Annual report pursuant to Section 13 and 15(d)

STOCK-BASED COMPENSATION

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STOCK-BASED COMPENSATION
 12 Months Ended
Dec. 31, 2011
STOCK-BASED COMPENSATION [Abstract]  
STOCK-BASED COMPENSATION
NOTE 12-STOCK-BASED COMPENSATION
 
In December 2005, the Company adopted its 2005 Stock Incentive Plan. The plan authorizes the Company to grant stock option awards, director shares, stock appreciation rights, restricted stock and deferred stock awards, other equity-based awards and performance awards. The Company has granted restricted stock awards and options to purchase its common stock to employees, directors and consultants of the Company and its affiliates under the stock incentive plan at no less than the fair market value of the underlying stock on the date of grant. The options are granted for a term not exceeding ten years and the nonvested options are generally forfeited in the event the employee or director terminates his or her employment or relationship with the Company or one of its affiliates. Any options that have vested at the time of termination are forfeited to the extent they are not exercised within the applicable post-employment exercise period provided in their option agreements. These options vest over one to five years. The stock incentive plan contains anti-dilutive provisions that require the adjustment of the number of shares of the Company's common stock represented by, and the exercise price of, each option for any stock splits or stock dividends.
 
The following is a summary of stock-based compensation expense recorded by the Company during the respective periods:
 
   
2011
    
2010
    
2009
  
   
(in thousands)
  
Selling, general and administrative expenses
   $ 40,496     $ 34,509     $ 4,696  
Corporate expenses
     20,149       27,098       7,801  
Total stock-based compensation expense
   $ 60,645     $ 61,607     $ 12,497  
 
In the first quarter of 2011, the Company acquired the remaining equity interests of Front Line. As a result of this acquisition, the Company recorded $24.4 million of stock-based compensation in selling, general and administrative expenses. See Note 3-Acquisitions for further discussion regarding the 2011 acquisition of the remaining equity interests in Front Line.
 
In June 2011, the Company registered an additional 10.0 million shares to service the Live Nation stock incentive plan. In January 2010, the Company registered an additional 4.9 million shares to service the Live Nation stock incentive plan, 1.5 million shares to service the Live Nation stock bonus plan and 16.7 million shares to service the Ticketmaster stock and annual incentive plan.
 
As part of the Merger Agreement, all Ticketmaster stock options, restricted stock awards and restricted stock units that were outstanding immediately before the Merger were exchanged for Live Nation awards using the final exchange ratio of 1.4743728. As a result, Live Nation issued 13.0 million stock options, 1.5 million shares of restricted stock and 0.9 million restricted stock units to employees and directors of Ticketmaster, as well as 2.5 million stock options and 0.2 million restricted stock units to employees of IAC and the Spincos. The Live Nation awards have the same vesting periods, terms and conditions as the previous Ticketmaster awards, with the exception of 1.5 million shares of restricted Live Nation common stock held by the Azoff Trust which now has a guaranteed minimum value of $15.0 million at the end of the vesting period in 2013. Stock-based compensation expense of $3.4 million and $3.2 million related to this restricted Live Nation common stock was recorded for the year ended December 31, 2011 and from the Merger date until December 31, 2010, respectively, as a component of corporate expenses. As discussed in Note 3-Acquisitions, the value of all exchanged awards which related to services already rendered as of the date of the Merger was included as part of the consideration transferred.
 
There were 23,825 stock-based awards issued by Front Line that were not exchanged or modified as a result of the Merger. The Company recorded $6.9 million of expense relating to these awards from the date of the Merger through December 31, 2010 as a component of selling, general and administrative expenses. In 2011, the Company acquired the remaining equity interests in Front Line, Vector and other smaller companies. See Note 3-Acquisitions for further discussion regarding the Front Line acquisition.
 
