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In connection with the Spin-off, HSNi entered into a Tax Sharing Agreement with IAC pursuant to which, among other things, each of the
Spincos has indemnified IAC and the other Spincos for any taxes resulting from the Spin-off of such Spinco (and any related interest, penalties,
legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts
result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity
securities or assets of such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any
representation or covenant contained in the separation documents or in the documents relating to the Internal Revenue Service (“IRS”) private
letter ruling and/or tax opinions. In the event an adjustment with respect to a pre-Spin-off period for which IAC is responsible results in a tax
benefit to HSNi in a post-Spin-off period, HSNi will be required to pay such tax benefit to IAC. In general, IAC controls all audits and
administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group and any other tax
returns for which the IAC group is responsible. The provisions set forth in the Tax Sharing Agreement could subject HSNi to future tax
contingencies.
The IRS has substantially completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2006,
which includes the operations of HSNi. The settlement for these years has not yet been submitted to the Joint Committee on Taxation for
approval. The IRS began its review of the IAC consolidated tax returns for the years ended December 31, 2007 through 2009 in July 2011. The
statute of limitations for the years 2001 through 2008 has been extended to December 31, 2013. Various IAC consolidated tax returns filed with
state, local and foreign jurisdictions are currently under examination, the most significant of which are California, New York and New York
City, for various tax years beginning with 2005. By virtue of the Tax Sharing Agreement with IAC, HSNi is indemnified with respect to
additional tax liabilities for consolidated or combined federal and state tax returns prepared and filed by IAC prior to the Spin-off, but is liable
for any additional tax liabilities for HSNi separately filed state income tax returns.
NOTE 13—COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, HSNi is a party to various audits and lawsuits. These audits or litigation may relate to claims involving
property, personal injury, contract, intellectual property (including patent infringement), sales tax, regulatory compliance and other claims. HSNi
has established reserves for specific legal or tax compliance matters that it has determined the likelihood of an unfavorable outcome is probable
and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not
probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against
HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on its liquidity, results of
operations, financial condition or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may
change in the future and an unfavorable resolution of such a proceeding could have a material impact. Moreover, any claims or regulatory
actions against HSNi, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of
management time and result in the diversion of significant operational resources.
HSNi leases satellite transponders, computers, warehouse and office space, equipment and services used in connection with its operations
under various operating leases, many of which contain escalation clauses.
Future minimum payments under operating lease agreements are as follows (in thousands):
Expenses charged to continuing operations under these agreements were $22.1 million , $20.8 million , and $20.6 million for the years
ended December 31, 2012, 2011 and 2010, respectively.
56
Years Ending December 31,
2013
$
23,578
2014
19,888
2015
18,292
2016
14,343
2017
13,027
Thereafter
26,559
Total
$
115,687