18. EQUITY-BASED COMPENSATION

In accordance with ASC 718, Compensation-Stock Compensation, the Company measures the cost of employee services rendered in exchange for share-based compensation based upon the grant date fair market value. The cost is recognized over the requisite service period, which is generally the vesting period.

Pre-IPO Incentive Plan

Employee Units Surrendered for Common Stock

Prior to April 18, 2013, the Partnerships granted Employee Units to certain key employees of SEA (“Employee Units”) under the Employee Unit Incentive Plan (“Pre-IPO Incentive Plan”). The Employee Units which were granted were accounted for as equity awards and were divided into three tranches, Time-Vesting Units (“TVUs”), 2.25x Performance Vesting Units (“PVUs”) and 2.75x PVUs. There was no related cost to the employee upon vesting of the units. Separately, certain members of management in 2011 also purchased Class D Units of the Partnerships (“Class D Units”).

Prior to the consummation of the Company’s initial public offering, on April 18, 2013, the Employee Units and Class D Units held by certain of the Company’s directors, officers, employees and consultants were surrendered to the Partnerships and such individuals received an aggregate of 4,165,861 shares of the Company’s issued and outstanding common stock from the Partnerships. The number of shares of the Company’s common stock received by such individuals from the Partnerships was determined in a manner intended to replicate the economic value to each equity holder immediately prior to the transaction. The Class D Units and vested Employee Units were surrendered for an aggregate of 949,142 shares of common stock. The unvested Employee Units were surrendered for an aggregate of 3,216,719 unvested restricted shares of the Company’s common stock, which were subject to vesting terms substantially similar to those applicable to the unvested Employee Units immediately prior to the transaction. These unvested restricted shares consisted of Time Restricted shares, and 2.25x and 2.75x Performance Restricted shares, which, for accounting purposes, were removed from issued shares until their restrictions are met, as shown on the accompanying consolidated statement of changes in stockholders’ equity.

Pre-IPO Incentive Plan TVUs and Time Restricted Shares

One-third of the Pre-IPO Incentive Plan Employee Units originally granted were TVUs and vested over five years (20% per year). Vesting was contingent upon continued employment. The TVUs were originally recorded at the fair market value at the date of grant and were being amortized to compensation expense over the vesting period.

The unvested Time Restricted shares received upon surrender of the TVUs contained substantially the same terms, conditions and vesting schedules as the previously outstanding TVUs. In accordance with the guidance in ASC 718-20, Compensation-Stock Compensation, the surrender of the TVUs for shares of common stock and Time Restricted shares qualified as a modification of an equity compensation plan. As such, the Company calculated the incremental fair value of the TVUs immediately prior to and after their modification and determined that $282 of incremental equity compensation cost would be recorded upon surrender of the vested TVUs for vested shares of stock in the year ended December 31, 2013. The remaining incremental compensation cost of $220 which represented the incremental cost on the unvested TVUs surrendered for unvested Time Restricted shares, was added to the original grant date fair value of the respective awards and is being amortized to compensation expense over the remaining vesting period.

Total combined compensation expense related to these Pre-IPO Incentive Plan TVU and Time Restricted share awards was $955, $1,938 and $1,191 for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income and as contributed capital in the accompanying consolidated statements of stockholders’ equity. Total unrecognized compensation cost related to the unvested Pre-IPO Incentive Plan Time Restricted shares, expected to be recognized over the remaining vesting term was approximately $358 as of December 31, 2014.

The activity related to the Pre-IPO Incentive Plan Time Restricted share awards for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share		Weighted Average Remaining Contractual Term
Pre-IPO Incentive Plan Time Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		375,480		$	4.19
Granted		—			—
Vested		(258,064	)	$	3.95
Forfeited		(3,343	)	$	3.82

Outstanding at December 31, 2014		114,073		$	4.72		11 months

There were no Pre-IPO Incentive Plan TVUs or Time Restricted shares granted in the years ended December 31, 2014 or 2013. The weighted average grant date fair value of Pre-IPO Incentive Plan TVUs granted during the year ended December 31, 2012 was $23.15 per share. The total fair value of Pre-IPO Incentive Plan TVUs and Time Restricted shares which vested during the years ended December 31, 2014, 2013 and 2012 was approximately $1,020, $1,050 and $850, respectively.