In 2010, the Company accelerated and modified the vesting of 1.4 million shares of unvested outstanding stock-based equity awards granted to certain employees of Ticketmaster effective upon termination, all of which had been converted to Live Nation equity awards in the Merger. The Company also accelerated 1.1 million shares of unvested outstanding stock-based equity awards as a result of the Merger based on employment contract “change of control” provisions for certain employees. In addition to these merger-related accelerations, the Company accelerated and modified the vesting of 3.4 million shares of unvested outstanding stock-based equity awards granted to certain employees of Live Nation effective upon termination. As a result of these accelerations, the Company recognized $18.1 million of stock-based compensation expense for the year ended December 31, 2010. Of this amount, $8.0 million was recorded in corporate expenses and $10.1 million was recorded in selling, general and administrative expenses.
 
As of December 31, 2011, there was $64.1 million of total unrecognized compensation cost related to stock-based compensation arrangements for stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.4 years.
 
Azoff Trust Note
 
As part of the Merger, a note was issued to the Azoff Trust in exchange for shares of Ticketmaster's series A convertible redeemable preferred stock held by the Azoff Trust. The note accrues interest equal to 3.0% of the outstanding principal balance and is payable in monthly installments of $0.8 million through October 1, 2013, subject to Mr. Azoff's continued employment with the Company. In the event of a termination of Mr. Azoff's employment with the Company without cause or good reason or due to death or disability, the note immediately will vest and the balance of the note will be due and paid in a cash lump sum. Upon any other termination of Mr. Azoff's employment, the Azoff Trust will forfeit the balance of the note.
 
The Company accounts for the note in accordance with the guidance for stock-based compensation because the note is considered a modification of an existing stock-based award. The Company included $14.4 million in consideration transferred relating to the exchanged award, calculated as the full fair value of the note, as determined by the Company, multiplied by the ratio of the pre-combination service period to the total service period. The Company will recognize a total of $24.0 million of stock-based compensation expense, which is the difference between the total cash payments due under the note of $38.4 million and the initial carrying value of $14.4 million at the date of the Merger, on a straight-line basis over the remaining service period. For the year ended December 31, 2011 and from the date of the Merger through December 31, 2010, the Company recorded $6.4 million and $5.9 million, respectively, related to this note as a component of corporate expenses.
 
Stock Options
 
The following assumptions were used to calculate the fair value of the Company's options on the date of grant:
 
             
   
 2011
  
 2010
  
 2009
Risk-free interest rate
  
0.99% - 2.16%
  
1.93%
  
2.00%
Dividend yield
  
0.0%
  
0.0%
  
0.0%
Volatility factors
  
39.6% - 62.5%
  
39.6%
  
39.0%
Weighted average expected life (in years)
  
6.25
  
                 6.25
  
6.25 - 6.5
 
The following table presents a summary of the Company's stock options outstanding at, and stock option activity during, the years ended December 31, 2011, 2010 and 2009 (“Price” reflects the weighted average exercise price per share):
 
   
2011
    
2010
    
2009
  
   
Options
    
Price
    
Options
    
Price
    
Options
    
Price
  
   
(in thousands, except per share data)
  
Outstanding January 1
     20,464     $ 12.41       7,099     $ 12.13       4,804     $ 16.78  
Granted
     2,512       11.22       2,471       11.01       2,385       2.75  
Merger conversion
     -       -       15,476       12.72       -       -  
Exercised
     (529 )     5.13       (1,642 )     4.76       -       -  
Forfeited or expired
     (1,018 )     15.20       (2,940 )     16.35       (90 )     11.59  
                                                 
Outstanding December 31
     21,429     $ 12.33       20,464     $ 12.41       7,099     $ 12.13  
                                                 
Exercisable December 31
     12,276     $ 14.71       9,454     $ 16.43       2,078     $ 17.21  
Weighted average fair value per option granted
           $ 5.27             $ 4.59             $ 1.16  
 
The total intrinsic value of stock options exercised during the years ended December 31, 2011 and 2010 was $3.0 million and $12.8 million, respectively. Cash received from stock option exercises for the years ended December 31, 2011 and 2010 was $2.7 million and $8.6 million, respectively. There were no stock options exercised during the year ended December 31, 2009. Through December 31, 2011, no tax benefits from the exercise of stock options have been recognized. Any future excess tax benefits derived from the exercise of stock options will be recorded prospectively and reported as cash flows from financing activities in accordance with the FASB guidance for stock compensation.
 
