These items are described in more detail in this Management's Discussion and Analysis.

        At the end of the 2009 fiscal year, we had $486.6 million in cash and cash equivalents and $513.0 million in available (unused) borrowing capacity under our revolving credit facilities. The combination of cash and cash equivalents and available borrowing capacity yields approximately $1 billion of overall liquidity. The Company has strengthened its balance sheet, cash position and liquidity greatly during 2009. At year-end, we had outstanding recourse debt of $297.1 million (both current and long-term) and non-recourse obligations of $1,470.0 million related to the timber securitization notes. There is no recourse against OfficeMax on the securitized timber notes payable as recourse is limited to proceeds from the applicable pledged installment notes receivable and underlying guarantees. There were no borrowings on our revolving credit facilities in 2009.

        The funded status of our pension plans also improved in 2009. Our pension obligations exceeded the assets held in trust to fund them by $210.2 million at year-end 2009, a decrease of $224.8 million compared to the $435.0 million under funding that existed at year-end 2008. This reduction was due to strong returns on plan investments in the year coupled with our voluntary excess contribution of 8.3 million shares of OfficeMax common stock to the plans in the fourth quarter of 2009.

        For the full year 2009, we generated $358.9 million of cash from operations reflecting our focus on cash generation. Working capital improved $219.0 million as a result of significant management oversight, which yielded reduced days outstanding for accounts receivable and a decrease in inventory per location along with an improved accounts payable leverage ratio. We also collected $71.0 million of tax refunds, net of payments, and borrowed $45.7 million on accumulated earnings held in company-owned life insurance policies. In addition, we received $41.1 million from investment activities, including $25.1 million from a prior tax escrow settlement and $15.0 million in additional company-owned life insurance withdrawals.

Outlook

        Given the continued weak economic environment, we are cautious in our expectations for 2010. We expect that U.S. unemployment trends will continue to unfavorably impact us in the near-term, with improvement occurring in the later part of the year. We anticipate that for the full year 2010, total sales, including the impact of foreign currency translation, and adjusted operating income margin will be slightly higher than they were in 2009. We expect positive cash flow from operations, although lower than 2009, due to a larger-than-expected incentive compensation payout during the first quarter and higher working capital needs due to the increased sales. We also believe that our liquidity position will remain strong and our need to access our revolving line of credit will be limited to seasonal periods.

2009 Compared with 2008

        Sales for 2009 decreased 12.8% to $7,212.1 million from $8,267.0 million for 2008. The year-over-year sales decreases occurred in both our Contract and Retail segments and resulted primarily from the weaker economic environment that existed throughout all of 2009. The change in sales resulting from changes in foreign exchange rates for the full year of 2009 was a decrease of 1.7%. However, in the fourth quarter, due to the weakening U.S. dollar, the change in total sales resulting from changes in foreign exchange rates was an increase of 2.8%.

        Gross profit margin decreased by 0.8% of sales to 24.1% of sales in 2009 compared to 24.9% of sales in 2008. The gross profit margins declined in both our Contract and Retail segments. The Retail segment experienced strong cost support from our vendors and reduced inventory shrinkage, the benefits of which were entirely offset by deleveraging of fixed occupancy costs and a mix shift to less profitable technology products. The Contract segment also experienced strong cost support

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from our vendors but earned overall lower gross margins as a result of softer market conditions as well as a shift in its customers' purchasing trends to a higher percentage of lower-margin consumable items, lower sales of off-contract items, and higher customer acquisition and retention costs.

        Operating and selling expenses increased by 0.3% of sales to 19.1% of sales in 2009 from 18.8% of sales a year earlier. The increased expense was primarily the result of deleveraging of fixed costs due to lower sales and increased incentive compensation expense, partially offset by reduced payroll and other targeted cost reductions. Incentive compensation expense included in operating and selling expense was $23.6 million for 2009 compared to $4.0 million for 2008.

        General and administrative expenses increased 0.4% of sales to 4.1% of sales in 2009 compared to 3.7% of sales in 2008. The increase primarily reflected higher pension and incentive compensation expenses. General and administrative expense included $40.8 million of these costs in 2009 as compared to $5.1 million in 2008. Excluding these costs, general and administrative expense was consistent between 2009 and 2008. The effect of deleveraging of expense resulting from lower sales was offset by lower headcount resulting from a significant reduction in force at the corporate headquarters in late 2008.

        As noted above, our results for 2009 include several significant items, as follows:

•

We recognized a non-cash impairment charge of $17.6 million associated with leasehold improvements and other assets at certain of our Retail stores in the U.S. and Mexico. After tax and noncontrolling interest, these charges reduced net income (loss) available to OfficeMax common shareholders by $10.0 million or $0.12 per diluted share.



