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MAPLEBY HOLDINGS MERGER Corp 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

x

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

For the quarterly period ended July 1, 2006

o

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: 1-5057

OFFICEMAX INCORPORATED
(Exact name of registrant as specified in its charter)

 

Delaware

 

82-0100960

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

150 Pierce Road

 

 

Itasca, Illinois

 

60143

(Address of principal executive offices)

 

(Zip Code)

 

(630) 438-7800
(Registrant’s telephone number, including area code)

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   x       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes  o       No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Shares Outstanding

Class

 

as of July 29, 2006

Common Stock, $2.50 par value

 

74,195,118

 

 







PART I—FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income (Loss)
(thousands, except per-share amounts)

 

 

Quarter Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

 

 

(unaudited)

 

Sales

 

$

2,040,951

 

$

2,091,804

 

Cost of goods sold and occupancy costs

 

1,521,954

 

1,598,906

 

Gross profit

 

518,997

 

492,898

 

Operating expenses:

 

 

 

 

 

Operating and selling

 

385,299

 

416,652

 

General and administrative

 

86,671

 

95,789

 

Other operating, net

 

456

 

282

 

Operating income (loss)

 

46,571

 

(19,825

)

Debt retirement expense

 

 

(2,237

)

Interest expense

 

(30,214

)

(33,481

)

Interest income

 

22,103

 

23,484

 

Other, net

 

6,727

 

(12

)

Income (loss) from continuing operations before income taxes and minority interest

 

45,187

 

(32,071

)

Income taxes

 

(17,284

)

15,266

 

Income (loss) from continuing operations before minority interest

 

27,903

 

(16,805

)

Minority interest, net of income tax

 

(508

)

(454

)

Income (loss) from continuing operations

 

27,395

 

(17,259

)

Discontinued operations:

 

 

 

 

 

Operating loss

 

 

(7,003

)

Income tax benefit

 

 

2,724

 

Loss from discontinued operations

 

 

(4,279

)

Net income (loss)

 

27,395

 

(21,538

)

Preferred dividends

 

(1,009

)

(1,155

)

Net income (loss) applicable to common shareholders

 

$

26,386

 

$

(22,693

)

Basic income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.36

 

$

(0.23

)

Discontinued operations

 

 

(0.05

)

Basic income (loss) per common share

 

$

0.36

 

$

(0.28

)

Diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

(0.23

)

Discontinued operations

 

 

(0.05

)

Diluted income (loss) per common share

 

$

0.35

 

$

(0.28

)

 

See accompanying notes to quarterly consolidated financial statements.

3




OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income (Loss)
(thousands, except per-share amounts)

 

 

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

 

 

(unaudited)

 

Sales

 

$

4,464,488

 

$

4,414,604

 

Cost of goods sold and occupancy costs

 

3,318,737

 

3,354,422

 

Gross profit

 

1,145,751

 

1,060,182

 

Operating expenses:

 

 

 

 

 

Operating and selling

 

818,344

 

866,954

 

General and administrative

 

175,904

 

188,253

 

Other operating, net

 

113,296

 

10,668

 

Operating income (loss)

 

38,207

 

(5,693

)

Debt retirement expense

 

 

(14,392

)

Interest expense

 

(61,717

)

(64,672

)

Interest income

 

43,217

 

55,353

 

Other, net

 

4,561

 

758

 

Income (loss) from continuing operations before income taxes and minority interest

 

24,268

 

(28,646

)

Income taxes

 

(9,290

)

11,750

 

Income (loss) from continuing operations before minority interest

 

14,978

 

(16,896

)

Minority interest, net of income tax

 

(1,689

)

(1,363

)

Income (loss) from continuing operations

 

13,289

 

(18,259

)

Discontinued operations:

 

 

 

 

 

Operating loss

 

(17,972

)

(14,028

)

Income tax benefit

 

6,991

 

5,457

 

Loss from discontinued operations

 

(10,981

)

(8,571

)

Net income (loss)

 

2,308

 

(26,830

)

Preferred dividends

 

(2,018

)

(2,261

)

Net income (loss) applicable to common shareholders

 

$

290

 

$

(29,091

)

Basic income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

(0.23

)

Discontinued operations

 

(0.15

)

(0.10

)

Basic income (loss) per common share

 

$

 

$

(0.33

)

Diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

(0.23

)

Discontinued operations

 

(0.15

)

(0.10

)

Diluted income (loss) per common share

 

$

 

$

(0.33

)

 

See accompanying notes to quarterly consolidated financial statements.

4




OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands)

 

 

July 1,
2006

 

December 31,
2005

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

173,956

 

 

$

72,198

 

 

Receivables, net

 

521,380

 

 

596,724

 

 

Related party receivables

 

4,902

 

 

3,520

 

 

Inventories

 

969,849

 

 

1,114,570

 

 

Deferred income taxes

 

101,311

 

 

105,820

 

 

Other

 

53,632

 

 

49,217

 

 

Total current assets

 

1,825,030

 

 

1,942,049

 

 

Property and equipment:

 

 

 

 

 

 

 

Land and land improvements

 

38,908

 

 

38,537

 

 

Buildings and improvements

 

363,410

 

 

359,481

 

 

Machinery and equipment

 

702,510

 

 

685,545

 

 

Total property and equipment

 

1,104,828

 

 

1,083,563

 

 

Accumulated depreciation

 

(585,901

)

 

(548,118

)

 

Net property and equipment

 

518,927

 

 

535,445

 

 

Goodwill

 

1,201,245

 

 

1,218,200

 

 

Intangible assets, net

 

202,295

 

 

205,232

 

 

Investments in affiliates

 

175,000

 

 

175,000

 

 

Timber notes receivable

 

1,635,000

 

 

1,635,000

 

 

Restricted investments

 

22,292

 

 

22,377

 

 

Deferred charges

 

43,711

 

 

52,810

 

 

Other non-current assets

 

476,092

 

 

486,029

 

 

Total assets

 

$

6,099,592

 

 

$

6,272,142

 

 

 

See accompanying notes to quarterly consolidated financial statements.