Pre-IPO Incentive Plan 2.25x and 2.75x PVUs and Performance Restricted Shares

One-third of the Pre-IPO Incentive Plan Employee Units originally granted were 2.25x PVUs and the remaining one-third of the Pre-IPO Incentive Plan Employee Units were 2.75x PVUs. The 2.25x and 2.75x PVUs contained vesting conditions based on certain events occurring. The unvested 2.25x and 2.75x Performance Restricted shares received upon surrender of the unvested 2.25x and 2.75x PVUs contained substantially the same terms and vesting conditions as the previously outstanding 2.25x and 2.75x PVUs.

The 2.25x Performance Restricted shares received upon surrender of the 2.25x PVUs will vest if the employee is employed by the Company when and if certain investment funds affiliated with Blackstone receive cash proceeds (not subject to any clawback, indemnity or similar contractual obligation) in respect of its Partnerships units equal to (x) a 20% annualized effective compounded return rate on such funds’ investment and (y) a 2.25x multiple on such funds’ investment.

The 2.75x Performance Restricted shares received upon surrender of the 2.75x PVUs will vest if the employee is employed by the Company when and if such funds receive cash proceeds (not subject to any clawback, indemnity or similar contractual obligation) in respect of its Partnerships units equal to (x) a 15% annualized effective compounded return rate on such funds’ investment and (y) a 2.75x multiple on such funds’ investment.

The 2.25x and 2.75x Performance Restricted shares received upon surrender of the 2.25x and 2.75x PVUs have no termination date other than termination of employment from the Company and no service or time vesting conditions other than continued employment through the time the performance benchmark is reached. No compensation expense was recorded related to the Pre-IPO Incentive Plan 2.25x and 2.75x PVUs prior to April 18, 2013, since their vesting was not considered probable. No compensation expense will be recorded related to the Pre-IPO Incentive Plan 2.25x and 2.75x Performance Restricted shares until their vesting is probable. Accordingly, no compensation expense has been recorded during the years ended December 31, 2014, 2013 or 2012 related to these PVUs or Performance Restricted shares.

In accordance with the guidance in ASC 718-20, Compensation-Stock Compensation, the surrender of the unvested PVUs for unvested Performance Restricted shares of stock qualified as a modification of an equity compensation plan. In December 2014, conditions for eligibility on approximately 576,000 Pre-IPO Incentive Plan Performance Restricted shares were modified to allow those participants holding such shares who were separating from the Company to vest in their respective shares if the performance conditions are achieved after their employment ends with the Company, subject to their continued compliance with applicable post-termination restrictive covenants (see Note 4–Restructuring Program and Separation Costs). This also qualified as a modification of an equity award. As the 2.25x and 2.75x Performance Restricted shares were not considered probable of vesting before or after either modification, the Company will use the respective modification date fair value to record compensation expense related to these shares if the performance conditions become probable within a future reporting period. The impact of this modification reduced the fair value of the respective shares by approximately $1,650 and $3,230 for the Pre-IPO Incentive Plan 2.25x and 2.75x Performance Restricted shares, respectively. Unrecognized compensation expense as of December 31, 2014, was approximately $26,085 and $15,350 for the Pre-IPO Incentive Plan 2.25x and 2.75x Performance Restricted shares, respectively.

