QVC Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-Based Awards (Note)

Stock-Based Awards (Note)

12 Months Ended

Dec. 31, 2016

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,
	2016			2015			2014
Selling and marketing	$	6,412		$	6,171		$	4,736
General and administrative	12,821			12,237			10,870
Stock-based compensation expense before income taxes	19,233			18,408			15,606
Income tax benefit	(6,734		)	(6,563		)	(5,685		)
Stock-based compensation expense after income taxes	$	12,499		$	11,845		$	9,921

As of December 31, 2016, there was approximately $22.9 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 1.9 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 (8.8 million shares after giving effect to the anti-dilution provisions of the Plan related to the special cash dividend) 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.

In connection with the special cash dividend of $10.00 per common share paid on February 19, 2015, and as required by the anti-dilution provisions of the Plan, adjustments were made to outstanding equity awards as of the ex-dividend date to preserve their value following the dividend, as follows: (i) the number of shares subject to outstanding restricted stock units was increased as a result of the reinvestment of the dividend; and (ii) the exercise prices of outstanding stock options and stock appreciation rights and the grant date fair value of market stock units were reduced and the number of shares subject to such awards was increased. These adjustments did not result in additional stock-based compensation expense as the fair value of the outstanding awards did not change. As further required by the Plan, the maximum number of shares issuable under the Plan was also proportionally adjusted, which resulted in approximately 0.8 million additional shares available to be issued. As of December 31, 2016, there were approximately 1.7 million shares of common stock available for grants under the Plan.

HSNi can grant restricted stock, restricted stock units ("RSUs"), market stock units ("MSUs"), performance share units ("PSUs"), 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 and PSUs have rights to receive dividend equivalents that vest at the same time the underlying awards 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 $3.3 million, $16.7 million and $12.7 million for the years ended December 31, 2016, 2015 and 2014, 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 and dividend equivalents, as of December 31, 2016 and changes during the year ended December 31, 2016 is as follows:



	Number of RSUs		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016 (including 83,132 outstanding dividend equivalents)	674,894		$	57.92
Granted	318,228		44.16
Additional units granted related to dividend equivalents due to quarterly dividends	24,602		—
Vested	(152,252	)	58.45
Forfeited	(102,843	)	56.01
Nonvested at December 31, 2016 (including 74,181 outstanding dividend equivalents)	762,629		51.86

The weighted average per share fair value of RSUs granted during the years ended December 31, 2016, 2015 and 2014 based on market prices of HSNi’s common stock on the grant date was $44.16, $65.89 and $55.06, respectively.

The total fair value of RSUs that vested during the years ended December 31, 2016, 2015 and 2014 and settled in HSNi common stock was $6.6 million, $12.0 million and $10.9 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 $3.4 million, $5.4 million and $4.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, there was approximately $16.7 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 2.1 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.

A summary of the status of the outstanding stock options and SARs as of December 31, 2016 is as follows:



	Number of options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016	1,810,973		$	45.80
Granted	928,990		44.86
Exercised	(39,054	)	23.27
Forfeited	(101,675	)	49.41
Expired	(19,017	)	46.25
Outstanding at December 31, 2016	2,580,217		45.66		6.6	$	4,430,444
Vested and expected to vest at December 31, 2016	2,437,355		45.47		6.5	$	4,430,444
Exercisable at December 31, 2016	1,308,868		41.69		4.6	$	4,430,444

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, 2016 of $34.30 and the exercise price for all “in the money” awards at December 31, 2016. 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, 2016, 2015 and 2014 was approximately $0.8 million, $44.4 million and $23.4 million, respectively. Cash received from stock option exercises for the years ended December 31, 2016, 2015 and 2014 was $0.2 million, $15.0 million, and $0.6 million, respectively. The tax benefit realized from stock option exercises for the years ended December 31, 2016, 2015 and 2014 was $0.3 million, $12.2 million, and $8.8 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,
	2016		2015		2014
Volatility factor	26.3	%	29.2	%	36.4	%
Risk-free interest rate	1.23	%	1.49	%	1.55	%
Expected term	4.5		4.4		4.7
Dividend yield	3.1	%	2.1	%	1.8	%

The weighted average fair values of stock options and SARs granted from the Plan during the years ended December 31, 2016, 2015 and 2014 at market prices equal to HSNi’s common stock on the grant date were $7.31, $13.65, and $15.24, respectively.

At the date of the Spin-off, HSNi granted 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. The weighted average exercise price and the weighted average fair value for the 373,000 stock options that were outstanding as of December 31, 2016 were $38.89 and $3.01, 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, 2016, there was approximately $6.2 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 1.3 years.

