NOTE 11—STOCK-BASED AWARDS

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):

 

		Year Ended December 31,
		2011				2010				2009
Selling and marketing		$	3,613			$	3,044			$	1,946
General and administrative			21,679				17,190				8,618
Production and programming			1,109				998				700
Stock-based compensation expense before income taxes			26,401				21,232				11,264
Income tax benefit			(8,792	)			(8,441	)			(4,492	)
Stock-based compensation expense after income taxes		$	17,609			$	12,791			$	6,772

 

As of December 31, 2011, there was approximately $17.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 1.8 years.

Second Amended and Restated 2008 Stock and Annual Incentive Plan

The Second Amended and Restated 2008 Stock and Annual Incentive Plan, as amended (the "Plan"), authorizes the issuance of 8.0 million shares of HSNi common stock for new awards granted by HSNi. The purpose of the Plan is to assist HSNi in attracting, retaining and motivating officers, employees, directors and consultants, and to provide HSNi with the ability to provide incentives more directly linked to the profitability of HSNi's business and increases in shareholder value. As of December 31, 2011, there were approximately 3.3 million shares of common stock available for grants under the Plan.

HSNi can grant restricted stock units ("RSUs"), stock options, stock appreciation rights ("SARs"), dividend equivalents and other stock-based awards under the Plan. Stock-based awards have a maximum term of 10 years. The exercise price of options and SARs granted under the Plan is required to be at, or above, the fair market value of HSNi's stock on the date of grant. RSUs have rights to receive dividend equivalents that vest at the same time the underlying RSUs vest once the requisite service has been rendered. HSNi elects to issue shares of its common stock for RSU vestings and SAR exercises net of the employees' minimum tax withholding obligation. The payments made by HSNi to the taxing authorities for these taxes were $11.5 million, $2.7 million and $0.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Modification of Stock-Based Compensation Awards

In conjunction with the Spin-off, IAC share-based awards granted prior to the Spin-off were converted to equivalent share-based awards. The adjustments to the number of shares subject to each award and the stock option exercise prices were based on the relative market capitalization of IAC and each of the Spincos following the Spin-off. The conversion was accounted for as a modification under the share-based payments accounting guidance, and resulted in additional fair value of $10.2 million that was recognized immediately for fully vested awards and is being amortized over the remaining service period for unvested awards. For the years ended December 31, 2011, 2010 and 2009, $0.4 million, $0.5 million and $0.9 million, respectively, of the additional compensation expense was recognized in the accompanying consolidated statements of operations.

Restricted Stock Units

RSUs are awards that are denominated in a hypothetical equivalent number of shares of HSNi's common stock. At the time of grant, HSNi determines if the RSUs will be settled in cash, stock or both. The value to the holder of the RSU is based upon the market value of HSNi's stock when the RSUs vest. Compensation expense for RSUs granted under the Plan is measured at the grant date as the fair market value of HSNi's common stock and expensed ratably over the vesting term. The RSUs are generally subject to service-based vesting over a three to five year term.

 

A summary of the status of the nonvested RSUs, including awards granted under the Plan and by IAC prior to the Spin-off, as of December 31, 2011 and changes during the year ended December 31, 2011 is as follows:

 

		Number of RSUs				Weighted Average Grant Date Fair Value
Nonvested at 1/1/11			2,145,133			$	12.80
Granted			331,749				30.32
Vested			(685,889	)			31.96
Forfeited			(195,197	)			14.54
Nonvested at 12/31/11			1,595,796				15.38

The weighted average fair value of RSUs granted during the years ended December 31, 2011, 2010 and 2009 based on market prices of HSNi's common stock on the grant date was $30.32, $23.50 and $5.19, respectively.

The total intrinsic value of RSUs held by employees of all five Spincos that vested during the years ended December 31, 2011, 2010 and 2009 and settled in HSNi common stock was $21.9 million, $10.4 million and $3.0, respectively. HSNi realizes a tax benefit for RSUs held by its employees in the year in which the award vests. The tax benefit realized by HSNi related to RSUs was approximately $6.7 million, $3.6 million and $0.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011, there was approximately $11.7 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.0 years.

Stock Options and SARs

SARs are similar to traditional stock options, except, upon exercise, holders of SARs will only receive a value equal to the spread between the current market price per share of the common stock and the exercise price. The SARs granted by HSNi may be settled in cash or common stock of HSNi, in the sole discretion of HSNi. All SARs exercised by employees of HSNi have been settled in stock. For all SARs currently outstanding, HSNi intends to settle these awards in stock upon exercise. The exercise price for awards granted under the Plan is required to be priced at, or above, the fair market value of HSNi's stock at the date of grant. Awards typically vest periodically over a three or four year term.

 

A summary of the status of the outstanding stock options and SARs as of December 31, 2011 is as follows:

 

The aggregate intrinsic value in the table above represents the pre-tax difference between the closing price of HSNi's common stock on December 31, 2011 of $36.26 and the exercise price for all "in the money" awards at December 31, 2011. This amount changes based on the fair market value of HSNi's common stock. The intrinsic value of the stock options and SARs exercised during the years ended December 31, 2011, 2010 and 2009 was approximately $20.5 million, $13.0 million and $0.7 million, respectively. Cash received from stock option exercises for the years ended December 31, 2011, 2010 and 2009 was $7.5 million, $17.1 million and $0.9 million, respectively. The tax benefit realized from stock option exercises for the years ended December 31, 2011, 2010 and 2009 was $7.4 million, $3.7 million and less than $0.5 million, respectively.

