Electronic Arts 2006 Annual Report Download - page 28

exchange under the Exchange Program if the Ñve-business-day average closing price of our Common
Stock immediately preceding the commencement of the Exchange Program were equal to $41.21. The
Compensation Committee will retain the discretion to adjust the threshold exercise price of options eligible
to participate in the Exchange Program (using the Ñve-business-day average closing price of our Common
Stock immediately preceding the commencement of the Exchange Program) if there is a signiÑcant
change in the market price of our Common Stock preceding the commencement of the Exchange Program
in comparison to the average market price used in determining the exchange ratios described under
""Exchange Ratios'' below.
Eligible Employees. The Exchange Program will be open to all of our employees and employees of any of
our subsidiaries designated for participation by the Compensation Committee who hold Eligible Options.
However, members of our Board of Directors and our Named Executive OÇcers will not be eligible to
participate. In addition, we may exclude employees in certain non-U.S. jurisdictions from the Exchange
Program if local tax or other laws would make their participation infeasible or impractical. To be eligible,
an employee must be employed by us or one of our participating subsidiaries both at the time the
Exchange Program commences and on the date the surrendered options are cancelled and restricted stock
rights are granted to replace them. Any employee holding Eligible Options who elects to participate but
whose employment terminates for any reason prior to the grant of the restricted stock rights, including
voluntary resignation, retirement, involuntary termination, layoÅ, death or disability, will not be eligible to
participate in the Exchange Program and will instead retain his or her Eligible Options subject to their
existing terms. As of June 19, 2006, Eligible Options were held by approximately 5,600 eligible employees.
Exchange Ratios. Our objective in determining the exchange ratios applicable under the Exchange
Program is to provide for the grant of replacement restricted stock rights that will have a value no greater
than the value of the stock options surrendered. We estimated the fair value of the Eligible Options using
the Black-Scholes option valuation model. The Black-Scholes model is a common method used for
estimating the fair value of a stock option, and we have been using this model for required footnote
disclosures in our Ñnancial statements through our Ñscal 2006. For purposes of estimating the fair value of
an Eligible Option under the Black-Scholes model, the following factors were used:
(a) the option's exercise price;
(b) an assumed value of $41.21 per share of our Common Stock, which was the closing price
reported on the NASDAQ National Market on June 19, 2006;
(c) an expected volatility of our Common Stock price (the weighted average volatility of all Eligible
Options was 54%);
(d) the expected term of the stock option (the weighted average expected term of all Eligible
Options is 6 years);
(e) a risk-free interest rate (the weighted average risk-free interest rate of all Eligible Options was
5%); and
(f) no expected dividends.
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