5




OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share and per share amounts)

 

 

July 1,
2006

 

December 31,
2005

 

 

 

(unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

 

 

$

18,666

 

 

Current portion of long-term debt

 

25,772

 

 

68,648

 

 

Accounts payable:

 

 

 

 

 

 

 

Trade

 

814,173

 

 

949,287

 

 

Related parties

 

27,295

 

 

42,166

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

Compensation and benefits

 

135,351

 

 

147,184

 

 

Other

 

335,865

 

 

352,537

 

 

Liabilities related to assets held for sale

 

16,692

 

 

9,838

 

 

Total current liabilities

 

1,355,148

 

 

1,588,326

 

 

Long-term debt:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

384,378

 

 

407,242

 

 

Timber notes securitized

 

1,470,000

 

 

1,470,000

 

 

Total long-term debt

 

1,854,378

 

 

1,877,242

 

 

Other long-term obligations:

 

 

 

 

 

 

 

Compensation and benefits

 

536,462

 

 

538,830

 

 

Deferred gain on sale of assets

 

179,757

 

 

179,757

 

 

Other long-term obligations

 

328,310

 

 

324,853

 

 

 

 

1,044,529

 

 

1,043,440

 

 

Minority interest

 

25,478

 

 

27,455

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock—no par value; 10,000,000 shares authorized;

 

 

 

 

 

 

 

Series D ESOP: $.01 stated value; 1,216,335 and 1,216,335 shares outstanding

 

54,735

 

 

54,735

 

 

Common stock—$2.50 par value; 200,000,000 shares authorized; 74,055,572 and 70,804,612 shares outstanding

 

185,108

 

 

176,977

 

 

Additional paid-in capital

 

855,574

 

 

747,805

 

 

Retained earnings

 

877,109

 

 

898,283

 

 

Accumulated other comprehensive loss

 

(152,467

)

 

(142,121

)

 

Total shareholders’ equity

 

1,820,059

 

 

1,735,679

 

 

Total liabilities and shareholders’ equity

 

$

6,099,592

 

 

$

6,272,142

 

 

 

See accompanying notes to quarterly consolidated financial statements.

6




OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Cash Flows

 

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

 

 

(unaudited)

 

 

 

(thousands)

 

Cash provided by (used for) operations:

 

 

 

 

 

 

 

Net income (loss)

 

 

$

2,308

 

 

$

(26,830

)

Items in net income (loss) not using (providing) cash:

 

 

 

 

 

 

 

Equity in net income of affiliates

 

 

(2,871

)

 

(2,654

)

Depreciation and amortization

 

 

60,316

 

 

73,233

 

Minority interest, net of income tax

 

 

1,689

 

 

1,363

 

Pension and other postretirement benefits expense

 

 

7,407

 

 

13,638

 

Discontinued operations

 

 

7,162

 

 

785

 

Other

 

 

17,593

 

 

12,151

 

Changes other than from acquisition of business:

 

 

 

 

 

 

 

Receivables

 

 

72,811

 

 

105,655

 

Inventories

 

 

144,721

 

 

96,223

 

Accounts payable and accrued liabilities

 

 

(180,825

)

 

(288,411

)

Current and deferred income taxes

 

 

20,382

 

 

(173,570

)

Other

 

 

287

 

 

(30,802

)

Cash provided by (used for) operations

 

 

150,980

 

 

(219,219

)

Cash used for investment:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(46,996

)

 

(59,103

)

Acquisitions of businesses

 

 

 

 

(33,028

)

Proceeds from sale of assets

 

 

 

 

90,522

 

Other

 

 

596

 

 

(1,709

)

Cash used for investment

 

 

(46,400

)

 

(3,318

)

Cash used for financing:

 

 

 

 

 

 

 

Cash dividends paid

 

 

(23,268

)

 

(28,009

)

Short-term borrowings (repayments), net

 

 

(18,666

)

 

25,327

 

Payments of long-term debt

 

 

(65,478

)

 

(201,768

)

Purchase of common stock

 

 

(33

)

 

(780,351

)

Proceeds from the exercise of stock options

 

 

104,623

 

 

22,009

 

Other

 

 

 

 

126

 

Cash used for financing

 

 

(2,822

)

 

(962,666

)

Increase (decrease) in cash and cash equivalents

 

 

101,758

 

 

(1,185,203

)

Cash and cash equivalents at beginning of period

 

 

72,198

 

 

1,242,542

 

Cash and cash equivalents at end of period

 

 

$

173,956

 

 

$

57,339

 

 

See accompanying notes to quarterly consolidated financial statements.

7




Notes to Quarterly Consolidated Financial Statements (Unaudited)

1.   Basis of Presentation

OfficeMax Incorporated (“OfficeMax,” the “Company” or “we”), which was formerly known as Boise Cascade Corporation, is a leader in both business-to-business and retail office products distribution. The Company provides office supplies and paper, print and document services, technology products and solutions and furniture to large, medium and small businesses, governmental offices, and consumers. OfficeMax customers are serviced by approximately 35,000 associates through direct sales, catalogs, the Internet and a network of retail stores located throughout the United States, Canada, Australia, New Zealand and Mexico. The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol OMX. The Company’s corporate headquarters is located in Itasca, Illinois, and the OfficeMax website address is www.officemax.com.

On December 9, 2003, the Company completed the acquisition of OfficeMax, Inc. (the “Acquisition”), which was primarily a retail office products distributor. References to the OfficeMax, Inc. Acquisition and OfficeMax, Inc. Integration herein refer to Boise Cascade Corporation’s acquisition of OfficeMax, Inc. and the related integration activities.

On October 29, 2004, the Company sold substantially all of its paper, forest products and timberland assets for approximately $3.7 billion in cash and other consideration to affiliates of Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC (the “Sale”). The Company changed its name from Boise Cascade Corporation to OfficeMax Incorporated in connection with the Sale.