There were 11.5 million shares available for future grants under the stock incentive plan at December 31, 2011. Upon share option exercise or vesting of restricted stock and restricted stock units, the Company issues new shares or treasury shares to fulfill these grants. Vesting dates on the stock options range from January 2012 to October 2015, and expiration dates range from January 2012 to October 2021 at exercise prices and average contractual lives as follows:
 
Range of
Exercise
Prices
   
Outstanding
as of
12/31/11
(in thousands)
   
Weighted
Average
Remaining
 Contractual
 Life
(in years)
   
Weighted
Average
 Exercise
Price
   
Exercisable
 as of
12/31/11
(in thousands)
   
Weighted
 Average
Remaining
 Contractual Life
(in years)
   
Weighted
Average
 Exercise
Price
 
                                       
$ 1.00 - $4.99       3,165       7.2     $ 3.07       1,146       7.2     $ 3.01  
$ 5.00 - $9.99       3,924       7.6     $ 6.68       2,036       7.3     $ 5.76  
$ 10.00 - $14.99       9,929       7.4     $ 11.89       4,963       6.1     $ 12.18  
$ 15.00 - $19.99       1,390       5.8     $ 18.38       1,110       5.7     $ 18.41  
$ 20.00 - $24.99       1,717       5.1     $ 24.47       1,717       5.1     $ 24.47  
$ 25.00 - $29.99       883       3.0     $ 29.19       883       3.0     $ 29.19  
$ 30.00 - $34.99       5       1.7     $ 32.50       5       1.7     $ 32.50  
$ 35.00 - $39.99       416       3.4     $ 39.93       416       3.4     $ 39.93  
 
The total intrinsic value of options outstanding and options exercisable as of December 31, 2011 was $24.0 million and $11.5 million, respectively.
 
Restricted Stock and Restricted Stock Units
 
The Company has granted restricted stock awards to its employees and directors under its stock incentive plans. These common shares carry a legend which restricts their transferability for a term of one to five years and are forfeited in the event the recipient's employment or relationship with the Company is terminated prior to the lapse of the restriction. In addition, certain restricted stock awards require the Company or the recipient to achieve minimum performance targets in order for these awards to vest.
 
Restricted stock units (“RSUs”) are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of the Company's common stock with the value of each RSU equal to the fair value of the Company's common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined at the time of the grant. The majority of RSUs are settled in stock and are classified as equity. Each RSU is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. The fair value of the RSU is amortized to expense on a straight-line basis over the RSUs vesting period. RSU grants to international employees require cash settlement at the end of the vesting term and are therefore classified as liabilities.
 
In 2011, the Company granted 0.8 million shares of restricted stock and 0.4 million shares of market-based or performance-based awards under the Company's stock incentive plans. These awards will all vest over four years with the exception of the market-based awards which will vest over four years if a specified stock price is achieved over a specified number of consecutive days during the four years and the performance-based awards which will vest within two years if the performance criteria are met.
 
In 2010, the Company granted 2.7 million shares of restricted stock and 0.5 million shares of market-based or performance-based awards. These awards will all vest over four years with the exception of the market-based awards which will vest if a specified stock price is achieved over a specified number of consecutive days and performance-based awards which will vest within two years if the performance criteria are met.
 
