Qurate Retail, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

Stock-Based Compensation

12 Months Ended

Dec. 31, 2017

Share-based Compensation [Abstract]

Stock-Based Compensation

(15) Stock-Based Compensation

Liberty - Incentive Plans

Pursuant to the Liberty Interactive 2016 Omnibus Incentive Plan (the “2016 Plan”), the Company may grant stock options (“Awards”) to be made in respect of a maximum of 39.9 million shares of Series A and Series B QVC Group common stock and Liberty Ventures common stock. Awards generally vest over 4-5 years and have a term of 7-10 years. Liberty issues new shares upon exercise of equity awards.

In connection with the HSNi acquisition in December 2017 (see note 5), outstanding awards to purchase shares of HSNi common stock (an “HSN Award”) were exchanged for awards to purchase shares of Series A QVC Group common stock (a “QVCA Award”). The exercise prices and number of shares subject to the QVCA Award were determined based on (1) the exercise prices and number of shares subject to the HSN Award and (2) the acquisition exchange ratio. The exchange of such awards was considered a modification under ASC 805 – Business Combinations. A portion of the fair value of the replacement QVCA Awards was attributed to the consideration paid in the acquisition. The remaining portion of the fair value will be recognized in the consolidated financial statements over the remaining vesting period of each individual award.

In connection with the Expedia Holdings Split-Off in November 2016, the holder of an outstanding award to purchase shares of Liberty Ventures Series A and Series B common stock (a “Liberty Ventures Award”) received an Award to purchase shares of the corresponding series of Expedia Holdings common stock and an adjustment to the exercise price and number of shares subject to the Liberty Ventures Award (as so adjusted, an “Adjusted Liberty Ventures Award”). Following the Expedia Holdings Split-Off, employees of Liberty hold Awards in both Liberty Ventures common stock and Expedia Holdings common stock. The compensation expense relating to employees of Liberty is recorded at Liberty.

In connection with the CommerceHub Spin-Off in July 2016, the holder of an outstanding award to purchase shares of Liberty Ventures Series A and Series B common stock (an “Original Liberty Ventures Award”) received an adjustment to the exercise price and number of shares subject to the Original Liberty Ventures Award (as so adjusted, an “Adjusted Liberty Ventures Award”). A holder of an Original Liberty Ventures Award who was a member of the board of directors or an officer of Liberty holding the position of Vice President or above also received an Award to purchase shares of the corresponding series of CommerceHub common stock as well as Series C CommerceHub common stock (in each case, a “CommerceHub Award”). Following the CommerceHub Spin-Off, employees of Liberty may hold Awards in both Liberty Ventures common stock and CommerceHub common stock. The compensation expense relating to employees of Liberty is recorded at Liberty.

Liberty – Grants

The following table presents the number and weighted average grant-date fair value (“GDFV”) of options granted by Liberty during the years ended December 31, 2017, 2016 and 2015:


	For the Years ended December 31,
	2017			2016			2015
	Options Granted (000's)	Weighted Average GDFV		Options Granted (000's)	Weighted Average GDFV		Options Granted (000's)	Weighted Average GDFV

Series A QVC Group common stock, QVC employees (1)	3,115	$	7.86	2,860	$	7.84	2,002	$	11.87
Series A QVC Group common stock, zulily employees (1)	483	$	7.86	433	$	7.57	264	$	9.84
Series A QVC Group common stock, Liberty employees and directors (2)	518	$	7.81	421	$	8.02	2,459	$	11.63
Series A QVC Group common stock, QVC CEO (3)	NA		NA	NA		NA	1,680	$	10.40
Series B QVC Group common stock, Liberty CEO (4)	154	$	7.92	730	$	7.47	132	$	10.10
Series A Ventures Group common stock, Liberty employees and directors (2)	188	$	16.52	114	$	12.25	683	$	18.10
Series B Ventures Group common stock, Liberty CEO (4)	269	$	15.41	209	$	12.48	135	$	16.94

(1)

Mainly vests semi-annually over four years.

(2)

Mainly vests between three and five years for employees and in one year for directors.

(3)

Vests 50% on each of December 31, 2019 and 2020. Grant was made in connection with a new compensation arrangement.

(4)

Grants in 2017 and 2016 cliff vested at the end of their respective grant year; grant in 2015 cliff vested in March 2016. Grants were made in connection with his employment agreement (see note 14).