Effective March 11, 2005, the Company amended its bylaws to make its fiscal year-end the last Saturday in December. Prior to this change, all of the Company’s businesses except for its U.S. retail operations had a December 31 fiscal year-end. The U.S. retail operations maintained a fiscal year that ended on the last Saturday in December. Due primarily to statutory requirements, the Company’s international businesses have maintained their December 31 year-ends. Fiscal year 2005 ended on December 31, 2005 for all reportable segments and businesses, and included 53 weeks for the Retail segment. Fiscal year 2006 ends on December 30, 2006. As a result of the fiscal year change, the domestic operations of the Contract segment had five additional selling days in the first quarter of 2006 than in the first quarter of 2005. The domestic operations of the Contract segment will have five fewer selling days in the fourth quarter of 2006 than in the fourth quarter of 2005. All  segments had the same number of selling days in the second quarter of 2006 as they had in the second quarter of 2005.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results are likely to differ from those estimates but management does not believe such differences will materially affect the Company’s financial position, results of operations or cash flows. Significant items subject to such estimates and assumptions include the recognition of vendor rebates and allowances; the carrying amount of property and equipment, intangibles and goodwill; valuation allowances for receivables, inventories and deferred income tax assets; store closing reserves and environmental liabilities; and assets and obligations related to employee benefits.

The Company has prepared the quarterly consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures, which would normally be included in comprehensive annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those rules and regulations. These quarterly consolidated financial

8




statements should be read together with the consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The quarterly consolidated financial statements included herein have not been audited by an independent registered public accounting firm, but in the opinion of management, include all adjustments necessary to present fairly the results for the periods. Except as may be disclosed within these “Notes to Quarterly Consolidated Financial Statements,” the adjustments made were of a normal, recurring nature. Quarterly results are not necessarily indicative of results which may be expected for a full year.

Certain amounts in prior years’ financial statements have been reclassified to conform with the current year’s presentation. These reclassifications did not affect net income (loss).

2.   Discontinued Operations

In December 2004, the Company’s board of directors authorized management to pursue the divestiture of a facility near Elma, Washington that manufactured integrated wood-polymer building materials. The board of directors and management concluded that the operations of the facility were no longer consistent with the Company’s strategic direction. As a result of that decision, the Company recorded the facility’s assets as held for sale on the Consolidated Balance Sheets and reported the results of its operations as discontinued operations.

During 2005, the Company experienced unexpected difficulties in achieving anticipated levels of production at the facility. These issues delayed the process of identifying and qualifying a buyer for the business. While management made substantial progress in addressing the manufacturing issues that caused production to fall below plan, during the fourth quarter of 2005, the Company concluded that the Company was unable to attract a buyer in the near term and elected to cease operations at the facility during the first quarter of 2006.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company recorded pre-tax charges of $67.8 million in the fourth quarter of 2004 and $28.2 million in the fourth quarter of 2005 to reduce the carrying value of the long-lived assets of the Elma, Washington facility to their estimated fair value. During the first quarter of 2006, the Company ceased operations at the facility and recorded pre-tax expenses of $18.0 million for contract termination and other closure costs. These charges and expenses were reflected within discontinued operations in the Consolidated Statements of Income (Loss).

3.   Integration and Facility Closures

The Company conducts regular reviews of its real estate portfolio to identify underperforming facilities, and closes those facilities that are no longer strategically or economically viable. Costs associated with the planned closure and consolidation of acquired facilities were accounted for under Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” and recognized as liabilities in connection with the acquisition and charged to goodwill. Costs incurred in connection with all other business integration activities have been recognized in the Consolidated Statements of Income (Loss).

During the first six months of 2006, the Company closed 109 underperforming, domestic retail stores and recorded a pre-tax charge of $89.6 million, including $11.3 million for employee severance, asset write-off and impairment and other closure costs and $78.3 million of estimated future lease obligations. The provision for estimated future lease obligations represents the estimated fair value of the obligations and is net of anticipated sublease income of $58.5 million.

In September 2005, the board of directors approved a plan to relocate and consolidate the Company’s retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in Itasca, Illinois into a

9




new facility in Naperville, Illinois. The Company began the consolidation and relocation process in the latter half of 2005. As of July 1, 2006, the Company has expensed approximately $51.6 million of costs related to the headquarters consolidation, including $26.6 million recognized during the first six months of 2006 and $25.0 million recognized during the second half of 2005.

The consolidation and relocation process is expected to be completed during the second half of 2006. Management continues to expect the total cost for the headquarter consolidation will be approximately $65 million to $75 million on a pre-tax basis, including approximately $45 million to $55 million for severance, retention, contract termination costs and accelerated depreciation and approximately $20 million for personnel training, recruiting and relocation. The estimated costs related to the headquarters consolidation do not include potential savings from expected efficiencies and tax incentives.

At July 1, 2006, approximately $61.9 million of the integration and facility closure reserve was included in accrued expenses and other current liabilities, other, and $77.0 million was included in other long-term obligations. Integration and facility closure reserve account activity during the first half of 2006, including activity related to the retail store closures and the headquarters consolidation, was as follows:

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 31, 2005

 

 

$

91,455

 

 

 

$

21,502

 

 

 

$

 

 

$

739

 

$

113,696

 

Charges to income

 

 

78,330

 

 

 

10,721

 

 

 

10,065

 

 

17,051

 

116,167

 

Adjustments to goodwill

 

 

(11,000

)

 

 

 

 

 

 

 

 

(11,000

)

Credits to income

 

 

 

 

 

(1,080

)

 

 

 

 

 

(1,080

)

Cash payments

 

 

(40,859

)

 

 

(16,062

)

 

 

 

 

(14,638

)

(71,559

)

Non-cash charges

 

 

 

 

 

 

 

 

(10,065

)

 

(685

)

(10,750

)

Accretion expense

 

 

3,402

 

 

 

 

 

 

 

 

 

3,402

 

Balance at July 1, 2006

 

 

$

121,328

 

 

 

$

15,081

 

 

 

$

 

 

$

2,467

 

$

138,876

 

 

4.   Net Income (Loss) Per Common Share

Net income (loss) per common share was determined by dividing net income (loss), as adjusted, by weighted average shares outstanding.