The following table summarizes the information about stock options and SARs outstanding and exercisable as of December 31, 2016:



	Outstanding				Exercisable
	Number Outstanding at December 31, 2016	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years	Number Exercisable at December 31, 2016	Weighted Average Exercise Price
$0.00 to $9.99	95,202	$	4.91	2.0	95,202	$	4.91
$10.00 to $19.99	48,873	16.11		2.3	48,873	16.11
$20.00 to $29.99	57,541	25.86		4.1	57,541	25.86
$30.00 to $39.99	450,822	37.52		2.2	450,822	37.52
$40.00 to $49.99	1,216,719	45.72		8.5	236,836	47.73
$50.00 to $59.99	283,116	51.56		6.2	275,666	51.57
$60.00 to $69.99	427,944	65.24		8.1	143,928	65.24
	2,580,217				1,308,868

Performance-Based Awards

During the third quarter of 2013, HSNi granted approximately 116,000 MSUs (after giving effect to the anti-dilution provisions of the Plan related to the special cash dividend) to its Chief Executive Officer. The MSUs vest over performance periods of 3 years and 5 years (50% for each period). Payout percentages range between 0% and 200% of the target award depending on the awards' market condition, the future price of HSNi's stock at the end of each performance period as compared to HSNi's stock price at the date of grant (as defined in the MSU agreement). The fair value of the MSUs at the grant date was $8.3 million, or an average of $82.67 per unit, and is recognized on a graded-vested basis over the performance periods. The fair value was measured on the grant date by applying a Monte Carlo simulation pricing model which estimates the potential outcome of reaching the market condition based on simulated future stock prices. The weighted average assumptions used in the valuation of the MSUs were the following: volatility factor of 39.7%, risk-free interest rate of 1.00%, expected term of 4.0 years and dividend yield of 1.1%. The fair value of the MSUs that vested during the year ended December 31, 2016 and settled in HSNi common stock was $2.4 million.

During the years ended December 31, 2016, 2015 and 2014, HSNi granted performance-based awards to certain executive employees which vest over a three-year performance period. The awards vest between 0% and 200% of the target award based on the company's Total Shareholder Return relative to an indexed peer group. For the year ended December 31, 2016, HSNi granted these awards using PSUs which represent a right to receive shares of HSNi common stock. For the years ended December 31, 2015 and 2014, HSNi granted these awards using a similar performance metric but they will be settled in cash. The aggregate target value of the performance-based awards granted during the years ended December 31, 2016, 2015 and 2014 was $5.0 million, $5.2 million and $4.4 million, respectively, with grant date fair value of $5.0 million, $4.9 million and $3.8 million, respectively, measured using a Monte-Carlo simulation.

The compensation expense for these PSUs is based on the fair value of the awards measured at the grant date and is expensed ratably over the vesting term. Performance cash awards are accounted for as liability-based awards as they will be settled in cash. The compensation expense for the cash awards is remeasured at the end of each reporting period. As of December 31, 2016 and 2015, a liability of $0.7 million and $2.3 million, respectively, was recorded for these awards.

A summary of the status of the nonvested MSUs, PSUs and dividend equivalents, as of December 31, 2016 and changes during the year ended December 31, 2016 is as follows:



	Number of MSUs and PSUs (a)		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016	231,602		$	82.67
Granted (a)	184,580		54.06
Additional units granted related to quarterly dividend equivalents	5,810		—
Vested	(57,049	)	78.04
Forfeited	(69,557	)	74.31
Nonvested at December 31, 2016	295,386		67.35

(a) Shares granted are based on the achievement of certain performance criteria and represent the maximum number of shares that can vest (200%).

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. All shares purchased under the ESPP must be held for a period of 6 months.

For the year ended December 31, 2016, HSNi granted approximately 62,000 options 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, 2016 and 2015:



	Year Ended December 31,
	2016		2015		2014
Volatility factor	32.0	%	21.7	%	22.0	%
Risk-free interest rate	0.42	%	0.12	%	0.08	%
Expected term	0.5		0.5		0.5
Dividend yield	2.8	%	1.9	%	1.7	%

For the years ended December 31, 2016, 2015 and 2014, approximately $0.6 million, $0.6 million and $0.5 million, respectively, of expenses related to the ESPP were included in the consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, HSNi received cash proceeds from the participating employees of approximately $2.2 million, $2.4 million and $2.0 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 vested in non-voting restricted common shares of Cornerstone Brands. As of December 31, 2016, these awards were significantly out of the money and are not expected to result in any cost should HSNi exercise its call right.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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