ERTS » Topics » Brief Summary of Exchange Program

This excerpt taken from the ERTS DEFA14A filed Jun 30, 2006.

Brief Summary of Exchange Program

Voluntary: The Exchange Program will be entirely voluntary and will be open to employees holding stock options eligible for exchange in the program. Certain executive officers and employees in countries where we do not currently grant restricted stock or restricted stock units will not be eligible for the Exchange Program. Employees with stock options eligible for exchange will have an election period of at least 20 business days from the commencement of the Exchange Program in which to determine whether they wish to exchange one or more outstanding grants of eligible options (vested and unvested) for restricted stock or restricted stock units. Depending on which results in more favorable treatment to our employees in a given country, we may decide to use either restricted stock or restricted stock units, but we refer to both in this EA Action as “restricted stock rights”**.

Eligibility: Options eligible for exchange in the program will be those with exercise prices that are at least 115% of the average market closing price of our stock for the 5 business days before the date we launch the offer. For example, if the average closing price of our stock for the 5 business days before the date of commencement of the Exchange Program is $41.21, the option grants eligible for exchange will be those priced at $47.39 or higher. We believe that setting eligibility at a 15% premium above the stock price will enhance the likelihood of receiving stockholder approval because it focuses on those options that are significantly underwater.

Exchange Ratio: We expect the exchange ratios of eligible options cancelled to restricted stock rights issued to range from 3-to-1 to 4-to-1, depending on the exercise price of the options. The exchange ratios that will actually be used, however, are subject to adjustment based on our stock price at the time of the exchange.

Vesting: Vesting schedules for the newly issued restricted stock rights will range from a minimum of two years to a maximum of four years, depending on the extent to which the eligible options exchanged were vested prior to their cancellation. Even restricted stock rights received in exchange for fully vested options will be subject to the minimum vesting periods. We believe that a minimum vesting period on the newly granted restricted stock rights is necessary to fully attain the retention goal of this program. In addition, we believe it will increase the likelihood of receiving stockholder approval.

Again, specific terms of the Exchange Program (including an extensive Q&A) will be set out in detail in an “Offer to Exchange” and provided to all eligible employees if the program is approved by stockholders. Until then, you can reference the full stockholder proposal for the Exchange Program in the Company’s 2006 Proxy Statement at [link]. In addition, within the next few weeks we will follow up this EA Action with a Q&A explaining the difference between stock options and restricted stock rights.


* “Overhang” refers to the total number of shares subject to outstanding equity awards (such as stock options and restricted stock units) as a percentage of EA’s total shares of common stock outstanding.


** Restricted stock is an award of shares of EA common stock that remain subject to forfeiture upon termination of employment until they have vested following a specified period of employment. Restricted stock units are rights to receive shares of EA common stock on specified future dates when those rights have vested following a required period of employment.
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