to pre-arranged stock trading plans. During three months ended June 30, 2012, we repurchased and retired approximately 4 million shares of our common stock for approximately $71 million under that program.

In July 2012, our Board of Directors authorized a program to repurchase up to $500 million of our common stock. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans.  The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time. During fiscal year 2013, we repurchased and retired approximately 22 million shares of our common stock for approximately $278 million under this program.
During the three months ended June 30, 2013, we did not repurchase any shares of our common stock.
Annual Meeting of Stockholders
At our Annual Meeting of Stockholders, held on July 31, 2013, our stockholders approved (a) amendments to our 2000 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares of common stock authorized under the Equity Plan by 18 million shares, and to increase the limit on the number of shares that may be covered by equity awards to new employees under the Equity Plan from a maximum of 2 million shares in the fiscal year of hire to 4 million shares in the fiscal year of hire, and (b) an amendment to the ESPP to increase the number of shares authorized under the ESPP by 7 million shares.

(15) NET INCOME PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income 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, restricted stock units, common stock through our ESPP, warrants,

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and other convertible securities using the treasury stock method.
 
Three Months Ended June 30,
(In millions, except per share amounts)
2013
 
2012
Net income
$
222

 
$
201

Shares used to compute net income per share:
 
 
 
Weighted-average common stock outstanding - basic
304

 
317

Dilutive potential common shares
8

 
3

Weighted-average common stock outstanding - diluted
312

 
320

Net income per share:
 
 
 
Basic
$
0.73

 
$
0.63

Diluted
$
0.71

 
$
0.63

 
Potentially dilutive shares of common stock related to our 0.75% Convertible Senior Notes due 2016 issued during the fiscal year ended March 31, 2012, which have a conversion price of $31.74 per share and the associated Warrants, which have a conversion price of $41.14 per share were excluded from the computation of Diluted EPS for the three months ended June 30, 2013 and 2012 as their inclusion would have had an antidilutive effect resulting from the conversion price. The associated Convertible Note Hedge was excluded from the calculation of diluted shares as the impact is always considered antidilutive since the call option would be exercised by us when the exercise price is lower than the market price. See Note 12 for additional information related to our 0.75% Convertible Senior Notes due 2016 and related Convertible Note Hedge and Warrants.

(16) SEGMENT INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Executive Chairman, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.

Our business is currently organized around our five labels, EA Games, EA SPORTS, Maxis, PopCap and All Play. Our CODM regularly reviews the aggregated results of the five labels to assess overall performance and allocate resources. All five of the labels comprise our operating segment (the “EA Labels” segment) as shown below. To a lesser degree, our CODM also reviews results based on geographic performance.
The following table summarizes the financial performance of the EA Labels segment and a reconciliation of the EA Labels segment’s income to our consolidated operating loss for the three months ended June 30, 2013 and 2012 (in millions):
 
Three Months Ended June 30,
 
2013
 
2012
EA Labels segment:
 
 
 
Net revenue before revenue deferral
$
482

 
$
467

Depreciation and amortization
(13
)
 
(16
)
Other expenses
(442
)
 
(461
)
EA Labels segment profit (loss)
27

 
(10
)
Reconciliation to consolidated operating income:
 
 
 
Other:
 
 
 
Revenue deferral
(355
)
 
(315
)
Recognition of revenue deferral
809

 
779

Other net revenue
13

 
24

Depreciation and amortization
(36
)
 
(34
)
Acquisition-related contingent consideration
(7
)
 
20

Restructuring and other charges
(1
)
 
(27
)
Stock-based compensation
(33
)
 
(39
)
Other expenses
(184
)
 
(183
)
Consolidated operating income
$
233

 
$
215


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EA Labels segment profit (loss) differs from consolidated operating income primarily due to the exclusion of (1) certain corporate and other functional costs that are not allocated to EA Labels, (2) the deferral of certain net revenue related to online-enabled games (see Note 10 for additional information regarding deferred net revenue (online-enabled games)), and (3) our Switzerland distribution revenue and expenses that is not allocated to EA Labels. Our CODM reviews assets on a consolidated basis and not on a segment basis.
Information about our total net revenue by revenue composition for the three months ended June 30, 2013 and 2012 is presented below (in millions): 
 
Three Months Ended June 30,
 
2013
 
2012
Publishing and other
$
452

 
$
592

Wireless, Internet-derived, advertising (digital)
482

 
342

Distribution
15

 
21

Net revenue
$
949

 
$
955

Information about our operations in North America and internationally as of and for the three months ended June 30, 2013 and 2012 is presented below (in millions): 
 
Three Months Ended June 30,
 
2013
 
2012
Net revenue from unaffiliated customers
 
 
 
North America
$
395

 
$
450

International
554

 
505

Net revenue
$
949

 
$
955

 
 
As of June 30,
 
2013
 
2012
Long-lived assets
 
 
 
