Electronic Arts 2006 Annual Report Download - page 31

the Exchange Program should be treated as a non-taxable exchange and the Company, our stockholders
and employees should recognize no income for United States federal income tax purposes upon the
surrender of Eligible Options and the grant of restricted stock rights (other than in the case of participants
who receive restricted stock and make certain elections). For a summary of the current United States
federal income tax consequences of restricted stock and restricted stock units we currently issue under the
Equity Plan, see the discussion of the treatment of such awards contained in Appendix A to this proxy
statement. The tax consequences of the receipt of restricted stock and stock units under the Equity Plan
for participating non-United States employees may diÅer signiÑcantly from the United States federal
income tax consequences described above and in Appendix A.
Accounting Treatment
EÅective with our Ñscal year commencing on April 2, 2006, we have adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standard No. 123 (revised 2004),
""Share-Based Payment'' (""SFAS No. 123R''), on accounting for share-based payments. Under
SFAS No. 123R, to the extent the fair value of each award of restricted stock rights granted to employees
exceeds the fair value of the stock options surrendered, such excess is considered additional compensation.
This excess, in addition to any remaining unrecognized expense for the stock options surrendered in
exchange for the restricted stock rights, will be recognized by the Company as an expense for
compensation. This expense will be recognized ratably over the vesting period of the restricted stock rights
in accordance with the requirements of SFAS No. 123R. In the event that any of the restricted stock
rights are forfeited prior to their vesting due to termination of employment, the expense for the forfeited
restricted stock rights will be reversed and will not be recognized. Because we do not anticipate issuing any
restricted stock rights having a fair value in excess of the fair value of the stock options surrendered, we do
Proxy Statement
not expect to recognize any incremental compensation cost as a result of the Exchange Program.
New Plan BeneÑts
Because the decision of eligible employees to participate in the Exchange Program is completely voluntary,
we are not able to predict who or how many employees will elect to participate, how many options of any
class described in the table above under ""Exchange Ratios'' will be surrendered for exchange or the
number of restricted stock rights that may be issued. As noted above, members of our Board of Directors
and our Named Executive OÇcers are not eligible to participate in the Exchange Program.
EÅect on Stockholders
We are not able to predict the impact the Exchange Program will have on our stockholders because we
are unable to predict how many or which employees will exchange their Eligible Options. The Exchange
Program was designed to avoid any additional compensation charge and to reduce the overhang from
outstanding stock options. As of June 19, 2006, assuming a Ñve-business-day average closing price of our
Common Stock of $41.21 immediately prior to the commencement of the Exchange Program, the
maximum number of shares subject to Eligible Options which could be exchanged is 15,989,086 and the
maximum number of shares of Common Stock underlying the restricted stock rights which could be issued
using the exchange ratios set forth above is 4,829,496. As explained above, the net reduction in shares
subject to outstanding equity awards resulting from the Exchange Program could be signiÑcantly lower
depending on factors such as the level of participation by our employees in the Exchange Program. The
reduction in overhang will also be partially oÅset by the grant of additional Retention Awards. In addition,
we intend to return up to 7 million shares subject to options cancelled in the Exchange Program to the
Equity Plan where they will be available for the grant of future awards.
Required Vote and Board of Directors Recommendation
Approval of this proposal requires the aÇrmative vote of a majority of the voting shares present at the
meeting in person or by proxy and voting on this proposal.
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