The activity related to the Pre-IPO Incentive Plan 2.25x Performance Restricted shares for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share
Pre-IPO Incentive Plan 2.25x Performance Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		1,308,752		$	21.49
Granted		—			—
Vested		—			—
Forfeited		(18,217	)	$	21.49

Outstanding at December 31, 2014		1,290,535		$	20.21

There were no Pre-IPO Incentive Plan 2.25x PVUs or Performance Restricted shares granted in the years ended December 31, 2014 or 2013. The weighted average grant date fair value of the Pre-IPO Incentive Plan 2.25x PVUs granted during the year ended December 31, 2012 was $15.66 per share. There were no Pre-IPO Incentive Plan 2.25x PVUs or Performance Restricted shares which vested in the years ended December 31, 2014, 2013 and 2012.

The activity related to the Pre-IPO Incentive Plan 2.75x Performance Restricted shares for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share
Pre-IPO Incentive Plan 2.75x Performance Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		1,308,752		$	14.40
Granted		—			—
Vested		—			—
Forfeited		(18,217	)	$	14.40

Outstanding at December 31, 2014		1,290,535		$	11.89

There were no Pre-IPO Incentive Plan 2.75x PVUs or Performance Restricted shares granted in the years ended December 31, 2014 or 2013. The weighted average grant date fair value of the Pre-IPO Incentive Plan 2.75x PVUs granted during the year ended December 31, 2012 was $10.52 per share. There were no Pre-IPO Incentive Plan 2.75x PVUs or Performance Restricted shares which vested in the years ended December 31, 2014, 2013 and 2012.

Pre-IPO Incentive Plan Fair Value Assumptions

The fair value of each Pre-IPO Incentive Plan Employee Unit originally granted prior to April 18, 2013 was estimated on the date of grant using a composite of the discounted cash flow model and the guideline public company approach to determine the underlying enterprise value. The discounted cash flow model was based upon significant inputs that are not observable in the market. Key assumptions included projected cash flows, a discount rate of 10.5%, and a terminal value. The guideline public company approach uses relevant public company valuation multiples to determine fair value. The value of the individual equity tranches was allocated based upon the Option-Pricing Method model. Significant assumptions included a holding period of 2.6 to 3.6 years, a risk free rate of 0.33% to 1.22%, volatility of approximately 49% to 57%, a discount for lack of marketability, depending upon the units, from 31% to 53% and a 0% dividend yield. Volatility for SEA’s stock at the date of grant was estimated using the average volatility calculated for a peer group, which is based upon daily price observations over the estimated term of units granted.

In order to calculate the incremental fair value when the unvested Employee Units were surrendered for unvested restricted shares on April 18, 2013, the Option-Pricing Method model was used to estimate the fair value prior to the modification. For the fair value after the modification, the initial public offering price of $27.00 per share was used to calculate the fair value of the TVUs while the fair value of the PVUs was estimated using an asset-or-nothing call option approach. Significant assumptions used in both the Option-Pricing Method model and the asset-or-nothing call option approach included a holding period of approximately 2 years from the initial public offering date, a risk free rate of 0.24%, a volatility of approximately 37.6% based on re-levered historical and implied equity volatility of comparable companies and a 0% dividend yield.

In order to calculate the modification date fair value in December 2014, for certain Performance Restricted shares, the asset-or-nothing call option approach was used. Significant assumptions included a holding period of approximately 1.5 years from the date of modification, a risk free rate of 0.38%, a volatility of approximately 45.4% based on re-levered historical and implied equity volatility of comparable companies and a 0% dividend yield.

Omnibus Incentive Plan

The Company reserved 15,000,000 shares of common stock for future issuance under the Company’s 2013 Omnibus Incentive Plan (“Omnibus Incentive Plan”). The Omnibus Incentive Plan is administered by the compensation committee of the Board of Directors, and provides that the Company may grant equity incentive awards to eligible employees, directors, consultants or advisors in the form of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based and performance compensation awards. If an award under the Omnibus Incentive Plan terminates, lapses, or is settled without the payment of the full number of shares subject to the award, the undelivered shares may be granted again under the Omnibus Incentive Plan.