The fair value of each stock option and SAR award, which HSNi intends to settle in stock, is estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various assumptions, including expected volatility and expected term. For purposes of this model, no dividends have been assumed. Expected stock price volatilities are estimated based on the historical and implied volatilities of comparable publicly-traded companies. The risk-free interest rates are based on U.S. Treasury yields for notes with comparable terms as the awards in effect at the grant date. The expected term of options granted is based on analyses of historical employee termination rates and option exercise patterns, giving consideration to expectations of future employee behavior.

The weighted average assumptions used in the Black-Scholes option pricing model are as follows:

 

		Year Ended December 31,
		2011				2010				2009
Volatility factor			46.5	%			46.5	%			47.3	%
Risk-free interest rate			2.33	%			2.39	%			2.31	%
Expected term			5.0				5.0				5.5
Dividend yield			—				—				—

 

The weighted average fair values of stock options and SARs granted from the Plan during the years ended December 31, 2011, 2010 and 2009 at market prices equal to HSNi's common stock on the grant date were $12.84, $8.79 and $2.94, respectively.

At the date of the Spin-off, HSNi granted approximately 719,000 stock options to its Chief Executive Officer at exercise prices greater than market value on the date of grant with a 10-year term and graded vesting over four years. The weighted average exercise price and the weighted average fair value related to these grants were $39.84 and $3.36, respectively. All other awards granted under the Plan have exercise prices based on the fair market value of HSNi's common stock at the date of grant.

As of December 31, 2011, there was approximately $5.3 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options and SARs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 1.2 years.

The following table summarizes the information about stock options and SARs outstanding and exercisable as of December 31, 2011:

 

		Outstanding												Exercisable
		Number Outstanding  at December 31, 2011				Weighted Average Exercise  Price				Weighted Average Remaining Contractual Term in Years				Number Exercisable  at December 31, 2011				Weighted Average Exercise Price
$0.00 to $9.99			660,842			$	5.23				6.9				493,397			$	5.56
$10.00 to $19.99			1,115,810				16.16				6.3				627,229				15.81
$20.00 to $29.99			1,232,058				25.12				6.1				672,984				24.40
$30.00 to $34.99			424,298				33.01				4.5				388,667				33.25
$35.00 to $44.99			576,419				42.16				6.6				432,314				42.16
			4,009,427												2,614,591

Performance-Based Awards

During the first quarter of 2010, HSNi implemented a performance-based equity compensation program for certain key members of Cornerstone's management. The amount payable is based on the extent to which certain pre-established performance goals for Cornerstone are achieved during the three-year period ending December 31, 2012. The amount earned pursuant to the award will be measured at the end of the requisite service period and is expected to be settled in shares of HSNi common stock. These equity awards are accounted for as liabilities which are remeasured each reporting period based on the probability of achievement of the performance conditions. As of December 31, 2011, a liability of approximately $12.2 million was recorded for these awards.

Employee Stock Purchase Plan

The HSN, Inc. 2010 Employee Stock Purchase Plan ("ESPP") was approved May 2010 and 750,000 shares of HSNi common stock were reserved for issuance under the ESPP. The ESPP permits employees to purchase shares of HSNi's common stock during semi-annual purchase periods. Under the terms of the ESPP, eligible employees accumulate funds through payroll deductions and purchase shares at a price equal to the lesser of 85% of the fair market value of the common stock at the grant date or purchase date, provided the resulting purchase price cannot be less than 75% of the fair market value at the end of the purchase period. All shares purchased under the ESPP must be held for a period of six months.

 

For the years ended December 31, 2011 and 2010, HSNi granted approximately 57,000 and 27,000 options, respectively, under the ESPP. The fair value of each option granted under the ESPP is determined on the grant date using the Black-Scholes option pricing model. The following are the weighted average assumptions used in the valuation of the ESPP options for the years ended December 31, 2011 and 2010:

 

		Year Ended December 31,
		2011				2010
Volatility factor			56.6	%			56.6	%
Risk-free interest rate			0.15	%			0.20	%
Expected term			0.50				0.42
Dividend yield			—				—

For the years ended December 31, 2011 and 2010, approximately $0.5 million and $0.2 million, respectively, of expense was included in the consolidated statements of operations. For the years ended December 31, 2011 and 2010, HSNi received cash proceeds from the participating employees of approximately $1.4 million and $0.7 million, respectively.

Restricted Common Equity in Cornerstone Brands

In connection with the acquisition of Cornerstone Brands by IAC in 2005 certain members of Cornerstone Brand's management were granted restricted common equity in Cornerstone Brands. These awards were granted on April 1, 2005 and were initially measured at fair value, which was amortized to expense over the vesting period. These awards vested ratably over four years, or earlier based upon the occurrence of certain prescribed events. The awards vest in non-voting restricted common shares of Cornerstone Brands.

These shares are subject to a put right by the holders, some of which became exercisable in the first quarter of 2010 and others of which become exercisable annually thereafter, and a call right by HSNi, which is not exercisable until the first quarter of 2012 and annually thereafter. The value of these shares upon exercise of the put or call is equal to their fair value, determined by negotiation or arbitration, reduced by the accreted value of the preferred interest that was taken by IAC upon the purchase of Cornerstone Brands. The initial value of the preferred interest was equal to the acquisition price of Cornerstone Brands. The preferred interest accretes value at a 15% annual rate. Upon exercise of the put or call the consideration is payable in HSNi shares or cash or a combination thereof at HSNi's option. As of December 31, 2011, these awards were significantly out of the money and are not expected to result in any cost should HSNi exercise its call right.