iRobot 2008 Annual Report Download - page 36

options for federal income tax purposes, regardless of whether the Eligible Options exchanged were incentive
stock options or non-qualified stock options. The New Options will otherwise have substantially the same
terms and conditions as the corresponding exchanged Eligible Options.
We believe that, if approved by the stockholders, the Option Exchange Program will permit us to:
• enhance long-term stockholder value by restoring competitive incentives to the participants so they are
further motivated to complete and deliver the important strategic and operational initiatives of our
company, as exercise prices significantly in excess of market price undermine the effectiveness of
options as employee performance and retention incentives; and
• reduce potential overhang, which is the number of shares issuable upon the exercise of outstanding
stock options and other stock awards, by reducing the total number of outstanding stock options.
Under the listing rules of NASDAQ, stockholder approval is required to implement the Option Exchange
Program. If our stockholders approve this proposal, our board of directors intends to close the exchange offer
at 5:00 p.m. Eastern Time on the day following our annual meeting. If we do not obtain stockholder approval
of this proposal, we will not be able to implement the Option Exchange Program.
Reasons for the Option Exchange Program
We believe that an effective and competitive employee incentive program is imperative for the future
growth and success of our business. We rely on our employees to implement our strategic initiatives, expand
and develop our business and satisfy customer needs. Competition for many of these employees, particularly
in the high-tech industry, is intense and many companies use stock options as a means of attracting, motivating
and retaining their best employees. At our company, stock options constitute a key part of our incentive and
retention programs because our board of directors believes that equity compensation encourages employees to
act like owners of the business, motivating them to work toward our success and rewarding their contributions
by allowing them to benefit from increases in the value of our shares.
When the compensation committee approves the grant of a stock option, it establishes the exercise price
that the employee must pay to purchase shares of our common stock when the option is exercised. The per
share exercise price is set at the closing price of a share of our common stock as reported by NASDAQ on the
date the option is granted. Thus, an employee receives value only if he or she exercises an option and sells the
purchased shares at a price that exceeds the option’s exercise price.
Our stock price has experienced a significant decline during the past several years. As a result, many of
our employees now hold stock options with exercise prices significantly higher than the current market price
of our common stock. For example, 67% of our outstanding stock options had exercise prices greater than the
closing price of our common stock as reported by NASDAQ on March 20, 2009 of $8.40. In addition, as of
March 20, 2009, Eligible Participants held options to purchase 1,398,592 shares of our common stock with
exercise prices ranging from $13.07 per share to $34.98 per share, while the closing price of our common
stock on NASDAQ on that date was $8.40. These “out-of-the-money” options are no longer effective as
performance and retention incentives. We believe that to enhance long-term stockholder value we need to
maintain competitive employee incentive and retention programs. An equity stake in the success of our
company is a critical component of these programs. We believe the Option Exchange Program will provide us
with an opportunity to restore for Eligible Participants an incentive to remain with us and contribute to the
future growth and success of our business. Although we continue to believe that stock options are an important
component of our employees’ total compensation, many of our employees view their existing options as
having little or no value due to the difference between the exercise prices and the current market price of our
common stock. As a result, for many employees, these options are ineffective at providing the incentives and
retention value that our board of directors believes are necessary to motivate our employees to increase long-
term stockholder value.
In addition to providing key incentives to our employees, excluding, among others, our executive officers,
the Option Exchange Program is also designed to benefit our stockholders by reducing the potential dilution to
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