UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF...

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

DAVID ROTH, On Behalf of Himself and All Others Similarly Situated,

Plaintiff,

vs.

OFFICEMAX INC., et al.,

Defendants.

) ) ) ) ) ) ) ) ) ) )

No. 05-C-0236 (Consolidated)

CLASS ACTION Judge Gottschall Magistrate Judge Denlow

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

Case 1:05-cv-00236 Document 110-1 Filed 11/09/2006 Page 1 of 58

- 1 -

SUMMARY AND OVERVIEW

1. This is a federal class action on behalf of those who purchased or otherwise acquired

the publicly traded securities of OfficeMax Inc. (“OfficeMax” or the “Company”), between

December 1, 2003 and January 11, 2005 (the “Class Period”), against OfficeMax and certain of its

current and former officers and directors for violations of the Securities Exchange Act of 1934 (the

“1934 Act”). OfficeMax was created when Boise Cascade Corporation (“Boise”), a paper products

company, bought old-OfficeMax just after the beginning of the Class Period. Boise subsequently

changed its name to OfficeMax after selling off part of its business. The name change did not

become effective until October 2004.1

2. Defendants’ fraudulent scheme involved three related facets. First, during a critical

period before and after Boise completed its purchase of old-OfficeMax, defendants fraudulently

inflated OfficeMax’s earnings by claiming false rebates from vendors who sold products to

OfficeMax. OfficeMax has since restated its financial results, admitting the Company had issued

false financial statements to investors, wherein its reported earnings were falsely inflated. The

Individual Defendants named in this action either knew of and approved the illegal conduct or

recklessly disregarded the existence of the scheme and failed to disclose this material information to

investors. Second, during the Class Period, defendants recklessly misrepresented to investors that

OfficeMax had put in place internal controls and reporting mechanisms to prevent such illegal

conduct. OfficeMax has since admitted, these representations and its CEO’s and CFO’s certification

of the Company’s internal control were false. And, third, defendants covered-up the existence of

these accounting improprieties until December 20, 2004 – when OfficeMax “announced it has

1 References to old-OfficeMax concern OfficeMax pre-acquisition by Boise. During the Class Period, many of the press releases by the Company refer to itself as Boise until the name change became effective in October 2004. Lead Plaintiff refers to the combined Company as OfficeMax in this Complaint.


- 2 -

commenced an investigation into certain vendor allegations” – so that OfficeMax could issue on

December 16, 2004, 5.4 million shares on favorable terms. Only two business days after issuing

$172.5 million in OfficeMax common stock, defendants disclosed the existence of the internal

investigation into significant impropriety – which investigation had already commenced “at the

direction of the audit committee of its board of directors.” Indeed, the investigation had begun

weeks, if not months, prior to when defendants formally disclosed it on December 20, 2004.

Covering-up such material information while issuing securities to the public was an independent

violation of the federal securities laws separate and apart from defendants’ violations of the

accounting rules.

3. In the beginning of the Class Period, on December 9, 2003, both companies’

shareholders approved the sale of old-OfficeMax to Boise for $10.50 per share. Boise’s acquisition

of old-OfficeMax was an important part of Boise’s transformation from a forest products company

to a major retail distribution company. In October 2004, Boise would sell its remaining forest

product assets, adopt the name “OfficeMax,” and abandon its wood product manufacturing business

in favor of its office supply retail business. Today, OfficeMax is a multinational retail distributor of

office supplies, paper, technology products and office furniture.

4. Investors were skeptical that the new OfficeMax could deliver on defendants’

promises of strong financial growth. Accordingly, the management of both old-OfficeMax and

Boise worked hard to get the merger approved. What investors did not know when they approved

the merger was that old-OfficeMax had falsified its financial results. And, after the merger was

approved, the combined OfficeMax continued to falsely inflate its financial results in an effort to

convince investors that the combined Company could in fact deliver on defendants’ promises.

5. It was a common, notorious practice at OfficeMax to bill vendors for

marketing/promotion services to be rendered by OfficeMax at some time in the future, and for


- 3 -

OfficeMax to book those payments in the present reporting period before the services were rendered.

For example, OfficeMax billed Microsoft for nearly a year’s worth of marketing and promotional

services it had not yet performed. This practice was sometimes referred to at the Company as

“leveraging the future.” OfficeMax’s CEO, defendant Michael Feuer, would personally instruct

OfficeMax Executive Vice-President of Merchandising Ryan Vero to oversee this process to ensure

that the Company made its numbers at the end of reporting periods during the Class Period.

6. In addition to issuing false financial statements, defendants George J. Harad,

Theodore Crumley and Christopher C. Milliken assured investors they personally supervised the

evaluation, design and operation of the Company’s disclosure procedures, as required by the

Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), to ensure that the Company’s internal controls

would alert them to material information that would conflict with Generally Accepted Accounting

Principles (“GAAP”) and/or require disclosure. Defendants repeatedly told investors throughout the

Class Period, that there existed no disclosure issues or control problems.

7. In fact, OfficeMax had extensive internal control weaknesses, which it has now

admitted. OfficeMax’s internal control deficiencies are alleged more fully in the section entitled

“OfficeMax’s Violations of SEC Regulations Due to Its Inadequate Internal Controls.”

8. As accounting expert Sheldon D. Zimmerman details in his attached declaration,

retail companies like OfficeMax must have developed internal control systems and other

sophisticated mechanisms to monitor and track the revenue implications of vendor rebate programs.

Moreover, because OfficeMax operated on very thin margins (OfficeMax’s retail operations had

profits of approximately only 0.5% of revenues) and vendor rebate programs significantly

contributed to these profit margins, the Individual Defendants could not reasonably have certified the

Company’s financial statements were prepared in compliance with GAAP unless the Individual


- 4 -

Defendants had themselves investigated the accuracy and the thoroughness of the Company’s

internal control and reporting mechanisms tracking the vendor rebate programs.

9. As detailed further herein, the defendants’ scheme to inflate OfficeMax’s reported

earnings by improperly charging deductions to its vendors was discovered by certain of these

vendors in Summer 2004. Notably, as vendors realized OfficeMax’s fraudulent charges, these

vendors demanded their money be returned, threatened OfficeMax with litigation and the vendors

put an end to OfficeMax’s ability to continue such practices in the future.

10. As a result of OfficeMax’s vendors’ discovery of the alleged scheme, at least in part,

on October 19, 2004 OfficeMax was forced to disclose to investors that OfficeMax could not meet

its previously stated 2004 financial projections. Investors were shocked, and OfficeMax’s stock

price tumbled 14% before rebounding to close down 11%.

11. However, even though vendors had threatened OfficeMax with litigation and the

Company had been conducting an internal investigation for weeks, if not months, defendants refused

to disclose the existence of the vendor rebate scheme it had used to inflate OfficeMax’s earnings.

Rather, on December 16, 2004, defendants caused OfficeMax to issue 5.4 million OfficeMax

shares without telling investors of the fraudulent scheme.

12. Before the market opened on December 20, 2004, two business days after OfficeMax

issued the $172.5 million in common stock, the Company again shocked the market by issuing a

press release entitled “OfficeMax Announces Financial Events, Commences Investigation.” The

release stated in part:

[A]t the direction of the audit committee of its board of directors, the company has commenced an internal investigation into claims by a vendor to its retail business that certain employees acted inappropriately in requesting promotional payments and in falsifying supporting documentation for approximately $3.3 million in claims billed to the vendor by OfficeMax during 2003 and 2004.


- 5 -

13. On this news, OfficeMax’s stock dropped from $32.50 per share the previous trading

day to as low as $29.51 per share before closing at $31.13 per share on volume of 5.5 million shares.

The next day, the stock dropped further to $30.40 per share.

14. The Class Period ends after OfficeMax disclosed on January 12, 2005 (before the

market opened) that it would delay the issuance of its fourth quarter of 2004 financial results in order

for the Company to complete an investigation of its 2003 and interim 2004 financial results.

15. On this news, OfficeMax’s stock dropped from $30.30 per share to $28.88 per share

on volume of 7.8 million shares.

16. OfficeMax subsequently admitted that it falsely recorded vendor income in its

financial results during the Class Period. OfficeMax has restated its interim 2004 results to remove

millions in improperly reported vendor income and admitted that its 2003 and interim 2004 financial

statements were not a fair presentation of OfficeMax’s financial results and were presented in

violation of GAAP and SEC rules. The Company restated its financial results to eliminate $7.1

million in income that had been improperly recognized in the first quarter of 2004, and recognized

the existence of vendor manipulations in its 2003 financial statements as well. While OfficeMax has

publicly asserted that its 2003 financial results were not materially affected by the illegal scheme,

the existence of any such illegal scheme to purposefully inflate the Company’s earnings in violation

of GAAP would have been important information to a reasonable investor in OfficeMax at all times

during the Class Period as such conduct raises grave questions concerning management credibility

and is symptomatic of, among other things, a corporate culture that tolerates and encourages

duplicitous behavior exposing investors to substantial, undisclosed risks.

17. As the accounting scandal unfolded, OfficeMax was forced to fire the persons

responsible. The first defendant to lose his job was Theodore Crumley, the Company’s Chief

Financial Officer during most of the Class Period, who left OfficeMax on November 11, 2004.


- 6 -

Then, Gary Peterson, president of the Company’s retail division, abruptly resigned “effective

immediately” on January 5, 2005. Shortly thereafter, on January 12, 2005, OfficeMax’s Chief

Financial Officer Brian Andersen resigned after only two months of employment. And, on February

14, 2005, the Company terminated its CEO, defendant Christopher C. Milliken, at least in part

because of the accounting improprieties alleged by Lead Plaintiff. These high level departures, all

occurring as the illegal accounting scheme alleged by Lead Plaintiff began to be discovered, are

strong circumstantial evidence that OfficeMax’s senior most management (the defendants in this

action) either knew or recklessly disregarded the truth during the Class Period in violation of the

federal securities laws. As one equity analyst covering OfficeMax opined concerning the departure

of defendant Milliken: “Fish always stinks from the head.”

18. Defendants’ false statements and fraudulent scheme had its intended effect as the

merger was consummated and tens of millions of dollars in severance and change-in-control

payments were eventually paid to defendants. Following the merger, the Company’s stock was sold

at inflated prices as the OfficeMax unit reported favorable results and the Individual Defendants

received large bonuses. Lead Plaintiff brings this action to recover their losses resulting from

defendants’ fraudulent actions.

JURISDICTION AND VENUE

19. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise

under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5.

20. Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false

and misleading statements were made in or issued from this District.

21. The Company’s principal executive offices are in Itasca, Illinois, where the day-to-

day operations of the Company are directed and managed.


- 7 -

THE PARTIES

22. Lead Plaintiff – pursuant to the Court’s June 9, 2005 Minute Entry – Wayne County

Employees’ Retirement System (“Lead Plaintiff”) purchased OfficeMax publicly traded securities as

described in the certification previously filed with the Court and was damaged thereby.

23. Defendant OfficeMax is a multinational contract and retail distributor of office

supplies, paper, technology products and office furniture.

24. Defendant Christopher C. Milliken (“Milliken”) was the President, CEO and a

director of OfficeMax until he resigned on February 14, 2005. Milliken signed false and misleading

SEC filings and Sarbanes-Oxley certifications during the Class Period. Milliken received a bonus of

$396,415 for 2004 based on the reported operating results of the office products business, in addition

to his salary of $753,577. Milliken’s, as well as other OfficeMax executive officers’ incentive

compensation was based entirely on its economic value added calculation, which was based on

reported operating profit. The 2004 Proxy Statement described this measure:

In 2003, we based variable incentive compensation on a single, quantitative measure – the company’s “economic value added.” Economic value added is determined by calculating the company’s operating profit and then subtracting a pretax charge for the financial cost of the capital used to generate that profit.

25. Defendant Theodore Crumley (“Crumley”) was the CFO of OfficeMax. Crumley

signed false and misleading SEC filings and Sarbanes-Oxley certifications during the Class Period.

Crumley received a bonus of $487,829 for 2004 based in part on OfficeMax’s financial performance,

in addition to his salary of $507,586.

26. Defendant Thomas E. Carlile (“Carlile”) was the Vice President and Controller of

OfficeMax. Carlile signed false and misleading SEC filings during the Class Period.

27. Defendant George J. Harad (“Harad”) is the Executive Chairman of the Board of

OfficeMax and served as the CEO and Chairman of Boise until November 2004. Harad signed the

Proxy Statement to shareholders recommending approval of the acquisition of old-OfficeMax by


- 8 -

Boise and issued false statements about both companies throughout the Class Period. Harad also

signed false and misleading SEC filings and Sarbanes-Oxley certifications during the Class Period.

Harad received a bonus of $1.54 million for 2004 in addition to his salary of more than $1 million

due to OfficeMax’s financial performance. This bonus was nearly double his bonus for 2003.

28. Defendant Michael Feuer (“Feuer”) founded old-OfficeMax in 1988 and served as its

Chairman and CEO until old-OfficeMax was sold to Boise on December 9, 2003.

29. The individuals named as defendants in ¶¶24-28 are referred to herein as the

“Individual Defendants.” The Individual Defendants, because of their executive positions with the

Company during the Class Period, had the power and authority to control the contents of

OfficeMax’s quarterly financial reports, press releases and presentations to securities analysts,

money and portfolio managers and institutional investors, i.e., the market. Each defendant received

copies of the Company’s public financial reports and press releases alleged herein to be false and

misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their

issuance or cause them to be corrected. The Individual Defendants are liable for the false statements

pleaded herein, as those statements were each “group-published” information and the result of the

collective actions of the Individual Defendants.