•

We recorded $31.2 million of charges in our Retail segment related to store closures. We also recorded $18.1 million of severance and other charges, principally related to reorganizations of our U.S. and Canadian Contract sales forces, customer fulfillment centers and customer service centers, as well as a streamlining of our Retail store staffing. These charges are recorded by segment in the following manner: Contract $15.3 million, Retail $2.1 million and Corporate and Other $0.7 million. After tax and noncontrolling interest, the cumulative effect of these items was a reduction of net income (loss) available to OfficeMax common shareholders by $30.0 million, or $0.39 per diluted share.



•

"Other income (expense), net" in the Consolidated Statement of Operations includes income of $2.6 million from a distribution on the Boise Investment related to our tax liability on allocated earnings. This distribution was much larger in the prior year due to a significant tax gain realized by Boise Cascade, L.L.C. on the sales of its paper and packaging and newsprint businesses. After tax, this item increased net income (loss) available to OfficeMax common shareholders $1.6 million, or $0.02 per diluted share.



•

We recorded $4.4 million of interest income related to a tax escrow balance established in a prior period in connection with our legacy Voyager Panel business which we sold in 2004. After tax, this item increased net income (loss) available to OfficeMax common shareholders by $2.7 million, or $0.04 per diluted share.



•

In the fourth quarter, we were notified that the U.S. Internal Revenue Service conceded an issue under appeals regarding the deductibility of interest on certain of our industrial revenue bonds. Upon the resolution of this matter, we released $14.9 million in tax uncertainty reserves which increased net income (loss) available to OfficeMax common shareholders by $0.18 per diluted share.

        Interest expense was $76.4 million in 2009 compared to $113.6 million for 2008. The decline in interest expense was principally due to the Lehman bankruptcy on September 15, 2008, and the

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resulting payment defaults on the timber note receivable guaranteed by Lehman and the related securitization notes payable. On October 29, 2008, Lehman failed to pay the semi-annual interest payment due on the timber note receivable that it guarantees. Because we are only obligated to make interest payments on the securitization notes supported by the timber note receivable and Lehman guaranty to the extent that we receive the interest payments due on the timber note receivable, we stopped accruing (and making) interest payments due on those securitization notes after the Lehman default. As a result in 2008 we recorded $33.7 million in interest expense on the Lehman securitization notes payable. In 2009, we did not accrue any interest on this non-recourse obligation.

        Interest income was $47.3 million and $57.6 million for the years ended 2009 and 2008, respectively. This decline reflects the $13.1 million reduction of interest income recorded on the timber note receivable guaranteed by Lehman in 2009 as compared to 2008, partially offset by $4.4 million of interest income related to a tax escrow balance established in a prior period in connection with the sale of our legacy Voyageur Panel business. As a result of Lehman's September 2008 bankruptcy filing, we recorded no interest income on the Lehman portion of the timber notes receivable in 2009. In 2008, we accrued and collected approximately $13.1 million in interest income on the Lehman timber note receivable for the period from January 1 through April 29, 2008. In 2009, approximately $40.8 million of interest income and $39.8 million of interest expense recorded relating to the Wachovia portion of the timber notes receivable and associated securitized obligation. See the "Timber Notes/Non-Recourse Debt" section that follows in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

        For 2009, we recognized an income tax benefit of $28.8 million on a pre-tax loss of $30.3 million (effective tax benefit rate of 94.8%) compared to an income tax benefit of $306.5 million on a pre-tax loss of $1,972.4 million (effective tax benefit rate of 15.5%) for 2008. Income taxes and the related effective rates for both years were affected by several significant items that caused our actual tax benefits to vary from the amount based on our reported pre-tax accounting income and the statutory U.S. federal tax rate of 35%. In 2009, the recorded tax benefit included $14.9 million from the release of a tax reserve upon the resolution of our claim that interest on certain of our industrial revenue bonds was fully tax deductible. In 2008, the goodwill and other assets impairment charge of $1.4 billion unfavorably impacted the tax benefit rate as the book basis of these assets was higher than the amortizable tax basis which resulted in a 4.6% tax benefit on the charge. In addition, in 2008 the Company also recognized a tax benefit resulting from a favorable U.S. Internal Revenue Service settlement. The effective tax rate in both years was also impacted by the effects of state income taxes, income items not subject to tax and non-deductible expenses and the mix of domestic and foreign sources of income.

        We reported a net loss attributable to OfficeMax and noncontrolling interest of $1.6 million for 2009. After adjusting for joint venture earnings attributable to noncontrolling interest and preferred dividends, we reported a net loss available to OfficeMax common shareholders of $2.2 million or $(0.03) per diluted share for 2009. Excluding the effects of the significant items discussed above, adjusted net income available to OfficeMax common shareholders was $18.6 million or $0.24 per diluted share for 2009 compared to $100.1 million or $1.30 per diluted share for 2008.

