Lumber Liquidators 2008 Annual Report Download - page 67

The Variable Plan
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 the Company
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 the Company 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, the Company
calculated that 853,853 shares of common stock had vested (the “Vested Shares”) 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 the Company recorded an
additional $2,960 stock-based compensation expense related to the Variable Plan, as the Company’s 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. The Company reversed the
additional accrual of stock-based compensation expense related to the Variable Plan, which reduced current year
stock-based compensation expense by $2,960, with an offset to additional capital. During 2008, the legal,
professional and other fees associated with this matter cost the Company $716, net of insurance proceeds.
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31,
2008 2007 2006
Current
Federal ......................................................... $12,174 $5,577 $7,433
State ........................................................... 2,983 1,217 1,425
Total Current ........................................................ 15,157 6,794 8,858
Deferred
Federal ......................................................... 390 310 (627)
State ........................................................... 96 67 (70)
Total Deferred ....................................................... 486 377 (697)
Total Provision for Income Taxes ........................................ $15,643 $7,171 $8,161
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