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands, except per-share amounts)

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

27,395

 

$

(17,259

)

$

13,289

 

$

(18,259

)

Preferred dividends

 

(1,009

)

(1,155

)

(2,018

)

(2,261

)

Basic income (loss) before discontinued operations

 

26,386

 

(18,414

)

11,271

 

(20,520

)

Loss from discontinued operations

 

 

(4,279

)

(10,981

)

(8,571

)

Basic income (loss)

 

$

26,386

 

$

(22,693

)

$

290

 

$

(29,091

)

Average shares used to determine basic income (loss) per common share

 

72,877

 

81,726

 

71,855

 

87,281

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.36

 

$

(0.23

)

$

0.15

 

$

(0.23

)

Discontinued operations

 

 

(0.05

)

(0.15

)

(0.10

)

Basic income (loss) per common share

 

$

0.36

 

$

(0.28

)

$

 

$

(0.33

)

 

10




 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands, except per-share amounts)

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic income (loss) from continuing operations

 

$

26,386

 

$

(18,414

)

$

11,271

 

$

(20,520

)

Preferred dividends eliminated

 

 

 

 

 

Supplemental ESOP contribution

 

 

 

 

 

Diluted income (loss) before discontinued operations

 

26,386

 

(18,414

)

11,271

 

(20,520

)

Loss from discontinued operations

 

 

(4,279

)

(10,981

)

(8,571

)

Diluted income (loss)

 

$

26,386

 

$

(22,693

)

$

290

 

$

(29,091

)

Average shares used to determine basic income (loss) per common share

 

72,877

 

81,726

 

71,855

 

87,281

 

Restricted stock, stock options and other

 

2,047

 

 

1,655

 

 

Series D Convertible Preferred Stock

 

 

 

 

 

Average shares used to determine diluted income (loss) per common share (a)

 

74,924

 

81,726

 

73,510

 

87,281

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

(0.23

)

$

0.15

 

$

(0.23

)

Discontinued operations

 

 

(0.05

)

(0.15

)

(0.10

)

Diluted income (loss) per common share

 

$

0.35

 

$

(0.28

)

$

 

$

(0.33

)

 


(a)           Options to purchase 6.4 million shares of common stock were outstanding during both the quarter and six months ended June 25, 2005, but were not included in the computation of diluted income (loss) per common share because the impact would have been anti-dilutive due to the net loss recognized in those periods.

5.   Other Operating, Net

The components of “Other operating, net” in the Consolidated Statements of Income (Loss) are as follows:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

Integration and facility closures (a)

 

 

$

1,899

 

 

 

$

2,405

 

 

$

116,167

 

$

2,792

 

Legal reserve (b)

 

 

 

 

 

 

 

 

9,800

 

Equity in net income of affiliates

 

 

(1,443

)

 

 

(1,352

)

 

(2,871

)

(2,654

)

Other, net

 

 

 

 

 

(771

)

 

 

730

 

 

 

 

$

456

 

 

 

$

282

 

 

$

113,296

 

$

10,668

 

(a)           See Note 3, Integration and Facility Closures.

(b)          Legal settlement with the Department of Justice recorded in the OfficeMax, Contract segment.

11




6. Income Taxes

For the six months ended July 1, 2006, the Company received income tax refunds, net of income taxes paid, of $21.1 million. For the six months ended June 25, 2005, the Company paid income taxes, net of refunds received, of $154.2 million.

7. Comprehensive Income (Loss)

Comprehensive income (loss) includes the following:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

Net income (loss)

 

$

27,395

 

$

(21,538

)

$

2,308

 

$

(26,830

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation adjustment

 

8,014

 

(7,075

)

(10,346

)

(9,558

)

Comprehensive income (loss)

 

$

35,409

 

$

(28,613

)

$

(8,038

)

$

(36,388

)

 

8. Sales of Accounts Receivable

On June 19, 2006, the Company entered into a Fourth Amended and Restated Receivables Sale Agreement with a group of lendors, which replaced the Third Amended and Restated Receivables Sale Agreement that expired on that day. The agreement allows the Company to sell, on a revolving basis, an undivided interest in a defined pool of receivables while retaining a subordinated interest in a portion of the receivables. The receivables are sold without legal recourse to third party conduits through a wholly owned bankruptcy-remote special purpose entity that is consolidated for financial reporting purposes. The Company continues servicing the sold receivables and charges the third party conduits a monthly servicing fee at market rates. The program qualifies for sale treatment under SFAS 140. The amount of available proceeds under the program is limited to $200 million, and is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables. At July 1, 2006 and December 31, 2005, $168.0 million and $163.0 million of sold accounts receivable were excluded from receivables in the accompanying Consolidated Balance Sheets. The Company’s subordinated retained interest in the transferred receivables was $116.2 million and $73.3 million at July 1, 2006 and December 31, 2005, respectively, and is included in receivables, net in the Consolidated Balance Sheets. The receivables sale agreement will expire on June 18, 2007.

9. Investments in Affiliates

In connection with the Sale, the Company invested $175 million in the equity units of affiliates of Boise Cascade, L.L.C., including approximately $66 million of equity units that carry no voting rights. This investment is accounted for under the cost method as the Company has less than a 20 percent voting interest in Boise Cascade, L.L.C. and does not have the ability to significantly influence its operating and financial policies. This investment is included in investments in affiliates in the Consolidated Balance Sheets.

The Boise Cascade, L.L.C. non-voting equity units accrue dividends daily at the rate of 8% per annum on the liquidation value plus accumulated dividends. Dividends accumulate semiannually to the extent not paid in cash on the last day of any June and December. The Company recognized dividend income on this investment of $1.4 million and $2.9 million for the quarter and six months ended July 1, 2006, respectively, and $1.4 million and $2.7 million for the quarter and six months ended June 25, 2005, respectively.

12




10. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. In accordance with the provisions of SFAS 142, “Goodwill and Other Intangible Assets,” we assess our acquired goodwill and intangible assets with indefinite lives for impairment at least annually in the absence of an indicator of possible impairment, and immediately upon an indicator of possible impairment. We completed our annual assessment in accordance with the provisions of the standard during the first quarter of 2006 and 2005, and concluded there was no impairment. During the first quarter of 2006 and 2005, we also evaluated the remaining useful lives of our finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary. We determined that no adjustments to the useful lives of our finite-lived purchased intangible assets were necessary.