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2008 Compared with 2007

        Sales for 2008 decreased 9.0% to $8,267.0 million from $9,082.0 million for 2007. The year-over-year sales decrease was largely the result of the weaker global economic environment and our more disciplined analysis-driven approach to sales generation and retention. The year-over-year sales decrease reflects a 10.7% decrease in comparable sales, and both our Contract and Retail segments experienced double-digit sales declines in 2008 as compared to 2007. In addition, the rate of sales decline (on a percentage basis) increased in each quarter of 2008 compared to the comparable quarters of 2007. Foreign exchange rate changes had only a minor effect on sales for full year 2008. However, they negatively impacted sales comparisons late in the year. For the year, sales increased $9.4 million due to the impact of foreign exchange rates, however, fourth quarter 2008 sales were reduced by $81.1 million due to the effect of foreign exchange rates.

        Gross profit margin decreased by 0.5% of sales to 24.9% of sales in 2008 compared to 25.4% of sales in 2007. The gross profit margins declined in our Retail segment compared to the previous year but improved for our Contract segment. The Retail margin decline was primarily due to the deleveraging of fixed costs, resulting from the lower sales, as well as the impact of opening new stores which require several years to ramp up to mature sales volumes and higher inventory shrinkage results. The decline was partially offset by a sales-mix shift towards higher-margin office supplies category sales. The Contract segment margin improvement was due primarily to a higher margin customer mix resulting from our more disciplined approach to contractual sales generation and retention.

        Operating and selling expenses increased by 0.8% of sales to 18.8% of sales in 2008 from 18.0% of sales a year earlier. The increases in operating and selling expenses as a percent of sales were primarily the result of deleveraging fixed costs due to lower sales, which were partially offset by reduced incentive compensation expense and targeted cost reductions, including reduced selling expenses in the Contract segment and reduced store payroll in the Retail segment resulting from the management reorganizations completed in the first and second quarters of 2008.

        General and administrative expenses were 3.7% of sales for both 2008 and 2007. The effect of deleveraging of expense resulting from lower sales was offset primarily by a reduction in incentive compensation.

        As noted above, our results for 2008 included several significant items, as follows:

•

We recorded pre-tax impairment charges of $1,364.4 million related to goodwill, trade names and other long-lived assets. These non-cash charges consisted of $1,201.5 million of goodwill impairment in both the Contract ($815.5 million) and Retail ($386.0 million) segments; $107.1 million of impairment of trade names in our Retail segment and $55.8 million of impairment related to store fixed assets in our Retail segment. These non-cash charges resulted in a reduction in net income available to OfficeMax common shareholders of $1,294.7 million, or $17.05 per diluted share For information regarding these impairment charges see "Goodwill and Other Asset Impairments" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.



•

We recognized a pre-tax impairment charge of $735.8 million on the timber installment note guaranteed by Lehman as a result of the Lehman bankruptcy. This impairment charge was recorded in the Corporate and Other segment. We also stopped accruing the interest income on the timber installment note guaranteed by Lehman as of the date of the last interest payment (April 29, 2008), while continuing to accrue interest expense on the related securitization notes payable until the date of default (October 29, 2008). The interest expense for this time period (from April 29 to October 29) was $20.4 million. The cumulative effect of

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the impairment charge and the additional interest expense resulted in a reduction of net income available to OfficeMax common shareholders of $462.0 million, or $6.08 per diluted share. For information regarding this impairment charge see our discussion of the timber notes under the heading "Timber Notes/Non-Recourse Debt" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

•

We recorded a $23.9 million pre-tax severance charge related to various sales and field reorganizations in our Retail and Contract segments as well as a significant reduction in force at the corporate headquarters. We also recorded $4.7 million of pre-tax charges related to store closings and lease terminations, and pre-tax charges of $2.4 million related to the consolidation of the Contract segment's manufacturing facilities in New Zealand. Offsetting these charges was a $3.1 million pre-tax gain primarily related to the release of a warranty escrow established at the time of sale of our legacy Voyageur Panel business in 2004.



•

We recorded $20.5 million of pre-tax income related to a distribution received on the Boise Investment. We receive distributions on the Boise Investment for the income tax liability associated with allocated earnings. The distribution received was primarily related to the income tax liability associated with the allocated gain on the sale by Boise Cascade, L.L.C. of a majority interest in its paper and packaging and newsprint businesses during the first quarter of 2008. This income was classified as non-operating and resulted in an increase in after-tax income of $12.5 million, or $0.16 per diluted share.

