Activision 2010 Annual Report Download - page 56

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44
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock
Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees (“ASC stock-based compensation
guidance”). Stock-based compensation expense recognized during the requisite services period is based on the value of
stock-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation
expense recognized in the consolidated statement of operations for the years ended December 31, 2010, 2009, and 2008
included compensation expense for stock- based payment awards granted by Activision, Inc. prior to, but not yet vested as of
July 9, 2008, based on the revalued fair value estimated at July 9, 2008, and compensation expense for the stock-based
payment awards granted subsequent to July 9, 2008.
We estimate the value of stock-based payment awards on the measurement date using a binomial-lattice model. Our
determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors.
Prior to the Business Combination, Vivendi Games had equity incentive plans that were equity-settled and cash-
settled. Vivendi Games used a binomial model to assess the value of these equity incentive awards. Equity-settled awards
include stock options and restricted shares granted by Vivendi, and the cash-settled awards include stock appreciation rights
and restricted stock units granted both by Vivendi and under the Blizzard Equity Plan (“BEP”). The Company records a
liability and recognizes changes in fair value of the liability that occur during the period as compensation cost over the
requisite service period. Changes in the fair value of the liability that occur after the end of the requisite service period are
compensation cost of the period in which the change occurs. Any differences between the amount for which the liability is
settled and its fair value at the settlement date as estimated is an adjustment of compensation cost in the period of settlement.
See Note 19 of the notes to consolidated financial statements.
3. Acquisitions
Reverse Acquisition
The Business Combination (See Note 1 of the notes to consolidated financial statements) is accounted for as a
reverse acquisition under the purchase method of accounting. For this purpose, Vivendi Games was deemed to be the
accounting acquirer and Activision, Inc. was deemed to be the accounting acquiree.
The purchase price of Activision, Inc. consists of the following items (amounts in millions):
Fair market value of Activision, Inc.’s outstanding common stock immediately
prior to the Business Combination at the closing price ............................................. $9,057
Fair value of Activision, Inc.’s existing vested and unvested stock awards at the
closing price* ............................................................................................................ 861
Transaction expenses ..................................................................................................... 1
Total consideration .................................................................................................... $9,919
* The fair value of the existing vested and unvested stock award is comprised of the following (amount
in millions):
Fair value of Activision, Inc. existing vested stock awards ......................................... $713
Fair value of Activision, Inc. unvested stock awards .................................................. 296
Less: Unearned stock-based compensation ................................................................. (148)
$861
The fair value of Activision, Inc.’s stock awards was determined using the fair value of Activision, Inc.’s common
stock of $15.04 per share, which was the closing price at July 9, 2008, and using a binomial-lattice model and the following
assumptions: (a) varying volatility ranging from 42.38% to 51.50%, (b) a risk free interest rate of 3.97%, (c) an expected life
ranging from 3.22 years to 4.71 years, (d) risk adjusted stock return of 8.89%, and (e) an expected dividend yield of 0.0%.