qrtea_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                             

Commission File Number 001-33982

QURATE RETAIL, INC.

(Exact name of Registrant as specified in its charter)

 


incorporation or organization)

 


Identification No.)

 

State of Delaware

(State or other jurisdiction of
incorporation or organization)

84-1288730

(I.R.S. Employer
Identification No.)

 

 

12300 Liberty Boulevard
Englewood, Colorado

(Address of principal executive offices)

80112

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

(do not check if
smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐    No ☒

The number of outstanding shares of Qurate Retail, Inc.'s common stock as of April 30, 2018 was:

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

QVC Group

 

440,356,117

 

29,258,343

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

Item 1. Financial Statements. 

 

 

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) 

    

I-3

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Operations (unaudited) 

 

I-5

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Comprehensive Earnings (Loss) (unaudited) 

 

I-7

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Cash Flows (unaudited) 

 

I-8

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statement Of Equity (unaudited) 

 

I-9

QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 

 

I-10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 

 

I-30

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

 

I-43

Item 4. Controls and Procedures. 

 

I-45

 

 

 

PART II—OTHER INFORMATION 

 

II-1

Item 1A. Risk Factors 

 

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

II-15

Item 6. Exhibits 

 

II-16

 

 

 

SIGNATURES 

 

II-17

 

I-2


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2018

 

2017

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,055

 

903

 

Trade and other receivables, net of allowance for doubtful accounts of $95 million and $92 million, respectively

 

 

1,273

 

1,726

 

Inventory, net

 

 

1,510

 

1,411

 

Indemnification asset (note 7)

 

 

253

 

 —

 

Other current assets

 

 

212

 

125

 

Total current assets

 

 

4,303

 

4,165

 

Investments in equity securities  (note 8)

 

 

611

 

2,363

 

Investments in affiliates, accounted for using the equity method (note 9)

 

 

204

 

309

 

Property and equipment, net

 

 

1,357

 

1,341

 

Intangible assets not subject to amortization (note 10):

 

 

 

 

 

 

Goodwill

 

 

7,094

 

7,082

 

Trademarks

 

 

3,925

 

3,929

 

 

 

 

11,019

 

11,011

 

Intangible assets subject to amortization, net (note 10)

 

 

1,172

 

1,248

 

Other assets, at cost, net of accumulated amortization

 

 

49

 

50

 

Assets of discontinued operations (note 4)

 

 

 —

 

3,635

 

Total assets

 

$

18,715

 

24,122

 

 

(continued)

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

992

 

1,151

 

Accrued liabilities

 

 

968

 

1,125

 

Current portion of debt, including $1,832 million and $978 million measured at fair value (note 11)

 

 

1,850

 

996

 

Other current liabilities

 

 

127

 

169

 

Total current liabilities

 

 

3,937

 

3,441

 

Long-term debt, including $0 and $868 million measured at fair value (note 11)

 

 

6,388

 

7,553

 

Deferred income tax liabilities

 

 

2,090

 

2,500

 

Other liabilities

 

 

332

 

242

 

Liabilities of discontinued operations (note 4)

 

 

 —

 

303

 

Total liabilities

 

 

12,747

 

14,039

 

Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A QVC Group common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 443,678,730 shares at March 31, 2018 and 449,335,940 shares at December 31, 2017

 

 

 5

 

 5

 

Series B QVC Group common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,258,343 shares at March 31, 2018 and 29,203,895 shares at December 31, 2017

 

 

 —

 

 —

 

Series C QVC Group common stock, $.01 par value. Authorized 400,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; issued and outstanding 81,686,659 shares at December 31, 2017

 

 

NA

 

 1

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares; issued and outstanding 4,455,311 shares at December 31, 2017

 

 

NA

 

 —

 

Series C Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; no shares issued

 

 

NA

 

 —

 

Additional paid-in capital

 

 

 —

 

1,043

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

 3

 

(133)

 

