MAPLEBY HOLDINGS MERGER Corp 10-Q 2006
Commission File Number: 1-5057
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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):
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 issuers classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
See accompanying notes to quarterly consolidated financial statements.
See accompanying notes to quarterly consolidated financial statements.
See accompanying notes to quarterly consolidated financial statements.
See accompanying notes to quarterly consolidated financial statements.
See accompanying notes to quarterly consolidated financial statements.
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 Companys common stock is traded on the New York Stock Exchange under the ticker symbol OMX. The Companys 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 Corporations 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 Companys 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 Companys 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 Companys 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
statements should be read together with the consolidated financial statements and the accompanying notes included in the Companys 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 years presentation. These reclassifications did not affect net income (loss).
In December 2004, the Companys 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 Companys strategic direction. As a result of that decision, the Company recorded the facilitys 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 Companys retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in Itasca, Illinois into a
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:
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.
(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:
(a) See Note 3, Integration and Facility Closures.
(b) Legal settlement with the Department of Justice recorded in the OfficeMax, Contract segment.
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:
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 Companys 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.
10. Goodwill and Intangible Assets
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:
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:
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.
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.
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 OMXQs). The OMXQs 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 OMXQs, 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 VIEs) under FASB Interpretation 46R, Consolidation of Variable Interest Entities. The OMXQs are considered to be the primary beneficiary, and therefore, the VIEs are required to be consolidated with the OMXQs, which are also the issuers of the securitization notes. As a result, the accounts of the OMXQs have been consolidated into those of their ultimate parent, OfficeMax. The effect of the Companys consolidation of the OMXQs 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.
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 Companys 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 Moodys Investors Service, Inc., and Standard & Poors Rating Services upgraded the credit rating on the Companys 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 Companys other public debt. During the first quarter of 2005, the Company purchased and cancelled $87.3 million of the 7.00% senior
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.
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):
There is a minimal contribution requirement in 2006.
14. Segment Information
The Company manages its business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. Each of the Companys 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 Companys operations by segment is as follows:
(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. Managements Discussion and Anlaysis of Financial Condition and Results of Operations in the Companys 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 Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2005.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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
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 RSUs 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 RSUs 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 Companys 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 Companys common shares during the vesting period; however, such dividends are not paid until the restrictions lapse.
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
Companys 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 Companys 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.
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 Companys 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 Companys 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 Companys 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: