NOTE H – EMPLOYEE BENEFIT PLANS

Long-Term Incentive Plan

During 2007, the company's board of directors adopted, and the shareholders approved, the Office Depot, Inc. 2007 Long-Term Incentive Plan (the "Plan"). The Plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based, and other equity-based incentive awards. The option exercise price for each grant of a stock option shall not be less than 100% of the fair market value of a share of common stock on the date the option is granted. Options granted under the Plan become exercisable from one to five years after the date of grant, provided that the individual is continuously employed with the company. All options granted expire no more than ten years following the date of grant. Our employee share-based awards are generally issued in the first quarter of the year.

Long-Term Incentive Stock Plan

During 2010, the company implemented a one-time voluntary stock option exchange program that had been approved by the board of directors and the company's shareholders. The fair value exchange program resulted in the tender of 3.8 million shares of eligible options in exchange for approximately 1.4 million of newly-issued options. No additional compensation expense resulted from this value-for-value exchange. The new options have an exercise price of $5.13, which was the closing price of Office Depot, Inc. common stock on the date of the exchange, and the majority of the options will vest over three years. The fair value of the exchanged shares was $2.97 per share. The new options are listed separately in the tables below.

A summary of the activity in our stock option plans for the last three years is presented below.


	2011					2010					2009
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year		20,021,044		$	7.49		24,202,715		$	11.81		14,479,141		$	22.78
Granted		3,680,850			4.53		5,140,900			8.11		11,901,752			0.93
Granted – option exchange		—			—		1,350,709			5.13		—			—
Canceled		(3,567,513	)		9.46		(4,510,682	)		21.57		(2,178,178	)		15.99
Cancelled – option exchange		—			—		(3,739,557	)		22.85		—			—
Exercised		(1,075,205	)		0.86		(2,423,041	)		0.95		—			—

Outstanding at end of year		19,059,176		$	6.90		20,021,044		$	7.49		24,202,715		$	11.81

The weighted-average grant date fair values of options granted during 2011, 2010, and 2009 were $2.25, $3.89, and $0.69, respectively, using the following weighted average assumptions for grants:

•

Risk-free interest rates of 1.97% for 2011, 2.3% for 2010, and 2.1% for 2009

•

Expected lives of 4.5 years for all three years

•

A dividend yield of zero for all three years

•

Expected volatility ranging from 67% to 77% for 2011, 64% to 73% for 2010, and 70% to 118% for 2009

•

Forfeitures are anticipated at 5% and are adjusted for actual experience over the vesting period

The following table summarizes information about options outstanding at December 31, 2011.


					Options Outstanding						Options Exercisable
Range of Exercise Prices					Number Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price
$	0.85	$	5.12			9,537,217		4.49	$	1.94		4,319,249		3.62	$	1.02
	5.13		(option exchange	)		995,256		5.04		5.13		374,020		4.56		5.13
	5.14		10.00			4,917,893		4.12		7.80		2,519,605		2.81		8.12
	10.01		15.00			960,634		1.97		11.30		940,525		1.96		11.29
	15.01		25.00			2,275,635		.082		20.63		2,275,635		0.82		20.63
	25.01		33.61			372,541		1.66		31.60		372,541		1.66		31.60

$	0.85	$	33.61			19,059,176		3.80	$	6.90		10,801,575		2.66	$	8.90

The intrinsic value of options exercised in 2011 and 2010, was $3.8 million, and $11.9 million, respectively. There were no option exercises in 2009.

As of December 31, 2011, there was approximately $11.1 million of total stock-based compensation expense that has not yet been recognized relating to non-vested awards granted under our option plans. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 1.9 years. Of the 8.3 million unvested shares, the company estimates that 7.9 million, or 95%, will vest. The number of exercisable shares was 10.8 million shares of common stock at December 31, 2011 and 8.3 million shares of common stock at December 25, 2010.