ADDITIONAL ALLEGATIONS OF SCIENTER

30. Because of each Individual Defendants’ position and access to material non-public

information, each of these defendants knew and/or recklessly disregarded that the adverse facts

specified herein had not been disclosed to and were being concealed from the public and that the

positive statements that were being made were then materially false and misleading.

31. Each of the Individual Defendants was actively involved in those areas of the

Company’s operations which would expose him to the facts alleged in this Complaint. Defendants

Crumley, as CFO, and Carlile as Controller, were responsible for financial reporting and


- 9 -

communications with the market. Many of the internal reports showing OfficeMax’s forecasted and

actual financials were prepared by the finance department under Crumley’s and Carlile’s oversight

and direction. Crumley also certified that he personally supervised the evaluation of the design and

operation of the Company’s disclosure procedures and internal controls pursuant to Rule 13a-15(c)

of the 1934 Act (§392 of Sarbanes-Oxley).

32. Defendant Milliken, as CEO and President, was responsible for the financial results

and press releases issued by the Company. Like Crumley, Milliken also certified that he personally

supervised the evaluation of the design and operation of the Company’s disclosure procedures and

internal controls pursuant to Rule 13a-15(e) of the 1934 Act (§392 of Sarbanes-Oxley).

33. Defendant Harad, while serving as the CEO and Chairman of the Board of Directors

of Boise and OfficeMax, was responsible for financial reporting and communications with the

market. Harad also certified that he personally supervised the evaluation of the design and operation

of the Company’s disclosure procedures and internal controls pursuant to Rule 13a-15(e) of the 1934

Act (§392 of Sarbanes-Oxley).

34. Defendant Feuer, while serving as CEO and Chairman of old-OfficeMax, instructed

subordinates to charge vendors for services not yet provided so that OfficeMax could report financial

results in line with forecasts but in violation of GAAP. Defendant Feuer’s conduct caused

OfficeMax’s 2003 financial results reported during the Class Period to be false and misleading.

35. OfficeMax employees describe OfficeMax as having a “top-down” management style

and being very “authoritarian” such that the Individual Defendants were knowledgeable about and

involved in all aspects of the Company’s financial operations.

36. OfficeMax’s vendor rebate program was of critical importance to OfficeMax’s

financial operations such that the Individual Defendants would undoubtedly have focused on this

aspect of the Company’s operations.


- 10 -

37. One characteristic of the retail operations was extremely low operating margins. Due

to competition in the office superstore industry, it was crucial to keep prices low. This was

exacerbated by competition from other large retailers, including Wal-Mart and Costco.

Consequently, operating margins in the retail industry were frequently lower than 3% of sales. One

important way retailers improve their margins is through the use of vendor credits which vendors

give retailers for various items, including for levels of inventory purchases, for advertising or for

product placement. Because of the low margins, the amount of vendor credits could have a dramatic

effect on margins. Thus, OfficeMax management closely monitored the credits offered by various

vendors, to determine whether OfficeMax qualified for the credits and to determine when the credits

could be recorded.

38. For example, in the first quarter of 2004, OfficeMax reported operating income from

the retail segment of just $24 million on sales of $1.22 billion. Of the $24 million, $7.1 million or

30% was from improperly recorded vendor credits. An additional portion of the operating income

was likely generated from legitimate vendor credits. Thus, the level of vendor credits recorded each

quarter was one of the most important business metrics OfficeMax management monitored.

39. Moreover, as demonstrated by Lead Plaintiff’s accounting expert Sheldon D.

Zimmerman, the Individual Defendants were, at best, acting in reckless disregard for the truth by

ignoring red flags concerning the improprieties alleged. Retail companies such as OfficeMax must

maintain sophisticated internal controls to monitor vendor rebate programs and track payments.

During the Class Period, defendants Crumley, Harad and Milliken repeatedly told investors that

OfficeMax had instituted such controls and that they had personally supervised their operation.

OfficeMax subsequently admitted that these defendants’ statements (and certifications) were false

when made. Given the significance of the vendor rebate program and the substantial deficiencies the

Company had during the Class Period with regard to these internal controls, defendants were acting


- 11 -

with extreme recklessness in assuring investors that OfficeMax’s financial statements were prepared

in compliance with GAAP.

40. Defendant Feuer knew of and authorized the problematic vendor promotional abuses.

Moreover, such abuses could not have occurred without senior management’s knowledge (or

willful, reckless disregard) because OfficeMax had checks and balances in place specifically to

prevent such abuses from happening.

41. In addition to the above-described involvement, each Individual Defendant was

motivated to conceal the accounting fraud alleged.

42. A big part of Defendants’ strategy was to merge the two companies, sell the

manufacturing operations and then expand the Company’s retail operations. Thus, the success and

future prospects of the retail operations – including the 970 superstores – were a focus of the

Individual Defendants.

43. The Individual Defendants were motivated to fraudulently inflate the Company’s

reported earnings and to conceal the truth concerning the fraud to convince a skeptical marketplace

that the combined Company had a positive financial future. As described herein, after its initial

public offering (“IPO”), old-OfficeMax had not been a successful company (at least not from an

investor’s perspective). Investors were similarly skeptical that new OfficeMax could do well,

particularly given the amount of debt the Company incurred as part of the acquisition. The

Individual Defendants were motivated to falsify OfficeMax’s earnings after the merger to convince

investors that the acquisition of old-OfficeMax would result in a stronger Company going forward.

44. Defendants were also motivated to conceal the fraudulent scheme until after the

Company had issued over 5 million shares of its common stock – knowing that disclosure of an

accounting scandal would cause the Company to have to issue more shares causing dilution to the

existing shareholder base, or possibly derail the stock issuance entirely. Pursuant to a December


- 12 -

2001 public offering, OfficeMax was obligated to redeem the securities issued in December 2001

with OfficeMax common stock on December 16, 2004. The amount of stock OfficeMax was

required to issue was determined by OfficeMax’s trading price in the 20 trading days prior to

December 13. The Individual Defendants were motivated to conceal the fraud until after December

16, 2004, as the Individual Defendants knew the accounting scandal was material information to

investors and that until the scandal was fully investigated the Company could not trade in its own

securities. Indeed, on December 20, 2004 – only two trading days after OfficeMax issued the 5.4

million shares – the Company admitted that the information concerning the scandal was significantly

material such that the Company had to cease all trading in its own securities:

The company also announced it has commenced an investigation into certain vendor allegations, and that it is postponing a decision on the form and timing of equity repurchases until the investigation is complete.

* * *

[A]t the direction of the audit committee of its board of directors, it had commenced an internal investigation into claims by a vendor to its retail business that certain employees acted inappropriately in requesting promotional payments and in falsifying supporting documentation for approximately $3.3 million in claims billed to the vendor by OfficeMax during 2003 and 2004. Because the company’s investigation has only recently begun, the company is postponing a decision as to the form and timing of share repurchases until the investigation is complete.

45. In truth, the internal investigation had been ongoing for weeks, if not months prior to

the December 20, 2004 disclosure. It became apparent to certain OfficeMax employees that the

OfficeMax Technology product category was a subject of the internal investigation, which

employees were working on the integration process for the legacy Boise Cascade and legacy

OfficeMax Technology departments after the merger. Because the OfficeMax Technology group

was the subject of this investigation, certain information had been “frozen” and could not be

transferred or reviewed – and much of this information remained frozen into 2006 as part of the

SEC’s investigation of OfficeMax.


- 13 -

46. The senior executives of both Boise and old-OfficeMax also stood to gain

substantially by completing the sale of OfficeMax to Boise:

(a) Defendant Michael Feuer, CEO and Chairman of old-OfficeMax, would

obtain about $60 million in severance and other cash payments upon closing of the sale. Feuer

would also receive a consulting contract worth $5 million. On December 15, 2003, Feuer caused the

Company to register for sale 542,469 shares of Boise common stock he received in the acquisition.

(b) During the Class Period, defendant Harad, as CEO of Boise and Executive

Chairman of the combined company satisfied the financial performance requirements for 260,300

shares of restricted stock the Board granted him in 2003, then worth just more than $8 million. On

October 29, 2004, Harad signed a new employment agreement with OfficeMax containing a

substantial severance package. Pursuant to the new agreement, when Harad stepped down as the

Executive Chairman of OfficeMax in June 2005 he would be guaranteed an incentive and severance

package worth over $10 million, including a $1.32 million incentive bonus, a $1.5 million retention

payment, and a $7.26 million severance payment.

(c) Other Executives. OfficeMax entered into change-in-control employment

agreements with each of its executive officers that provided each executive officer with millions of

dollars worth of severance benefits if their employment with OfficeMax was terminated after the

merger, and additional tax gross-up payments. All vested and unvested OfficeMax stock options

would be cashed out for millions of dollars. Additionally, thousands of shares of restricted stock

would prematurely vest upon consummation of the sale.

FRAUDULENT SCHEME AND COURSE OF BUSINESS

47. Each defendant is liable for: (i) making false statements; (ii) failing to disclose

adverse facts known to him about OfficeMax; or (iii) participating in a fraudulent scheme to falsify

OfficeMax’s reported earnings in violation of GAAP. Defendants’ fraudulent scheme and course of


- 14 -

business operated as a fraud or deceit on those who purchased or otherwise acquired OfficeMax

publicly traded securities because it: (i) deceived investors about OfficeMax’s financial

performance; (ii) allowed defendants to obtain shareholder approval of Boise’s acquisition of

OfficeMax, triggering tens of millions of dollars in severance and related payments to defendants;

(iii) artificially inflated the prices of OfficeMax’s publicly traded securities; (iv) enabled the

Company to issue $172.5 million in OfficeMax common stock two trading days before a material

disclosure; and (v) allowed the Individual Defendants to receive large bonuses based on OfficeMax’s

apparent operating performance.

BACKGROUND

48. Boise Cascade Corporation was a major distributor of building materials and an

integrated manufacturer and distributor of paper, packaging, and wood products. In March 2004,

Boise owned or controlled approximately 2.4 million acres of timberland in the United States.

49. In 1988, defendant Feuer founded OfficeMax, a chain of high-volume office products

superstores. In 1994, Feuer launched what was then the largest retail IPO, receiving $675 million in

proceeds. As of January 25, 2003, OfficeMax owned and operated 970 superstores in 49 states,

Puerto Rico, the U.S. Virgin Islands and, through a majority-owned subsidiary, in Mexico.

50. OfficeMax’s IPO was the largest, but compared to the 1989 IPO of office supply

chain pioneer Staples, which raised just $36 million, it was not the most profitable for shareholders.

Returns for shareholders in the rival chains differed sharply. OfficeMax shares traded flat for nine

years after their debut, while Staples’ shares rose nearly 500% over that same period. By the end of

2001, OfficeMax was carrying a debt-load of at least $220 million. By the middle of 2002,

OfficeMax had posted eight straight quarterly losses. By October 2002, OfficeMax’s stock, which

had traded as high as $20 per share in 1998, reached a 52-week low of $3.05. Feuer told the Daily

Deal in April 2004 that he “knew a year and a half ago that we couldn’t stay public.”


- 15 -

51. Feuer began discussing selling OfficeMax to paper products giant Boise. After

several months of negotiations defendants Feuer and Harad agreed to terms. On July 14, 2003,

Boise offered to purchase OfficeMax for 30% cash and 70% stock. OfficeMax’s stock price closed

at $10.50 per share. In November 2003, Institutional Shareholder Services urged Boise’s

shareholders to vote against the acquisition because of concerns about overpaying, taking on too

much debt, and doubts about the inexperience of the ongoing management of the combined

company. Additionally, large shareholders demanded Boise divest its timberlands or building

products line before more than doubling the size of its office products unit. In late November 2003,

Boise announced that once it completed its purchase of OfficeMax, it would exit both the paper and

building products businesses.

52. Boise consummated its acquisition of OfficeMax on December 9, 2003, for

approximately $1.06 billion.

53. In July 2004, the Company announced that the Chicago buyout firm of Madison

Dearborn Partners LLC had agreed to buy its paper, forest products and timberland businesses for

$3.7 billion. The spun-off entity would be called Boise Cascade, LLC and the Company would

rename itself “OfficeMax Inc.”

DEFENDANTS’ FRAUDULENT VENDOR REBATES SCHEME

54. OfficeMax has admitted that it improperly recorded vendor income in its publicly

stated financial results during the Class Period. OfficeMax has restated its interim 2004 results to

remove millions in previously reported income, such that its 2003 and interim 2004 financial

statements were false and violated GAAP and SEC rules.

55. During the Class Period, OfficeMax improperly recognized income from vendors.

Specifically, it recognized vendor incomes even though collection was not probable. Companies like

OfficeMax receive money from vendors to feature the supplier’s products in ads and circulars.


- 16 -

Frequently, an ad in the newspaper for OfficeMax for a certain brand of product was compensated in

part by the vendor of that brand. By overstating the expected amount of such compensation,

OfficeMax was able to artificially inflate its publicly reported financials.

