Annual report pursuant to Section 13 and 15(d)

Stock Options and Other Share-Based Awards

v2.4.1.9
Stock Options and Other Share-Based Awards
 12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Options and Other Share-Based Payments
Stock Options and Other Share-Based Payments
QVC employees and officers have received stock options (the "Options") and restricted shares in LINTA ("Series A Liberty Interactive" now "QVCA;" refer to 2014 Reattribution below) and LVNTA ("Series A Liberty Ventures") common stock 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").
(a) Stock options
2012 Creation of Liberty Ventures Tracking Stock
In August 2012, the LINTA stock was split into two tracking stocks, LINTA and LVNTA. The split was one LVNTA share for every 20 LINTA shares. Under the Liberty Incentive Plan, the Options have an exercise price equal to or greater than the fair market value of a share of LINTA and LVNTA common stock at the date of the grant. Under the Liberty Incentive Plan, the Options have a seven year term from the date of grant, with the Options generally becoming exercisable over four years from the date of grant, vesting in eight equal semi-annual traunches.
For accounting purposes, the Options are classified as equity-based awards.
Option Exchange
During the fourth quarter of 2012, Liberty entered into an option exchange transaction that required a series of transactions with certain officers of the Company in order to recognize tax deductions associated with the stock options in that year versus future years (the "2012 Option Exchange"). On December 4, 2012 (the "Grant Date"), there was an acceleration of (i) each unvested in-the-money option to acquire shares of Liberty Interactive and (ii) each unvested in-the-money option to acquire shares of Series A Liberty Ventures common stock, in each case, held by certain officers (collectively, the "Eligible Optionholders"). Following this acceleration, also on the Grant Date, each Eligible Optionholder exercised, on a net settled basis, substantially all of his or her outstanding in-the-money vested and unvested options to acquire Series A Liberty Interactive shares and Series A Liberty Ventures shares (the "Eligible Options"), and:
•
with respect to each vested Eligible Option, Liberty granted the Eligible Optionholder a vested new option with substantially the same terms and conditions as the exercised vested Eligible Option;
•
and with respect to each unvested Eligible Option:
◦
the Eligible Optionholder sold to Liberty, for cash, the shares of Series A Liberty Interactive or Series A Liberty Ventures, as applicable, received upon exercise of such unvested Eligible Option and used the proceeds of that net sale to purchase from Liberty at that price an equal number of restricted Series A Liberty Interactive or Series A Liberty Ventures shares, as applicable, which have a vesting schedule identical to that of the exercised unvested Eligible Option; and
◦
Liberty granted the Eligible Optionholder an unvested new option, with substantially the same terms and conditions as the exercised unvested Eligible Option, except that (a) the number of shares underlying the new option is equal to the number of shares underlying such exercised unvested Eligible Option less the number of restricted shares purchased from Liberty as described above and (b) the exercise price of the new option was the closing price per Series A Liberty Interactive or Series A Liberty Ventures share, as applicable, on The Nasdaq Global Select Market on the Grant Date.
This 2012 Option Exchange was considered a modification under ASC 718 - Stock Compensation and resulted in incremental compensation expense in 2012 and over the remaining vesting periods of the new unvested options and the restricted shares, and is included in unrecognized compensation.
2014 Liberty Ventures 2 for 1 Stock Split
On February 27, 2014, Liberty's board approved a two for one stock split of Series A and Series B Liberty Ventures common stock, effected by means of a dividend. The stock split was done in order to bring Liberty into compliance with a Nasdaq listing requirement regarding the minimum number of publicly held shares of the Series B Liberty Ventures common stock. In the stock split, a dividend was paid on April 11, 2014 of one share of Series A or Series B Liberty Ventures common stock to holders of each share of Series A or Series B Liberty Ventures common stock, respectively, held by them as of 5:00 pm, New York City time, on April 4, 2014. The stock split has been recorded retroactively for all periods presented for comparability purposes.
TripAdvisor Holdings Spin-Off
In August 2014, in connection with Liberty's spin-off (the "TripAdvisor Holdings Spin-Off") of its former wholly-owned subsidiary Liberty TripAdvisor Holdings, Inc. ("TripAdvisor Holdings") from Liberty Ventures, all outstanding awards with respect to Liberty Ventures common stock ("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 or base price, as applicable, 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 TripAdvisor Holdings common stock (a "TripAdvisor Holdings Award").
The exercise prices and number of shares subject to the Adjusted Liberty Ventures Award and the TripAdvisor Holdings Award were determined based on 1.) the exercise prices and number of shares subject to the Liberty Ventures Award, 2.) the pre-distribution trading price of the Liberty Ventures common stock and 3.) the post-distribution trading prices of Liberty Ventures common stock and TripAdvisor Holdings common stock, such that all of the pre-distribution intrinsic value of the Liberty Ventures Award was allocated between the Adjusted Liberty Ventures Award and the TripAdvisor Holdings Award.
Following the TripAdvisor Holdings Spin-Off, employees of QVC hold awards in both Liberty Ventures common stock and TripAdvisor Holdings common stock. The compensation expense relating to employees of QVC is recorded at QVC.
2014 Reattribution
On October 3, 2014, Liberty completed a transaction whereby certain of its digital commerce businesses and cash were reattributed from the QVC Group to the Ventures Group. In return, Liberty distributed Ventures Group common stock to the QVC Group stockholders in the form of a dividend. This reattribution transaction resulted in an adjustment to the outstanding QVCA options, a corresponding LVNTA option award and a LVNTA restricted stock award using a methodology similar to the one described above for the TripAdvisor Holdings Spin-Off. The adjustments to the QVCA options, LVNTA options and LVNTA restricted stock have been reflected within each respective table within this note.
A summary of the activity of the Liberty Incentive Plan with respect to the QVCA options granted to QVC employees and officers as of and during the year ended December 31, 2014 is presented below:
Options