Restricted Stock

Restricted stock grants typically vest annually over a three-year service period; however, grants made to the company's board of directors vest immediately and are free of restrictions. In 2011 we granted 2,890,943 shares of restricted stock to our broad-based eligible employee population which typically vest one-third annually on the anniversary of the grant date. Of these shares, two grants of 600,000 shares were awarded to our new Chair and CEO as an incentive for future performance. The first grant of 600,000 restricted shares is subject to a three-year cliff vesting based on a service requirement, and the second grant of 600,000 restricted shares is subject to vesting based on both service and performance requirements. In addition, 256,441 shares were granted to the board of directors as part of their annual compensation and vest immediately. A summary of the status of the company's nonvested shares as of December 31, 2011, and changes during the year ended December 31, 2011 is presented below.


	2011					2010					2009
	Shares			Weighted Average Grant- Date Price		Shares			Weighted Average Grant- Date Price		Shares			Weighted Average Grant- Date Price
Nonvested at beginning of year		496,059		$	10.39		1,318,162		$	13.21		2,663,216		$	14.06
Granted		2,890,943			3.96		173,387			8.01		21,628			0.85
Vested		(594,876	)		9.00		(741,007	)		14.19		(1,230,397	)		14.60
Forfeited		(179,250	)		4.97		(254,483	)		11.31		(136,285	)		15.24

Nonvested at end of year		2,612,876		$	3.96		496,059		$	10.39		1,318,162		$	13.21

As of December 31, 2011, there was approximately $6.8 million of total unrecognized compensation cost related to nonvested restricted stock. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of two years. Of the 2.6 million unvested shares at year end, the company estimates that 2.3 million will vest. The total grant date fair value of shares vested during 2011 was approximately $5.3 million.

Retirement Savings Plans

Eligible company employees may participate in the Office Depot, Inc. Retirement Savings Plan (401(k) Plan), which was approved by the board of directors. This plan allows those employees to contribute a percentage of their salary, commissions and bonuses in accordance with plan limitations and provisions of Section 401(k) of the Internal Revenue Code. Company matching contributions were suspended by the compensation and benefits committee of the board of directors during 2009 and 2010. The committee reinstated the company matching provisions at 50% of the first 4% of an employee's contributions, subject to the limits of the plan, effective with the first pay period beginning in 2011. Matching contributions are invested in the same manner as the participants' pre-tax contributions. The plan also allows for a discretionary matching contribution in addition to the normal match contributions if approved by the board of directors.

Office Depot also sponsors the Office Depot, Inc. Non-Qualified Deferred Compensation Plan that, until December 2009, permitted eligible highly compensated employees, who were limited in the amount they could contribute to the 401(k) Plan, to alternatively defer a portion of their salary, commissions and bonuses up to maximums and under restrictive conditions specified in this plan and to participate in company matching provisions. The matching contributions to the deferred compensation plan were allocated to hypothetical investment alternatives selected by the participants. The compensation and benefits committee of the board of directors amended the plan to eliminate the predetermined matching contributions effective with the first payroll period beginning in 2009. In October 2009, the compensation and benefits committee amended the plan to no longer accept new deferrals.

During 2011, 2010, and 2009, $7.2 million, $80.2 thousand, $1.1 million, respectively, was recorded as compensation expense for company contributions to these programs and certain international retirement savings plans. Additionally, nonparticipating annuity premiums were paid for benefits in certain European countries totaling $5.0 million, $4.7 million and $4.9 million in 2011, 2010, and 2009, respectively.