56. OfficeMax improperly took the same deductions from vendor invoices twice,

essentially “double dipping.” OfficeMax’s various vendors had certain “profiles” which would be

used to calculate the amount of vendor promotions the Company could deduct from payments to its

vendors. After the merger, many vendors tightened up their vendor promotion policies, which would

have resulted in much lower income for OfficeMax. To artificially inflate its income, OfficeMax did

not use the updated policies in their vendor profiles, but continued to use the old profiles. This

resulted in improper vendor allowances being deducted from payments to vendors. Another method

OfficeMax used to inflate deductions was to take deductions based on inventory that had been

returned to the vendor for which OfficeMax was already receiving a credit.

57. Naturally, vendors would complain about the improper deductions taken from

OfficeMax’s payments to them. OfficeMax’s strategy to handle the complaints was to delay

answering the complaints as long as possible. The vendor calls were routed to the Accounts Payable

department at OfficeMax but Accounts Payable could not answer the questions since Accounts

Payable had not calculated the deductions. Accounts Payable was not allowed to forward the vendor

calls to those who had calculated the deductions. Those who calculated the deductions, the Vendor

Income Planning and Analysis (“VIPA”) group, would also pre-date the deductions, or record the

deductions months before OfficeMax had earned them. Defendant Crumley met frequently with

personnel in the VIPA group.

58. Some vendors were so angry with these practices, they put OfficeMax on credit hold

and others even went to OfficeMax’s offices to complain and collect the monies OfficeMax had not


- 17 -

paid them. Vendors Sunbeam, StudioRTA and Pintel were so angry with OfficeMax for excessive

deductions that they threatened legal actions.

59. By way of example, OfficeMax had been making “double-dipping” deductions from

its vendor Pintel for a period of at least eight to nine months. Pintel repeatedly complained to

OfficeMax about these improper deductions. In either August or September 2004, a Pintel

representative made an unannounced visit to OfficeMax’s offices in Cleveland – flying in from

Chicago for the express purpose of reclaiming $650,000 in improper deductions. OfficeMax

employees named Kettlewell and Roche met with the Pintel representative. Ultimately, as a result of

this meeting, OfficeMax was forced to return the $650,000 in improper deductions to Pintel.

60. Oftentimes, the Company accounted for these types of payments to angry vendors as

debits to OfficeMax’s Inventory Control account or out of a reserve account known as OfficeMax’s

general Accounts Payable Ledger account – rather than reducing an Accounts Receivable account as

required under GAAP.

61. Ultimately, vendor complaints made it impossible for OfficeMax’s scheme to

continue. As vendors realized that they had been cheated by OfficeMax, the vendors demanded their

money back (contributing to OfficeMax, on October 19, 2004, having to lower its financial forecasts

for 2004) and more closely scrutinized OfficeMax’s payments to prevent OfficeMax from

continuing to perpetrate the fraud against the vendors.

62. In fact, OfficeMax billed Microsoft for approximately a year’s worth of

marketing/promotional services that OfficeMax had not performed. As a result, Microsoft lodged

complaints with OfficeMax causing OfficeMax to have to initiate the investigation ultimately

revealed to the public on December 20, 2004. However, OfficeMax’s improper charges were not

limited to Microsoft. And, moreover, the internal investigation had begun weeks, if not months,

prior to the disclosure.


- 18 -

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD

63. On December 9, 2003, OfficeMax’s and Boise’s shareholders approved the sale of

OfficeMax to Boise. Defendants should have, but did not, disclose the existence of the illegal

accounting manipulations and deficient internal controls existing at old-OfficeMax prior to these

shareholders meetings so that investors could make an informed decision with regard to approving

the proposed merger.

64. On January 22, 2004, the Company issued a press release announcing its fourth

quarter and full year 2003 financial results. The press release stated in part:

Boise Cascade Corporation today reported fourth quarter 2003 net income of $6.9 million, or 5 cents per diluted share. Before a special item and the net impact of the OfficeMax acquisition, Boise’s net income was $18.3 million, or 24 cents per diluted share. By comparison, Boise reported net income of $6.2 million, or 5 cents per diluted share, in fourth quarter 2002 and $30.0 million, or 43 cents per diluted share, in third quarter 2003, before a special item. For the full year 2003, net income was $8.3 million, or a loss of 8 cents per diluted share. Before special items and the net impact of the OfficeMax acquisition, Boise posted net income of $31.8 million, or 32 cents per diluted share. In 2002, before a special item, net income was $7.3 million, or a loss of 10 cents per diluted share.

Financial Highlights ($ in millions, except per-share amounts)

4Q 4Q 3Q Full Year 2003 2002 2003 2003 2002

Sales $ 2,352 $ 1,801 $ 2,111 $ 8,245 $ 7,412 Net income $ 6.9 $ 6.2 $ 32.9 $ 8.3 $ 11.3 Net income (loss) per diluted share $ 0.05 $ 0.05 $ 0.48 $ (0.08) $ (0.03) Before special items and net impact of OfficeMax acquisition

Net income $ 18.3 $ 6.2 $ 30.0 $ 31.8 $ 7.3 Net income (loss) per diluted share $ 0.24 $ 0.05 $ 0.43 $ 0.32 $ (0.10)

* * *

Sales in fourth quarter 2003 were $2.4 billion, 31% higher than sales in fourth quarter 2002. Sales for full year 2003 were $8.2 billion, an 11% increase over sales in 2002. The sales increases were mostly due to strong prices for wood products and growth in Boise Office Solutions, including the OfficeMax acquisition. Excluding the impact of the OfficeMax acquisition, sales increased 14% and 7% for the fourth quarter and full year, respectively.


- 19 -

Boise Office Solutions ($ in millions)

4Q 4Q 3Q Full Year 2003 2002 2003 2003 2002

Sales $1,248 $906 $934 $4,025 $3,546 Operating income $40.0 $32.4 $31.0 $115.5 $123.0 Operating income before special items and net impact of OfficeMax acquisition

$36.9

$32.4

$31.0

$121.6

$123.0

On December 9, 2003, Boise acquired OfficeMax, Inc. Following that

acquisition, the company began reporting two operating segments, Contract and Retail, within Boise Office Solutions, its office products distribution business. Taken together, the two operating segments make up our Boise Office Solutions business.

For fourth quarter 2003, Boise Office Solutions reported operating income of $40.0 million, compared with $32.4 million in fourth quarter 2002 and $31.0 million in third quarter 2003. For full year 2003, the business reported operating income of $115.5 million, compared with $123.0 million in 2002.

Before special items and the net impact of the OfficeMax acquisition, Boise Office Solutions earned $36.9 million, compared with $32.4 million in fourth quarter 2002 and $31.0 million in third quarter 2003. For full year 2003, the business had operating income of $121.6 million, compared with $123.0 million in 2002.

Sales of $1.2 billion in fourth quarter 2003 were 38% higher than sales in fourth quarter 2002 and 34% higher than in third quarter 2003, due primarily to the acquisition of OfficeMax. Year-over-year same-store sales, which exclude OfficeMax sales, rose 4% in the fourth quarter, with the increase attributable to foreign exchange rates.

Full-year sales of $4.0 billion in this business were 14% higher than the year earlier, while same-store sales rose 5%, with 4% of the lift generated by foreign exchange rates. Sales volume of Boise’s office papers increased 4% to 568,000 tons.

Boise Office Solutions, Contract Segment ($ in millions)

4Q 4Q 3Q Full Year 2003 2002 2003 2003 2002

Sales $965 $906 $934 $3,742 $3,546 Operating income $33.9 $32.4 $31.0 $109.4 $123.0 Operating income before special items and impact of OfficeMax acquisition

$36.9

$32.4

$31.0

$121.6

$123.0

For fourth quarter 2003, Boise Office Solutions, Contract, reported operating income of $33.9 million, compared with $32.4 million in fourth quarter 2002 and


- 20 -

$31.0 million in third quarter 2003. For full year 2003, this segment reported operating income of $109.4 million, compared with $123.0 million in 2002.

Before special items in fourth quarter 2003 and full year 2003 and the impact of the OfficeMax acquisition, operating income in Boise Office Solutions, Contract, in the fourth quarter was $36.9 million, up from $32.4 million in fourth quarter a year ago and $31.0 million in third quarter 2003. When excluding the same items for full year 2003, the segment reported operating income of $121.6 million, compared with $123.0 million in 2002.

Sales of $965 million in fourth quarter 2003 were 6% higher than sales in fourth quarter 2002 and 3% higher than in third quarter 2003. Year-over-year same-store sales in the fourth quarter rose 4%; however, excluding foreign exchange rates, same-store sales were essentially flat.

Full-year sales of $3.7 billion for this segment were 6% higher than the year earlier, while same-store sales rose 5%, fueled by a 4% lift from foreign exchange rates.

Excluding special items and the impact of the OfficeMax acquisition, the fourth-quarter operating margin for the Contract segment was 3.9%, up from 3.6% in the fourth quarter a year ago and 3.3% in the third quarter. For the full year, the operating margin, before special items and the impact of the OfficeMax acquisition, was 3.3%, compared with 3.5% in 2002.

Boise Office Solutions, Retail Segment ($ in millions)

4Q 2003 Sales $ 283 Operating income $ 6.1

Boise began reporting its Boise Office Solutions, Retail, segment on

December 10, 2003. For 17 selling days in fourth quarter 2003, the segment recorded sales of $283 million, operating income of $6.1 million, and an operating margin of 2.2%.

* * *

“Boise’s sales and income should increase substantially in 2004,” said George J. Harad, chairman and chief executive officer.

“With the acquisition of OfficeMax, Boise Office Solutions will post sharply higher sales and operating income in 2004. Same-store sales growth should continue to be positive. However, operating margins will be lower in 2004 than in 2003, as we integrate the lower-margin retail business into our operations,” Harad said.


- 21 -

65. On March 2, 2004, the Company filed its Form 10-K for the fiscal year ended

December 31, 2003, including the Company’s results previously reported for 2003. The Form 10-K

was signed by defendants Harad as Chairman and CEO, Crumley as CFO and Carlile as Controller.

In their Sarbanes-Oxley Certifications, defendants Harad and Crumley also claimed that they

personally supervised the evaluation of the design and operation of the Company’s disclosure

procedures pursuant to Rule 13a-15(e) of the 1934 Act (pursuant to §392 of Sarbanes-Oxley) (“Rule

13a-15(e)”), to ensure that the Company’s controls would alert them to material information which

would conflict with GAAP and/or require disclosure. Defendants affirmatively stated on March 2,

2004 that no such disclosure issues or control problems existed.

66. In fact, OfficeMax did have internal control weaknesses which were required to be

disclosed. Ultimately, in March 2005, when OfficeMax filed its Form 10-K for 2004, it would admit

to the internal control deficiencies. OfficeMax’s internal control deficiencies are alleged more fully

in the section entitled “OfficeMax’s Violations of SEC Regulations Due to Its Inadequate Internal

Controls.”

67. On April 20, 2004, the Company announced its first quarter 2004 financial results.

The press release stated in part:

Boise Cascade Corporation today reported first quarter 2004 net income of $63.5 million, or 66 cents per diluted share, compared with a net loss of $27.5 million, or 53 cents per diluted share, in first quarter 2003. Fourth quarter 2003 net income was $6.9 million, or 5 cents per diluted share.

The quarter’s results include a pretax gain of $59.9 million, or 40 cents per diluted share, from the sale of 79,000 acres of timberland in Louisiana. Before this special item, the company posted first quarter 2004 net income of $26.9 million, or 26 cents per diluted share.


- 22 -

FINANCIAL HIGHLIGHTS ($ in millions, except per-share amounts)

1Q 1Q 4Q 2004 2003 2003 Sales

$3,530

$1,853

$2,352

Net income (loss) $63.5 $(27.5) $6.9 Net income (loss) per diluted share $0.66 $(0.53) $0.05

BEFORE SPECIAL ITEMS Net income (loss)

$26.9

$(12.6)

$15.9

Net income (loss) per diluted share $0.26 $(0.27) $0.18

Sales in first quarter 2004 nearly doubled to $3.5 billion, compared with $1.9 billion in the first quarter a year ago. Sales in fourth quarter 2003 were $2.4 billion. Sales increased primarily because of the acquisition of OfficeMax in December 2003 but were also aided by strong product prices in Boise Building Solutions.

REVIEW OF OPERATIONS


1Q 1Q 4Q 2004 2003 2003 Sales $2,341 $938 $1,248 Operating income $58.4 $20.7 $40.0 Operating margin 2.5% 2.2% 3.2% BEFORE SPECIAL ITEM Operating income $58.4 $29.9 $40.0 Operating margin 2.5% 3.2% 3.2%

* * *

On December 9, 2003, Boise acquired OfficeMax, Inc. Following that acquisition, the company began reporting two operating segments, Contract and Retail, within Boise Office Solutions, its office products distribution business. Taken together, the two operating segments make up the company’s Boise Office Solutions business.

For first quarter 2004, Boise Office Solutions sales increased 150% to $2.3 billion, compared with the same quarter a year ago. Sales for locations operating in both periods, including OfficeMax locations on a pro forma basis, increased 5%. Total pro forma sales of office supplies and paper increased 4%, sales of technology products increased 5%, and sales of furniture were up 4%. Boise’s office papers sold through Boise Office Solutions increased 16% to 167,000 tons, compared with a year ago.