Changes in the carrying amount of goodwill by segment are as follows:

 

 

OfficeMax,
Contract

 

OfficeMax,
Retail

 

Total

 

 

 

(thousands)

 

Balance at December 31, 2005

 

 

$

523,537

 

 

 

$

694,663

 

 

$

1,218,200

 

Effect of foreign currency translation

 

 

(3,041

)

 

 

 

 

(3,041

)

Other

 

 

(2,914

)

 

 

(11,000

)

 

(13,914

)

Balance at July 1, 2006

 

 

$

517,582

 

 

 

$

683,663

 

 

$

1,201,245

 

 

Acquired Intangible Assets

Intangible assets represent the values assigned to trade names, customer lists and relationships, noncompete agreements and exclusive distribution rights of businesses acquired. The trade name assets have an indefinite life and are not amortized. All other intangible assets are amortized on a straight-line basis over their expected useful lives. Customer lists and relationships are amortized over three to 20 years, noncompete agreements over their terms, which are generally three to five years, and exclusive distribution rights over ten years. Intangible assets consisted of the following:

 

 

July 1, 2006

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,100

 

 

 

$

 

 

 

$

173,100

 

 

Customer lists and relationships

 

 

36,436

 

 

 

(14,671

)

 

 

21,765

 

 

Noncompete agreements

 

 

12,860

 

 

 

(6,913

)

 

 

5,947

 

 

Exclusive distribution rights

 

 

3,130

 

 

 

(1,647

)

 

 

1,483

 

 

 

 

 

$

225,526

 

 

 

$

(23,231

)

 

 

$

202,295

 

 

 

 

 

December 31, 2005

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,100

 

 

 

$

 

 

 

$

173,100

 

 

Customer lists and relationships

 

 

36,438

 

 

 

(13,438

)

 

 

23,000

 

 

Noncompete agreements

 

 

12,852

 

 

 

(5,577

)

 

 

7,275

 

 

Exclusive distribution rights

 

 

3,508

 

 

 

(1,651

)

 

 

1,857

 

 

 

 

 

$

225,898

 

 

 

$

(20,666

)

 

 

$

205,232

 

 

 

13




Intangible asset amortization expense totaled $2.1 million and $3.8 million for the quarter and six months ended July 1, 2006, respectively. Intangible asset amortization expense totaled  $1.5 million and $3.0 million for the quarter and six months ended June 25, 2005, respectively.

11. Timber Notes Receivable

In October 2004, OfficeMax sold its timberlands as part of the Sale. In exchange for the timberlands, the Company received timber installment notes receivable in the amount of $1,635 million, which were credit enhanced with guarantees. The guarantees were issued by highly-rated financial institutions and were secured by the pledge of underlying collateral notes issued by the credit enhancement banks. The timber installment notes receivable are 15-year non-amortizing. There are two notes that total $817.5 million bearing interest at 4.982% and a third note in the amount of $817.5 million bearing interest at 5.112%. Interest earned on all of the notes is received semiannually. See sub-caption “Timber Notes” in Note 12, Debt, for additional information concerning a securitization transaction involving the timber installment notes receivable.

12. Debt

Credit Agreements

On June 24, 2005, the Company entered into a loan and security agreement for a new revolving credit facility. The revolving credit facility permits the Company to borrow up to the maximum aggregate borrowing amount, which is equal to the lesser of (i) a percentage of the value of certain eligible inventory less certain reserves or (ii) $500 million. In the second quarter of 2006, the Company amended the revolving credit facility to provide greater access to the borrowing base availability under the facility. There were no borrowings outstanding under the revolving credit facility as of July 1, 2006. There were $18.7 million in borrowings outstanding under the revolving credit facility as of December 31, 2005. The maximum amount outstanding under the revolving credit facility was $122.0 million during the six months ended July 1, 2006. The average amount outstanding under the revolving credit facility during the six months ended July 1, 2006 was $41.5 million. Letters of credit, which may be issued under the revolver up to a maximum of $100 million, reduce available borrowing capacity under the facility. Letters of credit issued under the revolver totaled $80.3 million as of July 1, 2006. As of July 1, 2006, the maximum aggregate borrowing amount available under the revolver was $500.0 million and excess availability under the revolver was $419.7 million.

Borrowings under the revolver bear interest at rates based on either the prime rate or the London Interbank Offered Rate (“LIBOR”). Margins are applied to the applicable borrowing rates and the letter of credit fees under the revolver depending on the level of average excess availability. For borrowings outstanding under the revolver during the six months ended July 1, 2006, the weighted average interest rate was equal to 7.6%. Fees on letters of credit issued under the revolver were charged at a weighted average rate of 1.125%. The Company is also charged an unused line fee of 0.25% on the amount by which the maximum available credit of $500 million exceeds the average daily outstanding borrowings and letters of credit.

Borrowings under the revolver are secured by a lien on substantially all inventory and related proceeds. The revolving loan and security agreement contains customary conditions to borrowing including a monthly calculation of excess borrowing availability and reporting compliance. Covenants in the revolver agreement restrict the amount of letters of credit that may be issued, dividend distributions and other uses of cash if excess availability is less than $75 million. At July 1, 2006, the Company was in compliance with all covenants under the revolver agreement. The revolver expires on June 24, 2010.

14




Timber Notes

In October 2004, the Company sold its timberlands as part of the Sale and received credit-enhanced timber installment notes receivable in the amount of $1,635 million. (See Note 11, Timber Notes Receivable.) In December 2004, the Company completed a securitization transaction in which its interest in the timber installment notes receivable and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries that were designated to be qualifying special purpose entities (the “OMXQ’s”). The OMXQ’s pledged the timber installment notes receivable and related guarantees and issued securitization notes in the amount of $1,470 million. Recourse on the securitization notes is limited to the pledged timber installment notes receivable. The securitization notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.42% and 5.54%, respectively.

As a result of these transactions, OfficeMax received $1,470 million in cash from the OMXQ’s, and over 15 years will earn approximately $82.5 million per year in interest income on the timber installment notes receivable and incur interest expense of approximately $80.5 million on the securitization notes. The pledged timber installment notes receivable and nonrecourse securitization notes will mature in 2020 and 2019, respectively. The securitization notes have an initial term that is approximately three months shorter than the installment notes. The Company expects to refinance its ownership of the installment notes in 2019 with a short-term secured borrowing to bridge the period from initial maturity of the securitization notes to the maturity of the installment notes.