During the year ended December 31, 2014, the Company granted 33,273 time vesting restricted shares (“Omnibus Plan Time Restricted shares”) under the Omnibus Incentive Plan primarily to certain Board of Director members. These shares generally vest ratably over a three year term.

On April 19, 2013, 494,557 shares of restricted stock were granted to the Company’s directors, officers and employees under the Omnibus Incentive Plan (the “2013 Grant”). The shares granted were in the form of Omnibus Plan Time Restricted shares, 2.25x performance restricted shares (“Omnibus Plan 2.25x Performance Restricted shares”) and 2.75x performance restricted shares (“Omnibus Plan 2.75x Performance Restricted shares”). The vesting terms and conditions of the 2013 Grant were substantially the same as those of the previous Incentive Plan (see the previous section under the caption Pre-IPO Incentive Plan 2.25x and 2.75x PVUs and Performance Restricted Awards). After an initial 180 day post initial public offering lock up period, the vesting schedule from the Pre-IPO Incentive Plan carried over so that each recipient vested in the 2013 Grant in the same proportion as they were vested in the previous Pre-IPO Incentive Plan. The remaining unvested shares vest over the remaining service period, subject to substantially the same vesting conditions which carried over from the previous Pre-IPO Incentive Plan.

The activity related to the Omnibus Plan Time Restricted shares for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share		Weighted Average Remaining Contractual Term
Omnibus Plan Time Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		59,160		$	33.35
Granted		33,273		$	24.59
Vested		(41,519	)	$	33.58
Forfeited		(442	)	$	32.88

Outstanding at December 31, 2014		50,472		$	27.40		17 months

The weighted average grant date fair value of the Omnibus Plan Time Restricted shares granted during the years ended December 31, 2014 and 2013 was $24.59 and $33.45 per share, respectively. The total fair value of Omnibus Plan Time Restricted shares which vested during the years ended December 31, 2014 and 2013 was approximately $1,390 and $3,770, respectively. There were no Omnibus Plan Time Restricted shares which were granted or vested in the year ended December 31, 2012.

The activity related to the Omnibus Plan 2.25x Performance Restricted shares for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share
Omnibus Plan 2.25x Performance Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		163,310		$	30.46
Granted		—			—
Vested		—			—
Forfeited		(2,392	)	$	30.46

Outstanding at December 31, 2014		160,918		$	26.96

There were no Omnibus Plan 2.25x Performance Restricted shares granted in the years ended December 31, 2014 or 2012. The weighted average grant date fair value of the Omnibus Plan 2.25x Performance Restricted shares granted during the year ended December 31, 2013 was $30.46 per share. There were no Omnibus Plan 2.25x Performance Restricted shares which vested in the years ended December 31, 2014, 2013 and 2012.

The activity related to the Omnibus Plan 2.75x Performance Restricted shares for the year ended December 31, 2014, is as follows:


	Shares			Weighted Average Grant Date Fair Value per Share
Omnibus Plan 2.75x Performance Restricted shares:		(not in thousands	)
Outstanding at December 31, 2013		163,310		$	23.05
Granted		—			—
Vested		—			—
Forfeited		(2,392	)	$	23.05

Outstanding at December 31, 2014		160,918		$	18.32

There were no Omnibus Plan 2.75x Performance Restricted shares granted in the years ended December 31, 2014 or 2012. The weighted average grant date fair value of the Omnibus Plan 2.75x Performance Restricted shares granted during the year ended December 31, 2013 was $23.05 per share. There were no Omnibus Plan 2.75x Performance Restricted shares which vested in the years ended December 31, 2014, 2013 and 2012.

Approximately $1,394 and $4,088 of compensation expense was recognized in the years ended December 31, 2014 and 2013, respectively, related to grants under the Omnibus Incentive Plan. As of December 31, 2014, unrecognized compensation expense related to the Omnibus Plan Time Restricted shares was approximately $1,060 to be recognized over the remaining requisite service period.