Boise Office Solutions operating income was $58.4 million, up from $20.7 million in first quarter 2003 and $40.0 million in fourth quarter 2003. The results increased, relative to comparison periods, due to the OfficeMax acquisition. The


- 23 -

operating margin was 2.5%, compared with 3.2%, before a special item, in first quarter 2003 and 3.2% in fourth quarter 2003.

In first quarter 2004, Boise Office Solutions achieved $12.6 million of the $80 million in integration synergies expected for the year. Integration costs of $8.9 million occurred primarily in the contract segment, as the business began to consolidate delivery warehouses, customer service centers, and administrative staffing. Boise Office Solutions also recorded acquisition-related step-up costs of $4.5 million.

Below is the review of operations for the Boise Office Solutions Contract and Retail segments.


1Q 1Q 4Q 2004 2003 2003

Sales $1,120 $938 $965 Operating income $34.4 $20.7 $33.9 Operating margin 3.1% 2.2% 3.5% BEFORE SPECIAL ITEM Operating income $34.4 $29.9 $33.9 Operating margin 3.1% 3.2% 3.5%

Boise Office Solutions, Contract, sales of $1.1 billion in first quarter 2004

were 19% higher than sales in first quarter 2003 and 16% higher than in fourth quarter 2003. Excluding foreign exchange gains, sales rose 15%. Year- over-year same-location sales, excluding foreign exchange gains, in the first quarter rose 4%.

This segment reported first quarter 2004 operating income of $34.4 million, compared with $29.9 million, before a special item, in first quarter 2003 and $33.9 million in fourth quarter 2003. The operating margin was 3.1%, compared with 3.2% before a special item, in first quarter 2003 and 3.5% in fourth quarter 2003.


1Q 4Q 2004 2003 Sales $1,220 $283 Operating income $24.0 $6.1 Operating margin 2.0% 2.2%


December 10, 2003. In first quarter 2004, segment sales of $1.2 billion were 1% higher, and same-store sales were 3% higher, than pro forma sales in first quarter 2003. Boise Office Solutions, Retail, reported operating income of $24.0 million and an operating margin of 2.0% in first quarter 2004.


- 24 -

* * *

OUTLOOK

“For Boise overall, we continue to expect significantly higher sales and income for full year 2004, relative to 2003, both as the result of the acquisition of OfficeMax and strong or improving performance in all of our businesses,” said George J. Harad, chairman and chief executive officer.

“In Boise Office Solutions, the second quarter of the year is always seasonally weak, for both the Contract and Retail segments. We expect sales to decline sequentially and operating income to be substantially lower than in the first quarter. However, we are pleased with the progress we are making in integrating OfficeMax into our operations and continue to expect to meet our targets for the full year of $80 million in integration synergies, same-store sales growth of 4% to 6%, and an operating margin of 2.4% to 2.6%.

* * *

Effective January 1, 2003, we adopted an accounting change for vendor allowances to comply with the guidelines issued by the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received From a Vendor. Under the new guidance, vendor allowances reside in inventory with the product and are recognized when the product is sold, changing the timing of our recognition of these items. This change resulted in a one-time, noncash, cumulative-effect adjustment of $4.7 million, or 8 cents per share.

68. On May 7, 2004, the Company filed its Form 10-Q for the period ended March 30,

2004. The 10-Q was signed by defendant Carlile as Vice President and Controller. In their

Sarbanes-Oxley Certifications, defendants Harad and Crumley claimed that they personally

supervised the evaluation of the design and operation of the Company’s disclosure procedures

pursuant to Rule 13a-15(e), to ensure that the Company’s controls would alert them to material

information which would conflict with GAAP and/or require disclosure. Defendants Harad and

Crumley also affirmatively stated on May 7, 2004 that no such disclosure issues or control problems

existed.

69. These results were viewed favorably by the market. In June 2004, OfficeMax’s stock

would reach its Class Period high of more than $38.00 per share.


- 25 -

70. In fact, OfficeMax’s financial statements for the first quarter of 2004 were materially

false and misleading and operating income was overstated by $7.1 million due to the improper

recording of vendor allowances and OfficeMax has significant internal control problems as more

fully detailed herein.

71. On July 20, 2004, the Company announces its second quarter 2004 financial results.

The press release stated in part:

Boise Cascade Corporation today reported second quarter 2004 net income of $50.4 million, or 52 cents per diluted share, compared with a net loss of $3.9 million, or 12 cents per diluted share, in second quarter 2003. In first quarter 2004, Boise reported net income of $63.5 million, or 66 cents per diluted share.

The quarter’s results include a pretax gain of approximately $46.5 million, or 31 cents per diluted share, on the sale of Boise’s 47% interest in Voyageur Panel in May 2004. Before this special item, the company posted second quarter 2004 net income of $22.0 million, or 21 cents per diluted share.


2Q 2Q 1Q 2004 2003 2004 Sales $3,401 $1,929 $3,530 Net income (loss) $50.4 $(3.9) $63.5 Net income (loss) per diluted share $0.52 $(0.12) $0.66 BEFORE SPECIAL ITEMS Net income (loss) $22.0 $(3.9) $26.9 Net income (loss) per diluted share $0.21 $(0.12) $0.26

Sales in second quarter 2004 increased 76% to $3.40 billion, compared with

$1.93 billion in the second quarter a year ago. Sales in first quarter 2004 were $3.53 billion. Year-over-year sales increased primarily because of the acquisition of OfficeMax in December 2003 but were also aided by strong product prices in Boise Building Solutions.

REVIEW OF OPERATIONS


2Q 2Q 1Q 2004 2004 2003

Sales $2,005 $905 $2,341 Operating income $16.0 $23.9 $58.4 Operating margin 0.8% 2.6% 2.5%


- 26 -

On December 9, 2003, Boise acquired OfficeMax, Inc. Following that acquisition, the company began reporting two operating segments, Contract and Retail, within Boise Office Solutions, its office products distribution business. Taken together, the two operating segments make up the company’s Boise Office Solutions business.

For second quarter 2004, Boise Office Solutions sales increased 122% to $2.0 billion, compared with $905 million in the same quarter a year ago. Sales for locations operating in both periods, including OfficeMax retail store locations on a pro forma basis, increased 2%. Total pro forma sales of office supplies and paper and technology products increased 1%, and sales of furniture were up 4%. Boise’s office papers sold through Boise Office Solutions increased 23% to 177,000 tons, compared with a year ago.

Boise Office Solutions operating income was $16.0 million, down from $23.9 million in second quarter 2003 and $58.4 million in first quarter 2004. The operating margin was 0.8%, compared with 2.6% in second quarter 2003 and 2.5% in first quarter 2004. Results weakened from year-ago levels primarily because of seasonal losses in the Retail segment. The sharp decline in operating income from first to second quarter, although more severe in Retail than in Contract, reflected normal seasonality in both segments.

In second quarter 2004, Boise Office Solutions achieved $31.7 million of integration synergies and recorded integration costs of $8.3 million. In the first half of 2004, synergies totaled $44.3 million of the $80 million expected for the year. First half integration costs were $17.2 million.

Below is the review of operations for the Boise Office Solutions Contract and Retail segments.


2Q 2Q 1Q 2003 2004 2004 Sales $1,038 $905 $1,120 Operating income $21.4 $23.9 $34.4 Operating margin 2.1% 2.6% 3.1%

Boise Office Solutions, Contract, sales of $1.0 billion in second quarter 2004

were 15% higher than sales in second quarter 2003 and 7% lower than first quarter 2004. Year-over-year same-location sales on a pro forma basis rose 5% in the second quarter. Excluding the impact of foreign exchange, same-location sales grew 3%.

This segment reported second quarter 2004 operating income of $21.4 million, compared with $23.9 million in the second quarter 2003 and $34.4 million in first quarter 2004. The operating margin was 2.1%, compared with 2.6% in second quarter 2003 and 3.1% in first quarter 2004. The Contract segment includes the


- 27 -

former OfficeMax direct business, with its extensive warehouse infrastructure, which recorded losses in the first and second quarters.


2Q 1Q 2004 2004 Sales $967 $1,221 Operating income (loss) $(5.4) $24.0 Operating margin (0.6)% 2.0%


December 10, 2003. In second quarter 2004, segment sales of $967 million were 3% lower than OfficeMax retail sales on a pro forma basis in second quarter 2003. Second quarter sales no longer include sales from the 45 retail stores closed in the first quarter 2004. Same-location pro forma sales were flat. Retail segment sales declined 21% from first quarter 2004 sales, reflecting normal seasonality.

The Retail segment reported an operating loss of $5.4 million in second quarter 2004, compared with income of $24.0 million in first quarter 2004 and an operating margin of (0.6)%, compared with 2.0% in first quarter 2004.

72. On August 5, 2004, the Company filed its Form 10-Q for the period ended June 30,

2004. The 10-Q was signed by defendant Carlile as Vice President and Controller. In the 10-Q,

defendants Harad and Crumley claimed that they personally supervised the evaluation of the design

and operation of the Company’s disclosure procedures pursuant to Rule 13a-15(e), to ensure that the

Company’s controls would alert them to material information which would conflict with GAAP

and/or require disclosure. Defendants Harad and Crumley affirmatively stated on August 5, 2004

that no such disclosure issues or control problems existed.

73. In fact, OfficeMax’s financial statements for the second quarter 2004 were materially

false and misleading due to the improper recording of vendor allowances and OfficeMax has

significant internal control problems as more fully detailed herein.

74. On October 19, 2004, the Company announced its third quarter 2004 financial results.

The release stated in part:

Boise Cascade Corporation today reported third-quarter net income of $61.1 million, or 63 cents per diluted share.


- 28 -

The results included a $13.1 million pretax gain on the sale of certain Idaho timberlands recorded in our Boise Building Solutions segment; $8.8 million of costs related to the announced sale of our forest products assets in Corporate and Other; and $5.8 million of costs and lost income in Boise Office Solutions, Retail, and Boise Paper Solutions related to disruption from hurricanes in the southeastern United States.

By comparison, Boise reported net income of $32.9 million, or 48 cents per diluted share, in third quarter 2003 and $50.4 million, or 52 cents per diluted share, in second quarter 2004. Before special items, Boise earned $30.0 million, or 43 cents per diluted share, in third quarter 2003 and $22.0 million, or 21 cents per diluted share, in second quarter 2004.


3Q 3Q 2Q 2004 2003 2004 Sale $3,651 $2,111 $3,401 Net income $61.1 $32.9 $50.4 Net income per diluted share $0.63 $0.48 $0.52 BEFORE SPECIAL ITEMS Net income $61.1 $30.0 $22.0 Net income per diluted share $0.63 $0.43 $0.21

Sales in third quarter 2004 increased 73% to $3.65 billion, compared with

$2.11 billion in third quarter a year ago and $3.40 billion in second quarter 2004. Year-over-year sales increased primarily because of our acquisition of OfficeMax in December 2003. Sales were also aided by strong product prices in Boise Building Solutions and improving product prices in Boise Paper Solutions.



On December 9, 2003, Boise acquired OfficeMax, Inc. Following that

acquisition, the company began reporting two operating segments, Contract and Retail, within Boise Office Solutions, its office products distribution business. Taken together, the two operating segments make up the company’s Boise Office Solutions business.

In third quarter 2004, Boise Office Solutions sales increased 139% to $2.235 billion, compared with $934 million in the same quarter a year ago. Sales for locations operating in both periods, including OfficeMax retail store locations on a pro forma basis, increased 4%. Pro forma sales of office supplies and paper, technology products, and furniture each increased 3%. Boise’s office papers sold


- 29 -

through Boise Office Solutions increased 26% to 178,000 tons, compared with last year.

Boise Office Solutions operating income in the third quarter was $56.5 million, up from $31.0 million in the same quarter a year ago and $16.0 million in second quarter. Segment sales, income, and operating margin increased sequentially in the third quarter. The operating margin was 2.5% in third quarter 2004, compared with 3.3% in the third quarter a year ago and 0.8% in second quarter 2004.

In third quarter 2004, Boise Office Solutions achieved $30.8 million of integration synergies related to its acquisition of OfficeMax and recorded integration costs of $6.9 million. In the first nine months of 2004, synergies totaled $75.2 million of the $80 million expected for the year, and integration costs reached $24.1 million.

Below is the review of operations for the Contract and Retail office products segments.



Boise Office Solutions, Contract, sales of $1.096 billion in third quarter 2004

were 17% higher than sales in third quarter 2003 and 6% higher than in second quarter 2004. Year-over-year same-location sales on a pro forma basis rose 7% in the third quarter.

This segment reported third quarter 2004 operating income of $31.4 million, compared with $31.0 million in third quarter 2003 and $21.4 million in second quarter 2004. The operating margin was 2.9%, compared with 3.3% in third quarter a year ago and 2.1% in second quarter 2004. The Contract segment includes the former OfficeMax direct business, which is supported by excess warehouse capacity and recorded losses in the first, second, and third quarters of 2004.


3Q 2Q 2004 2004 Sales $1,138 $967 Operating income (loss) $25.1 $(5.4) Operating margin 2.2% (0.6%


December 10, 2003. In third quarter 2004, segment sales of $1.138 billion were 1% lower than OfficeMax retail sales on a pro forma basis in third quarter 2003 and 18%


- 30 -

higher than sales in second quarter 2004. In first quarter 2004, the company closed 45 retail stores. Same-store pro forma sales were 1% higher than the year-ago third quarter.