Pension Plan

The company has a defined benefit pension plan covering a limited number of employees in Europe. During 2008, curtailment of that plan was approved by the trustees and future service benefits ceased for the remaining employees. The following table provides a reconciliation of changes in the projected benefit obligation, the fair value of plan assets and the funded status of the plan to amounts recognized on our balance sheets:


(Dollars in thousands)	December 31, 2011			December 25, 2010

Changes in projected benefit obligation:
Obligation at beginning of period	$	177,195		$	192,131
Service cost		—			—
Interest cost		9,838			10,466
Member contributions		—			—
Benefits paid		(4,118	)		(4,426	)
Actuarial gain		(1,558	)		(14,651	)
Currency translation		1,007			(6,325	)

Obligation at valuation date		182,364			177,195

Changes in plan assets:
Fair value at beginning of period		132,022			120,383
Actual return on plan assets		(1,259	)		14,959
Company contributions		5,293			5,105
Member contributions		—			—
Benefits paid		(4,118	)		(4,426	)
Currency translation		849			(3,999	)

Plan assets at valuation date		132,787			132,022

Benefit obligation in excess of plan assets		(49,577	)		(45,173	)

Net liability recognized at end of period	$	(49,577	)	$	(45,173	)

The net unfunded amount is classified as a non-current liability in the caption deferred taxes and other long-term liabilities on the Consolidated Balance Sheets. Included in OCI was a deferred loss of approximately $1 million and a deferred gain of $6 million at December 31, 2011 and December 25, 2010, respectively. The deferred loss is not expected to be amortized into income during 2012. The plan's accumulated benefit obligations were approximately $182.4 million and $177.2 million at the 2011 and 2010 valuation dates, respectively.

The components of net periodic expense are presented below:


(Dollars in thousands)	2011			2010			2009
Service cost	$	—		$	—		$	—
Interest cost		9,838			10,466			9,006
Expected return on plan assets		(9,336	)		(8,039	)		(6,291	)

Net periodic pension cost	$	502		$	2,427		$	2,715

Assumptions used in calculating the funded status included:


	2011			2010			2009
Long-term rate of return on plan assets		6.00	%		6.77	%		6.89	%
Discount rate		4.70	%		5.40	%		5.70	%
Salary increases		—			—			—
Inflation		3.00	%		3.40	%		3.80	%

The plan's investment policies and strategies are to ensure assets are available to meet the obligations to the beneficiaries and to adjust plan contributions accordingly. The plan trustees are also committed to reducing the level of risk in the plan over the long term, while retaining a return above that of the growth of liabilities.

The long-term rate of return on assets assumption has been derived based on long-term UK government fixed income yields, having regard to the proportion of assets in each asset class. The funds invested in equities have been assumed to return 4.0% above the return on UK government securities of appropriate duration. Funds invested in corporate bonds are assumed to return equal to a 15 year AA bond index. Allowance is made for expenses of 0.5% of assets.

The allocation of assets is as follows:


	Percentage of Plan Assets						Target Allocation
	2011		2010		2009
Equity securities		70%		73%		71%	60% - 95%
Debt securities		30%		27%		27%	0% - 30%
Real estate		0%		0%		0%	0% - 10%
Other		0%		0%		2%	0% - 10%

Total		100%		100%		100%

The fair value of plan assets by asset category is as follows:


(Dollars in thousands)			Fair Value Measurements at December 31, 2011
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	—	$	—	$	—	$	—
Equity securities		91,912		88,088		3,824		—
Debt securities		40,875		—		40,875		—

Total	$	132,787	$	88,088	$	44,699	$	—


(Dollars in thousands)			Fair Value Measurements at December 25, 2010
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	—	$	—	$	—	$	—
Equity securities		95,699		95,699		—		—
Debt securities		36,323		36,323		—		—

Total	$	132,022	$	132,022	$	—	$	—

Anticipated benefit payments, at December 31, 2011 exchange rates, are as follows:


(Dollars in thousands)
2012	$	4,111
2013		4,232
2014		4,360
2015		4,490
2016		4,626
Next five years		25,292

During January 2012, the company settled an outstanding dispute with the seller of the entity which included this pension plan. Amounts received from the seller have been contributed to the plan in 2012. See Note R for additional discussion.