Retained earnings

 

 

5,853

 

9,068

 

Total stockholders' equity

 

 

5,861

 

9,984

 

Noncontrolling interests in equity of subsidiaries

 

 

107

 

99

 

Total equity

 

 

5,968

 

10,083

 

Commitments and contingencies (note 12)

 

 

 

 

 

 

Total liabilities and equity

 

$

18,715

 

24,122

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Total revenue, net

 

$

3,230

 

2,327

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of retail sales (exclusive of depreciation shown separately below)

 

 

2,093

 

1,505

 

Operating expense

 

 

228

 

151

 

Selling, general and administrative, including stock-based compensation and transaction related costs (note 5)

 

 

452

 

250

 

Depreciation and amortization

 

 

163

 

208

 

 

 

 

2,936

 

2,114

 

Operating income (loss)

 

 

294

 

213

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(98)

 

(90)

 

Share of earnings (losses) of affiliates, net (note 9)

 

 

(14)

 

(27)

 

Realized and unrealized gains (losses) on financial instruments, net (note 7)

 

 

99

 

175

 

Other, net

 

 

 4

 

 1

 

 

 

 

(9)

 

59

 

Earnings (loss) from continuing operations before income taxes

 

 

285

 

272

 

Income tax (expense) benefit

 

 

(29)

 

(84)

 

Earnings (loss) from continuing operations

 

 

256

 

188

 

Earnings (loss) from discontinued operations, net of taxes

 

 

141

 

331

 

Net earnings (loss)

 

 

397

 

519

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

13

 

12

 

Net earnings (loss) attributable to Qurate Retail, Inc. shareholders

 

$

384

 

507

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Qurate Retail, Inc. shareholders:

 

 

 

 

 

 

QVC Group common stock (note 1)

 

$

142

 

91

 

Liberty Ventures common stock (note 1)

 

 

242

 

416

 

 

 

$

384

 

507

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

I-5


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2018

    

2017

 

Basic net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.30

 

0.20

 

Series A and Series B Liberty Ventures common stock

 

$

1.17

 

1.00

 

Diluted net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.30

 

0.20

 

Series A and Series B Liberty Ventures common stock

 

$

1.16

 

0.99

 

 

 

 

 

 

 

 

Basic net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.30

 

0.20

 

Series A and Series B Liberty Ventures common stock

 

$

2.81

 

4.89

 

Diluted net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.30

 

0.20

 

Series A and Series B Liberty Ventures common stock

 

$

2.78

 

4.84

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

Table of Contents

 

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

397

 

519

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

71

 

27

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

 1

 

 2

 

Comprehensive earnings (loss) attributable to debt credit risk adjustments

 

 

(5)

 

 —

 

Other comprehensive earnings (loss)

 

 

67

 

29

 

Comprehensive earnings (loss)

 

 

464

 

548

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

20

 

18

 

Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders

 

$

444

 

530

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

I-7


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements Of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

397

 

519

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

(Earnings) loss from discontinued operations

 

 

(141)

 

(331)

 

Depreciation and amortization

 

 

163

 

208

 

Stock-based compensation

 

 

23

 

16

 

Share of (earnings) losses of affiliates, net

 

 

14

 

27

 

Cash receipts from returns on equity investments

 

 

 —

 

 7

 

Realized and unrealized (gains) losses on financial instruments, net

 

 

(99)

 

(175)

 

Deferred income tax expense (benefit)

 

 

(7)

 

60

 

Other, net

 

 

 3

 

 3

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

22

 

254

 

Payables and other liabilities

 

 

(87)

 

(162)

 

Net cash provided (used) by operating activities

 

 

288

 

426

 

Cash flows from investing activities:

 

 

 

 

 

 

Investments in and loans to cost and equity investees

 

 

(22)

 

(21)

 

Capital expended for property and equipment

 

 

(47)

 

(30)

 

Other investing activities, net

 

 

(20)

 

(1)

 

Net cash provided (used) by investing activities

 

 

(89)

 

(52)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

2,026

 

499

 

Repayments of debt

 

 

(1,354)

 

(704)

 

GCI Liberty Split-Off

 

 

(475)

 

 —

 

Repurchases of QVC Group common stock

 

 

(217)

 

(152)

 

Withholding taxes on net settlements of stock-based compensation

 

 

(19)

 

(4)

 

Other financing activities, net

 

 

(22)

 

(26)

 

Net cash provided (used) by financing activities

 

 

(61)

 

(387)

 

Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash

 

 

13

 

 9

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

151

 

(4)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

912

 

836

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,063

 

832

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

QVC

 

Liberty

 

Additional

 

other

 

 

 

Noncontrolling

 

 

 

 

 

Preferred

 

Group

 

Ventures

 

paid-in

 

comprehensive

 

Retained

 

interest in equity

 

Total

 

 

  

stock

  

Series A

  

Series B

  

Series A

  

Series B

  

capital

  

earnings (loss)

  

earnings

  

of subsidiaries

  

equity

 

 

 

amounts in millions

 

Balance at January 1, 2018

 

$

 —

 

 5

 

 —

 

 1

 

 —

 

1,043

 

(133)

 

9,068

 

99

 

10,083

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

384

 

13

 

397

 

Other comprehensive income (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

60

 

 —

 

 7

 

67

 

Stock compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

23

 

 —

 

 —

 

 —

 

23

 

Series A QVC Group stock repurchases

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(217)

 

 —

 

 —

 

 —

 

(217)

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(23)

 

(23)

 

Option exercises

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(19)

 

 —

 

 —

 

 —

 

(19)

 

Cumulative effect of accounting change (note 2)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

76

 

(69)

 

 —

 

 7

 

Reattribution of the Ventures Group to the QVC Group

 

 

 —

 

 —

 

 —

 

(1)

 

 —

 

 1

 

 —

 

 —

 

 —

 

 —

 

GCI Liberty Split-Off

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,362)

 

 —

 

 —

 

11

 

(4,351)

 

Reclassification

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

3,530

 

 —

 

(3,530)

 

 —

 

 —

 

Balance at March 31, 2018

 

$

 —

 

 5

 

 —

 

 —

 

 —

 

 —

 

 3

 

5,853

 

107

 

5,968

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

I-9


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

(1)   Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Qurate Retail, Inc. (formerly named Liberty Interactive Corporation, prior to the Transactions defined and described below, or “Liberty”) and its controlled subsidiaries (collectively, "Qurate Retail," the "Company," “Consolidated Qurate Retail,” “us,” “we,” or “our” unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation. Qurate Retail is made up of wholly-owned subsidiaries QVC, Inc. (“QVC”), zulily, llc (“zulily”), and HSN, Inc. (“HSNi” which includes its televised shopping business “HSN” and its catalog retail business “Cornerstone”), an equity investment in FTD Companies, Inc. (“FTD”) and an investment in ILG, Inc. (“ILG”).

Qurate Retail is primarily engaged in the video and online commerce industries in North America, Europe and Asia. The businesses of the  Company’s wholly-owned subsidiaries, QVC and HSNi, are seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Qurate Retail's Annual Report on Form 10-K for the year ended December 31, 2017.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Qurate Retail considers (i) fair value measurement, (ii) accounting for income taxes, (iii) assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most significant estimates.   

Prior to the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. Qurate Retail had two tracking stocks—QVC Group common stock and Liberty Ventures common stock, which were intended to track and reflect the economic performance of the businesses, assets and liabilities attributed to the QVC Group and the Ventures Group, respectively.  The QVC Group was comprised of the Company’s wholly-owned subsidiaries QVC, zulily and HSNi (as of December 29, 2017), among other assets and liabilities.  The Ventures Group was comprised of businesses not included in the QVC Group including Evite, Inc. (“Evite”) and our interests in Liberty Broadband Corporation (“Liberty Broadband”), LendingTree, Inc. (“LendingTree”), FTD, investments in Charter Communications, Inc. (“Charter”) and ILG, among other assets and liabilities. The Company’s results are attributed to the QVC Group and the Ventures Group through March 9, 2018.

On December 29, 2017, Qurate Retail acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary. HSNi stockholders (other than Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSNi common stock. Qurate Retail issued 53.6 million shares QVCA common stock to HSNi stockholders.

On March 9, 2018, Qurate Retail completed the transactions contemplated by the Agreement and Plan of Reorganization (as amended, the “reorganization agreement,” and the transactions contemplated thereby, the “Transactions”)  among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a

I-10


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. (“GCI Liberty”)) and effected a reclassification and auto conversion of its common stock. After market close on March 8, 2018, Qurate Retail’s board of directors approved the reattribution of certain assets and liabilities from Qurate Retail’s Ventures Group to its QVC Group, which was effective immediately. The reattributed assets and liabilities included cash, Qurate Retail’s interest in ILG, FTD, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. 

Following these events, Qurate Retail acquired GCI (renamed “GCI Liberty”) through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty in exchange for a controlling interest in GCI Liberty. Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interest in Liberty Broadband, Charter, and LendingTree, the Evite operating business and other assets and liabilities attributed to Qurate Retail’s Venture Group (following the reattribution), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A Common Stock and a number of shares of GCI Liberty Class B Common Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

Following the contribution,  Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock.  Simultaneous with the closing of the Transactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and thus QVC Group common stock ceased to function as a tracking stock.

As a result of repurchases of Series A QVC Group common stock and the GCI Liberty Split-Off, the Company’s additional paid-in capital balance was in a deficit position as of March 31, 2018.  In order to ensure that the additional paid-in capital account is not negative, we reclassified the amount of the deficit ($3.5 billion) at March 31, 2018 to retained earnings.

Qurate Retail holds investments that are accounted for using the equity method. Qurate Retail does not control the decision making process or business management practices of these affiliates. Accordingly, Qurate Retail relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that Qurate Retail uses in the application of the equity method. In addition, Qurate Retail relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on Qurate Retail's condensed consolidated financial statements.

 

Qurate Retail has entered into certain agreements with Liberty Media Corporation ("LMC") (for accounting purposes, a related party of the Company), a separate publicly traded company. These agreements include a reorganization agreement, services agreement and facilities sharing agreement. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other.

 

The reorganization agreement with LMC provides for, among other things, provisions governing the relationship between Qurate Retail and LMC, including certain cross-indemnities. Pursuant to the services agreement, LMC provides Qurate Retail with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Qurate Retail reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Qurate Retail's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Qurate Retail. Under the facilities sharing agreement, LMC shares office space and related amenities at its corporate headquarters with Qurate Retail. Under these various agreements, approximately $3 million and $3 million was reimbursable to LMC for the three months ended March 31, 2018 and 2017, respectively.    

 

I-11


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.  In the prior year, we recognized the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 31, 2017. We are still in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, continued analysis of the estimates and further guidance and interpretations on the application of the law. We expect to complete our analysis by December 2018.

 

 (2) Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue Recognition. In May 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. On January 1, 2018, the Company adopted the revenue accounting standard using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to our net income on an ongoing basis. Refer to the table below for the adoption of this guidance.

 

 

 

 

 

 

 

 

 

 

Balance at

 

Adjustments

 

Balance at

 

 

 

December 31, 

 

Due to ASU

 

January 1,

 

 

 

2017

 

2014-09

 

2018

 

 

 

in millions

 

Assets: 

 

 

 

 

 

 

 

Inventory, net

$

1,411

 

(27)

 

1,384

 

Other current assets

$

125

 

(11)

 

114

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Other current liabilities

$

169

 

(46)

 

123

 

Deferred income tax liabilities

$

2,500

 

2

 

2,502

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Retained earnings

$

9,068

 

6

 

9,074

 

 

I-12


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

In accordance with the new revenue standard requirements, the following table illustrates the impact on our reported results in the condensed consolidated statements of operations assuming we did not adopt the new revenue standard on January 1, 2018. Other than as previously discussed, upon the adoption of the new revenue standard on January 1, 2018, there were no additional material adjustments to our condensed consolidated balance sheet as of March 31, 2018. 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

Effect of Change

 

Balance without

 

 

 

Three months ended

 

(Increase)/

 

adoption of

 

 

 

March 31, 2018

 

Decrease

 

ASU 2014-09

 

 

 

in millions

 

Net revenue

$

3,230

 

(65)

 

3,165

 

 

 

 

 

 

 

 

 

Cost of retail sales

$

2,093

 

15

 

2,108

 

Selling, general and administrative expenses, including stock-based compensation and transaction related costs

$

452

 

28

 

480

 

Operating

$

228

 

5

 

233

 

Income tax expense

$

(29)

 

3

 

(26)

 

Net income

$

384

 

(14)

 

370

 

 

The effect of changes of adoption is primarily due to changes in the timing of revenue recognition and the classification of credit card income for the QVC-branded credit card and the HSN-branded credit card.  Additionally, for the three months ended March 31, 2018, revenue is recognized at the time of shipment to our customers consistent with when control passes and credit card income is recognized in revenue. For the three months ended March 31, 2017, revenue was recognized at the time of delivery to the customers and deferred revenue, as well as inventory and related expenses, were recorded to account for the shipments in-transit. In addition, credit card income was recognized as an offset to selling, general and administrative expenses.  The Company also recognized a separate $91 million asset (included in other current assets) relating to the expected return of inventory and a  $204 million liability (included in other current liabilities) relating to its sales return reserve at March 31, 2018, instead of the net presentation that was used at December 31, 2017. 

 

Disaggregated revenue by segment and product category consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 2018

 

 

 

QVC

 

HSN

 

zulily

 

Corporate and other

 

Total

 

 

in millions

 

Home

$

759

 

227

 

116

 

147

 

1,249

 

Apparel

 

399

 

27

 

156

 

39

 

621

 

Beauty

 

383

 

67

 

12

 

 —

 

462

 

Accessories

 

253

 

50

 

114

 

 —

 

417

 

Electronics

 

113

 

86

 

 4

 

 —

 

203

 

Jewelry

 

150

 

37

 

12

 

 —

 

199

 

Other revenue

 

36

 

15

 

 5

 

23

 

79

 

Total Revenue

$

2,093

 

509

 

419

 

209

 

3,230

 

 

Consumer Product Revenue and Other Revenue. Qurate Retail's revenue includes sales of consumer products in the following categories: home, apparel, beauty, accessories, electronics and jewelry, which are primarily sold through live merchandise-focused televised shopping programs and via our websites and other interactive media, including catalogs.

 

I-13


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Other revenue consists primarily of income generated from our company branded credit cards in which a large consumer financial services company provides revolving credit directly to the Company’s customers for the sole purpose of purchasing merchandise or services with these cards.  In return, the Company receives a portion of the net economics of the credit card program.

 

Revenue Recognition. Revenue is recognized when obligations with our customers are satisfied; generally this occurs at the time of shipment to our customers consistent with when control of the shipped product passes. The recognized revenue reflects the consideration we expect to receive in exchange for transferring goods, net of allowances for returns.

 

The Company recognizes revenue related to its company branded credit cards over time as the credit cards are used by Qurate Retail's customers.

 

Sales, value add, use and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

 

The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service.  Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment.  

 

The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money.