        Interest expense was $113.6 million in 2008 compared to $121.3 million for 2007. The year-over-year decrease in interest expense was a result of lower average borrowings and the curtailment of interest accruals on certain of the timber securitization notes payable after the default on the timber installment note guaranteed by Lehman on October 29, 2008 due to the Lehman bankruptcy. Interest expense includes interest related to the affected timber securitization notes payable of approximately $73.5 million and $80.5 million for 2008 and 2007, respectively. Per the timber note agreements, the interest expense related to the timber securitization notes payable is to be offset by interest income earned on the timber installment notes receivable. However, at the time of the Lehman bankruptcy in September 2008, the Company reversed interest income accrued on the installment note guaranteed by Lehman from the date of the last payment (April 29, 2008), and has not recognized any additional interest income on this installment note. We did, however, continue to record the ongoing interest expense on the related timber securitization notes payable until the default date (October 29, 2008), resulting in $20.4 million of additional interest expense that will only be paid if the corresponding interest income is collected. Total timber note related interest income was $53.9 million in 2008. In 2007, the timber note related interest expense was offset by timber note related interest income of $82.5 million.

        Excluding the interest income earned on the timber notes receivable, interest income was $3.7 million and $5.4 million for the years ended December 27, 2008 and December 29, 2007, respectively.

        For 2008, we recognized an income tax benefit of $306.5 million on our $1,972.4 million pre-tax loss (effective tax benefit rate of 15.5%) compared to income tax expense of $125.3 million on $337.5 million in pretax income (effective tax rate of 37.1%) for 2007. In the first quarter of 2008, the Company effectively settled an audit with the Federal government for all tax years through 2005. As a result of the settlement and other related filings, the Company recognized a $6.8 million benefit in its tax provision for 2008. The goodwill, trade names and other long-lived assets impairment charge of $1.4 billion unfavorably impacted the tax benefit rate as the book basis of these assets was higher than the amortizable tax basis and resulted in a tax benefit of $63.2 million or approximately 4.6% of the tax charge. The Company also reviewed the realizability of state net operating loss carryforwards and foreign tax credits in 2008, resulting in the recognition of approximately

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$1.3 million of tax benefit, as a result of a reduction in the valuation allowance. Income taxes for all periods were affected by the impact of state income taxes, non-deductible expenses and the mix of domestic and foreign sources of income.

        As a result of the foregoing factors, we reported a net loss attributable to OfficeMax and noncontrolling interest of $1,665.9 million for 2008. After adjusting for joint venture earnings attributable to noncontrolling interest and preferred dividends, we reported a loss available to OfficeMax common shareholders of $1,661.6 or $(21.90) per diluted share, for 2008. Excluding the effects of the significant items discussed above, adjusted net income available to OfficeMax common shareholders was $100.1 million or $1.30 per diluted share for 2008.

Segment Discussion

        We report our results using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other.

        OfficeMax, Contract distributes a broad line of items for the office, including office supplies and paper, technology products and solutions, office furniture, and print and document services. OfficeMax, Contract sells directly to large corporate and government offices, as well as to small and medium-sized offices in the United States, Canada, Australia and New Zealand. This segment markets and sells through field salespeople, outbound telesales, catalogs, the Internet and in some markets, including Canada, Australia and New Zealand, through office products stores.

        OfficeMax, Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions and office furniture. In addition, this segment contracts with large national retail chains to supply office and school supplies to be sold in their stores. Our retail office supply stores feature OfficeMax ImPress, an in-store module devoted to print-for-pay and related services. Our Retail segment has operations in the United States, Puerto Rico and the U.S. Virgin Islands. Our Retail segment also operates office products stores in Mexico through a 51%-owned joint venture.

        Corporate and Other includes support staff services and certain other legacy expenses as well as the related assets and liabilities. The income and expense related to certain assets and liabilities that are reported in the Corporate and Other segment have been allocated to the Contract and Retail segments.

        Management evaluates the segments' performances based on operating income (loss) after eliminating the effect of certain operating matters such as severances, facility closures, and asset impairments, that are not indicative of our core operations ("segment income (loss)".)

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OfficeMax, Contract

($ in millions)

2009 Compared with 2008

        Contract segment sales for 2009 decreased 15.2% to $3,656.7 million from $4,310.0 million for 2008, reflecting a U.S. sales decline of 14.9% and an international sales decline of 15.8% in U.S. dollars, or 8.2% in local currencies. The change in total Contract sales resulting from changes in foreign exchange rates for the full year of 2009 was a decrease of 2.2%. However, in the fourth quarter, due to the weakening U.S. dollar, the change in total Contract sales resulting from changes in foreign exchange rates was an increase of 5.6%. The U.S. Contract sales decline primarily reflected weaker sales from existing corporate accounts as our customers reduced overhead spending and headcount in response to the weak overall U.S. economy. This decline continued to be meaningful, increasing (as measured by the rate of decline compared to the prior year) in the first two quarters, while decreasing modestly in the third and fourth quarters. For the year, the reduction in sales volume from lost customers was greater than the incremental sales from newly acquired customers. However, in the fourth quarter, the trend reversed and we gained net sales from newly acquired customers.