The Retail segment reported operating income of $25.1 million in third quarter 2004, compared with a loss of $5.4 million in second quarter 2004, and an operating margin of 2.2%, compared with (0.6)% in second quarter 2004. Third quarter 2004 results were hampered by hurricanes in the southeastern United States, which caused temporary retail store closures, lost sales, and an estimated $3.0 million in lost income.

* * *

OUTLOOK

In July 2004, Boise Cascade Corporation announced the sale of its paper, forest products, and timberland assets for approximately $3.7 billion to affiliates of Boise Cascade, LLC, a new company formed by Madison Dearborn Partners LLC (MDP). The targeted completion date for this transaction is October 29.

* * *

When the transaction with MDP closes, Boise Cascade Corporation will change its name to OfficeMax Incorporated. It will continue to operate the office products distribution business as its principal business. OfficeMax will trade on the New York Stock Exchange under the ticker symbol OMX, and its corporate headquarters will be in Itasca, Illinois. Privately held Boise Cascade, LLC, will operate from its headquarters in Boise, Idaho.

* * *

Effective January 1, 2003, we adopted an accounting change for vendor allowances to comply with the guidelines issued by the Financial Accounting Standards Board’s Emerging Issues Task Force EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received From a Vendor. Under the new guidance, vendor allowances reside in inventory with the product and are recognized when the product is sold, changing the timing of our recognition of these items. This change resulted in a one-time, noncash, cumulative-effect adjustment of $4.7 million, or 8 cents per share.

75. On November 9, 2004, the Company filed its Form 10-Q for the period ended

September 30, 2004. The 10-Q was signed by defendants Milliken as CEO and Crumley as CFO. In

the 10-Q, defendants claimed that they personally supervised the evaluation of the design and

operation of the Company’s disclosure procedures pursuant to Rule 13a-15(e), to ensure that the

Company’s controls would alert them to material information which would conflict with GAAP


- 31 -

and/or require disclosure. Defendants affirmatively stated on November 9, 2004 that no such

disclosure issues or control problems existed.

76. What defendants did not disclose, and which disclosure was necessary to make the

defendants’ statements not misleading, was the existence of the fraudulent scheme to improperly

charge vendors as detailed herein. Moreover, at least by October 19, 2004, OfficeMax vendors had

begun to learn of the fraudulent scheme and were then notifying the Company that the vendors

would pursue litigation to reclaim the illegal deductions if the problem was not immediately

remedied. As a result, OfficeMax’s financial statements were materially false and misleading due to

the improper recording of vendor allowances and OfficeMax had significant internal control

problems as more fully detailed herein.

DEFENDANTS’ FRAUDULENT CONDUCT IS REVEALED

77. The defendants’ scheme to inflate OfficeMax’s reported earnings by improperly

charging deductions to its vendors was discovered by certain of these vendors at least as early as

Summer 2004. Notably, as vendors realized OfficeMax’s fraudulent charges, these vendors

demanded their money be returned, threatened OfficeMax with litigation and the vendors put an end

to OfficeMax’s ability to continue such practices in the future.

78. Some vendors were so angry with these practices, they put OfficeMax on credit hold

and others even went to OfficeMax’s offices to get the monies OfficeMax had not paid them.

Vendors Sunbeam, StudioRTA and Pintel were so angry with OfficeMax for excessive deductions

that they threatened legal actions.

79. By way of example, OfficeMax had been making “double-dipping” deductions from

its vendor Pintel for a period of at least eight to nine months. Pintel repeatedly complained to

OfficeMax about these improper deductions. In either August or September 2004, a Pintel

representative made an unannounced visit to OfficeMax’s offices in Cleveland – flying in from


- 32 -

Chicago for the express purpose of reclaiming $650,000 in improper deductions. OfficeMax

employees named Kettlewell and Roche met with the Pintel representative. Ultimately, as a result of

this meeting, OfficeMax was forced to return the $650,000 in improper deductions to Pintel.

80. As a result of OfficeMax’s vendors’ discovery of the alleged scheme, at least in part,

on October 19, 2004 OfficeMax was forced to reveal to investors that OfficeMax could not meet its

previously announced 2004 financial projections. Investors were shocked, and OfficeMax’s stock

price tumbled 14% before rebounding to close down 11%.

81. The next partial revelation that all was not right at OfficeMax occurred on November

11, 2004, two days after the November 9, 2004 Form 10-Q was filed, when defendant Crumley

resigned.

82. Then, on December 20, 2004, the Company issued a press release entitled

“OfficeMax Announces Financial Events, Commences Investigation.” The press release stated in

part:

OfficeMax Incorporated, a leader in office products and services, today announced monetization of the promissory notes received from the sale of its timberlands and the distribution of OMX common stock to holders of its Adjustable Conversion-Rate Equity Security (ACES) units. The company also announced it has commenced an investigation into certain vendor allegations, and that it is postponing a decision on the form and timing of equity repurchases until the investigation is complete.

On October 29, 2004, OfficeMax closed the sale of its paper and forest products businesses. At that time, the company received $2.025 billion in cash for the assets sold, and an additional $15 million in cash and promissory notes of $1.635 billion for the timberlands portion of the sale. On December 21, 2004, the company will realize $1.470 billion in cash, before transaction expenses and related costs, from the monetization of those notes. In addition to $15 million received at closing and $1.470 billion realized from the monetization, the company will retain a residual interest in timber promissory notes of $165 million due in 2019.

On December 16, 2004, holders of OfficeMax’s outstanding 7.50% equity security units received 5.41 million newly issued shares of OMX common stock in exchange for cash proceeds to OMX of $172.5 million. The settlement rate was 1.5689 shares of OMX common stock for each purchase contract forming a part of the $50 stated amount of each equity security unit. Following the conversion, OfficeMax has approximately 95 million fully diluted shares of common stock.


- 33 -

OfficeMax intends to use the proceeds from monetization of the timber promissory notes and conversion of the equity security units to continue its debt reduction program and to repurchase between $775 million and $815 million of its common stock. However, at the direction of the audit committee of its board of directors, the company has commenced an internal investigation into claims by a vendor to its retail business that certain employees acted inappropriately in requesting promotional payments and in falsifying supporting documentation for approximately $3.3 million in claims billed to the vendor by OfficeMax during 2003 and 2004. Because the company’s investigation has only recently begun, the company is postponing a decision as to the form and timing of share repurchases until the investigation is complete.

83. On January 5, 2005, the Company issued a press release entitled “OfficeMax

Announces Peterson Resignation.” The article stated in part:

OfficeMax Incorporated, a leader in office products and services, today announced the resignation of Gary Peterson, president of the company’s retail division, effective immediately. The company noted that the timing of Mr. Peterson’s departure is unrelated to the company’s current investigation into allegations of impropriety regarding vendor promotional payments.

84. Then, on January 12, 2005, the Company issued a press release entitled “OfficeMax

Announces Resignation of CFO, Delays Earnings Release Pending Investigation and Reiterates

Intent to Repurchase Common Shares.” The press release stated in relevant part:

OfficeMax, Incorporated announced today that Brian Anderson, executive vice president and chief financial officer, has resigned. Ted Crumley, the former chief financial officer of OfficeMax, will return to that position on an interim basis. The company has begun a search for a permanent replacement. . . .

OfficeMax also announced that it will postpone the release of its earnings for the fourth quarter and full year 2004, pending the conclusion of its previously announced internal investigation into issues relating to its accounting for vendor income. The investigation is being conducted under the direction of the audit committee of OfficeMax’s board of directors.

To date, the company’s investigation has confirmed the claims by a vendor to its retail business that certain employees fabricated supporting documentation for approximately $3.3 million in claims billed to the vendor by OfficeMax during 2003 and 2004. As a result of information discovered in the course of its investigation, the company has expanded the scope of its investigation to include a review of the manner in which it recorded rebates and other payments from vendors for fiscal years 2003 and 2004. The issues involved in this aspect of the investigation principally involve the proper timing for the recognition of such payments. The company has


- 34 -

terminated four employees, based on the information discovered through its investigation.

85. On January 12, 2005, CBSMarketWatch issued an article entitled “OfficeMax delays

earnings report; CFO quits.” The article stated in part:

Office Max Inc. said Wednesday it will postpone the release of its fourth-quarter and full-year earnings reports, pending the conclusion of a now-expanded probe into an accounting fraud.

* * *

In addition, the company said Chief Financial Officer Brian Anderson resigned after two months on the job. Former CFO Ted Crumley will return to that post on an interim basis, the company said.

OfficeMax, which first disclosed the investigation Dec. 20, said it has confirmed claims by a vendor that certain employees created false documents to support about $3.3 million in claims billed to a vendor in 2003 and 2004.

Four employees have been fired as a result of the investigation, the company said.

OfficeMax spokesman Bill Bonner said the company could not reveal the name of the employees, or the vendor, as the investigation is still underway.

The Itasca, Ill.-based office products retailer said that as a result of information discovered in its investigation, it has expanded the scope of the inquiry to include accounting procedures for rebates and other vendor payments in fiscal 2003 and 2004.

OfficeMax said it expects to finish the probe by the third full-week of February, and intends to proceed with its previously stated share repurchase program once fiscal 2004 results have been reported.

86. After this news was released, OfficeMax’s stock declined to as low as $27.82 per

share before closing at $28.88 per share, on volume of 7.7 million shares.

87. The New York Times reported on January 13, 2006:

Investors took a dim view of the latest news, and sent OfficeMax shares down $1.42, or 4.7 percent, to close at $28.88.

“It’s more than a little disconcerting,” Mr. Souers said. “They’re delaying the share repurchases; there may be more negative findings – they’ve really lost credibility on the Street.”


- 35 -

88. On February 14, 2005, the Company issued a press release entitled “Resignation of

CEO Sets Expected Date for Release of Fourth Quarter and Full-Year 2004 Earnings with

Preliminary Guidance Comments on Preliminary Results of Internal Investigation Reiterates Intent

to Repurchase Common Stock.” The press release stated in part:

OfficeMax Incorporated announced today that Christopher C. Milliken has resigned as president, chief executive officer and as a director. George J. Harad, executive chairman, has been appointed by the board of directors to serve as chief executive officer on an interim basis. The board has formed a committee to begin immediately a search for a permanent chief executive officer.

* * *

Fourth Quarter and Full-Year 2004 Earnings

OfficeMax now expects to announce fourth-quarter and full-year 2004 earnings on March 14, 2005, and to host an investor conference call on that date. Based on preliminary unaudited results, and without considering adjustments which may arise from the company’s investigation into its accounting for vendor income in prior periods, operating income for the company’s office products businesses is expected to range from $125 million to $135 million for full-year 2004.

The company does not expect to provide further information about the results of its operations until 2004 financial results have been reported.

Internal Investigation

As previously announced, OfficeMax is currently conducting an investigation under the direction of its audit committee into its accounting for vendor income in prior periods. Based on the work completed to date, the company has confirmed that certain employees fabricated supporting documents for approximately $3.3 million in claims billed to a vendor to its retail business. In addition, the company has determined that certain rebates and other payments from vendors in 2004 were not recorded in the appropriate accounting periods, so that operating income in the first fiscal quarter of 2004 was overstated and the second and third fiscal quarters of 2004 were understated. Six employees have been terminated for cause in connection with the investigation.

The company currently estimates that the amount of overstatement in operating income in the first quarter of 2004 was in the range of $5 million to $10 million, and the subsequent understatements in the second and third quarters reduce the net overstatement to a range of $4 million to $6 million through the end of the third quarter 2004. As a result, subject to completion of the investigation, acceptance of a final investigation report by the audit committee, and review by the company’s auditors, OfficeMax now expects to restate quarterly income in each of the first three


- 36 -

fiscal quarters of 2004. Accordingly, the company believes that its previously issued interim statements of operating results for those periods should no longer be relied upon.

OfficeMax believes that its financial statements as of and for the year ended December 31, 2003, were not materially impacted.

The company expects its investigation to be complete by the third full week of February, 2005.

89. The next day, on February 15, 2004, the Chicago Tribune reported:

OfficeMax Inc. announced the resignation Monday of its CEO – its third high-level departure so far in 2005 – and sacked two more employees amid an internal investigation into billing and accounting problems that include falsified documents.

The resignation of Christopher Milliken as chief executive, president and board member of OfficeMax coincided with an announcement by the Itasca-based company that it overstated earnings last year by $4 million to $6 million by failing to record certain payments to vendors.

As a result, the nation’s No. 3 office supplies retailer said it will have to redo its financial reports for most of 2004, news that caused the company’s stock to close Monday at $30.02, down 5.4 percent.

90. Moreover, the Chicago Tribune further compared OfficeMax’s accounting scandal to

that of other scandal plagued icons of corporate securities fraud and implicated defendant Milliken

for the mess. Indeed, the Chicago Tribune quotes OfficeMax’s corporate representative as

acknowledging that defendant Milliken was fired because of the accounting scandal:

OfficeMax, which has nearly 950 stores and about 40,000 workers, is the latest high-profile company to be beset by accounting problems. WorldCom Inc., Enron Corp. and Adelphia Communications Corp. all folded in recent years due to creative numbers-crunching.

HealthSouth Corp.’s former CEO is on trial for overstating profits. Krispy Kreme Doughnuts Inc. is adjusting its numbers. Fannie Mae has been on the hot seat, with the Securities and Exchange Commission forcing it to restate years of earnings.