Additionally, in December 2014, conditions for eligibility on approximately 77,000 Omnibus Plan Performance Restricted shares were modified to allow those participants holding such awards who were separating from the Company to vest in their respective awards if the performance conditions are achieved after their employment ends with the Company, subject to their continued compliance with applicable post-termination restrictive covenants (see Note 4–Restructuring Program and Separation Costs). There is no compensation expense recorded related to the Omnibus Plan 2.25x and 2.75x Performance Restricted shares until their vesting is probable. The impact of the modification reduced the fair value of the respective awards by approximately $560 and $760 for the Omnibus Plan 2.25x and 2.75x Performance Restricted shares, respectively. Total unrecognized compensation expense as of December 31, 2014 was approximately $4,339 and $2,948 for the Omnibus Plan 2.25x and 2.75x Performance Restricted shares, respectively.

Omnibus Incentive Plan Fair Value Assumptions

For Omnibus Plan Time Restricted Shares, the grant date fair value is determined based on the closing market price of the Company’s stock at the date of grant applied to the total number of shares that are anticipated to fully vest. The grant date fair value of the Omnibus Plan 2.25x and 2.75x Performance Restricted shares was measured using the asset-or-nothing option pricing model. Significant assumptions included a holding period of approximately 2 years from the initial public offering date, a risk free rate of 0.24%, a volatility of approximately 33.2% based on re-levered historical and implied equity volatility of comparable companies and a 0% dividend yield.

In order to calculate the modification date fair value in December 2014 for certain Performance Restricted shares which were modified, the asset-or-nothing call option approach was used. Significant assumptions included a holding period of approximately 1.5 years from the date of modification, a risk free rate of 0.38%, a volatility of approximately 45.4% based on re-levered historical and implied equity volatility of comparable companies and a 0% dividend yield.

Other

Based on cash proceeds previously received by certain investment funds affiliated with Blackstone from the Company’s initial public offering and subsequent secondary offerings of stock in December 2013 and April 2014, the Company’s repurchase of shares directly from such funds and the cumulative dividends paid by the Company through January 31, 2015, if such funds receive additional future cash proceeds of approximately $14,000, and other vesting conditions are satisfied, the Pre-IPO Incentive Plan 2.25x Performance Restricted shares and Omnibus Plan 2.25x Performance Restricted shares will vest. Similarly, if such funds receive additional future cash proceeds of approximately $441,000, and other vesting conditions are satisfied, the Pre-IPO Incentive Plan 2.75x Performance Restricted shares and the Omnibus Plan 2.75x Performance Restricted shares will vest. As receipt of these future cash proceeds will be primarily related to liquidity events, such as secondary offerings of stock, the shares are not considered to be probable of vesting until such events are consummated.

For the year ended December 31, 2014, the Company withheld an aggregate of 8,936 shares of its common stock from employees to satisfy minimum tax withholding obligations related to the vesting of restricted stock awards. As a result, these shares were added back to the number of shares of common stock available for future issuance under the Company’s Omnibus Incentive Plan. As of December 31, 2014, there were 14,511,216 shares of common stock available for future issuance under the Company’s Omnibus Incentive Plan.

Subsequent Grants

On January 15, 2015, the Company granted 100,000 Omnibus Plan Time Restricted shares to its Interim Chief Executive Officer (the “Interim CEO”) in accordance with his appointment to such role (see further discussion in Note 4–Restructuring Program and Separation Costs). The shares had a grant date fair value per share of $16.50 and will vest on the earlier of the start date of a new Chief Executive Officer or June 30, 2015. Also on January 15, 2015, the Company granted 7,272 Omnibus Plan Time Restricted shares to a new Board member in accordance with the Company’s Outside Director Compensation Policy. These shares had a grant date fair value per share of $16.50 and vest ratably over a three year term.