        Contract segment gross profit margin declined 1.2% of sales to 20.8% of sales for 2009 compared to 22.0% of sales in the previous year. The decrease in gross profit margin was primarily due to softer market conditions, a shift in the purchasing trends of our customers to a higher percentage of on-contract items, including lower-margin commodities and consumable items like paper, and higher customer acquisition and retention expenses as a percentage of sales. Our Contract performance in the fourth quarter improved from the previous quarters in 2009 due to our disciplined approach to profitable customer acquisition and retention, as well as other initiatives to grow the business and improve margins by providing better solutions for our customers. Targeted cost controls in our delivery fleet helped to mitigate the impact of deleveraging.

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        Contract segment operating, selling and general and administrative expenses increased 1.1% of sales to 19.2% of sales for 2009 from 18.1% of sales a year earlier. The increase was primarily due to the deleveraging of fixed expenses from lower sales and increased incentive compensation expenses, which were $22.1 million higher in 2009 compared to 2008, partially offset by cost management initiatives, including lower payroll costs as a result of the reorganization of our U.S. and Canadian sales forces, fewer personnel in our customer fulfillment and customer service centers and the reduction in force at our corporate headquarters in the fourth quarter of 2008.

        Contract segment income was $58.0 million, or 1.6% of sales, for 2009, compared to $167.3 million for 2008. The decline in segment income was primarily attributable to the reduction in sales and gross profit.

        Contract other operating expenses for 2009 included $15.3 million of severance and other charges, principally related to reorganizations of our U.S. and Canadian Contract sales forces, customer fulfillment centers and customer service centers.

        The Contract segment's operating income (loss) improved $700.2 million to operating income of $42.7 million for 2009, compared to an operating loss of $657.5 million for 2008.

2008 Compared With 2007

        Contract segment sales for 2008 decreased 10.5% to $4,310.0 million from $4,816.1 million for 2007, reflecting a U.S. sales decline of 13.8% and an international sales decline of 1.7% in U.S. dollars, or 2.4% in local currencies. U.S. sales declined in 2008 compared to the prior year primarily due to: a) decreased sales from existing corporate accounts of 9%, b) our continued discipline in account acquisition and retention which resulted in lower sales to new and retained customers and c) lower sales from small market public website and catalog business customers. Early in the fourth quarter of 2008, we entered into an alliance with Lyreco to service our respective global customers. This agreement allows OfficeMax to supply global customers that have operations in European countries and Asia through Lyreco, and allows Lyreco to supply global customers that have operations in the United States and Mexico through OfficeMax.

        Contract segment gross profit margin increased 0.2% of sales to 22.0% of sales for 2008 compared to 21.8% of sales in the previous year. The year-over-year increase was primarily due to improved account profitability for existing and new customers which was partially offset by deleveraging fixed delivery and occupancy costs from lower sales. Targeted cost controls helped to reduce the impact of deleveraging. These targeted cost controls included year-over-year reductions in our delivery fleet resulting from optimizing delivery routes, which helped to reduce the impact of increased fuel costs.

        Contract segment operating, selling and general and administrative expenses increased 0.6% of sales to 18.1% of sales for 2008 from 17.5% of sales a year earlier. The increase was primarily due to the deleveraging of fixed expenses from lower sales, including higher fixed marketing and account administration costs, partially offset by targeted cost controls, including reduced selling expenses and lower compensation costs as a result of fewer personnel in our customer fulfillment centers and customer service centers, as well as reduced incentive compensation expense. We also cycled on operating expense improvements that we started generating in the second half of 2007.

        Contract segment income was $167.3 million, or 3.9% of sales, for 2008, compared to $207.9 million for 2007. The decline in segment income was primarily attributable to the reduction in sales and gross profit.

        The Contract segment reported a non-cash charge of $815.5 million related to impairment of the Contract segment's goodwill balance in 2008. Contract other operating expense of $9.3 million

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for 2008 included employee severance costs in our U.S and international operations and the costs to consolidate manufacturing facilities in New Zealand. For more information regarding impairment charges, see discussion of "Goodwill and Other Asset Impairments" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The Contract segment's operating income (loss) decreased $865.4 million to an operating loss of $657.5 million compared to segment operating income of $207.9 million for 2007.