The original entities issuing the credit enhanced timber installment notes are variable-interest entities (the “VIE’s”) under FASB Interpretation 46R, “Consolidation of Variable Interest Entities”. The OMXQ’s are considered to be the primary beneficiary, and therefore, the VIE’s are required to be consolidated with the OMXQ’s, which are also the issuers of the securitization notes. As a result, the accounts of the OMXQ’s have been consolidated into those of their ultimate parent, OfficeMax. The effect of the Company’s consolidation of the OMXQ’s is that the securitization transaction is treated as a financing, and both the timber notes receivable and the securitization notes payable are reflected in the Consolidated Balance Sheets.

Note Agreements

In October 2003, the Company issued $300 million of 6.50% senior notes due in 2010 and $200 million of 7.00% senior notes due in 2013. At the time of issuance, the senior note indentures contained a number of restrictive covenants, substantially all of which have been eliminated through the execution of supplemental indentures as described below. On November 5, 2004, the Company repurchased approximately $286.3 million of the 6.50% senior notes and received the requisite consents to adopt amendments to the indenture pursuant to a tender offer for these securities. As a result, the Company and the trustee executed a supplemental indenture that eliminated substantially all of the restrictive covenants, certain events of default and related provisions, and replaced them with the covenants contained in the Company’s other public debt. Those covenants include a limitation on mergers and similar transactions, a restriction on secured transactions involving Principal Properties, as defined, and a restriction on sale and leaseback transactions involving Principal Properties.

In December 2004, both Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services upgraded the credit rating on the Company’s 7.00% senior notes to investment grade. The upgrades were the result of actions the Company took to collateralize the notes by granting the note holders a security interest in $113 million in principal amount of General Electric Capital and Bank of America Corp. notes maturing in 2008 (the “pledged instruments”). These pledged instruments are reflected as restricted investments in the Consolidated Balance Sheets. As a result of these ratings upgrades, the original 7.00% senior note covenants have been replaced with the covenants found in the Company’s other public debt. During the first quarter of 2005, the Company purchased and cancelled $87.3 million of the 7.00% senior

15




notes. As a result, $92.8 million of the pledged instruments were released from the security interest granted to the 7.00% senior note holders, and were sold during the second quarter of 2005. The remaining pledged instruments continue to be subject to the security interest, and are reflected as restricted investments in the Consolidated Balance Sheets.

Other

The Company had leased certain equipment at its integrated wood-polymer building materials facility near Elma, Washington under a capital lease. The lease agreement had a base term of seven years and an interest rate of 4.67%. During the first quarter of  2006 the Company paid $29.1 million to terminate the lease agreement. At December 31, 2005, the capital lease was included in the current portion of long-term debt in the Consolidated Balance Sheets.

Cash payments for interest were $11.1 million and $21.8 million for the quarter and six months ended July 1, 2006, respectively, and $43.2 million and $57.6 million for the quarter and six months ended June 25, 2005, respectively.

13. Retirement and Other Benefit Plans

The following represents the components of net periodic pension and postretirement benefit costs (income):

 

 

Pension Benefits

 

Other Benefits

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

Service cost

 

$

400

 

$

240

 

$

217

 

 

$

182

 

 

Interest cost

 

18,670

 

18,816

 

395

 

 

1,059

 

 

Expected return on plan assets

 

(21,838

)

(21,034

)

 

 

 

 

Recognized actuarial loss

 

5,789

 

7,407

 

173

 

 

130

 

 

Amortization of prior service costs and other

 

 

 

(893

)

 

19

 

 

Company-sponsored plans

 

3,021

 

5,429

 

(108

)

 

1,390

 

 

Immediate recognition

 

223

 

 

 

 

 

 

Net periodic benefit cost

 

$

3,244

 

$

5,429

 

$

(108

)

 

$

1,390

 

 

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

Service cost

 

$

800

 

$

480

 

$

434

 

 

$

364

 

 

Interest cost

 

37,340

 

37,632

 

790

 

 

2,118

 

 

Expected return on plan assets

 

(43,676

)

(42,068

)

 

 

 

 

Recognized actuarial loss

 

11,579

 

14,814

 

346

 

 

260

 

 

Amortization of prior service costs and other

 

 

 

(1,786

)

 

38

 

 

Company-sponsored plans

 

6,043

 

10,858

 

(216

)

 

2,780

 

 

Immediate recognition

 

1,580

 

 

 

 

 

 

Net periodic benefit cost

 

$

7,623

 

$

10,858

 

$

(216

)

 

$

2,780

 

 

 

There is a minimal contribution requirement in 2006.

16




14. Segment Information

The Company manages its business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. Each of the Company’s segments represent a business with differing products, services and/or distribution channels. Each of these businesses require distinct operating and marketing strategies. Management reviews the performance of the Company based on these segments.

OfficeMax, Contract markets and sells a broad line of items for the office, including office supplies and paper, technology products and solutions and office furniture. OfficeMax, Contract sells directly to large corporate, government and small and medium-sized offices in the United States, Canada, Australia, New Zealand and Mexico through field salespeople, outbound telesales, catalogs, the Internet and office products stores in Canada, Hawaii, Australia and New Zealand.

OfficeMax, Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions and office furniture. OfficeMax, Retail has operations in the United States, Puerto Rico and the U.S. Virgin Islands. OfficeMax office supply stores feature OfficeMax Print and Document Services, an in-store module devoted to print-for-pay and related services. The retail segment owns a 51% interest in a joint venture that operates office supply stores in Mexico.

Substantially all products sold by the Contract and Retail segments are purchased from third party manufacturers or industry wholesalers except for office papers. The Contract and Retail segments purchase office papers from Boise Cascade, L.L.C., under the terms of a long-term paper supply contract.

Corporate and Other includes corporate support staff services and related assets and liabilities.