Weighted
average
exercise
price

Aggregate
intrinsic
value
(000s)

Weighted average remaining
life
(years)
Outstanding at January 1, 2014
15,638,139

$
17.01

$
192,975

4.4
Granted
1,819,559

26.90




Exercised
(3,784,111
)
14.42




Forfeited
(1,007,491
)
19.31




Net effect of 2014 Reattribution
512,995

16.36




Outstanding at December 31, 2014
13,179,091

17.34

159,203

3.7
Exercisable at December 31, 2014
7,325,843

14.94

106,078

2.9
A summary of the activity of the Liberty Incentive Plan with respect to the LVNTA options granted to QVC employees and officers as of and during the year ended December 31, 2014 is presented below:
Options

Weighted average exercise
price

Aggregate intrinsic
value (000s)

Weighted average remaining
life (years)
Outstanding at January 1, 2014
441,212

$
29.40

$
14,072

3.6
Granted
—

—




Exercised
(106,709
)
16.02




Forfeited
—

—




Adjustment for TripAdvisor Holdings Spin-Off
6,736

14.86




Net effect of 2014 Reattribution
612,138

22.31




Outstanding at December 31, 2014
953,377

19.51

17,361

2.8
Exercisable at December 31, 2014
597,523

19.70

10,767

2.6
Upon employee exercise of the Options, the exercise price is remitted to Liberty in exchange for the shares. The aggregate intrinsic value of all options exercised during the years ended December 31, 2014, 2013 and 2012 was $54 million, $37 million and $97 million, respectively.
The weighted average fair value at date of grant of a QVCA Option granted, excluding the 2012 Option Exchange, during the years ended December 31, 2014, 2013 and 2012 was $11.16, $8.16 and $6.66, respectively. The weighted average fair value at date of grant of a QVCA 2012 Option Exchange option granted during the year ended December 31, 2012 was $6.94. The weighted average fair value at date of grant of a LVNTA Option granted, excluding the 2012 Option Exchange, during the year ended December 31, 2012 was $15.22. There were no LVNTA Options granted during the years ended December 31, 2014 and 2013. The weighted average fair value at date of grant of a LVNTA 2012 Option Exchange option granted during the year ended December 31, 2012 was $25.69.
During the years ended December 31, 2014, 2013 and 2012, the fair value of each QVCA option was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2014

2013

2012

Expected volatility
38.7
%
38.3
%
41.9
%
Expected term (years)
6.3

6.2

5.2

Risk free interest rate
2.0
%
1.1
%
0.8
%
Expected dividend yield
—

—

—

During the years ended December 31, 2014, 2013 and 2012, the fair value of each LVNTA option was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2014

2013

2012

Expected volatility
—
%
—
%
49.9
%
Expected term (years)
—

—

4.9

Risk free interest rate
—
%
—
%
0.6
%
Expected dividend yield
—

—

—

Expected volatility is based on historical and implied volatilities of QVCA and LVNTA 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 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 fair value of the options is recognized as expense over the requisite service period, net of estimated forfeitures. Based on QVC's historical experience of option pre-vesting cancellations, the Company has assumed an annualized forfeiture rate of 10% for all participants. We will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture is higher than estimated.
During the years ended December 31, 2014, 2013 and 2012, the Company recorded $36 million, $31 million and $29 million, respectively, of stock-based compensation expense related to the options. As of December 31, 2014, the total unrecognized compensation cost related to unvested options, net of estimated forfeitures, was approximately $34 million. Such amount will be recognized in the Company's consolidated statement of operations over a weighted average period of approximately 3.8 years.
(b) Restricted stock plan
A summary of the activity of the Liberty Incentive Plan with respect to the QVCA restricted shares granted to QVC employees and officers as of and during the year ended December 31, 2014 is presented below:
Restricted Shares

Weighted average
grant date fair value

Outstanding at January 1, 2014
1,214,462

$
17.62

Granted
328,887

24.86

Vested
(460,069
)
14.79

Forfeited
(48,154
)
17.79

Outstanding at December 31, 2014
1,035,126

19.29

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, 2014 is presented below:
Restricted Shares

Weighted
Average
Grant Date Fair Value

Outstanding at January 1, 2014
64,158

19.34

Granted
—

—

Vested
(34,718
)
9.01

Forfeited
(2,445
)
14.98

Net effect of 2014 Reattribution
146,798

23.13

Outstanding at December 31, 2014
173,793

22.13

During the years ended December 31, 2014, 2013 and 2012, the Company recorded $8 million, $7 million and $5 million, respectively, of stock-based compensation expense related to these shares. As of December 31, 2014, the total unrecognized compensation cost related to unvested restricted shares of common stock was approximately $14 million. Such amount will be recognized in the Company's consolidated statement of operations over a weighted average period of approximately 1.1 years. The aggregate fair value of all restricted shares of common stock that vested during the years ended December 31, 2014, 2013 and 2012 was $16 million, $15 million and $9 million, respectively.