In connection with the Option Exchange (see below), Liberty granted 5.9 million, 946 thousand and 1.1 million options to purchase shares of Series A QVC Group common stock, Series A Liberty Ventures common stock and Series B Liberty Ventures common stock, respectively. Such options had an incremental weighted average GDFV of $3.49, $8.53 and $6.94, respectively.

In addition to the stock option grants to the Liberty CEO, Liberty granted performance-based restricted stock units ("RSUs") of Series B QVC Group common stock in 2017, 2016 and 2015 of 115 thousand, 53 thousand and 182 thousand, respectively. The RSUs had a fair value of $19.90, $25.11 and $29.41 per share, respectively, at the time they were granted. Liberty also granted performance-based RSUs of Series B Liberty Ventures common stock in 2016 and 2015 of 16 thousand and 13 thousand, respectively. The RSUs had a fair value of $38.79 and $42.33 per share, respectively, at the time they were granted. The 2017, 2016 and 2015 performance-based RSUs cliff vested in one year, subject to the satisfaction of certain performance objectives and based on an amount determined by the compensation committee.

During the fourth quarter of 2017, the Company entered into a series of transactions with certain officers of Liberty, associated with certain outstanding stock options, in order to recognize tax deductions in the current year versus future years (the “Option Exchange”). On December 26, 2017 (the “Grant Date”), pursuant to the approval of the Compensation Committee of its Board of Directors, the Company effected the acceleration of (i) each unvested in-the-money option to acquire shares of LVNTA and (ii) each unvested in-the-money option to acquire shares of LVNTB, in each case, held by certain of its officers (collectively, the “Eligible Optionholders”). Following this acceleration, also on the Grant Date, each Eligible Optionholder exercised, on a net settled basis, all of his outstanding in-the-money vested and unvested options to acquire QVCA shares, LVNTA shares and LVNTB shares (the “Eligible Options”), and:

with respect to each vested Eligible Option, the Company granted the Eligible Optionholder a vested new option with substantially the same terms and conditions as the exercised vested Eligible Option, except that the exercise price for the new option is, in the case of options to acquire shares of QVCA or LVNTA, the closing price on the Grant Date per QVCA or LVNTA share, as applicable, and, in the case of options to acquire shares of LVNTB, the fair market value on the Grant Date of the LVNTB shares as determined pursuant to the incentive plan under which the awards were granted; and

with respect to each unvested Eligible Option:

in satisfaction of the exercise, on a net settled basis, of the unvested Eligible Options, the Company granted the Eligible Optionholder a number of restricted LVNTA or LVNTB shares (the “Restricted Shares”) with a vesting schedule identical to that of the unvested Eligible Options so exercised, and the Eligible Optionholder made an election under Section 83(b) of the Internal Revenue Code with respect to such Restricted Shares; and

the Company granted the Eligible Optionholder a new option (the “Unvested New Option”) to acquire the same series of common stock and with substantially the same terms and conditions, including with respect to vesting and expiration, as the unvested Eligible Option exercised as set forth above, except that the number of LVNTA or LVNTB shares subject to such Unvested New Option is equal to the number of shares subject to the unvested Eligible Option minus the number of Restricted Shares received upon exercise of such unvested Eligible Option. The exercise price of such new option is, in the case of a LVNTA option, the closing price on the Grant Date per share of LVNTA, or, in the case of a LVNTB option, the fair market value on the Grant Date of the LVNTB shares as determined pursuant to the incentive plan under which the Unvested New Options were granted.

The Option Exchange was considered a modification under ASC 718 – Stock Compensation, with the following impacts on compensation expense. The unamortized value of the unvested Eligible Options that were exercised, which was $14 million for LVNTA and LVNTB combined, will be expensed over the vesting period of the Restricted Shares attributable to the exercise of those options. The grant of new vested options resulted in incremental compensation expense in the fourth quarter of 2017 of $30 million for QVCA, LVNTA and LVNTB combined. The grant of Unvested New Options resulted in incremental compensation expense totaling $6 million for LVNTA and LVNTB combined, which will be amortized over the vesting periods of those options.

