8-KOther Events

ELECTRONIC ARTS INC. 8-K Report, Corporate Update (Jul 13, 2006)

Filed July 13, 2006For Securities:EA

Summary

Electronic Arts Inc. (EA) has filed an 8-K report detailing modifications to its previously announced voluntary stock option exchange program. The primary goal of this program, subject to stockholder approval, is to reduce outstanding equity "overhang" which consists of stock options that are currently "out of the money" and thus lack retention incentive for employees. The modifications specify that only options with exercise prices at least 125% of the average closing stock price in the five days prior to the program's commencement will be eligible. Furthermore, the program will be canceled if the average closing stock price in the five days prior to its conclusion exceeds $55.00. To further incentivize and retain key employees, EA also plans to grant new retention awards, consisting of a mix of stock options and restricted stock units, which will partially offset the overhang reduction from the exchange program. These retention awards do not require stockholder approval. The company anticipates that the combined effect of the exchange program and retention awards will lead to a net reduction in equity overhang, thereby improving its ability to retain and motivate its workforce.

Key Highlights

  • 1EA is modifying its voluntary stock option exchange program, requiring stockholder approval at the 2006 Annual Meeting.
  • 2The program targets options with exercise prices at least 125% of the preceding five-day average closing stock price.
  • 3The exchange program will be canceled if the average closing stock price in the five days before its conclusion is $55.00 or higher.
  • 4Participating employees will exchange more options for fewer restricted stock rights, reducing overall equity "overhang".
  • 5EA plans to grant new retention awards (stock options and RSUs) to key employees, partially offsetting the overhang reduction.
  • 6The company estimates a potential net reduction in overhang of approximately 2-3% based on assumed participation and retention award grants.
  • 7Eligible options are held by 5,073 employees, but Board members and Named Executive Officers are excluded from participating.

Frequently Asked Questions

The primary purpose of the stock option exchange program is to reduce the company's equity "overhang," which refers to the total number of shares subject to outstanding equity awards as a percentage of total outstanding shares. Many of EA's existing stock options are "out of the money," meaning their exercise price is higher than the current market price, thus diminishing their value as a retention incentive for employees. By allowing employees to exchange these less valuable options for a smaller number of restricted stock rights, EA aims to lower its overall equity overhang and improve employee retention.

Options eligible for the exchange program, termed "Eligible Options," must have exercise prices that are at least 125% of the average closing price of EA's common stock for the five business days immediately preceding the date on which the Exchange Program commences. The company may also adjust this threshold if there are significant changes in the market price of its common stock before the program begins.

The Exchange Program will be canceled if the average closing price of EA's common stock on the NASDAQ Global Select Market, for the five business days prior to the conclusion of the Exchange Program, is $55.00 or higher. This condition acts as a safeguard to prevent the program from being executed under potentially unfavorable market conditions for the company.

The program is designed to reduce the number of outstanding stock options by having employees exchange more options for fewer restricted stock rights. This should lead to a net reduction in the company's equity overhang. While the program aims to avoid additional compensation charges and reduce dilution from these specific "out of the money" options, the grant of new retention awards will partially offset the reduction in overhang. The exact impact on dilution will depend on the participation rate of eligible employees.