Annual report pursuant to Section 13 and 15(d)

Stock Options and Other Share-Based Awards Stock Options and Other Share- Based Awards

v3.10.0.1
Stock Options and Other Share-Based Awards Stock Options and Other Share- Based Awards
 12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Options and Other Share-Based Payments
Stock Options and Other Share-Based Payments
Certain QVC employees and officers have received stock options (the "Options") and restricted shares in Series A Qurate Retail common stock ( “QRTEA”) and Series A Liberty Ventures common stock ("LVNTA") in accordance with the Liberty Interactive Corporation 2000 Incentive Plan, as amended from time to time; the Liberty Interactive Corporation 2007 Incentive Plan, as amended from time to time; the Liberty Interactive Corporation 2010 Incentive Plan, as amended from time to time; and the Liberty Interactive Corporation 2012 Incentive Plan, as amended from time to time (collectively, the "Liberty Incentive Plan"). On December 31, 2018, Qurate Retail transferred their 100% ownership interest in HSN to QVC through a transaction among entities under common control. As a result of the transaction, QVC has presented the related Options and shares granted to HSN employees and officers in the information below as of December 29, 2017.
(a) Stock options
CommerceHub, Inc. ("CommerceHub") Spin-Off
In connection with the spin-off of CommerceHub ("CommerceHub Spin-Off") in July 2016, all outstanding awards with respect to Liberty Ventures common stock as of the record date for the CommerceHub Spin-Off (“Liberty Ventures Award”) were adjusted pursuant to the anti-dilution provisions of the incentive plans under which the equity awards were granted, such that:
i.
A holder of a Liberty Ventures Award who was a member of the board of directors or an officer of Qurate Retail holding the position of Vice President or above received (i) an adjustment to the exercise price and the number of shares subject to the Liberty Ventures Award (as so adjusted, an “Adjusted Liberty Ventures Award”) and (ii) a corresponding equity award relating to shares of the corresponding series of CommerceHub common stock, as well as Series C CommerceHub common stock (in each case, a “CommerceHub Award”); and
ii.
Each other holder of a Liberty Ventures Award received only an adjustment to the exercise price and the number of shares subject to the Liberty Ventures Award (also referred to as an “Adjusted Liberty Ventures Award”).
The exercise prices and number of shares subject to the Adjusted Liberty Ventures Awards and the CommerceHub Awards were determined based on (1) the exercise prices and number of shares subject to the Liberty Ventures Award, (2) the distribution ratios used in the CommerceHub Spin-Off, (3) the pre-CommerceHub Spin-Off trading price of the Liberty Ventures common stock and (4) the post-CommerceHub Spin-Off trading prices of Liberty Ventures common stock and CommerceHub common stock, such that all of the pre-CommerceHub Spin-Off intrinsic value of the Liberty Ventures Award was allocated between the Adjusted Liberty Ventures Award and the CommerceHub Award, or fully to the Adjusted Liberty Ventures Award.
Following the CommerceHub Spin-Off, employees of QVC may hold Awards in both Liberty Ventures common stock and CommerceHub common stock. The compensation expense relating to employees of QVC is recorded at QVC.
Liberty Expedia Holdings, Inc. Split-Off
In connection with the split-off of Liberty Expedia Holdings, Inc. (“Expedia Holdings”) from Liberty (the “Expedia Holdings Split-Off”) in November 2016, all outstanding Awards with respect to a Liberty Ventures common stock (a "Liberty Ventures Award") were adjusted pursuant to the anti-dilution provisions of the incentive plans under which the equity awards were granted, such that a holder of a Liberty Ventures Award received:
i.
An adjustment to the exercise price and the number of shares subject to the Liberty Ventures Award and
ii.
A corresponding equity award relating to shares of the corresponding series of Expedia Holdings common stock (an “Expedia Holdings Award”)
The exercise prices of and number of shares subject to the new Expedia Holdings Award and the Adjusted Liberty Ventures Award were determined based on (1) the exercise price and number of shares subject to the original Liberty Ventures Award, (2) the redemption ratios used in the Expedia Holdings Split-Off, (3) the pre-Expedia Holdings Split-Off trading price of Liberty Ventures common stock and (4) the relative post-Expedia Holdings Split-Off trading prices of Liberty Ventures Awards and Expedia Holdings common stock, such that the pre-Expedia Holdings Split-Off intrinsic value of the original Liberty Ventures Award was allocated between the new Expedia Holdings Award and the Adjusted Liberty Ventures Award.
Following the Expedia Holdings Split-Off, employees of QVC hold Awards in both Liberty Ventures common stock and Expedia Holdings common stock. The compensation expense relating to employees of QVC is recorded at QVC.
Except as described above, all other terms of an Adjusted Liberty Ventures Award, a new Expedia Holdings Award and a new CommerceHub Award (including, for example, the vesting terms thereof) are in all material respects, the same as those of the corresponding original Liberty Ventures Award.
The adjustments related to the CommerceHub Spin-Off and the Expedia Holdings Split-Off were considered modifications under Accounting Standards Codification ("ASC") 718 - Stock Compensation but did not result in incremental compensation expense.
A summary of the activity of the Liberty Incentive Plan with respect to the QRTEA Options granted to QVC employees and officers as of and during the year ended December 31, 2018 is presented below:
 