North America
$
2,001

 
$
2,123

International
492

 
498

Total
$
2,493

 
$
2,621

We attribute net revenue from external customers to individual countries based on the location of the legal entity that sells the products and/or services.  Note that revenue attributed to the legal entity that makes the sale is often not the country where the consumer resides. For example, revenue generated in Switzerland includes revenue derived from Internet game downloads by consumers who reside outside of Switzerland, and some of these consumers reside outside of Europe. Revenue generated in Switzerland during the three months ended June 30, 2013 and 2012 represented $403 million and $273 million, or 43 percent and 29 percent, of our total net revenue, respectively. Revenue generated in the United States represents over 99 percent of our total North America net revenue. There were no other countries with net revenue greater than 10 percent.
Our direct sales to GameStop Corp. represented approximately 11 percent of total net revenue for the three months ended June 30, 2012. Our direct sales to GameStop Corp. did not exceed 10 percent of total net revenue during the three months ended June 30, 2013.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Electronic Arts Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Electronic Arts Inc. and subsidiaries (the Company) as of June 29, 2013 and the related condensed consolidated statements of operations, comprehensive income, and cash flows for the three‑month period ended June 29, 2013 and June 30, 2012. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Electronic Arts Inc. and subsidiaries as of March 30, 2013, and the related consolidated statements of operations, comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated May 22, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 30, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/   KPMG LLP
Santa Clara, California
August 2, 2013

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, made in this Quarterly Report are forward looking. Examples of forward-looking statements include statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie the forward-looking statements. We use words such as “anticipate,” “believe,” “expect,” “intend,” “estimate” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Our actual results could differ materially from those in the forward-looking statements. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed in this report under the heading “Risk Factors” in Part II, Item 1A, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 as filed with the Securities and Exchange Commission (“SEC”) on May 22, 2013 and in other documents we have filed with the SEC.

OVERVIEW
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers is important in order to understand our results for the three months ended June 30, 2013, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” “Risk Factors,” and the Condensed Consolidated Financial Statements and related Notes. Additional information can be found in the “Business” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 as filed with the SEC on May 22, 2013 and in other documents we have filed with the SEC.
About Electronic Arts
We develop, market, publish and distribute game software content and services that can be played by consumers on a variety of platforms, including video game consoles (such as the Sony PLAYSTATION 3 and Microsoft Xbox 360), personal computers, mobile devices (such as the Apple iPhone and Google Android compatible phones), tablets and electronic readers (such as the Apple iPad and Amazon Kindle), and the Internet. Our ability to publish games across multiple platforms, through multiple distribution channels, and directly to consumers (online and wirelessly) has been, and will continue to be, a cornerstone of our product strategy. We have generated substantial growth in new business models and alternative revenue streams (such as subscription, micro-transactions, and advertising) based on the continued expansion of our online and wireless product and service offerings. Some of our games are based on our wholly-owned intellectual property (e.g., Battlefield, Mass Effect, Need for Speed, The Sims, Bejeweled, and Plants v. Zombies), and some of our games are based on content that we license from others (e.g., FIFA and Madden NFL). Our goal is to turn our core intellectual properties into year-round businesses available on a range of platforms. Our products and services may be purchased through physical and online retailers, platform providers such as console manufacturers and mobile carriers via digital downloads, as well as directly through our own distribution platform, including online portals such as Origin.
Financial Results
Total net revenue for the three months ended June 30, 2013 was $949 million, a decrease of $6 million, or 1 percent, as compared to the three months ended June 30, 2012. At June 30, 2013, deferred net revenue associated with sales of online-enabled games decreased by $454 million as compared to March 31, 2013, directly increasing the amount of reported net revenue during the three months ended June 30, 2013. At June 30, 2012, deferred net revenue associated with sales of online-enabled games decreased by $464 million as compared to March 31, 2012, directly increasing the amount of reported net revenue during the three months ended June 30, 2012. Without this change in deferred net revenue, reported net revenue would have increased by approximately $4 million, or 1 percent, during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. Net revenue for the three months ended June 30, 2013 was driven by FIFA 2013, Battlefield 3, and Need for Speed Most Wanted.


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Net income for the three months ended June 30, 2013 was $222 million as compared to $201 million for the three months ended June 30, 2012. Diluted earnings per share for the three months ended June 30, 2013 was $0.71 as compared to a diluted earnings per share of $0.63 for the three months ended June 30, 2012. Net income increased for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 primarily as a result of (1) a $5 million increase in gross profit, (2) a $40 million decrease in operating expenses, excluding acquisition-related contingent consideration charges, and (3) a $3 million decrease in the provision for income taxes. This increase in net income was partially offset by an increase of $27 million of acquisition-related contingent consideration charges.
Trends in Our Business

Next-generation Console Systems. Both Microsoft and Sony have announced their plans to release new video game console systems in November 2013. EA is investing in products and services for these next-generation consoles. In the near term, we expect to continue to develop and market products and services for current-generation consoles including the Xbox 360 and PLAYSTATION 3 while also developing products and services for next-generation console systems. The success of our products and services for these next generation consoles depends in part on the commercial success and adequate supply of these new consoles, our ability to accurately predict which platforms will be successful in the marketplace, and our ability to develop commercially successful products and services for these platforms.
Digital Content Distribution and Services.    Consumers are spending an ever-increasing portion of their money and time on interactive entertainment that is accessible online, or through mobile digital devices such as smart phones, or through social networks such as Facebook. We provide a variety of online-delivered products and services including those available through our Origin platform. Many of our games that are available as packaged goods products are also available through direct online download via the Internet. We also offer online-delivered content and services that are add-ons or related to our packaged goods products such as additional game content or enhancements of multiplayer services. Further, we provide other games, content and services that are available only via electronic delivery, such as Internet-only games and game services, and games for mobile devices.
We significantly increased the revenue that we derive from wireless, Internet-derived and advertising (digital) products and services from $1,159 million in fiscal year 2012 to $1,440 million in fiscal year 2013 and we expect this portion of our business to continue to grow in fiscal 2014 and beyond.
Wireless and Internet Platforms; Casual and Mobile Games.    Advances in technology have resulted in a variety of platforms for interactive entertainment. Examples inc