Lumber Liquidators 2008 Annual Report Download - page 39

Total stock-based compensation expenses included in SG&A for 2008, 2007 and 2006 were:
2008 2007 2006
Variable Plan ......................................................... $(2,960) $3,220 $1,040
Stock Options, Restricted Stock and Other ................................. 2,969 1,756 409
Acceleration of Stock Options/Regional Manager Plan ........................ — 1,235 —
Total ............................................................... $ 9 $6,211 $1,449
Variable Plan. We were party to a stock-based agreement between the Founder and his brother, Kevin
Sullivan, a regional manager until December 2008 (or “Kevin”), accounted for as a variable performance plan
(the “Variable Plan”) in accordance with the provisions of SFAS 123(R). The Variable Plan awarded Kevin the
right (the “Variable Right”) to an ownership percentage of common stock, contributed by the Founder. The
Variable Plan was originally established in 1998, and through an amendment in 2005, the Variable Right was
established to award Kevin a right to purchase an ownership position in common stock from the Founder for his
service to the Company. The ownership position was defined as a fixed percentage of 2.5% of common stock on
a fully diluted basis, as defined in the agreement, plus an additional ownership percentage based on certain
performance criteria, primarily a comparison of the net income of the region under Kevin’s management to total
Company net income on a trailing twelve-month basis.
The Variable Plan provided for a cash settlement of the Variable Right at a defined, performance based,
value through put-call provisions, executed by the Founder or Kevin, if an IPO or sale event, as defined, had not
taken place prior to February 1, 2008. The Founder was liable for the cash payment, and we guaranteed his
performance. Pursuant to the terms of the Variable Plan, the Founder had previously placed 1.5 million shares of
common stock in escrow for purposes of satisfying his obligations thereunder, which obligations we had
generally guaranteed.
The Variable Right fully vested and became exercisable in connection with the IPO and all cash settlement
provisions via put-call rights terminated. In accordance with the terms of the Variable Plan, we calculated that
853,853 shares of common stock had vested and were exercisable under the Variable Right. Cumulative stock-
based compensation expense related to the Variable Plan was determined utilizing the Vested Shares and the $11
per share IPO price to adjust the stock compensation liability and in the fourth quarter of 2007, the stock
compensation liability was reclassified to additional capital in accordance with the provisions of SFAS 123(R).
The Variable Right was exercised on February 1, 2008.
Kevin filed a demand for arbitration and an Amended Statement of Claim where he maintained that he was
entitled to, among other things, more than the Vested Shares. As a result, during 2007 we recorded an additional
$2.96 million of stock-based compensation expense related to the Variable Plan, as our best estimate of the
ultimate value of incremental shares (above the Vested Shares) that may have been delivered to Kevin via
settlement or arbitration.
In November 2008, the parties completed the arbitration proceeding, and in a ruling dated December 1,
2008, the arbitrator determined that Kevin was entitled only to the Vested Shares. We reversed the additional
accrual of stock-based compensation expense related to the Variable Plan, which reduced current year stock-
based compensation expense by $2.96 million, with an offset to additional capital. During 2008, the legal,
professional and other fees associated with this matter cost us $0.7 million, net of insurance proceeds.
Stock Options, Restricted Stock and Other Equity Equivalents.As described in Note 6 to the consolidated
financial statements included in Item 8 of this report, we maintain an equity incentive plan for employees,
non-employee directors and other service providers, the Lumber Liquidators, Inc. 2007 Equity Compensation
Plan, from which we expect to continue to grant stock options and restricted share awards, primarily on an annual
basis.
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