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EA requests stock option revamp to keep employees

Company asking shareholders to approve plan allowing employees to swap underwater options for restricted stock.

Videogame maker Electronic Arts will ask shareholders this month to approve a plan to let employees swap underwater options for restricted shares in an effort to boost morale at the company, whose stock has lost about a third of its value over the last 12 months.

"This is an effort to retain valuable employees," EA spokesman Jeff Brown said on Wednesday. He added that the Silicon Valley-based company competes for talent not only with other video game makers but also with technology giants like Google and Yahoo.

Options are underwater when a company's shares are trading at a level lower than the price at which an employee can exercise his or her option to buy shares.

EA shares fell 62 cents to close on Wednesday at $42.81 on the Nasdaq, down from a 52-week high of $63.12 on July 21, 2005.

Video game makers have seen sales stall as console makers Microsoft, Sony and Nintendo transition to new technology. EA also has embarked on an aggressive investment program that some investors worry may dampen profits.

About 92 percent of EA employees held at least some options that were underwater on June 19, while 63 percent had all of their options under water, EA said in a proxy filing late last week. It said the exercise price on the options range from $41.49 to $65.93 per share.

If approved at EA's shareholder meeting on July 27, employees holding significantly underwater stock options would be able to trade those in at an exchange rate of between 3-to-1 and 4-to-1, with some of the restricted shares becoming eligible for vesting in as little as two years.

Brown said the move is also expected to immediately reduce the company's options overhang, lessening its dilutive effect on earnings.

Wedbush Morgan analyst Michael Pachter said he needed more information on the proposal

. "I wish I understood the total cost. My question is whether it's better for shareholders," Pachter said.

Executives and directors are not eligible for the program. The company's compensation committee already has approved a retention plan for "key employees"--including named executives--that would grant new stock options and restricted stock unit awards.

EA expects to grant a mix of stock options to purchase about 2.2 million shares and 600,000 restricted stock units under the key employee retention plan, which does not require shareholder approval.