12. Share-Based Compensation

The Company sponsors several share-based compensation plans. The Company recognizes compensation expense from all share-based payment transactions with employees in the consolidated financial statements at fair value. Pre-tax compensation costs related to the Company’s share-based plans were $2.5 million and $2.3 million for the second quarters of 2013 and 2012, respectively, and $4.9 million and $5.1 million for the first six months of 2013 and 2012, 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 Consolidated Statements of Operations for share-based compensation arrangements was $1.0 million and $0.9 million for the second quarters of 2013 and 2012, respectively, and $1.9 million and $2.0 million for the first six months of 2013 and 2012, respectively.

Restricted Stock and Restricted Stock Units

Restricted stock is restricted until it vests and cannot be sold by the recipient until its restrictions have lapsed. Each restricted stock unit (“RSU”) is convertible into one share of common stock after its restrictions have lapsed. The Company recognizes compensation expense related to these awards over the vesting periods based on the awards’ grant date fair values. The Company calculates the grant date fair value of the RSU awards by multiplying the number of RSUs by the closing price of the Company’s common stock on the grant date. If these awards contain performance criteria the grant date fair value is set assuming performance at target, and management periodically reviews actual performance against the criteria and adjusts compensation expense accordingly. Pre-tax compensation expense and additional paid-in capital related to restricted stock and RSU awards was $1.6 million and $0.2 million for the second quarters of 2013 and 2012, respectively, and $2.8 million and $0.9 million for the first six months of 2013 and 2012, respectively. The remaining compensation expense to be recognized related to outstanding restricted stock and RSU awards, net of estimated forfeitures, is approximately $10.6 million and will be recognized through the first quarter of 2016.

As a result of a special non-recurring dividend of $1.50 per share of common stock (the “Special Dividend”), which is further described in Note 14, “Shareholders’ Equity and Noncontrolling Interest,” outstanding RSU awards were equitably adjusted to maintain the awards’ pre-dividend value, under existing anti-dilution provisions of the Company’s share-based compensation plans. The adjustment resulted in an increase in the number of RSUs related to previously RSU awards. The adjustment did not result in additional compensation expense because the fair value of the awards after adjustment was substantially equal to the fair value of the awards before the adjustment.

A summary of restricted stock and RSU activity for the first six months of 2013 is presented in the following table:


	Shares			Weighted-Average Grant Date Fair Value Per Common Share
Unvested, December 29, 2012		1,317,756		$	10.70
Granted		1,335,421			11.73
Special Dividend adjustment		269,714			11.39
Vested		(6,250	)		12.97
Forfeited		(612,438	)		12.53

Unvested June 29, 2013		2,304,203		$	10.89

In the above table, granted RSUs include 216,730 shares of performance-based RSUs reserved for issuance in 2012 which were not considered granted or outstanding until 2013 when the associated performance measures were established.

Unvested restricted stock and RSUs are not included as shares outstanding in the calculation of basic earnings per share, but, except as described below, are included in the number of shares used to calculate diluted earnings per share as long as all applicable performance criteria are met, and their effect is dilutive. Unvested RSUs outstanding at June 29, 2013 in the above table do not include 235,281 shares of performance-based RSUs that were reserved for issuance in 2012 for which associated performance measures have not yet been established. Therefore, they are not considered granted or outstanding and have been excluded from the number of shares used to calculate diluted earnings per share.

There are 973,379 unvested performance based RSUs as of June 29, 2013 that would be converted into time based RSUs upon completion of the Merger Transactions, including the 235,281 shares of performance-based RSUs discussed above that have been reserved for issuance but are not considered granted in the above table. For more information related to the Merger Transactions, see Note 2, “Merger Agreement.”

Stock Options

The Company’s stock options are issued with an exercise price equal to fair market value on the grant date and typically expire within seven years of the grant date. Stock options granted under the 2003 OfficeMax Incentive and Performance Plan generally vest over a three year period. Pre-tax compensation expense related to stock options was $0.9 million and $2.1 million for the second quarters of 2013 and 2012, respectively, and $2.1 million and $4.2 million for the first six months of 2013 and 2012, respectively. The remaining compensation expense to be recognized related to outstanding stock options, net of estimated forfeitures, is approximately $2.8 million and will be recognized through the fourth quarter of 2016.

As a result of the Special Dividend discussed in Note 14, “Shareholders’ Equity and Noncontrolling Interest,” outstanding stock options were equitably adjusted to maintain the stock options’ pre-dividend value, under existing anti-dilution provisions of the Company’s share-based compensation plans. The adjustment resulted in an increase in the number of shares underlying each stock option and a decrease in the per-share exercise price of each stock option. The adjustment did not result in additional compensation expense because the fair value of the awards after the adjustment was substantially equal to the fair value of the awards before the adjustment.

A summary of stock option activity for the first six months of 2013 is presented in the following table:


	Shares			Wtd. Avg. Exercise Price
Balance at December 29, 2012		5,212,738		$	10.57
Options granted		3,500			9.76
Special Dividend adjustment		635,142			9.56
Options exercised		(241,708	)		4.81
Options forfeited and expired		(261,738	)		12.50

Balance at June 29, 2013		5,347,934		$	9.48

Exercisable at June 29, 2013		3,063,150
Weighted average fair value of options granted (Black-Scholes) during 2013	$	5.07

The following table provides summarized information about stock options outstanding at June 29, 2013:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding		Weighted Average Contractual Life (Years)		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
$2.21		12,645		—	$	2.21		12,645	$	2.21
$3.50 – $9.00		2,917,986		5.1		4.99		1,240,580		4.75
$11.00 – $15.00		1,306,314		4.2		13.96		1,067,001		13.76
$16.00 – $22.00		1,110,989		4.3		16.07		742,924		16.08

At June 29, 2013, the aggregate intrinsic value was $15.4 million for outstanding stock options and $6.9 million for those stock options that were exercisable. The aggregate intrinsic value represents the total pre-tax intrinsic value (i.e. the difference between the Company’s closing stock price on the last trading day of the second quarter of 2013 and the exercise price, multiplied by the number of in-the-money stock options at the end of the quarter).

During the first six months of 2013, the Company granted stock options for 3,500 shares of our common stock and estimated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 0.63%, expected annual dividends of $0.08 per share, expected life of 4.5 years and expected stock price volatility of 69.94%.

The risk-free interest rate assumptions are based on the applicable U.S. Treasury Bill rates over the options’ expected lives; the expected life assumptions are based on the time period stock options are expected to be outstanding based on historical experience; and the expected stock price volatility assumptions are based on the historical and implied volatility of the Company’s common stock.