 

Significant Judgments. Qurate Retail’s products are generally sold with a right of return for up to 30 days after the date of shipment and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize.  Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. The Company has determined that it is the principal in vendor arrangements as the Company can establish control over the goods prior to shipment. Accordingly, the Company records revenue for these arrangements on a gross basis.

 

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments.  The new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The Company adopted this guidance during the first quarter of 2018.  As the Company has historically measured its investments in equity securities with readily determinable fair values at fair value, the new guidance had no impact on the accounting for these instruments. The Company has elected the measurement alternative for its equity securities without readily determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments. In addition, a portion of the unrealized gain (loss) recognized on the Company’s exchangeable debt accounted for at fair value is now presented in other comprehensive income as it relates to instrument specific credit risk, however this impact was not material to the overall financial statements for the period ended March 31, 2018. See note 8 for information related to the Company’s equity securities.    

 

I-14


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Statement of Cash Flows. In November 2016, the FASB issued new accounting guidance which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted this guidance during the first quarter of 2018 and has reclassified prior period balances in cash and cash equivalents within the condensed consolidated statements of cash flows in order to conform with current period presentation. The following table reconciles cash, cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31, 

 

 

 

2018

 

2017

 

 

 

in millions

 

Cash and cash equivalents

$

1,055

 

903

 

Restricted cash included in other current assets

 

8

 

9

 

Total cash, cash equivalents and restricted cash  in the condensed consolidated statement of cash flows

$

1,063

 

912

 

 

In August 2016, the FASB issued new accounting guidance which addresses eight specific cash flow issues to reduce the diversity in practice for appropriate classification on the statement of cash flows. The Company adopted this guidance during the first quarter of 2018, and there was no significant effect of the standard on its condensed consolidated financial statements. 

 

Share-based payment modification. In May 2017, the FASB issued new accounting guidance to provide clarity to which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting in Accounting Standards Codification (“ASC”) 718. The Company adopted this guidance during the first quarter of 2018, and there was no significant effect of the standard on its condensed consolidated financial statements. 

 

Intra-entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued new accounting guidance which requires an entity to recognize at the transaction date the income tax consequences of intercompany asset transfers.  The Company adopted this guidance during the first quarter of 2018, and there was no significant effect of the standard on its condensed consolidated financial statements.

 

Accounting Pronouncements Not Yet Adopted

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued new guidance which addresses the effect of the change in the U.S. federal corporate tax rate due to the enactment of the December 22, 2017 Tax Act on items within accumulated other comprehensive income (loss). The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its condensed consolidated financial statements.

 

Leases.    In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases, evaluating technology solutions and collecting lease data.

 

 

I-15


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

(3) Acquisitions

On December 29, 2017, Qurate Retail acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary. HSNi shareholders (other than Qurate Retail) received fixed consideration of 1.65 QVCA shares for each share of HSNi common stock. Qurate Retail issued 53.6 million shares QVCA common stock to HSNi shareholders. In conjunction with application of acquisition accounting, we recorded a full step up in basis of HSNi which resulted in a $409 million gain. The fair market value of our ownership interest previously held in HSNi ($605 million) was determined based on the trading price of QVCA common stock on the date of the acquisition (Level 1) less a control premium. The market value of the shares of QVCA common stock issued to HSNi stockholders ($1.3 billion) was determined based on the trading price of QVCA common stock on the date of the acquisition. The total equity value of the transaction was $1.9 billion.

The preliminary purchase price allocation for HSNi is as follows (amounts in millions):

 

 

 

 

 

 

Cash and cash equivalents

 

$

22

 

Property and equipment

 

 

223

 

Other assets

 

 

752

 

Goodwill

 

 

952

 

Trademarks

 

 

676

 

Intangible assets subject to amortization

 

 

598

 

Accounts payable & accrued liabilities

 

 

(515)

 

Long-term debt

 

 

(467)

 

Other liabilities assumed

 

 

(13)

 

Deferred tax liabilities

 

 

(280)

 

 

 

$

1,948

 

Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and noncontractual relationships. Intangible assets acquired during 2017 were comprised of customer relationships of $421 million with a weighted average life of approximately 9 years, capitalized software of $16 million with a weighted average life of approximately 1 year, and technology of $161 million with a weighted average life of approximately 7 years. None of the acquired goodwill is expected to be deductible for tax purposes. Subsequent to December 31, 2017, the preliminary purchase price allocation was adjusted, resulting in an increase of $9 million to property and equipment, $7 million to debt, $1 million to other liabilities assumed and $2 million to goodwill, and corresponding decreases of $1 million to deferred tax liabilities and $4 million to intangible assets subject to amortization. As of March 31, 2018, the valuation related to the purchase is not final and the purchase price allocation is preliminary and subject to revision.  The primary areas of the purchase price allocation that are not yet finalized are related to certain fixed and intangible assets, liabilities and tax balances.

I-16


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The pro forma revenue and net earnings from continuing operations of Qurate Retail, prepared utilizing the historical financial statements of HSNi, giving effect to purchase accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, are as follows:

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

March 31,

 

 

 

 

2017

 

 

 

 

amounts in millions

 

Revenue

 

$

3,114

 

Net earnings (loss) from continuing operations

 

$

181

 

The pro forma information is not representative of Qurate Retail’s future financial position, future results of operations or future cash flows nor does it reflect what Qurate Retail’s financial position, results of operations or cash flows would have been as if the transaction had happened previously and Qurate Retail controlled HSNi during the periods presented.

(4)      Disposals

On March 9, 2018,  Qurate Retail completed the GCI Liberty Split-Off. At the time of the GCI Liberty Split-Off, GCI Liberty was comprised of, among other things, GCI Liberty’s legacy business, Qurate Retail’s former interest in Liberty Broadband, Charter and LendingTree, and Qurate Retail’s former wholly-owned subsidiary Evite.  Qurate Retail viewed Liberty Broadband, LendingTree and Evite as separate components and evaluated them separately for discontinued operations presentation. As Qurate Retail’s former interest in Charter was accounted for as an available for sale investment it did not meet the definition of a component for discontinued operation presentation. The disposition of Liberty Broadband was considered significant to the overall financials and therefore was considered to be a strategic shift.  Accordingly, the accompanying condensed consolidated financial statements of Qurate Retail have been prepared to reflect Qurate Retail’s interest in Liberty Broadband as a discontinued operation. The disposition of LendingTree and Evite as part of the GCI Liberty Split-Off does not have a major effect on Qurate Retail’s historical or future results. Therefore, the disposition of LendingTree and Evite was not considered a strategic shift in Qurate Retail’s operations. Accordingly, LendingTree and Evite are not presented as discontinued operations in the accompanying condensed consolidated financial statements of Qurate Retail.  LendingTree and Evite are included in the Corporate and other segment through March 8, 2018.   

Included in revenue in the accompanying condensed consolidated statements of operations is $3 million and $4 million for the three months ended March 31, 2018 and 2017, respectively, related to Evite. Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are losses of $2  million for both of the three months ended March 31, 2018 and 2017, respectively, related to Evite.  Included in total assets in the accompanying condensed consolidated balance sheets as of December 31, 2017 is $43 million related to Evite.  Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are earnings of less than a million and $1 million for the three months ended March 31, 2018 and 2017, respectively, related to LendingTree. Included in total assets in the accompanying condensed consolidated balance sheets as of December 31, 2017 is $115 million related to LendingTree.

Certain financial information for the Company’s investment in Liberty Broadband, which is included in the discontinued operations line items of the condensed consolidated Qurate Retail balance sheets as of December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

2017

 

 

 

 

amounts in millions

 

Investment in Liberty Broadband measured at fair value

 

$

3,635

 

Deferred income tax liabilities

 

$

303

 

 

I-17


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Certain financial information for the Company’s investment in Liberty Broadband, which is included in earnings (loss) from discontinued operations is as follows:

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Three months ended 

 

 

 

 

March 31,

 

March 31,

 

 

 

 

2018

 

2017

 

 

 

 

amounts in millions

 

Earnings (loss) before income taxes

 

$

187

 

526

 

Income tax (expense) benefit

 

$

(46)

 

(195)

 

 

The impact from discontinued operations on basic and diluted earnings (loss) per share is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Three months ended 

 

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

2018

 

2017

 

 

Basic earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share:

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

NA

 

NA

 

 

Series A and Series B Liberty Ventures common stock

 

$

1.64

 

3.89

 

 

Diluted earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share:

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

NA

 

NA

 

 

Series A and Series B Liberty Ventures common stock

 

$

1.62

 

3.85

 

 

 

Prior to the GCI Liberty Split-Off, Qurate Retail accounted for the investment in Liberty Broadband at its fair value. Accordingly, Liberty Broadband’s assets, liabilities and results of operations were not included in Qurate Retail’s consolidated financial statements. Summary financial information for Liberty Broadband for the periods prior to the GCI Liberty Split-Off is as follows:

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

2017

 

 

 

 

amounts in millions

 

Current assets

 

$

84

 

Total assets

 

$

11,932

 

Current liabilities

 

$

11

 

Total liabilities 

 

$

1,445

 

Equity

 

$

10,487

 

 

I-18


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

March 31,

 

 

 

 

2017

 

 

 

 

amounts in millions

 

Operating income

 

$

(6)

 

Share of earnings (loss) of affiliate

 

$

19

 

Gain (loss) on dilution of investment in affiliate

 

$

(32)

 

Income tax (expense) benefit

 

$

 8

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

(14)

 

 

 

 

(5)   Stock-Based Compensation

The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock, restricted stock units (“RSUs”) and options to purchase shares of the Company’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

In connection with the GCI Liberty Split-Off (see note 1), the Company redeemed each outstanding share of its Series A and Series B Liberty Ventures common stock for shares of the corresponding class of GCI Liberty common stock.

Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $23 million and $16 million of stock-based compensation during the three months ended March 31, 2018 and 2017, respectively.

The following table presents the number and weighted average GDFV of options granted by the Company during the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

2018

 

 

Options Granted (000's)

 

Weighted Average GDFV

 

 

 

 

 

 

 

 

Series A QVC Group common stock, QVC employees (1)

 

2,910

 

$

8.77

 

Series A QVC Group common stock, zulily employees (1)

 

311

 

$

8.77

 

Series A QVC Group common stock, HSNi employees (1)

 

859

 

$

8.77

 

Series B QVC Group common stock, Qurate Retail Chairman of the Board (2)

 

175

 

$

8.84

 

Series B Ventures Group common stock, Qurate Retail  Chairman of the Board (2)

 

143

 

$

16.55

 


(1)

Mainly vests semi-annually over four years.

(2)

Grants cliff vest on December 31, 2018. Grants were made in connection with his employment agreement.

In addition to the stock option grants to the Qurate Retail Chairman of the Board and in connection with our Chairman’s employment agreement, Qurate Retail granted performance based RSUs to him. During the three months ended March 31, 2018, Qurate Retail granted 124 thousand performance-based RSUs of Series B QVC Group common stock.  The RSUs had a GDFV of $27.77 per share at the time they were granted.  The performance-based RSUs cliff vest in one year, subject to the satisfaction of certain performance objectives.  Performance objectives, which are subjective, are considered in determining the timing and amount of compensation expense recognized.  When the satisfaction of the

I-19


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

performance objectives becomes probable, the Company records compensation expense.  The value of the grant is remeasured at each reporting period.

The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards and certain performance-based Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Qurate Retail's stock 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.

Qurate Retail—Outstanding Awards

The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase QVC Group common stock granted to certain officers, employees and directors of the Company.