Electronic Arts 2006 Annual Report Download - page 25

PROPOSAL 2. APPROVAL OF THE EXCHANGE PROGRAM
On June 19, 2006, our Board of Directors authorized, subject to stockholder approval, a voluntary program
(the ""Exchange Program'') that, if implemented, will permit our eligible employees to exchange certain
outstanding stock options that are signiÑcantly ""underwater'' for a lesser number of shares of restricted
stock or restricted stock units to be granted under our 2000 Equity Incentive Plan, provided that the
proposed amendments to the Equity Plan are approved by the stockholders (see Proposal 3. Amendments
to the 2000 Equity Incentive Plan). The Exchange Program will be open to all employees of the Company
and any of our subsidiaries designated for participation by the Compensation Committee of the Board of
Directors. However, members of the Board of Directors and our Named Executive OÇcers will not be
eligible to participate. Options eligible for the Exchange Program (""Eligible Options'') will be those
having exercise prices that are at least 115% of the average closing price of our Common Stock as
reported on the NASDAQ National Market for the Ñve business days preceding the date on which we
commence the program. As a prerequisite to the implementation of the Exchange Program, stockholders
must not only approve this proposal, but also approve the proposed amendment to the Equity Plan
described in Proposal 3 below.
Eligible employees who elect to participate in the Exchange Program may surrender one or more
outstanding grants of Eligible Options and receive in exchange awards for a lesser number of shares of
Common Stock. These awards may consist either of shares of restricted stock or restricted stock units,
subject to determination within the discretion of the Compensation Committee. In making this
determination, the Compensation Committee will take into account factors including tax and other laws
applicable to an exchange of options for such awards in each of the tax jurisdictions of our participating
employees. Restricted stock is an award of shares of Common Stock that remain subject to forfeiture upon
termination of employment until they have vested following a speciÑed period of employment. Restricted
Proxy Statement
stock units are rights to receive shares of Common Stock on speciÑed future dates when those rights have
vested following a required period of employment. In this proposal, we refer to both shares of restricted
stock and restricted stock units as ""restricted stock rights.'' The weighted average ratio of shares subject to
Eligible Options cancelled to restricted stock rights issued will be approximately 3.3-to-1 and is expected
to range from 3-to-1 to 4-to-1, subject to adjustment as further described below. These exchange ratios
have been selected to result in the issuance of restricted stock rights that have a value, as of the closing
date of the Exchange Program (""Exchange Date''), that is equal to or less than the value, determined
using the Black-Scholes option valuation model, of the options to be cancelled in exchange for the
restricted stock rights. The restricted stock rights will be subject to vesting schedules ranging from a
minimum of two years to a maximum of four years measured from August 1, 2006, depending on the
extent to which the Eligible Options exchanged were vested (or, in the case of Eligible Options that cliÅ
vest in their entirety after a minimum of three years, if at least 50% or more of the time required to vest
has elapsed) prior to their cancellation.
Reasons for the Exchange Program
The Company has granted stock options periodically to a substantial portion of its employees and those of
its subsidiaries. The Company has also assumed stock options in connection with certain acquisitions,
including stock options granted by JAMDAT Mobile Inc., which was acquired by the Company in
February 2006. Each stock option award speciÑes the exercise price that the employee must pay to
purchase shares of Common Stock when the option is exercised. The exercise price per share is set at the
closing market price of a share of our Common Stock on the date the option is granted. Employees
receive value from their options only by exercising their rights under the options to purchase shares of
Common Stock and subsequently selling the purchased shares at a price that exceeds their purchase price.
Restore Retention Incentives. Like many companies, our stock price has experienced signiÑcant volatility
during the last several years. As a result, many of our employees hold options with exercise prices
signiÑcantly higher than the current market price of our Common Stock. On June 19, 2006, options to
purchase 18,463,724 shares held by our employees (other than our Named Executive OÇcers and non-
employee directors), representing approximately 60% of outstanding options, had exercise prices greater
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