OfficeMax, Retail

($ in millions)

2009 Compared with 2008

        Retail segment sales for 2009 decreased by 10.2% (9.1% after adjusting for the foreign currency exchange effect) to $3,555.4 million from $3,957.0 million for 2008, reflecting a same-store sales decrease of 11.0% mitigated by new store improvement. This included a same-store sales decline in the U.S. of 9.6% and in Mexico of 13.9% (after adjusting for the foreign currency exchange effect). Retail same-store sales declined primarily due to weaker consumer and small business spending in the U.S. and the significant negative effects of weak economic conditions in Mexico together with the effects of the influenza epidemic during the summer. Store traffic was lower compared to the prior year as sales declined across all major product categories, particularly in the higher-priced, discretionary furniture category, which resulted in decreased average tickets. We ended 2009 with 1,010 stores. In the U.S., we opened 12 retail stores and closed 18, ending the year with 933 retail stores. Grupo OfficeMax, our majority-owned joint venture in Mexico, closed six stores, ending the year with 77 retail stores.

        Retail segment gross profit margin declined 0.6% of sales to 27.4% of sales for 2009, compared to 28.0% of sales in the previous year. The declines were primarily due to the

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deleveraging of fixed occupancy costs which has continued since late-2007, offset by favorable product margins, which benefited from good vendor support and lower inventory shrinkage, reduced delivery costs, and strong cost controls over utilities and maintenance. Margins were also negatively impacted by a shift to lower margin technology products.

        Retail segment operating, selling and general and administrative expenses decreased 0.4% of sales to 26.1% of sales for 2009 from 26.5% of sales a year earlier. The decrease was primarily due to targeted cost reductions in response to the sales shortfall partially offset by $29.4 million in additional incentive compensation expenses in 2009 and the deleveraging effect of reduced sales. Results in the Retail segment benefited from a favorable property tax settlement as well as the resolution of a prior dispute with a service provider, the effects of which were partially offset by adverse workers compensation expense related to prior period claims. Cost reductions consist primarily of reduced payroll costs resulting from reductions in staff in the stores, in field management and at the corporate headquarters and lower advertising and pre-opening costs.

        Retail segment income was $44.9 million, or 1.3% of sales, for 2009, compared to $61.2 million for 2008. The decline in segment income was primarily attributable to the reduction in sales and gross profit, partially offset by the effects of cost reduction initiatives.

        For 2009, the Retail segment recorded a $17.6 million non-cash charge related to impaired store assets. Other operating expense included charges of $33.3 million primarily related to store closure costs. The segment closed 21 underperforming stores prior to the end of their lease terms, of which 16 were in the U.S. and five were in Mexico with a total cost of $31.2 million. In addition, the segment incurred $2.1 million of severance related to a streamlining of our Retail store staffing.

        The Retail segment's operating loss improved $499.1 million to an operating loss of $6.0 million in 2009, compared to an operating loss of $505.1 million in 2008.

2008 Compared With 2007

        Retail segment sales for 2008 decreased by 7.2% to $3,957.0 million from $4,265.9 million for 2007, reflecting a same-store sales decrease of 10.8%, partially offset by sales by new stores. The weaker U.S. consumer and small business spending was evidenced by lower store traffic and weaker back-to-school and holiday seasons than in the previous year. Retail same-store sales for 2008 declined across all major product categories, compared to the prior year. Declines were greatest in the higher-priced, discretionary furniture and technology product categories, which resulted in decreased average tickets. During 2008, we opened 43 new retail stores in the U.S., including three Ink-Paper-Scissors stores (a smaller format store), ending the year with 939 retail stores in the U.S. Our majority-owned joint-venture in Mexico opened 17 stores during 2008, ending the year with 83 stores.

        Retail segment gross profit margin declined 1.5% of sales to 28.0% of sales for 2008, compared to 29.5% of sales in the previous year. The gross margin decline was primarily due to the deleveraging of fixed occupancy costs, which has continued since late-2007, as well as increased inventory shrinkage cost. For the 2008 back-to-school and holiday seasons, which are always an aggressive pricing environment, we adjusted our advertising strategies to drive traffic in the stores without sacrificing overall gross margin levels, and we continued to rationalize and refine our marketing mix through various media, not just circular advertising. The impact of deleveraging of fixed-occupancy costs and increased inventory shrinkage costs was partially offset by increased merchandise margins and a sales-mix shift towards higher-margin office supplies category sales. Increased fuel prices were mostly offset by fulfillment improvement programs and flexible delivery scheduling that resulted in fewer miles driven.

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        Retail segment operating, selling and general and administrative expenses increased 1.1% of sales to 26.5% of sales for 2008 from 25.4% of sales a year earlier, primarily due to deleveraging of expenses from the same-store sales volume decrease, as well as new stores which have not ramped up to mature sales volumes, partially offset by reduced incentive compensation expense and targeted cost controls, including the benefits from the reorganization of our Retail store management in the second quarter and Retail field and ImPress management undertaken in the first quarter.

        Retail segment income was $61.2 million, or 1.5% of sales, for 2008, compared to $173.7 million for 2007. The decline in segment income was primarily attributable to the reduction in sales and gross profit.

