Electronic Arts 2005 Annual Report Download - page 26

‚Increase by 1 million shares the limit on the total number of shares underlying awards of restricted
stock and restricted stock units that may be granted under the Equity Plan Ì from 3 million to
4 million shares. In May 2005, we began granting restricted stock units to certain of our U.S.-based
employees. In the future, we expect restricted stock and/or restricted stock units to become a more
prevalent form of equity incentive compensation that we oÅer our non-executive employees worldwide.
We believe it is important that the Equity Plan be amended to allow us to issue an adequate number of
restricted stock and restricted stock units to attract, retain and motivate eligible employees.
‚Modify the payment alternatives under the Equity Plan to:
(a) Eliminate the ability of participants to pay for shares issued under the Equity Plan by means of a
loan from or guaranteed by EA. Although, as a matter of policy, we do not allow participants to pay
for shares issued under the Equity Plan through a loan from or guaranteed by us, the Equity Plan
currently provides us with the ability to do so. As we have no intention of allowing participants to pay
for shares through a loan from or guaranteed by us, we believe that it would be appropriate to amend
the Plan to reÖect both our current practices and intentions for the future.
(b) Provide us with the Öexibility to grant stock options that include a ""net settlement'' mechanism
that could, in the future, enable us to reduce dilution by issuing fewer shares upon the exercise of stock
options while still providing for the same economic beneÑt to the option holder. Using a ""net
settlement'' mechanism, a participant who wished to receive all cash proceeds upon the exercise of
their stock option would be able to realize the full value of their stock option while at the same time
allowing us to reduce the total number of shares we would be required to issue upon exercise. Currently
under the Equity Plan, a person who wishes to receive cash proceeds upon the exercise of their stock
option must instruct their broker to sell the entire number of shares underlying the stock option and use
the proceeds to pay the exercise price and applicable withholding taxes. Thus, under the current
provisions of the Equity Plan, if a person had a stock option to purchase 100 shares of common stock at
a $30 per share exercise price, and the fair market value of one share were $50 at the time of exercise,
we would issue 100 shares of common stock and, assuming the person sold such shares on the open
market immediately after receiving them, the person would realize cash proceeds of $2,000 less
applicable withholding taxes and brokerage fees ($50 fair market value per share at the time of
exercise minus the $30 per share exercise price multiplied by 100 shares). By contrast, if the stock
option contained a ""net settlement'' mechanism, we would only need to issue 40 shares of common
stock less shares equal to the value of applicable holding taxes and brokerage fees, if any, to satisfy the
award, which could be immediately sold to realize the same $2,000 gain less applicable withholding
taxes and brokerage fees ($50 fair market value per share multiplied by 40 shares).
Although we have no current plans to issue stock options with a ""net settlement'' feature (primarily
due to their uncertain tax treatment and the diÇculty encountered by brokerage Ñrms in implementing
""real time'' settlement processes), we believe it is important to amend the Equity Plan to provide the
Öexibility to grant such stock options in the future in the event circumstances change.
‚Add Öexibility to grant performance-based stock options and stock appreciation rights under the
Equity Plan and modify the performance factors currently contained in the Equity Plan to more closely
reÖect the metrics we use in evaluating the success of our business. We may, in the future, elect to
grant awards under the Equity Plan that are tied to the achievement of one or more performance-based
factors. We believe that granting performance-based awards would be consistent with our pay-for-
performance philosophy, and would serve to further align our employees' interests with those of our
stockholders. In addition, granting performance-based awards could potentially allow us to deduct
under Section 162(m) of the Internal Revenue Code performance-based compensation in excess of
$1 million paid to certain of our executive oÇcers. While the Equity Plan currently permits us to grant
restricted stock and restricted stock units subject to the achievement of one or more performance-
based factors, the amendments would allow us to subject stock options and stock appreciation rights to
performance-based factors as well. If approved, the Equity Plan would be revised to permit the
Compensation Committee to grant performance-based awards subject to one or more of the following
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