NOTE 13. STOCK-BASED COMPENSATION

Long-Term Incentive Plans

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. Employee share-based awards are generally issued in the first quarter of the year.

In addition, the Company assumed the share issuance plan formerly related to OfficeMax employee grants, the 2003 OfficeMax Incentive and Performance Plan (the “2003 Plan”). 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. Future share awards under this plan will be of Office Depot, Inc. common stock.

As provided for in the Merger agreements, each option to purchase OfficeMax common stock outstanding immediately prior to the effective time of the Merger was converted into an option to purchase Office Depot common stock, on the same terms and conditions adjusted by the 2.69 exchange ratio. The fair value of those options was measured using an option pricing model with the following assumptions: risk-free rate 0.42%; expected life 2.34; dividend yield of zero; expected volatility 52.18% and forfeiture rate of 5%.

Similarly, each previously-existing OfficeMax restricted stock and restricted stock unit outstanding immediately prior to the effective time of the Merger was converted into an Office Depot restricted stock or restricted stock unit, as appropriate, at the 2.69 exchange ratio. The fair value of these awards was allocated to consideration and unearned compensation, based on the past and future service conditions. The assumed awards related to the Merger have been identified, as applicable, in the tables that follow.

Stock Options

The Company’s stock 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 and the 2003 Plan have vesting periods ranging from one to five years and from one to three years after the date of grant, respectively, provided that the individual is continuously employed with the Company. Following the date of grant, all options granted under the Plan and the 2003 Plan expire no more than ten years and seven years, respectively.

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


	2013					2012					2011
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year		12,578,071		$	5.25		19,059,176		$	6.90		20,021,044		$	7.49
Granted		2,003,000			5.24		82,000			3.22		3,680,850			4.53
Assumed — Merger		13,142,351			3.62		—			—		—			—
Cancelled		(2,072,560	)		8.83		(4,512,372	)		14.51		(3,567,513	)		9.46
Exercised		(2,948,328	)		1.40		(2,050,733	)		0.88		(1,075,205	)		0.86

Outstanding at end of year		22,702,534		$	4.48		12,578,071		$	5.25		19,059,176		$	6.90

The weighted-average grant date fair values of options granted during 2013, 2012, and 2011 were $3.00, $1.86, and $2.25, respectively, using the following weighted average assumptions for grants:

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Risk-free interest rates of 1.69% for 2013, 0.94% for 2012, and 1.97% for 2011

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Expected lives of six years for 2013 and 4.5 years for 2012 and 2011

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A dividend yield of zero for all three years

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Expected volatility ranging from 61% to 69% for 2013, 72% to 74% for 2012, and 67% to 77% for 2011

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

The following table summarizes information about options outstanding and exercisable at December 28, 2013.


	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
$0.83 $5.12		11,957,410		2.85	$	2.41		8,627,640		2.48	$	2.45
5.13 (option exchange)		460,016		2.91		5.13		458,240		2.91		5.13
5.14 10.00		9,736,550		3.45		6.25		7,292,093		1.64		6.57
10.01 15.00		350,065		1.15		11.30		350,065		1.15		11.30
15.01 25.00		25,834		0.14		17.55		25,834		0.14		17.55
25.01 33.61		172,659		0.43		30.44		172,659		0.43		30.44

$0.83 $33.61		22,702,534		3.06	$	4.48		16,926,531		2.08	$	4.79

The intrinsic value of options exercised in 2013, 2012 and 2011, was $10 million, $4 million, and $4 million, respectively. The aggregate intrinsic value of options outstanding and exercisable at December 28, 2013 were $33 million and $24 million, respectively.

As of December 28, 2013, there was approximately $11 million of total stock-based compensation expense that has not yet been recognized relating to non-vested awards granted under option plans. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2.0 years. Of the 5.8 million unvested options, the Company estimates that 4.7 million options will vest. The number of exercisable options was 16.9 million shares of common stock at December 28, 2013 and 9.5 million shares of common stock at December 29, 2012.

Restricted Stock and Restricted Stock Units

Restricted stock grants typically vest annually over a three-year service period.

In 2013, the Company granted 4.5 million shares of restricted stock and restricted stock units to eligible employees. In addition, 0.4 million shares were granted to the Board of Directors as part of their annual compensation and vested within one year from the grant date. A summary of the status of the Company’s nonvested shares and changes during 2013, 2012 and 2011 is presented below.


	2013					2012					2011
	Shares			Weighted Average Grant-Date Price		Shares			Weighted Average Grant-Date Price		Shares			Weighted Average Grant-Date Price
Outstanding at beginning of year		5,459,900		$	3.52		2,612,876		$	3.96		496,059		$	10.39
Granted		4,884,848			4.54		4,018,253			3.26		2,890,943			3.96
Assumed — Merger		6,426,968			3.46		—			—		—			—
Vested		(5,788,992	)		4.49		(695,751	)		3.45		(594,876	)		9.00
Forfeited		(775,178	)		4.01		(475,478	)		3.79		(179,250	)		4.97

Outstanding at end of year		10,207,546		$	4.76		5,459,900		$	3.52		2,612,876		$	3.96

As of December 28, 2013, there was approximately $25 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 approximately 2.2 years. Of the 8.3 million unvested shares at year end, the Company estimates that 7.4 million shares will vest. The total grant date fair value of shares vested during 2013 was approximately $26 million.

Performance-Based Incentive Program

The Company has a performance-based long-term incentive program consisting of performance stock units and performance cash. Payouts under this program are based on achievement of certain financial targets set by the Board of Directors, and are subject to additional service vesting requirements, generally of three years from the grant date.

A summary of the activity in the performance-based long-term incentive program since inception is presented below.


	2013					2012
	Shares			Weighted Average Grant-Date Price		Shares			Weighted Average Grant-Date Price
Outstanding at beginning of the period		1,030,753		$	3.25		—		$	—
Granted		4,317,314			4.55		2,073,628			3.25
Vested		(261,095	)		3.63		—			—
Forfeited		(2,010,680	)		4.15		(1,042,875	)		3.32

Outstanding at end of the period		3,076,292		$	4.45		1,030,753		$	3.25

As of December 28, 2013, there was approximately $9 million of total unrecognized compensation expense related to the performance-based long-term incentive program. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2.7 years. Of the 3.1 million unvested shares at year end, the Company estimates that 3.0 million shares will vest. The total grant date fair value of shares vested during 2013 was approximately $3.9 million.