        For 2008, the Retail segment recorded impairment charges of $548.9 million, consisting of $386.0 million for impairment of goodwill, $107.1 million for impairment of trade names and $55.8 million for impairment of store fixed assets, consisting primarily of leasehold improvements. Retail other operating expense for 2008 included a $12.7 million charge for headcount reductions primarily for the reorganization of our Retail field and store management and $4.7 million of charges related to site and store lease terminations. For more information regarding impairment charges, see the discussion of "Goodwill and Other Asset Impairments" that follows.

        The Retail segment's operating loss was $505.1 million for 2008, compared to operating income of $173.7 million for 2007.

Corporate and Other

        Corporate and Other expenses were $40.7 million for 2009 compared to $773.6 million for 2008. Expenses recorded in 2009 included a $0.7 million pre-tax charge for severance. Increased incentive compensation expense ($3.8 million more in 2009) and pension costs more than offset reduced payroll expense resulting from reductions in staff at the corporate headquarters in late 2008. Expenses recorded in 2008 included a $735.8 million charge related to the impairment of the timber installment note guaranteed by Lehman, a $4.3 million severance charge related to a fourth quarter reduction in force at our corporate headquarters and a $3.1 million gain, primarily related to the release of a warranty escrow established at the time of sale of our legacy Voyageur Panel business in 2004. During 2007, total Corporate and Other expenses were $37.4 million.

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Liquidity and Capital Resources

        At the end of fiscal year 2009, the total liquidity available for OfficeMax was $999.6 million. This includes cash and cash equivalents of $486.6 million and borrowing availability of $513.0 million (availability includes $473.3 million and $39.7 million relating to our U.S. and Canadian revolving credit agreements, respectively). As of December 26, 2009, the Company was in compliance with all covenants under the credit agreements, both of which expire on July 12, 2012. As of December 26, 2009, we had $297.1 million of short-term and long-term debt and $1,470 million of non-recourse timber securitization notes outstanding.

        Our primary ongoing cash requirements relate to working capital, expenditures for property and equipment, technology enhancements and upgrades, lease obligations, pension funding and debt service. We expect to fund these requirements through a combination of available cash balance, cash flow from operations and, if necessary, seasonal borrowings under our revolving credit facilities. The following sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations discuss in more detail our operating, investing, and financing activities, as well as our financing arrangements.

Operating Activities

        Our operating activities generated cash of $358.9 million, $223.7 million and $70.6 million in 2009, 2008 and 2007, respectively. The increase in cash from operations in 2009 was due principally to significantly reduced inventories, net of the associated decrease in payables as a result of both lower purchasing activity and the timing of payments, and reduced receivables as a result of lower sales and strong management oversight. We ended 2009 with $143.8 million less inventory than at the end of 2008, with approximately 17% lower average inventory per store and approximately 15% lower average inventory per distribution center as compared to the prior year. Clearance inventory levels were at an all time low while our in-stock levels were high. Accounts payable at the end of 2009 were $68.5 million lower than at the end of the prior year, primarily reflecting lower merchandise purchasing levels. Receivables at the end of 2009 were $27.5 million lower than at the end of the prior year, reflecting both sales declines in the Contract segment and a modest improvement in days sales outstanding compared to the prior year period.

        In addition, cash from operations in 2009 includes $71.0 million of tax refunds, net of payments, from federal and state governments and $45.7 million in proceeds from loans against accumulated earnings in our company-owned life insurance (COLI) policies. We expect to periodically repay and re-borrow on these loans in order to manage our investments and minimize interest expense.

        We sponsor noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active OfficeMax, Contract employees. Pension expense was $14.1 million, $4.2 million and $10.0 million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007, respectively. In 2009, 2008 and 2007, we made cash contributions to our pension plans totaling $6.8 million, $13.1 million and $19.1 million, respectively. In 2009, we also contributed 8.3 million shares of OfficeMax common stock to our qualified pension plans. Based on actuarial estimates, this additional contribution is expected to reduce our pension contributions over the next five years by approximately $100 million. The minimum required funding contribution in 2010 is approximately $3.8 million and the expense is projected to be $7.1 million compared to expense of $14.1 million in 2009. However, we may elect to make additional voluntary contributions. See "Critical Accounting Estimates" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for more information.

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Investment Activities

        Our investing activities provided $2.8 million of cash during 2009 compared to a use of funds of $112.1 million and $138.9 during 2008 and 2007, respectively. During 2009, we received $25.1 million in cash from the distribution of a tax escrow balance established in a prior period in connection with our legacy Voyageur Panel business sold in 2004, and $15.0 million related to withdrawals from the principal balance of our COLI policies. Our capital spending in 2009 primarily related to leasehold improvements, 12 new stores and maintenance projects. Details of the capital investment by segment are included in the following table:

        We expect our capital investments in 2010 to be approximately $90 to $110 million. Our capital spending in 2010 will be primarily for technology enhancements such as an upgrade to our financial systems platform and improvements in the telephony software and hardware used by our call centers. We will also invest in leasehold improvements and replacement maintenance projects. In 2010, we expect store openings to be limited to two by our joint venture partner in Mexico.

