NOTE 8. STOCK-BASED COMPENSATION

Stock-based compensation expense included in SG&A expenses consisted of:


	Year Ended December 31,
	2012		2011		2010
Stock Options, Restricted Stock Awards and Stock Appreciation Rights	$	3,997	$	4,005	$	2,962
Regional Manager Plan		—		—		129

Total	$	3,997	$	4,005	$	3,091

Overview

On May 6, 2011, the Company’s stockholders approved the Lumber Liquidators Holdings, Inc. 2011 Equity Compensation Plan (the “2011 Plan”), which succeeded the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan (the “2007 Plan”). The 2011 Plan is an equity incentive plan for employees, non-employee directors and other service providers from which the Company may grant stock options, restricted stock awards, stock appreciation rights (“SARs”) and other equity awards. The total number of shares of common stock authorized for issuance under the 2011 Plan is 5.3 million. As of December 31, 2012, 1.7 million shares of common stock were available for future grants. Stock options granted under the 2011 Plan expire no later than ten years from the date of grant and the exercise price shall not be less than the fair market value of the shares on the date of grant. Vesting periods are assigned to stock options and restricted stock awards on a grant by grant basis at the discretion of the Board of Directors. The Company issues new shares of common stock upon exercise of stock options and vesting of restricted stock awards.

The Company also maintains the Lumber Liquidators Holdings, Inc. Outside Directors Deferral Plan (the “Deferral Plan”) under which each of the Company’s non-employee directors has the opportunity to elect annually to defer certain fees until his departure from the Board of Directors. A non-employee director may elect to defer up to 100% of his fees and have such fees invested in deferred stock units. Deferred stock units must be settled in common stock upon the director’s departure from the Board. There were 47,334 and 32,960 deferred stock units outstanding at December 31, 2012 and 2011, respectively.

The Regional Manager Plan

The Company maintained a stock unit plan for regional store management, the 2006 Stock Unit Plan for Regional Managers (the “2006 Regional Plan”). In 2006, certain Regional Managers were granted a total of 85,000 stock units vesting over approximately a five year period. Through December 2010, vesting was complete and the Company’s founder contributed the 85,000 shares of common stock necessary to provide for the exercise of the stock units. No additional grants of stock units are available under the 2006 Regional Plan.

Stock Options

The following table summarizes activity related to stock options:


	Shares			Weighted Average Exercise Price		Remaining Average Contractual Term (Years)		Aggregate Intrinsic Value
Balance, December 31, 2009		2,046,976		$	8.61		7.2	$	37,237

Granted		289,026			24.35
Exercised		(206,821	)		8.68
Forfeited		(59,664	)		13.24

Balance, December 31, 2010		2,069,517		$	10.67		6.6	$	29,635

Granted		557,557			24.64
Exercised		(377,775	)		8.14
Forfeited		(54,952	)		19.82

Balance, December 31, 2011		2,194,347		$	14.42		6.6	$	12,746

Granted		182,281			25.73
Exercised		(937,048	)		11.16
Forfeited		(128,203	)		19.94

Balance, December 31, 2012		1,311,377		$	17.79		6.5	$	45,954

Exercisable at December 31, 2012		670,420		$	11.59		4.8	$	27,647

The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s common stock on December 31. The intrinsic value of the stock options exercised during 2012, 2011 and 2010 was $22,881, $5,583 and $3,742, respectively.

As of December 31, 2012, total unrecognized compensation cost related to unvested options was approximately $4,877, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.6 years.

The fair value of each stock option award is estimated by management on the date of the grant using the Black-Scholes-Merton option pricing model. The weighted average fair value of options granted during 2012, 2011 and 2010 was $12.68, $12.57 and $11.44, respectively.

The following are the ranges of assumptions for the periods noted:


	Year Ended December 31,
	2012			2011			2010
Expected dividend rate		0	%		0	%		0	%
Expected stock price volatility		45	%		45	%		45	%
Risk-free interest rate		1.0-1.6	%		1.7-3.0	%		1.9-3.2	%
Expected term of options		6.5-7.5 years			7.5 years			3.5-7.5 years

The expected stock price volatility range is based on a combination of historical volatility of the Company’s stock price and the historical volatilities of companies included in a peer group that was selected by management whose shares or options are publicly available. The volatilities are estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior.

Restricted Stock Awards

The following table summarizes activity related to restricted stock awards:


	Shares			Weighted Average Grant Date Fair Value
Nonvested, December 31, 2009		145,230		$	12.19

Granted		67,811			24.69
Released		(48,245	)		24.63
Forfeited		(22,715	)		14.26

Nonvested, December 31, 2010		142,081		$	13.60

Granted		79,236			23.28
Released		(56,529	)		21.45
Forfeited		(22,668	)		18.61

Nonvested, December 31, 2011		142,120		$	15.08

Granted		66,425			27.62
Released		(43,529	)		29.41
Forfeited		(12,611	)		21.58

Nonvested, December 31, 2012		152,405		$	15.19

The fair value of restricted stock awards released during the years ended December 31, 2012, 2011 and 2010 was $1,391, $1,212 and $1,188, respectively. As of December 31, 2012, total unrecognized compensation cost related to unvested restricted stock awards was approximately $856, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.1 years.

Stock Appreciation Rights

The following table summarizes activity related to SARs:


	Shares			Weighted Average Exercise Price		Remaining Average Contractual Term (Years)		Aggregate Intrinsic Value
Balance, December 31, 2011		—		$	—		—	$	—

Granted		9,796			24.71
Forfeited		(165	)		24.35

Balance, December 31, 2012		9,631		$	24.72		9.2	$	271

Exercisable at December 31, 2012		—		$	—		—	$	—

The fair value method, estimated by management using the Black-Scholes-Merton option pricing model, is used to recognize compensation cost associated with SARs.