The Company has calculated the GDFV for all of its equity classified awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. For grants made in 2017, 2016 and 2015, the range of expected terms was 2.0 to 6.7 years. The volatility used in the calculation for Awards is based on the historical volatility of Liberty's stocks and the implied volatility of publicly traded Liberty 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 following table presents the range of volatilities used by Liberty in the Black-Scholes-Merton Model for the 2017, 2016 and 2015 QVC Group and Liberty Ventures grants.


	Volatility
2017 grants
QVC Group options	26.9	%	-	32.7	%
Liberty Ventures options	25.9	%	-	28.9	%
2016 grants
QVC Group options	27.4	%	-	27.4	%
Liberty Ventures options	30.6	%	-	30.6	%
2015 grants
QVC Group options	27.4	%	-	39.7	%
Liberty Ventures options	30.6	%	-	42.4	%

Liberty - Outstanding Awards

The following table presents the number and weighted average exercise price ("WAEP") of the Awards to purchase QVC Group and Liberty Ventures common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.


	QVC Group
	Series A							Series B
				Weighted		Aggregate					Weighted		Aggregate
				average		intrinsic					average		intrinsic
	Awards			remaining		value		Awards			remaining		value
	(000's)	WAEP		life		(in millions)		(000's)	WAEP		life		(in millions)
Outstanding at January 1, 2017	29,585	$	20.80					1,489	$	27.50
HSNi Acquisition	3,635	$	26.22					—	$	—
Granted	4,116	$	23.82					154	$	23.87
Exercised	(3,611)	$	16.34					—	$	—
Forfeited/Cancelled	(1,364)	$	27.23					—	$	—
Option Exchange, Exercised	(5,931)	$	17.76					—	$	—
Option Exchange, Granted	5,931	$	25.74					—	$	—
Outstanding at December 31, 2017	32,361	$	23.48	4.0	years	$	86	1,643	$	27.16	4.8	years	$	—
Exercisable at December 31, 2017	20,286	$	22.66	3.2	years	$	71	997	$	25.40	4.3	years	$	—


	Liberty Ventures
	Series A							Series B
				Weighted		Aggregate					Weighted		Aggregate
				average		intrinsic					average		intrinsic
	Awards			remaining		value		Awards			remaining		value
	(000's)	WAEP		life		(in millions)		(000's)	WAEP		life		(in millions)
Outstanding at January 1, 2017	1,974	$	22.18					987	$	35.02
Granted	188	$	55.42					269	$	52.39
Exercised	(451)	$	16.69					—	$	—
Forfeited/Cancelled	(12)	$	38.50					—	$	—
Option Exchange, Exercised	(975)	$	20.99					(1,256)	$	38.74
Option Exchange, Granted	946	$	55.96					1,080	$	56.38
Outstanding at December 31, 2017	1,670	$	47.12	2.6	years	$	14	1,080	$	56.38	4.7	years	$	—
Exercisable at December 31, 2017	1,273	$	47.45	2.0	years	$	10	443	$	56.38	2.0	years	$	—

As of December 31, 2017, the total unrecognized compensation cost related to unvested Liberty Awards was approximately $116 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.8 years.

Liberty - Exercises

The aggregate intrinsic value of all options exercised during the years ended December 31, 2017, 2016 and 2015 was $145 million, $44 million and $115 million, respectively. The aggregate intrinsic value of options exercised for the year ended December 31, 2017 includes approximately $104 million related to the intrinsic value of options exercised as a result of the Option Exchange.

Liberty - Restricted Stock

The Company had approximately 5.2 million and 252 thousand unvested restricted shares of QVC Group and Liberty Ventures common stock, respectively, held by certain directors, officers and employees of the Company as of December 31, 2017. These Series A and Series B unvested restricted shares of QVC Group and Liberty Ventures had a weighted average GDFV of $24.00 and $50.46 per share, respectively.

The aggregate fair value of all restricted shares of Liberty common stock that vested during the years ended December 31, 2017, 2016 and 2015 was $23 million, $26 million and $16 million, respectively.

Other

Certain of the Company's other subsidiaries have stock-based compensation plans under which employees and non-employees are granted options or similar stock-based awards. Awards made under these plans vest and become exercisable over various terms and are typically cash settled and recorded as liability awards. During the year ended December 31, 2016, approximately $90 million of cash payments were made to settle CommerceHub stock based awards. The awards and compensation recorded, if any, under the plans at the other subsidiaries are not significant to Liberty.