Milliken resigned due to his “overall performance to date,” OfficeMax spokesman Bill Bonner said. It’s “impossible” to say that the accounting problems didn’t play a role, but “it was not the sole reason,” Bonner said.

“It’s inevitable that this guy would take the heat,” said Ivan Feinseth, analyst at Matrix USA LLC in New York, who still has a strong “buy” recommendation on


- 37 -

OfficeMax stock. “If you’re the CEO and there’s impropriety in your company, you’re either part of it and get booted, or you have no idea and you’re incompetent and get booted. Fish always stinks from the head.”

91. On March 1, 2005, the Company issued a press release entitled “OfficeMax

Announces Completion of Internal Investigation.” The press release stated in part:

OfficeMax Incorporated, a leader in office products and services, today announced the completion of an internal investigation into its accounting for vendor income in prior periods. As a result of the investigation, and as previously announced, the company expects to restate quarterly income for each of the first three fiscal quarters of 2004.

The investigation began in December 2004 and was conducted under the direction of the company’s audit committee. Subject to final review by the company’s auditors, OfficeMax currently estimates that it overstated operating income in first quarter 2004 by approximately $7 million and understated operating income by approximately $1 million in each of the second and third quarters of 2004. The cumulative net operating income overstatement for the first nine months of 2004 is estimated to be approximately $4 to $5 million. Accordingly, the company expects to restate quarterly income for each of the first three fiscal quarters of 2004 and believes that its previously issued interim statements of operating results for those periods should no longer be relied upon.

OfficeMax believes that its financial statements as of and for the year ended December 31, 2003, were not materially impacted.

92. On March 14, 2005, OfficeMax reported its fourth quarter of 2004 results. The retail

segment operating margin was a negative 1.5%, which was lower than prior years. OfficeMax

attributed the decline in profitability to weak sales but also to “lower vendor income.” Thus,

OfficeMax’s profitability has been adversely affected by its inability to engage in the manipulations

with vendor promotions which occurred in 2003 and interim 2004.

93. The true facts, which were known by each of the defendants but concealed from the

investing public during the Class Period, were as follows:

(a) that the Company had improperly booked promotional payments from

vendors and falsified supporting documentation for millions of dollars in claims billed to vendors

during 2003 and 2004;


- 38 -

(b) that the Company’s fourth quarter of 2004 results and those beyond would be

eroded by the halting of the Company’s abusive vendor rebate scheme;

(c) that the Company lacked the necessary internal controls to ensure all revenue

reported complied with GAAP; and

(d) that the Company had instituted an investigation of these illegal practices

weeks, if not months, before its public announcement on December 20, 2004.

OFFICEMAX’S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD

94. To artificially inflate the price of OfficeMax’s stock, defendants caused the Company

to falsely report its financial results for 2003 through the third quarter of 2004 by improperly

accounting for vendor income.

95. The Company’s interim 2004 results were included in Form 10-Qs filed with the

SEC. OfficeMax’s 2003 results were included in a Form 10-K filed with the SEC. The results were

also included in press releases disseminated to the public.

96. OfficeMax has admitted that it inappropriately recorded vendor income included in its

first through third quarters of 2004 results, and has restated those results to remove millions in

improperly reported income, such that its 2003 and interim 2004 financial statements were not a fair

presentation of OfficeMax’s results and were presented in violation of GAAP and SEC rules.

97. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a particular

time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the

SEC which are not prepared in compliance with GAAP are presumed to be misleading and

inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial

statements must also comply with GAAP, with the exception that interim financial statements need


- 39 -

not include disclosure which would be duplicative of disclosures accompanying annual financial

statements. 17 C.F.R. §210.10-01(a).

98. In OfficeMax’s 2003 Form 10-K for the year ended December 31, 2003, filed on

March 2, 2004, it represented that:

We receive rebates and allowances from our vendors under a number of different programs, including OfficeMax advertising programs and other vendor marketing programs. These rebates and allowances are accounted for in accordance with Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. Rebates and allowances received from our vendors are deferred in inventory with the cost of the associated product and are recognized as a reduction of “Materials, labor, and other operating expenses” when the product is sold, unless the rebates and allowances are linked to a specific incremental cost to sell a vendor’s product. Amounts received from vendors that are linked to specific selling and distribution expenses are recognized as a reduction of “Selling and distribution expenses” in the period the expense is incurred. See Note 5, Accounting Changes, for information related to the 2003 accounting change for vendor allowances.

Included in the vendor rebate programs referred to above are various volume purchase rebate programs. These programs generally include annual purchase rebate programs. These programs generally include annual purchase targets and may offer increasing tiered rebates based on our reaching defined purchase levels. For such tiered rebate programs, the company calculates an estimated consideration based on expected purchases during the rebate program period. We review sales projections and related purchases on a quarterly basis and adjust the estimated consideration accordingly. We record consideration received for these programs as a reduction of “Materials, labor, and other operating expenses” as the related inventory is sold.

99. Pursuant to GAAP, as set forth in Emerging Issues Task Force (“EITF”) 02-16 which

describes the accounting for consideration received from a vendor, vendor income should not be

recognized unless it is probable and can be reasonably estimated. EITF 02-16 states in part:

4. [C]ash consideration received by a customer from a vendor is presumed to be a reduction of the prices of the vendor’s products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer’s income statement. However, that presumption is overcome when the consideration is either (a) a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue (or other income, as appropriate) when recognized in the customer’s income statement, or (b) a reimbursement of costs incurred by the customer to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction of that cost when recognized in the customer’s income statement.


- 40 -

* * *

7. The Task Force reached a consensus on Issue 2 that a rebate or refund of a specified amount of cash consideration that is payable pursuant to a binding arrangement only if the customer completes a specified cumulative level of purchases or remains a customer for a specified time period should be recognized as a reduction of the cost of sales based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the customer toward earning the rebate or refund provided the amounts are probable and reasonably estimable. If the rebate or refund is not probable and reasonably estimable, it should be recognized as the milestones are achieved.

8. The Task Force observed that the ability to make a reasonable estimate of the amount of future cash rebates or refunds depends on many factors and circumstances that will vary from case to case. However, the Task Force reached a consensus that the following factors may impair a customer’s ability to determine whether the rebate or refund is probably and reasonably estimable:

a. The rebate or refund relates to purchases that will occur over a relatively long period.

b. There is an absence of historical experience with similar products or the inability to apply such experience because of changing circumstances.

c. Significant adjustments to expected cash rebates or refunds have been necessary in the past.

d. The product is susceptible to significant external factors (for example, technological obsolescence or changes in demand).

100. During the Class Period, OfficeMax improperly recognized income from vendors

even though the conditions required by GAAP, as described in EITF 02-16, did not exist.

Specifically, it recognized vendor incomes even though collection was not probable. Companies like

OfficeMax receive money from vendors to feature the supplier’s products in ads and circulars.

Frequently, an ad in the newspaper for OfficeMax for a certain brand of product was compensated in

part by the vendor of that brand. By overstating the expected amount of such compensation,

OfficeMax was able to manipulate its reported results.

101. On December 20, 2004, OfficeMax announced an investigation into certain vendor

allegations. The release stated in part:


- 41 -

[A]t the direction of the audit committee of its board of directors, the company has commenced an internal investigation into claims by a vendor to its retail business that certain employees acted inappropriately in requesting promotional payments and in falsifying supporting documentation for approximately $3.3 million in claims billed to the vendor by OfficeMax during 2003 and 2004. Because the company’s investigation has only recently begun, the company is postponing a decision as to the form and timing of share repurchases until the investigation is complete.

102. Later on January 12, 2005, OfficeMax announced that its release of its fourth quarter

of 2004 results would be delayed in order for the Company to complete its investigation of its 2003

and interim 2004 financial results. The Company subsequently restated its first through third

quarters of 2004 results to eliminate $7.4 million in income that had been improperly recognized in

the first quarter of 2004. While the Company did not restate its 2003 financial statements, it has

only represented that the vendor manipulations were not material to the results for the year ended

December 31, 2003. The 2004 10-K filed on March 16, 2005 stated:

We have amended our Quarterly Reports on Form 10-Q for the quarterly periods in the fiscal year ended December 31, 2004. The purpose of the restatement is to correct the accounting for vendor income, after we determined that rebates and other payments from vendors in 2004 were not recorded in the appropriate accounting periods. As a result, income from continuing operations was overstated by approximately $7.1 million in the first quarter of 2004 and was understated by approximately $1.1 million and $1.7 million in the second and third quarters of 2004, respectively.

103. The fact that OfficeMax has restated its financial statements for interim 2004 is an

admission that (i) the financial statements originally issued were materially false and misleading, and

(ii) the financial statements reported during the Class Period were incorrect based on information

available to defendants at the time the results were originally reported. Pursuant to GAAP, as set

forth in Accounting Principles Board Opinion (“APB”) No. 20, the type of restatement announced

by OfficeMax was to correct for material errors in its previously issued financial statements. See

APB No. 20, ¶¶7-13. As recently noted by the SEC, “GAAP only allows a restatement of prior

financial statements based upon information ‘that existed at the time the financial statements were

prepared’” and “restatements should not be used to make any adjustments to take into account


- 42 -

subsequent information that did not and could not have existed at the time the original financial

statements were prepared.”2 The APB has defined the kind of “errors” that may be corrected

through a restatement: “Errors in financial statements result from mathematical mistakes, mistakes in

the application of accounting principles, or oversight or misuse of facts that existed at the time that

the financial statements were prepared.” See APB No. 20 ¶¶7-13. The restatement at issue here

was not due to a simple mathematical error, honest misapplication of a standard or oversight as

alleged below, it was due to intentional misuse of the facts that were known at the time.

104. The SEC has reiterated its position that, in its investigations of restated financial

statements, it often finds that the persons responsible for the improper accounting acted with

scienter:

[T]he Commission often seeks to enter into evidence restated financial statements, and the documentation behind those restatements, in its securities fraud enforcement actions in order, inter alia, to prove the falsity and materiality of the original financial statements [and] to demonstrate that persons responsible for the original misstatements acted with scienter.

SEC Brief. The resignations of defendants Crumley, Peterson and Milliken after the misstatements

were discovered is strong, circumstantial evidence that OfficeMax’s senior most management (the

defendants in this action) either knew or recklessly disregarded the truth during the Class Period in

violation of the federal securities laws.

OfficeMax GAAP Violations and Restatement Were Material

105. OfficeMax’s false and misleading Class Period statements and omissions regarding

its accounting were material, particularly in light of SEC guidance on materiality. SEC Staff

2 In re Sunbeam Sec. Litig., No. 98-8258-Civ.-Middlebrooks, Brief of the United States Securities and Exchange Commission as SEC Amicus Curiae Regarding Defendants’ Motions In Limine to Exclude Evidence of the Restatement and Restatement Report (S.D. Fla., filed Jan. 31, 2002) (“SEC Brief”).


- 43 -

Accounting Bulletin (“SAB”) Topic 1M, Materiality, summarizes GAAP definitions of materiality.3

Among other items, SAB Topic 1M says: “A matter is ‘material’ if there is a substantial likelihood

that a reasonable person would consider it important.” It also stresses that materiality requires

qualitative, as well as quantitative, considerations. For example, if a known misstatement would

cause a significant market reaction, that reaction should be taken into account in determining the

materiality of the misstatement.

106. SAB Topic 1M further states:

Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –

* * *

• whether the misstatement masks a change in earnings or other trends

• whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise

* * *

• whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability.

107. SAB Topic 1M also says that an intentional misstatement of even immaterial items

may be illegal and constitute fraudulent financial reporting.

108. OfficeMax’s misstatements, by their own admissions, satisfy these criteria and, thus,

were material from both a quantitative and qualitative perspective.

109. Due to these accounting improprieties, the Company presented its financial results

and statements in a manner which violated GAAP, including the following fundamental accounting

principles:

3 SAB Topic 1M, Materiality, represents the codification of certain Staff Accounting Bulletins, including SAB No. 99, Materiality, as of May 9, 2003. SAB No. 99 was effective August 12, 1999.


- 44 -

(a) The principle that interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial statements was violated (APB

No. 28, 10);

(b) The principle that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credit

and similar decisions was violated (FASB Statement of Concepts No. 1, 34);

(c) The principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and effects of transactions, events

and circumstances that change resources and claims to those resources was violated (Financial

Accounting Standards Board (“FASB”) Statement of Concepts No. 1, 40);

(d) The principle that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it was violated. To the extent that management offers

securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB Statement of Concepts

No. 1, 50);

(e) The principle that financial reporting should provide information about an

enterprise’s financial performance during a period was violated. Investors and creditors often use

information about the past to help in assessing the prospects of an enterprise. Thus, although

investment and credit decisions reflect investors’ expectations about future enterprise performance,

those expectations are commonly based at least partly on evaluations of past enterprise performance

(FASB Statement of Concepts No. 1, 42);


- 45 -

(f) The principle that financial reporting should be reliable in that it represents

what it purports to represent was violated. That information should be reliable as well as relevant is

a notion that is central to accounting (FASB Statement of Concepts No. 2, 58-59);

(g) The principle of completeness, which means that nothing is left out of the

information that may be necessary to insure that it validly represents underlying events and

conditions was violated (FASB Statement of Concepts No. 2, 79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considered

was violated. The best way to avoid injury to investors is to try to ensure that what is reported

represents what it purports to represent (FASB Statement of Concepts No. 2, 95, 97).