The following table presents a summary of the Company's unvested restricted stock awards and equity-settled RSUs outstanding at December 31, 2011, 2010 and 2009 (“Price” reflects the weighted average share price at the date of grant):
 
   
Restricted Stock
    
RSUs
  
   
Awards
    
Price
    
Awards
    
Price
  
   
(in thousands, except per share data)
  
Unvested at December 31, 2008
     994     $ 15.76       -     $ -  
Granted
     163       2.54       -       -  
Forfeited
     (14 )     18.29       -       -  
Vested
     (451 )     16.56       -       -  
Unvested at December 31, 2009
     692     $ 12.08       -     $ -  
Granted
     3,191       11.74       586       9.94  
Merger conversion
     -       -       1,026       10.51  
Forfeited
     (71 )     10.76       (147 )     10.51  
Vested
     (787 )     11.93       (459 )     10.51  
Unvested at December 31, 2010
     3,025     $ 11.76       1,006     $ 10.16  
Granted
     1,220       9.97       -       -  
Forfeited
     (35 )     11.19       (66 )     10.51  
Vested
     (885 )     11.68       (237 )     10.51  
Unvested at December 31, 2011
     3,325     $ 10.98       703     $ 10.03  
 
The total fair market value of the shares issued upon the vesting of restricted stock awards and RSUs during the years ended December 31, 2011, 2010 and 2009 was $12.0 million, $14.0 million and $2.6 million, respectively. As of December 31, 2011, there were 599,400 restricted stock awards and 372,854 RSUs outstanding which require the Company or the recipient to achieve minimum performance targets or market conditions in order for the awards to vest.
 
Bonus Incentives
 
For 2010 and 2009, the Company entered into arrangements with certain key employees that allow the Company to issue shares of its common stock in lieu of cash bonus payments. No issuance of common stock in lieu of a cash bonus payment was done in 2011. The following table presents a summary of the Company's non-cash and stock-based compensation expense related to bonus incentives recorded for the years ending December 31, 2010 and 2009:
 
   
2010
    
2009
  
   
(in thousands)
  
Selling, general and administrative expenses
   $ 313     $ 4,820  
Corporate expenses
     -       (625 )
Total non-cash and stock-based compensation expense for bonus incentives
   $ 313     $ 4,195  
                 
Total non-cash and stock-based compensation expense for bonus incentives from discontinued operations
   $ -     $ (17 )
 
Stock-Based Compensation of Acquired Companies
 
Front Line
 
As of the Merger date and December 31, 2010, Irving Azoff had 3,402 options outstanding and exercisable to acquire Front Line common stock for a 2006 grant by the Front Line board of directors. These options had a weighted average exercise price of $3,600 per share and a remaining contractual term of 5.47 years as of December 31, 2010. These options contained put arrangements exercisable at the option of the holder. Refer to Note 11-Stockholders' Equity for further discussion.
 
As of the Merger date and December 31, 2010, Mr. Azoff and the Azoff Trust held 15,376 restricted shares of Front Line's common stock from a June 2007 grant which cliff vest at the end of the required service period on October 29, 2013. As of the date of the Merger and December 31, 2010, there were 5,047 restricted shares of common stock of Front Line outstanding with various employees and consultants.  Because of a put arrangement involving these restricted shares, these awards were classified as liabilities. Refer to Note 11-Stockholders' Equity for further discussion of the put arrangements.
 
The fair value of all Front Line liability awards was measured each period. Stock-based compensation expense was calculated for each award as the total fair value of the award multiplied by the portion of the service period completed at the end of the period. As of December 31, 2010, the Company had recorded a liability of $29.2 million in other long-term liabilities on the balance sheets for all Front Line liability awards.
 
No Front Line awards were granted, forfeited, or vested from the date of the Merger through December 31, 2010.
 
The Company recorded $9.8 million relating to all Front Line awards from the date of the Merger through December 31, 2010 as a component of selling, general and administrative expenses.
 
In the first quarter of 2011, the Company acquired all of the remaining equity interests of Front Line that it did not previously own in a series of transactions. See Note 3-Acquisitions for further discussion regarding the Front Line acquisition.