Time Magazine 2011 Annual Report Download - page 107

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
other companies in the S&P 500 Index, 0% to 200% of the target PSUs granted based on a sliding scale where a
relative ranking of less than the 25th percentile will pay 0% and a ranking at the 100th percentile will pay 200%
of the target number of shares. However, for PSUs granted in and subsequent to 2009, if the Company’s TSR
ranking is below the 50th percentile and its growth in adjusted earnings per share (“adjusted EPS”) relative to the
growth in adjusted EPS of the other companies in the S&P 500 Index is at or above the 50th percentile, the
percentage of a participant’s target PSUs that will vest will be the average of (i) the percentage of target PSUs
that would vest based on the Company’s TSR ranking during the performance period and (ii) 100%.
For accounting purposes, PSUs are considered to have a market condition (based on TSR) and a performance
condition (based on adjusted EPS). The effect of a market condition is reflected in the grant date fair value of the
award, which is estimated using a Monte Carlo analysis to estimate the total return ranking of Time Warner
among the S&P 500 Index companies over the performance period. Participants who are terminated by the
Company other than for cause or who terminate their own employment for good reason or due to retirement or
disability are generally entitled to a pro rata portion of the PSUs that would otherwise vest following the
performance period.
Holders of PSUs granted in, and subsequent to 2010 are entitled to receive dividend equivalents based on the
regular quarterly cash dividends declared and paid by the Company during the period that the PSUs are
outstanding. The dividend equivalent payment will be made in cash following the vesting of the PSUs (generally
following the end of the respective performance period) and will be based on the number of shares paid out.
Upon the (i) exercise of a stock option award, (ii) the vesting of an RSU, (iii) the vesting of a PSU or (iv) the
grant of restricted stock, shares of Time Warner common stock may be issued either from authorized but
unissued shares or from treasury stock.
In connection with the AOL Separation and the TWC Separation (collectively, the “Separations”) in 2009,
and as provided for in the Company’s equity plans, the number of stock options, RSUs and target PSUs
outstanding at each of the Distribution Date and Distribution Record Date, respectively, and the exercise prices
of such stock options were adjusted to maintain the fair value of those awards (collectively, the “Adjustments”).
The Adjustments were determined by comparing the fair value of such awards immediately prior to each of the
Separations (“pre-Separation”) to the fair value of such awards immediately after each of the Separations. In
performing these analyses, the only assumptions that changed were related to the Time Warner stock price and
the stock option’s exercise price. Accordingly, each equity award outstanding as of the Distribution Date relating
to the AOL Separation was increased by multiplying the size of such award by 1.07, while the per share exercise
price of each stock option was decreased by dividing by 1.07. Each equity award outstanding as of the
Distribution Record Date relating to the TWC Separation was increased by multiplying the size of such award by
1.35, while the per share exercise price of each stock option was decreased by dividing by 1.35. The Adjustments
resulted in an aggregate increase of approximately 65 million equity awards (comprised of 60 million stock
options and 5 million RSUs and target PSUs). The modifications to the outstanding equity awards were made
pursuant to existing antidilution provisions in the Company’s equity plans and did not result in any additional
compensation expense.
Under the terms of Time Warner’s equity plans and related award agreements, and as a result of the Separations,
AOL and TWC employees who held Time Warner equity awards were treated as if their employment with Time
Warner was terminated without cause at the time of each of the Separations. This treatment resulted in the forfeiture of
unvested stock options, shortened exercise periods for vested stock options and pro rata vesting of the next installment
of (and forfeiture of the remainder of) the RSU awards for those AOL and TWC employees who did not satisfy
retirement-treatment eligibility provisions in the Time Warner equity plans and related award agreements.
Upon the exercise of Time Warner stock options held by TWC employees, TWC is obligated to reimburse
Time Warner for the intrinsic value of the applicable award. This asset is carried at fair value and is $20 million
as of December 31, 2011. Changes in the fair value of this asset are recorded in Other loss, net, in the
Consolidated Statement of Operations. No such similar arrangement exists with AOL.
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