Management evaluates the segments based on operating profits before interest expense, income taxes, minority interest, extraordinary items and cumulative effect of accounting changes. The income and expense related to certain assets and liabilities that are reported in the Corporate and Other segment have been allocated to the Contract and Retail segments. Certain expenses that management considers unusual or non-recurring are reflected in the Corporate and Other segment.

An analysis of the Company’s operations by segment is as follows:

 

 

Sales

 

Income (Loss) Before Taxes
and Minority Interest (a)

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

OfficeMax, Contract

 

 

$

1,146,742

 

 

 

$

1,138,173

 

 

 

$

44,424

 

 

 

$

23,720

 

 

OfficeMax, Retail

 

 

894,209

 

 

 

953,631

 

 

 

27,186

 

 

 

(15,523

)

 

Corporate and Other

 

 

 

 

 

 

 

 

(25,039

)

 

 

(28,022

)

 

 

 

 

2,040,951

 

 

 

2,091,804

 

 

 

46,571

 

 

 

(19,825

)

 

Debt retirement expense

 

 

 

 

 

 

 

 

 

 

 

(2,237

)

 

Interest expense

 

 

 

 

 

 

 

 

(30,214

)

 

 

(33,481

)

 

Interest income and other           

 

 

 

 

 

 

 

 

28,830

 

 

 

23,472

 

 

 

 

 

$

2,040,951

 

 

 

$

2,091,804

 

 

 

$

45,187

 

 

 

$

(32,071

)

 

 

17




 

 

 

Sales

 

Income (Loss) Before Taxes
and Minority Interest (a)

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

July 1,
2006

 

June 25,
2005

 

July 1,
2006

 

June 25,
2005

 

 

 

(thousands)

 

OfficeMax, Contract

 

 

$

2,377,504

 

 

 

$

2,262,614

 

 

 

$

111,473

 

 

 

$

42,082

 

 

OfficeMax, Retail

 

 

2,086,984

 

 

 

2,151,990

 

 

 

(10,806

)

 

 

7,337

 

 

Corporate and Other

 

 

 

 

 

 

 

 

(62,460

)

 

 

(55,112

)

 

 

 

 

4,464,488

 

 

 

4,414,604

 

 

 

38,207

 

 

 

(5,693

)

 

Debt retirement expense

 

 

 

 

 

 

 

 

 

 

 

(14,392

)

 

Interest expense

 

 

 

 

 

 

 

 

(61,717

)

 

 

(64,672

)

 

Interest income and other

 

 

 

 

 

 

 

 

47,778

 

 

 

56,111

 

 

 

 

 

$

4,464,488

 

 

 

$

4,414,604

 

 

 

$

24,268

 

 

 

$

(28,646

)

 


(a)        See Note 3, Integration and Facility Closures and Note 5, Other Operating, Net for an explanation of items affecting the segments.

15. Commitments and Guarantees

In addition to commitments for leases and long-term debt, and purchase obligations for goods and services and capital expenditures entered into in the normal course of business, the Company has various other commitments, guarantees and obligations that are described in Note 20, Commitments and Guarantees, in “Item 8. Financial Statements and Supplementary Data” and under the caption “Contractual Obligations” in “Item 7. Management’s Discussion and Anlaysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. At July 1, 2006, there had not been a material change to the information regarding commitments, guarantees and contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, other than an adjustment to the Additional Consideration Agreement described below.

The Company may be required to make cash payments to, or may be entitled to receive cash payments from, Boise Cascade L.L.C. under the terms of the Additional Consideration Agreement that was entered into in connection with the Sale. Under this agreement, the Sale proceeds may be adjusted upward or downward based on changes in paper prices during the six years following the Sale. At the date of the Sale, the Company recorded a $42 million liability related to the Additional Consideration Agreement based on the net present value of the weighted average expected payments due under the agreement based on paper price projections. During the quarter ended July 1, 2006, the Company reversed a portion of the liability estimated to be due under the Additional Consideration Agreement. The adjustment to this liability reduced Other, net expense (non-operating) by $9.2 million.

16. Legal Proceedings and Contingencies

We are involved in litigation and administrative proceedings arising in the normal course of our business. In the opinion of management, our recovery, if any, or our liability, if any, under pending litigation or administrative proceedings would not materially affect our financial position or results of operations. In our 2005 Annual Report on Form 10-K, we described certain claims under the Comprehensive Environmental Response Compensation and Liability Act or similar federal and state laws with respect to 15 active sites where hazardous substances or other contaminants are or may be located. The number of active sites is now 13. For other information regarding legal proceedings and contingencies, see Note 21, Legal Proceedings and Contingencies, in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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17. Share Based Payments

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share Based Payment.”  SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. SFAS 123R requires entities to recognize compensation expense from all share-based payment transactions in the financial statements. SFAS 123R establishes fair value as the measurement objective in accounting for share-based payment transactions and requires all companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.

Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. Accordingly, the financial statements for periods prior to January 1, 2006 have not been restated to reflect the adoption of SFAS 123R. Under SFAS 123R, the Company must record compensation expense for all awards granted after the adoption date and for the unvested portion of previously granted awards that remain outstanding at the adoption date, under the fair value method. Previously, the Company recognized compensation expense for share-based awards to employees using the fair-value-based guidance in SFAS 123. Due to the fact that the Company had previously accounted for share-based awards using SFAS 123, the adoption of SFAS 123R did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Company sponsors several share-based compensation plans, which are described below. Compensation costs related to the Company’s share-based plans were $5.8 million and $10.5 million for the quarter and six months ended July 1, 2006, respectively. Compensation costs related to the Company’s share-based plans were $2.1 million and $3.5 million for the quarter and six months ended June 25, 2005, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $2.2 million and $4.0 million for the quarter and six months ended July 1, 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.8 million and $1.4 million for the quarter and six months ended June 25, 2005, respectively.

2003 Director Stock Compensation Plan and OfficeMax Incentive and Performance Plan

In February 2003, the Company’s Board of Directors adopted the 2003 Director Stock Compensation Plan (the “2003 DSCP”) and the 2003 OfficeMax Incentive and Performance Plan (the “2003 Plan”), which were approved by shareholders in April 2003.

