Annual report pursuant to Section 13 and 15(d)

Stock-Based Awards (Note)

v2.4.0.6
Stock-Based Awards (Note)
 12 Months Ended
Dec. 31, 2012
Share-based Compensation [Abstract]  
Stock-Based Awards
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,
2012
 
2011
 
2010
Selling and marketing
 
$
3,515

 
$
4,722

 
$
4,042

General and administrative
 
15,541

 
21,679

 
17,190

Stock-based compensation expense before income taxes
 
19,056

 
26,401

 
21,232

Income tax benefit
 
(6,494
)
 
(8,792
)
 
(8,441
)
Stock-based compensation expense after income taxes
 
$
12,562

 
$
17,609

 
$
12,791

 
 
 
 
 
 
 

 
As of December 31, 2012, there was approximately $15.4 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, 2012, 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 $18.2 million, $11.4 million, and $2.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.
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 term of 3 years to 5 years.
 
A summary of the status of the nonvested RSUs, as of December 31, 2012 and changes during the year ended December 31, 2012 is as follows:

 
 
Number of
RSUs
 
Weighted
Average Grant
Date Fair Value
Nonvested at 1/1/12
 
1,595,796

 
$
15.38

Granted
 
313,084

 
36.51

Vested
 
(882,056
)
 
8.51

Forfeited
 
(154,715
)
 
25.70

Nonvested at 12/31/12
 
872,109

 
28.02


The weighted average per share fair value of RSUs granted during the years ended December 31, 2012, 2011 and 2010 based on market prices of HSNi’s common stock on the grant date was $36.51, $30.32, and $23.50, respectively.
The total fair value of RSUs held by employees of all five Spincos that vested during the years ended December 31, 2012, 2011 and 2010 and settled in HSNi common stock was $33.9 million, $21.9 million, and $10.4 million, 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 $10.9 million, $6.7 million, and $3.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.
As of December 31, 2012, there was approximately $10.7 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 ratably over a term of 3 years or 4 years.
 
A summary of the status of the outstanding stock options and SARs as of December 31, 2012 is as follows:

 
 
Number of
options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic Value
Outstanding at January 1, 2012
 
4,009,427

 
$
22.63

 
 
 
 
Granted
 
357,415

 
35.69

 
 
 
 
Exercised
 
(1,542,969
)
 
15.61

 
 
 
 
Forfeited
 
—

 
—

 
 
 
 
Expired
 
(47,180
)
 
18.85

 
 
 
 
Outstanding at December 31, 2012 (1)
 
2,776,693

 
28.28

 
6.1
 
$
74,407,602

Vested and expected to vest at December 31, 2012
 
2,722,267

 
28.18

 
6.1
 
$
73,229,471

Exercisable at December 31, 2012
 
2,041,397

 
27.44

 
5.3
 
$
56,433,155

(1)
Approximately 0.3 million stock options outstanding as of December 31, 2012 were held by employees of the other Spincos.
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, 2012 of $55.08 and the exercise price for all “in the money” awards at December 31, 2012. 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, 2012, 2011 and 2010 was approximately $45.7 million, $20.5 million, and $13.0 million, respectively. Cash received from stock option exercises for the years ended December 31, 2012, 2011 and 2010 was $19.1 million, $7.5 million, and $17.4 million, respectively. The tax benefit realized from stock option exercises for the years ended December 31, 2012, 2011 and 2010 was $11.7 million, $7.4 million, and less than $3.7 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. Expected stock price volatilities are estimated based on HSNi's historical volatility and 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 and SARs granted is based on an analysis of historical employee termination rates and option exercise patterns, giving consideration to expectations of future employee behavior. Dividends yields are estimated based on HSNi's historical and anticipated dividend payments.
The weighted average assumptions used in the Black-Scholes option pricing model are as follows:
 
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Volatility factor
 
46.5
%
 
46.5
%
 
46.5
%
Risk-free interest rate
 
0.91
%
 
2.33
%
 
2.39
%
Expected term
 
5.0

 
5.0

 
5.0

Dividend yield
 
1.4
%
 
0.0
%
 
0.0
%

The weighted average fair values of stock options and SARs granted from the Plan during the years ended December 31, 2012, 2011 and 2010 at market prices equal to HSNi’s common stock on the grant date were $12.96, $12.84, and $8.79, 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 term of 10 years and graded vesting over 4 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, 2012, there was approximately $4.8 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 1.4 years.
The following table summarizes the information about stock options and SARs outstanding and exercisable as of December 31, 2012:
 
 
 
Outstanding
 
Exercisable
 
 
Number
Outstanding  at
December 31,
2012
 
Weighted
Average
Exercise  Price
 
Weighted
Average
Remaining
Contractual
Term in Years
 
Number
Exercisable  at
December 31,
2012
 
Weighted
Average
Exercise Price
$0.00 to $9.99
 
177,102

 
$
5.51

 
5.8
 
177,102

 
$
5.51

$10.00 to $19.99
 
556,708

 
16.95

 
5.3
 
513,927

 
16.70

$20.00 to $29.99
 
685,488

 
24.91

 
7.4
 
350,388

 
23.29

$30.00 to $39.99
 
986,840

 
34.94

 
6.0
 
629,425

 
34.51

$40.00 to $44.99
 
370,555

 
44.71

 
5.6
 
370,555

 
44.71

 
 
2,776,693

 
 
 
 
 
2,041,397

 
 

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 was based on the extent to which certain pre-established performance goals for Cornerstone were achieved during the three-year period ending December 31, 2012. The amount earned pursuant to the award was measured at the end of the requisite service period and will be settled in shares of HSNi common stock in the first quarter of 2013. These equity awards were accounted for as liabilities which were remeasured each reporting period based on the probability of achievement of the performance conditions. As of December 31, 2012, a liability of approximately $16.8 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 6 months.
 
For the years ended December 31, 2012 and 2011, HSNi granted approximately 50,000 and 57,000 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, 2012 and 2011:
 
  
 
Year Ended December 31,
  
 
2012
 
2011
Volatility factor
 
41.7
%
 
56.6
%
Risk-free interest rate
 
0.09
%
 
0.15
%
Expected term
 
0.5

 
0.5

Dividend yield
 
1.3
%
 
0.0
%

For the years ended December 31, 2012 and 2011, approximately $0.5 million of expense was included in the consolidated statements of operations. For the years ended December 31, 2012 and 2011, HSNi received cash proceeds from the participating employees of approximately $1.6 million and $1.4 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 4 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 was 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, 2012, these awards were significantly out of the money and are not expected to result in any cost should HSNi exercise its call right.