Overstock.com 2008 Annual Report Download - page 108

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Table of Contents
Valuation Assumptions
During the twelve months ended December 31, 2006, 2007 and 2008, total stock options granted to employees were 183,000,
762,000 and 11,000 respectively, with estimated total grant-date fair values of $2.4 million, $8.1 million and $106,000, respectively.
The Company estimates that the stock-based compensation for the awards not expected to vest during the years ended December 31,
2006, 2007 and 2008 was $643,000, $2.4 million and $32,000, respectively. During the years ended December 31, 2006, 2007 and
2008, the Company recorded stock-based compensation related to stock options of $4.1 million, $4.5 million and $3.3 million,
respectively.
The fair value for each stock option granted during the twelve months ended December 31, 2006, 2007 and 2008 was estimated at
the date of grant using the BSM option-pricing model, assuming no dividends and the following assumptions.
Years ended December 31,
2006 2007 2008
Average risk-free interest rate 4.77% 4.75% 2.91%
Average expected life (in years) 3.5 6.3 6.3
Volatility 65.1% 68.5% 70.6%
Expected Volatility: The fair value of stock based payments were valued using a volatility factor based on the Company's
historical stock prices.
Expected Term: For 2006 option grants, the Company's expected term represents the period that the Company's stock-based
awards are expected to be outstanding and was determined based on historical experience of similar awards, giving
consideration to the contractual terms and vesting provisions of the stock-based awards. For 2007 and 2008 option grants, the
Company elected to use the "simplified method" as discussed in SAB No. 107 to develop the estimate of the expected term.
In December 2007, the SEC issued SAB No. 110, Certain Assumptions Used in Valuation Methods—Expected Term ("SAB
No. 110"). According to SAB No. 110, under certain circumstances the SEC staff will continue to accept the use of the
simplified method as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options
in accordance with SFAS No. 123(R), beyond December 31, 2007. The Company adopted SAB No. 110 effective January 1,
2008 and will continue to use the simplified method in developing the expected term used for its valuation of stock-based
compensation.
Expected Dividend: The Company has not paid any dividends and does not anticipate paying dividends in the foreseeable
future.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used on the implied yield currently available on U.S.
Treasury zero-coupon issues with remaining term equivalent to the expected term of the options.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary and involuntary
termination behavior.
Stock Option Activity
The Company's board of directors adopted the Amended and Restated 1999 Stock Option Plan, the 2002 Stock Option Plan and
the 2005 Equity Incentive Plan (collectively, the "Plans"), in May 1999, April 2002, and April 2005 respectively. Under these Plans,
the Board of Directors may issue incentive stock options to employees and directors of the Company and non-qualified stock options
to consultants of the Company. Options granted under these Plans generally expire at the end of five or ten years and vest in
accordance with a vesting schedule determined by the Company's Board of Directors, usually over four years from the grant date. As
of the initial public offering, the Amended and Restated 1999 Stock Option Plan was terminated, and as of April 2005 the 2002 Stock
Option Plan was terminated (except with regard to outstanding options). Future shares will be granted under the 2005 Equity Incentive
Plan. As of December 31, 2008, 1.2 million shares of stock based awards are available for future grants under the 2005 Equity
Incentive Plan. The Company settles stock option exercises with newly issued common shares. The following is a summary of stock
option activity (in thousands, except per share data):
2006 2007 2008
Shares
Weighted Average
Exercise Price Shares
Weighted Average
Exercise Price Shares
Weighted Average
Exercise Price
Outstanding—beginning of year 1,299 $ 18.09 1,011 $ 18.97 1,161 $ 20.48
Granted at fair value 183 22.47 762 18.14 11 14.14
Exercised (276) 9.19 (354) 8.81 (112) 12.96
Canceled/forfeited (195)30.17 (258)23.65 (86)20.45
Outstanding—end of year 1,011 18.97 1,161 20.48 974 21.27
Options exercisable at year-end 679 $ 15.74 408 $ 22.36 609 $ 23.18
F-28