A total of 68,739 shares of common stock are reserved for issuance under the 2003 DSCP. Prior to December 8, 2005, the 2003 DSCP permitted non-employee directors to elect to receive some or all of their annual retainer and meeting fees in the form of options to purchase shares of the Company’s common stock. Non-employee directors, who elected to receive a portion of their compensation in the form of stock options, did not receive cash for that portion of their compensation. The difference between the $2.50-per-share exercise price of the options and the market value of the common stock on the date of grant was equal to the cash compensation that participating directors elected to forego and was recognized as compensation expense in the Consolidated Statements of Income (Loss). On December 8, 2005, the Board of Directors amended the 2003 DSCP to eliminate the choice to receive discounted stock options. All options granted under the 2003 DSCP expire three years after the holder ceases to be a director.

A total of 5,691,139 shares of common stock is reserved for issuance under the 2003 Plan. The Company’s executive officers, key employees and nonemployee directors are eligible to receive awards under the 2003 Plan at the discretion of the Executive Compensation Committee of the Board of

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Directors. Eight types of awards may be granted under the 2003 Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, annual incentive awards and stock bonus awards.

Restricted Stock and Restricted Stock Units

In the first six months of 2006, the Company granted to employees and directors 1,112,930 restricted stock units (“RSUs”). The weighted-average grant-date fair value of the RSUs was $27.90. As of July 1, 2006, 1,090,420 of these RSU’s remained outstanding and vest half in 2008 and half in 2009. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is approximately $32 million.

In 2005, the Company granted to employees and nonemployee directors 726,438 RSUs. The weighted-average grant-date fair value of the RSUs was $33.15. As of July 1, 2006, 595,717 of these RSU’s remained outstanding, which vest after defined service periods as follows: 46,343 units in 2006, 497,474 units in 2007, 45,900 units in 2008 and 3,000 units in both 2009 and 2010. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is approximately $6 million.

In 2004, the Company granted 366,775 RSUs to employees and 14,765 shares of restricted stock to nonemployee directors. The weighted-average grant-date fair value of the RSUs and restricted stock shares was $32.14. The vesting of the 2004 RSU award to employees was based on performance criteria established for 2004 and 2005. The performance criteria were not met; therefore, no compensation expense was recorded for this RSU award, and these units were forfeited and will not be distributed. The restricted stock granted to directors vests six months from their termination or retirement from board service, and 13,680 of these restricted stock shares remain outstanding at July 1, 2006.

Shares of restricted stock are restricted until they vest and cannot be sold by the recipient until the restriction has lapsed. Each RSU converts into one common share after the restriction lapses. No entries are made in the financial statements on the grant date of restricted stock and RSU awards. The Company measures compensation expense related to these awards based on the closing price of the Company’s common stock on the grant date, and recognizes the expense over the applicable vesting period. If these awards contain performance criteria, management periodically reviews actual performance against the criteria and adjusts compensation expense accordingly. For the quarter and six months ended July 1, 2006, the Company recognized $5.5 million and $10.0 million, respectively, of pretax compensation expense and additional paid-in capital related to restricted stock and RSU awards. For the quarter and six months ended June 25, 2005, the Company recognized $2.1 million and $3.5 million, respectively, of pretax compensation expense and additional paid-in capital related to restricted stock and RSU awards.

Restricted shares and RSUs are not included as shares outstanding in the calculation of basic earnings per share, but are included in the number of shares used to calculate diluted earnings per share, if dilutive. When the restriction lapses on restricted stock, the par value of the stock is reclassified from additional paid-in-capital to common stock. When the restriction lapses on RSUs, the units are converted to unrestricted common shares, and the par value of the stock is reclassified from additional paid-in-capital to common stock. Unrestricted shares are included in shares outstanding for purposes of calculating both basic and diluted earnings per share. Restricted stock and RSUs may be eligible to receive all dividends declared on the Company’s common shares during the vesting period; however, such dividends are not paid until the restrictions lapse.

Stock Units

The Company has a shareholder approved deferred compensation program for certain of its executive officers that allows them to defer a portion of their cash compensation. Previously, these officers could allocate their deferrals to a stock unit account. Each stock unit is equal in value to one share of the

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Company’s common stock. The Company matched deferrals used to purchase stock units with a 25% Company allocation of stock units. The value of deferred stock unit accounts is paid in shares of the Company’s common stock when an officer retires or terminates employment. At July 1, 2006, 62,867 stock units were allocated to the accounts of these executive officers. As a result of an amendment to the plan, no additional deferrals can be allocated to the stock unit accounts.

Stock Options

In addition to the 2003 DSCP and the 2003 Plan (discussed above), the Company has the following shareholder-approved stock option plans: the Key Executive Stock Option Plan (“KESOP”), the Director Stock Option Plan (“DSOP”) and the Director Stock Compensation Plan (“DSCP”). No further grants will be made under the KESOP, DSOP and DSCP.

The KESOP provided for the grant of options to purchase shares of common stock to key employees of the Company. The exercise price of awards under the KESOP was equal to the fair market value of the Company’s common stock on the date the options were granted. Options granted under the KESOP expire, at the latest, ten years and one day following the grant date.

The DSOP, which was available only to nonemployee directors, provided for annual grants of options. The exercise price of awards under the DSOP was equal to the fair market value of the Company’s common stock on the date the options were granted. The options granted under the DSOP expire upon the earlier of three years after the director ceases to be a director or ten years after the grant date.

The DSCP permitted nonemployee directors to elect to receive grants of options to purchase shares of the Company’s common stock in lieu of cash compensation. The difference between the $2.50-per-share exercise price of DSCP options and the market value of the common stock subject to the options was intended to offset the cash compensation that participating directors elected not to receive. Options granted under the DSCP expire three years after the holder ceases to be a director.

Under the KESOP and DSOP, options may not, except under unusual circumstances, be exercised until one year following the grant date. Under the DSCP, options may be exercised six months after the grant date.

A summary of stock option activity for the six months ended July 1, 2006 and June 25, 2005 is presented in the table below:

 

 

2006

 

2005

 

 

 

Shares

 

Weighted Avg.
Exercise Price

 

Shares

 

Weighted Avg.
Exercise Price

 

Balance at beginning of period

 

5,759,545

 

 

$

32.39

 

 

6,963,462