110. Further, the undisclosed adverse information concealed by defendants during the

Class Period is the type of information which, because of SEC regulations, regulations of the

national stock exchanges and customary business practice, is expected by investors and securities

analysts to be disclosed and is known by corporate officials and their legal and financial advisors to

be the type of information which is expected to be and must be disclosed.

OfficeMax’s Violations of SEC Regulations Due to Its Inadequate Internal Controls

111. In addition to the foregoing improper accounting practices, the Company also

suffered from a severe breakdown of its internal accounting controls throughout the Class Period,

which tendered OfficeMax’s financial reporting inherently corrupt, subject to manipulation and

unreliable, and this problem resulted in materially false and misleading financial statements.

112. In this regard, the Individual Defendants failed to design and implement an internal

control system over the Company’s financial reporting processes and this failure allowed the

Company, in violation of GAAP, to improperly recognize vendor income.


- 46 -

113. In its Form 10-K for the year ended December 31, 2004, OfficeMax admitted that its

internal control deficiencies had contributed to the accounting problems:

Based on this assessment, management concluded that as of December 31, 2004, OfficeMax’s internal control over financial reporting was not effective due to a material weakness in internal control associated with the control environment of an entity acquired near the end of 2003. This material weakness resulted from the combination of the following internal control deficiencies that, when aggregated, resulted in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions: (i) insufficient policies and procedures to ensure that employees in the merchandizing department of the acquired entity acted in accordance with our Code of Conduct, (ii) insufficient policies and procedures regarding the follow-up on communications from vendor(s) regarding disputed claims, including the lack of adequate segregation of duties involving initiation of transactions and dispute resolution, and (iii) inadequately trained personnel within the merchandising and accounting departments. As a result of the deficiencies, the company overstated operating income in the first quarter of 2004 and understated operating income in the second and third quarters of 2004. The company has restated each of the aforementioned quarters to properly reflect the appropriate accounting in each period.

114. Section 13(b)(2) of the 1934 Act states, in pertinent part, that every reporting

company must: “(A) make and keep books, records, and accounts which, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [and] (B)

devise and maintain a system of internal controls sufficient to provide reasonable assurances that . . .

transactions are recorded as necessary . . . to permit preparation of financial statements in conformity

with [GAAP].” 15 U.S.C. §78m(b)(A). These provisions require an issuer to employ and supervise

reliable personnel, to maintain reasonable assurances that transactions are executed as authorized, to

record transactions on an issuer’s books and, at reasonable intervals, to compare accounting records

with physical assets.

115. OfficeMax has now admitted that its disclosure controls and procedures during the

Class Period were inadequate. OfficeMax admitted to these significant and material deficiencies in


- 47 -

its 2004 Form 10-K filed with the SEC on March 16, 2005, in which OfficeMax acknowledged the

necessity of making the following remediation:

• Terminated employees who knowingly violated company policies;

• Completed a review of all outstanding vendor claims and receivables;

• Converted a substantial portion of our vendor credits to standard agreements that emphasize purchase volume credits over promotion and event driven credits, thereby ensuring the use of objective criteria to determine when a credit has been earned and may be taken into income by the company;

• Expanded the practice of requesting vendor confirmation of vendor credit claims and outstanding receivables; and

• Clarified the duties and responsibilities of the company personnel who interact with vendors to reinforce accountability.

* * *

• Improve the training of personnel in the accounting and merchandising departments with respect to the company’s vendor income policies and practices;

• Enhance the skill level, staffing and reporting authority of personnel in the accounting and merchandising departments; and

• Vest a senior executive with the responsibility to review issues related to vendor credits, such as outstanding receivables and disagreements with vendors, and regularly report his or her findings directly to the audit committee.

116. This case is not a simple matter of a company having a few minor internal control

problems but rather the widespread nature of the deficiencies over an important part of OfficeMax’s

business.

117. OfficeMax’s lack of adequate internal controls rendered OfficeMax’s Class Period

financial reporting inherently unreliable and precluded the Company from preparing financial

statements that complied with GAAP. Nonetheless, throughout the Class Period, the Company

regularly issued quarterly financial statements without ever disclosing the existence of the significant


- 48 -

and material deficiencies in its internal accounting controls and falsely asserted that its financial

statements complied with GAAP.

118. During the Class Period, defendants Harad, Crumley and Milliken assured investors

they personally supervised the evaluation, design and operation of the Company’s disclosure

procedures, as required by Sarbanes-Oxley, to ensure that the Company’s internal controls would

alert them to material information that would conflict with GAAP and/or require disclosure.

Defendants repeatedly misrepresented to investors, throughout the Class Period, that there existed no

disclosure issues or control problems.

119. Given the significance of the vendor rebate program and the substantial deficiencies

the Company had during the Class Period with regard to these internal controls, defendants were

acting with extreme recklessness in assuring investors that OfficeMax’s financial statements were

prepared in compliance with GAAP. The Individual Defendants were, at best, acting in reckless

disregard for the truth by ignoring red flags concerning the improprieties alleged.

LOSS CAUSATION/ECONOMIC LOSS

120. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated OfficeMax’s stock price and

operated as a fraud or deceit on Class Period purchasers of OfficeMax stock by misrepresenting the

Company’s financial results, the success of its integration of OfficeMax into Boise and the

Company’s future business prospects. Defendants achieved this façade of success, growth and

strong future business prospects by misrepresenting earnings through vendor rebate manipulations.

121. Later, however, when the truth concerning OfficeMax’s troubled business operations,

finances and internal control deficiencies entered the market and became apparent to investors,

OfficeMax stock fell as the prior artificial inflation came out of OfficeMax’s stock price. As a result


- 49 -

of their purchases of OfficeMax stock during the Class Period, Lead Plaintiff and other members of

the Class suffered economic loss, i.e., damages under the federal securities laws.

122. By misrepresenting its earnings, the defendants presented a misleading picture of

OfficeMax’s business and prospects. Thus, instead of truthfully disclosing during the Class Period

that OfficeMax’s business was not as healthy as represented, defendants caused OfficeMax to falsely

report earnings and to understate its “materials, labor and other operating expense.”

123. Defendants’ false and misleading statements had the intended effect and caused

OfficeMax stock to trade at artificially inflated levels, reaching as high as $38.01 per share,

throughout the Class Period.

124. On October 19, 2004, at least in part because the Company’s vendors had discovered

the fraudulent scheme and were demanding reimbursements for moneys improperly withheld by

OfficeMax, defendants were forced to admit the Company could not achieve its previously forecast

2004 financial results. As a result, OfficeMax’s stock price dropped from $33.92 on October 18 to

$29.52 on October 19, 2004, with extraordinary trading volume of 9 million shares.

125. Then, on December 20, 2004, defendants were forced to publicly announce an

investigation into inappropriate vendor deductions it had recorded due to a vendor’s complaints

regarding some $3.3 million in inappropriate promotional payments in 2003 and 2004. As investors

and the market became aware that OfficeMax’s prior financials may have been falsified, the prior

artificial inflation began to come out of OfficeMax’s stock price, dropping from above $32 per share

to $30 per share. Later, on January 12, 2005, OfficeMax announced it would delay its earnings due

to the investigation, announced the resignation of its CFO (Brian Anderson) after only two months

on the job and that OfficeMax had fired four employees. As the seriousness of the accounting issues

became apparent, OfficeMax’s stock dropped to as low as $27.82 per share before closing at $28.88

per share on January 12, 2005, damaging investors.


- 50 -

126. As a direct result of defendants’ admissions and the public revelations regarding the

truth about OfficeMax’s finances and its actual business prospects going forward, OfficeMax’s stock

price plummeted 12%, falling from $32.50 on December 17, 2004 to $28.88 per share on January 12,

2004, a 17 day drop of $3.62 per share. This drop removed the inflation from OfficeMax’s stock

price, causing real economic loss to investors who had purchased the stock during the Class Period.

In sum, as the truth about defendants’ fraud and OfficeMax’s business performance was revealed,

the Company’s stock price plummeted, the artificial inflation came out of the stock and Lead

Plaintiff and other members of the Class were damaged, suffering economic losses.

127. The 12% decline in OfficeMax’s stock price at the end of the Class Period was a

direct result of the nature and extent of defendants’ fraud finally being revealed to investors and the

market. The timing and magnitude of OfficeMax’s stock price declines negate any inference that the

loss suffered by Lead Plaintiff and other Class members was caused by changed market conditions,

macroeconomic or industry factors or Company-specific facts unrelated to the defendants’ fraudulent

conduct. During the same period in which OfficeMax’s stock price fell 12% as a result of

defendants’ fraud being revealed, the Standard & Poor’s 500 Consumer Discretionary Index was up

1%. The economic loss, i.e., damages, suffered by Lead Plaintiff and other members of the Class

was a direct result of defendants’ fraudulent scheme to artificially inflate OfficeMax’s stock price

and the subsequent significant decline in the value of OfficeMax’s stock when defendants’ prior

misrepresentations and other fraudulent conduct was revealed.

FIRST CLAIM FOR RELIEF

For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

128. Lead Plaintiff incorporates ¶¶1-125 by reference.

129. During the Class Period, defendants disseminated or approved the false statements

specified above, which they knew or deliberately disregarded were misleading in that they contained


- 51 -

misrepresentations and failed to disclose material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading.

130. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) employed devices, schemes, and artifices to defraud;

(b) made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under which they were

made, not misleading; or

(c) engaged in acts, practices, and a course of business that operated as a fraud or

deceit upon Lead Plaintiff and others similarly situated in connection with their purchase or

acquisition of OfficeMax publicly traded securities during the Class Period.

131. Lead Plaintiff and the Class have suffered damages in that, in reliance on the integrity

of the market, they paid artificially inflated prices for OfficeMax publicly traded securities. Lead

Plaintiff and the Class would not have purchased or acquired OfficeMax publicly traded securities at

the prices they paid, or at all, if they had been aware that the market prices had been artificially and

falsely inflated by defendants’ misleading statements.

132. As a direct and proximate result of these defendants’ wrongful conduct, Lead Plaintiff

and the other members of the Class suffered damages in connection with their purchase or

acquisition of OfficeMax publicly traded securities during the Class Period.

SECOND CLAIM FOR RELIEF

For Violation of §20(a) of the 1934 Act Against All Defendants

133. Lead Plaintiff incorporates ¶¶1-130 by reference.

134. The Individual Defendants acted as controlling persons of OfficeMax within the

meaning of §20(a) of the 1934 Act. By reason of their positions as officers and/or directors of

OfficeMax, and their ownership of OfficeMax stock, the Individual Defendants had the power and


- 52 -

authority to cause OfficeMax to engage in the wrongful conduct complained of herein. OfficeMax

controlled each of the Individual Defendants and all of its employees. By reason of such conduct,

the Individual Defendants and OfficeMax are liable pursuant to §20(a) of the 1934 Act.

CLASS ACTION ALLEGATIONS

135. Lead Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired OfficeMax

publicly traded securities (the “Class”) on the open market during the Class Period. Excluded from

the Class are defendants.

136. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial benefits to

the parties and the Court. OfficeMax had more than 94 million shares of stock outstanding, owned

by hundreds if not thousands of persons.

137. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class which

predominate over questions which may affect individual Class members include:

(a) whether the 1934 Act was violated by defendants;

(b) whether defendants omitted and/or misrepresented material facts;

(c) whether defendants’ statements omitted material facts necessary to make the

statements made, in light of the circumstances under which they were made, not misleading;

(d) whether defendants knew or deliberately disregarded that their statements

were false and misleading;

(e) whether the prices of OfficeMax’s publicly traded securities were artificially

inflated; and


- 53 -

(f) the extent of damage sustained by Class members and the appropriate measure

of damages.

138. Lead Plaintiff’s claims are typical of those of the Class because Lead Plaintiff and the

Class sustained damages from defendants’ wrongful conduct.

139. Lead Plaintiff will adequately protect the interests of the Class and has retained

counsel who are experienced in class action securities litigation. Lead Plaintiff has no interests

which conflict with those of the Class.

140. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Federal Rule of Civil

Procedure 23;

B. Awarding Lead Plaintiff and the members of the Class damages, including interest;

C. Awarding Lead Plaintiff reasonable costs, including attorneys’ fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and

proper.

JURY DEMAND

Lead Plaintiff demands a trial by jury.