Options

Weighted
average
exercise
price

Aggregate
intrinsic
value
(000s)

Weighted average remaining
life
(years)
Outstanding at January 1, 2018
14,872,849

$
24.53

$
25,290

5.1
Granted
4,016,618

26.77

 
 
Transferred from zulily (1)
2,785,968

16.16

 
 
Exercised
(3,045,271
)
16.60

 
 
Forfeited
(3,976,575
)
27.25

 
 
Outstanding at December 31, 2018
14,653,589

24.46

8,353

4.4
Exercisable at December 31, 2018
6,970,577

23.85

6,214

3.4
(1) During year ended December 31, 2018, employees were transferred to QVC from zulily and are now employed by QVC. The row represents employees' previous grants prior to being a QVC employee.
Upon employee exercise of the Options, the exercise price is remitted to Qurate Retail in exchange for the shares. The aggregate intrinsic value of all Options exercised during the years ended December 31, 2018, 2017 and 2016 was $20 million, $32 million and $28 million, respectively.
The weighted average fair value at date of grant of a QRTEA Option granted during the years ended December 31, 2018, 2017 and 2016 was $8.52, $7.86 and $7.84, respectively.
During the years ended December 31, 2018, 2017 and 2016, the fair value of each QRTEA Option was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2018

2017

2016

Expected volatility
29.7
%
30.3
%
27.4
%
Expected term (years)
5.2

5.9

6.1

Risk free interest rate
2.7
%
2.1
%
1.6
%
Expected dividend yield
—

—

—


Expected volatility is based on historical and implied volatilities of QRTEA common stock over a period commensurate with the expected term of the options. The Company estimates the expected term of the Options based on historical exercise and forfeiture data. The volatility used in the calculation for the Options is based on the historical volatility of Qurate Retail's stocks and the implied volatility of publicly traded Qurate Retail Options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject Options.
The fair value of the Options is recognized as expense over the requisite service period.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded $28 million, $29 million and $21 million, respectively, of stock-based compensation expense related to the Options. As of December 31, 2018, the total unrecognized compensation cost related to unvested Options was approximately $49 million. Such amount will be recognized in the Company's consolidated statement of operations over a weighted average period of approximately 2.4 years.
(b) Restricted stock plan
A summary of the activity of the Liberty Incentive Plan with respect to the QRTEA restricted shares granted to QVC employees and officers as of and during the year ended December 31, 2018 is presented below:
Restricted shares

Weighted average
grant date fair value

Outstanding at January 1, 2018
2,393,700

$
24.49

Granted
910,559

26.23

Transferred from zulily (1)
110,550

24.02

Transferred from CBI (2)
1,818

24.42

Vested
(1,516,428
)
24.21

Forfeited
(300,906
)
26.06

Outstanding at December 31, 2018
1,599,293

25.42

(1) During year ended December 31, 2018, employees were transferred to QVC from zulily and are now employed by QVC. The row represents employees' previous grants prior to being a QVC employee.
(2) During year ended December 31, 2018, employees were transferred to QVC from CBI and are now employed by QVC. The row represents employees' previous grants prior to being a QVC employee.
A summary of the activity of the Liberty Incentive Plan with respect to the LVNTA restricted shares granted to QVC employees and officers as of and during the year ended December 31, 2018 is presented below:
Restricted shares

Weighted
average
grant date fair value

Outstanding at January 1, 2018
4,061

$
51.47

Granted
—

—

Vested
(3,839
)
51.54

Forfeited
(222
)
50.52

Outstanding at December 31, 2018
—

—


During the years ended December 31, 2018, 2017 and 2016, the Company recorded $18 million, $10 million and $11 million, respectively, of stock-based compensation expense related to these shares. As of December 31, 2018, the total unrecognized compensation cost related to unvested restricted shares of common stock was approximately $24 million. Such amount will be recognized in the Company's consolidated statement of operations over a weighted average period of approximately 2.3 years.
Fair value of restricted shares is calculated based on the market price on the day of the granted shares. The weighted average grant date fair value of the QRTEA restricted shares granted to QVC employees and officers during the years ended December 31, 2018, 2017 and 2016 was $26.23, $22.49, and $25.86, respectively. There have been no LVNTA restricted shares granted to QVC employees and officers during the years ended December 31, 2018, 2017 and 2016.
The aggregate fair value of all restricted shares of common stock that vested during the years ended December 31, 2018, 2017 and 2016 was $37 million, $10 million and $8 million, respectively.