DATED: November 9, 2006 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP MARK SOLOMON WILLIAM J. DOYLE II MATTHEW P. SIBEN

s/WILLIAM J. DOYLE II WILLIAM J. DOYLE II


- 54 -

655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiffs

MILLER FAUCHER AND CAFFERTY LLP MARVIN A. MILLER JENNIFER W. SPRENGEL NYRAN ROSE PEARSON 30 North LaSalle Street, Suite 3200 Chicago, IL 60602 Telephone: 312/782-4880 312/782-4485 (fax)

Liaison Counsel S:\CasesSD\OfficeMax 05\Cpt OfficeMax_Amended Consol.doc


CERTIFICATE OF SERVICE

I hereby certify that on November 9, 2006, I electronically filed the foregoing with the Clerk

of the Court using the CM/ECF system which will send notification of such filing to the e-mail

addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have

mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF

participants indicated on the attached Manual Notice List.

s/ WILLIAM J. DOYLE II WILLIAM J. DOYLE II

LERACH COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) E-mail:[email protected]


Mailing Information for a Case 1:05-cv-00236

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

Laurel G. Bellows [email protected]

John Lawrence Conlon [email protected]

William J. Doyle [email protected] [email protected];[email protected]

Erik F. Dyhrkopp [email protected]

Christopher L. Gallinari [email protected] [email protected];[email protected]

Carol V Gilden [email protected] [email protected]

Phillip M. Goldberg [email protected]

Daniel J. Hayes [email protected] [email protected]

Thomas Paul Krebs [email protected]

Marvin Alan Miller [email protected] [email protected];[email protected]

Udoka Nwanna [email protected] [email protected]

Maura Forde O'Meara [email protected] [email protected]

Nyran Rose Pearson [email protected] [email protected];[email protected]

John William Rotunno [email protected]

Samuel H Rudman

Page 1 of 2CM/ECF LIVE, Ver 2.5 - U.S. District Court, Northern Illinois

11/9/2006https://ecf.ilnd.uscourts.gov/cgi-bin/MailList.pl?107350573029731-L_701_0-1


[email protected]

Matthew P. Siben [email protected]

Jennifer Winter Sprengel [email protected]

Patrick Thomas Stanton [email protected]

Lisa L. Tharpe [email protected] [email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

Mitchell G Blair Calfee, Halter & Griswold LLP 1400 McDonald Investment Center 800 Superior Avenue Cleveland, OH 44114-2688 William S Lerach Lerach Coughlin Stoia Geller Rudman & Robbins 655 West Broadway Suite 1900 San Diego, CA 92101 Mark Solomon Lerach Coughlin Stoia Geller Rudman & Robbins 655 West Broadway Suite 1900 San Diego, CA 92101

Page 2 of 2CM/ECF LIVE, Ver 2.5 - U.S. District Court, Northern Illinois

11/9/2006https://ecf.ilnd.uscourts.gov/cgi-bin/MailList.pl?107350573029731-L_701_0-1


UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

DAVID ROTH, on behalf of himself and all )

Others similarly situated, )

Plaintiff, )

V .

OFFICEMAX, INC., et al ., Defendant .

No . 05-C-0236 ( Consolidated)

CLASS ACTION

Judge Joan B. GottschallMagistrate Judge Denlow

DECLARATION OF SHELDON D. ZIMMERMAN

I, Sheldon D. Zimmerman, declare as follows :

1 .

I am over 18 years of age and am competent to make this Declaration . I give thisDeclaration in support of the Complaint in the above-captioned action to which thisDeclaration is attached (hereinafter the "Complaint") .

2 .

I am a shareholder in the Atlanta, Georgia accounting and auditing firm of Tauber& Balser, P .C ., which was founded in 1968 . Tauber & Balser, P .C. is located in Atlanta,Georgia, a full-service C.P.A. and consulting firm with a diverse group of clientele .Tauber & Balser, P .C . is a registered firm with the Public Company AccountingOversight Board ("PCAOB") . I have been a Certified Public Accountant licensed in theState of Georgia since 1975 . Attached hereto as Exhibit 1 is my curriculum vitae .

3 .

Prior to joining Tauber & Balser, P.C., I was a chief financial officer of aspecialty retailer that operated over 800 stores throughout the United States . Some of myprimary responsibilities were to manage the vendor rebate and other merchandisingprograms . As part of that responsibility, I was involved in the negotiation of the variousarrangements with the more significant suppliers, billing and collecting of the monies thatwere due the company and determining the amount and timing of recognition in thefinancial statements of the company.

4

My career in public accounting began with Touche Ross & Co . in Atlanta,Georgia in 1972 . During my career at Touche Ross & Co. I served as an audit partnerspecializing in serving retail companies . I was a partner in the National Retail Group atTouche Ross & Co ., and taught numerous retail seminars on internal controls . I laterjoined Deloitte Haskins & Sells and was an audit partner serving primarily retailcompanies and was a member of their National Retail Group . After the merger o fTouche Ross & Co . and Deloitte Haskins & Sells, I was a partner in the combined firm ofDeloitte & Touche concentrating on retail accounts and a member of their National RetailGroup .

5 .

I have been retained by Lerach Coughlin Stoia Geller Rudman & Robbins LLP toopine as to whether or not the senior management of OfficeMax, Inc . ("OfficeMax")should have been aware of the internal control weaknesses which did not detect theoverstatement of income recorded relating to vendor rebates and allowances .

6 .

Through my education, training and experience as a Certified Public Accountant,I am familiar with generally accepted accounting principles ("GAAP") utilized byCertified Public Accountants in the United States under the Code of Professional Conductof the American Institute of Certified Public Accountants ("AICPA"), generally acceptedauditing standards ("GAAS") and other applicable ethical and professional standards andregulations . I am particularly familiar with the accounting principles relating to theaccounting for vendor rebates and allowances by retail companies and particularlyfamiliar with how retailers account for vendor rebates and allowances .

7 .

My knowledge of the facts of this case are based primarily upon my review of theConsolidated Complaint for Violation of the Federal Securities Law dated August 1,2005, Memorandum Opinion and Order, dated September 12, 2006, a draft of the FirstAmended Consolidated Complaint for Violation of the Federal Securities Laws andvarious financial statements included in OfficeMax's filings with the Securities andExchange Commission ("SEC") during the applicable time period .

8 .

It is clear that senior management of OfficeMax was aware of the accountingissues surrounding vendor allowances as the company adopted the provisions ofEmerging Issues Task Force ("EITF") Issue No . 02-16 ("Accounting by a Customer[Including a Reseller] for Certain Consideration Received from a Vendor") effective

2

January 1, 2003 . The adoption of the provisions of EITF Issue No . 02-16 resulted in aone time, noncash, after tax charge of $4 .7 million in the financial statements .

9 .

The knowledge of senior management is indicated via disclosures in the financialstatements and the Company's correspondence with the Financial Accounting StandardsBoard ("FASB") and EITF. The OfficeMax Senior Vice President, Controller, Phillip P .DePaul wrote a letter dated April 23, 2003 to the Chairman of the EITF relating to thetransition provisions of the EITF 02-16 and the impact that the proposed transitionaccounting would have on the company and other retailers . The letter indicated "ourcompany and our other direct competitor (whose year-end was February 1, 2003) mustadopt Issue 02-16 prospectively, based on our understanding of he March 20, 2003decision" .

10 .

The EITF is an organization formed by the FASB to provide assistance withtimely financial reporting . The EITF holds public meetings in order to identify andresolve accounting issues occurring in the financial world . This group consists mainly ofaccountants from large public firms, but it also included the chief accountant of the SECas observer and participant . The main purpose of the task force is to identify emergingissues and resolve them with a uniform set of practices before divergent methods ariseand become widespread . The fact that the senior management of OfficeMax wa scommunicating with the EITF about this issue demonstrates the importance thatOfficeMax placed on the accounting for vendor rebates .

11 .

Indeed vendor rebates were significant to OfficeMax's earnings . While the salesvolume of the OfficeMax retail locations exceeded $4 .4 billion., the operating profit wasonly $22 .7 million or .5% (one-half of one percent) of revenue, as reported in Form 10-Kfor the year ending December 31, 2004 .

12 .

The vendor rebate and merchandising programs can have a significant effect onthe operating profit of a retail company. The amount of the restatement that OfficeMaxmade during 2004 resulted in an overstatement of operating income of approximately$4 .3 million, or 18 .9% of the operating income the company reported . While the $4 .3million only represents the portion of the vendor rebates relating to the restatement, itsrelationship to the operating income reported indicates that the total amount associatedwith all the vendor rebate and merchandising programs would have been substantiallygreater than the reported operating income of the company and therefore material to thecompany's operations .

3

13 .

Due to the significance of these types of programs to OfficeMax's operatingincome it was imperative for the company to have developed internal control systemsand other reporting mechanisms to monitor and track the status of the various programsin order to comply with the relevant accounting standards and requirements. I wouldhave expected no less than a fully functioning system with proper reporting under GAAPof the financial ramifications of the vendor rebate and merchandizing programs . BecauseOfficeMax has thousands of different inventory products that must be tracked,sophisticated computer programs and systems are generally utilized in order to properlyaccount for these programs. In fact the OfficeMax chief executive officer and chieffinancial officer signed the CEO and CFO certifications pursuant to Section 302 of theSarbanes Oxley Act of 2002 indicating that they were responsible for establishing andmaintaining disclosure controls and procedures and internal control over financialreporting for the company, and such controls and procedures were designed under theirsupervision to ensure that material information relating to the company would be madeknown to them by others within the company, particularly during the period in which thereport they are certifying is prepared .

14 .

The PCAOB and SEC have defined internal control over financial reporting asdescribed in AU 320, "An Audit of Internal Control Over Financial Reporting Performedin Conjunction with an Audit of Financial Statements ." As set forth in AU 320 .07internal control over financial reporting is defined as "a process designed by, or under thesupervision of, the company's principal executive and principal financial officers, orpersons performing similar functions, and effected by the company's board of directors,management, and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles and includes thosepolicies and procedures that :

(1) Pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of theassets of the company ;

(2) Provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and

(3) Provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use of disposition of the company's assetsthat could have a material effect on the financial statements ."

4

This same definition is utilized in the CEO and CFO certifications that were contained inthe OfficeMax public filings .

15 .

It is very common for senior financial management and other members of thesenior management team to be knowledgeable of, and involved in negotiating andmonitoring the vendor rebate and merchandising programs due to the magnitude of thedollars involved and its potential impact on the earnings of the company .

I declare under penalty of perjury under the laws of the United States that theforegoing is true and correct . Executed this 91h day of November, 2006, at Atlanta,Georgia .

SHELDON D. ZIMMERMAN, CPA

5

CURRICULUM VITAE

SHELDON D. ZIMMERMAN

Certified Public Accountant

EDUCATION

Mr. Zimmerman obtained his BBA Accounting at the University of South Florida in 1972

and is a Certified Public Accountant licensed in Georgia.

BACKGROUND Mr. Zimmerman has approximately 30 years experience in auditing, accounting, and

corporate restructuring/turnaround, due diligence, forensic accounting and litigation

support. In addition to his public accounting experience as a partner in one of the Big 4

accounting firms, where he served as the lead engagement partner on primarily retail

engagements, he also served as Executive Vice President & Chief Financial Officer of a

national retail chain that operated over 800 stores in 40 states with more than 7,000

employees with annual revenues in excess of $500 million. He is a Shareholder in

Tauber & Balser’s Audit & Accounting Services practice. Representative assignments on

which Mr. Zimmerman has worked include:

Court Appointed Estate Representative for the liquidation of Wolf Camera, Inc.

Workout and Lender Negotiations

Corporate Turnaround/Restructuring

Accounting Irregularities

Accounting for Vendor Rebates and Allowances

Financial and Treasury Management Operations

Structured Finance Considerations

Negotiated and integrated more than 25 business acquisitions

Responsible for the oversight and review of financial reporting requirements to the

Securities and Exchange Commission for numerous publicly held clients, including a

number of IPO’s

Financial due diligence for numerous business acquisitions

Taught various seminars focusing on accounting and internal control topics relating

to retail companies

Sheldon D. Zimmerman


Page 2

PROFESSIONAL

EXPERIENCE Tauber & Balser, P.C., Atlanta, Georgia

2002 – Present

Shareholder – Accounting & Auditing Services Team

Wolf Camera, Inc.

1990 – 2001

Executive Vice President & Chief Financial Officer, Member of Board of Directors

Deloitte & Touche

1987 - 1990

Audit Partner at Deloitte Haskins & Sells prior to merger with Touche Ross

Member of National Retail Group

The Banker’s Note

1986

Chief Financial Officer

Touche Ross & Co.

1972 - 1986

Audit Partner

Member of National Retail Group

EXPERT

TESTIMONY

EXPERIENCE

(prior 4 years only)

Williams Die & Mold, Inc.

United States Bankruptcy Court Northern District of Georgia

Trial testimony – June 2004

Michael Vogt, Paul Beaumont and Fred Breu on their own behalf and as representative

Plaintiffs on behalf of all similarly situated employees of Outboard Marine Corporation v.

Greenmarine Holdings, LLC; Quantum Industrial Partners, LDC; and Quantum Industrial

Holdings, Ltd.

United States District Court Southern District of New York

Deposition testimony – March 2005

Herbert C. Broadfoot II, in his capacity as Chapter 7 Trustee for NWS Holdings, LLC, et.

al. v. Howard and David Belford, et. al.

United States Bankruptcy Court Northern District of Georgia

Deposition testimony – August 2005

Sheldon D. Zimmerman


Page 3

PUBLICATIONS“All in the Details” - March 2004, SmartBusiness Atlanta Magazine

Article related to financial due diligence in connection with acquisitions

“Cash is King” – March 2005, SmartBusiness Atlanta Magazine

Article on how cash flow forecasts can benefit business owners

PROFESSIONAL

AFFILIATIONSThe American Institute of Certified Public Accountants

The Georgia Society of Certified Public Accountants

Association of Insolvency & Restructuring Advisors, Associate Member

Turnaround Management Association

Date post:	17-Aug-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF...

Documents