Financing Activities

        Our financing activities used cash of $60.6 million in 2009, $86.1 million in 2008 and $62.6 million in 2007. Common and preferred dividend payments totaled $3.1 million in 2009, $47.5 million in 2008, and $49.1 million in 2007. In 2008 and 2007, our quarterly cash dividend was 15 cents per common share. Due to the challenging economic environment, and to conserve cash, our quarterly cash dividend was suspended in December 2008. We had net debt payments of $57.7 million, $40.0 million and $11.6 million in 2009, 2008 and 2007 respectively.

Financing Arrangements

        We lease our store space and certain other property and equipment under operating leases. These operating leases are not included in debt; however, they represent a significant commitment. Our obligations under operating leases are shown in the "Contractual Obligations" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Our debt structure consists of credit agreements, note agreements, and other borrowings as described below. For more information, see the "Contractual Obligations" and "Disclosures of Financial Market Risks" sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Credit Agreements

        On July 12, 2007, we entered into a revolving credit agreement (the "U.S. Credit Agreement") with a group of banks. The U.S. Credit Agreement permits us to borrow up to a maximum of $700 million subject to a borrowing base calculation that limits availability to a percentage of eligible accounts receivable plus a percentage of the value of eligible inventory less certain reserves. The U.S. Credit Agreement may be increased (up to a maximum of $800 million) at our request or reduced from time to time, in each case according to the terms detailed in the U.S. Credit Agreement. There were no borrowings outstanding under our U.S. Credit Agreement at the end of fiscal years 2009 or 2008, and there were no borrowings outstanding under this facility

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during 2009 or 2008. Letters of credit, which may be issued under the U.S. Credit Agreement up to a maximum of $250 million, reduce available borrowing capacity. Stand-by letters of credit issued under the U.S. Credit Agreement totaled $61.1 million at the end of fiscal year 2009 and $66.7 million at the end of fiscal year 2008. At the end of fiscal year 2009, the maximum aggregate borrowing amount available under the U.S. Credit Agreement was $534.4 million and availability under the U.S. Credit Agreement totaled $473.3 million. The U.S. Credit Agreement allows the payment of dividends, subject to availability restrictions and if no default has occurred. At the end of fiscal year 2009, we were in compliance with all covenants under the U.S. Credit Agreement. The U.S. Credit Agreement expires on July 12, 2012.

        Borrowings under the U.S. Credit Agreement bear interest at rates based on either the prime rate or LIBOR. Margins are applied to the applicable borrowing rates and letter of credit fees under the U.S. Credit Agreement depending on the level of average availability. Fees on letters of credit issued under the U.S. Credit Agreement were charged at a weighted average rate of 0.875% during 2009. We are charged an unused line fee at an annual rate of 0.25% on the amount by which the maximum available credit exceeds the average daily outstanding borrowings and letters of credit.

        On September 30, 2009, Grand & Toy Limited, the Company's wholly owned subsidiary based in Canada, entered into a revolving credit agreement (the "Canadian Credit Agreement") with a group of banks. The Canadian Credit Agreement permits Grand & Toy Limited to borrow up to a maximum of C$60 million subject to a borrowing base calculation that limits availability to a percentage of eligible accounts receivable plus a percentage of the value of eligible inventory less certain reserves. The Canadian Credit Agreement may be increased (up to a maximum of C$80 million) at Grand & Toy Limited's request or reduced from time to time, in each case according to the terms detailed in the Canadian Credit Agreement. There were no borrowings outstanding under the facility at the end of fiscal year 2009, and there were no borrowings outstanding under this facility during 2009. Letters of credit, which may be issued under the Canadian Credit Agreement up to a maximum of C$10 million, reduce available borrowing capacity. There were no letters of credit outstanding under the Canadian Credit Agreement at the end of fiscal year 2009. The maximum aggregate borrowing amount available under the Canadian Credit Agreement was $39.7 million (C$41.6 million) at the end of fiscal year 2009. Grand & Toy Limited was in compliance with all covenants under the Canadian Credit Agreement at the end of fiscal year 2009. The Canadian Credit Agreement expires on July 12, 2012.

Timber Notes/Non-recourse debt

        In October 2004, we sold our timberland assets in exchange for $15 million in cash plus credit-enhanced timber installment notes in the amount of $1,635 million (the "Installment Notes"). The Installment Notes were issued by single-member limited liability companies formed by affiliates of Boise Cascade, L.L.C (the "Note Issuers"). In order to support the Installment Notes, the Note Issuers transferred $1,635 million in cash to Lehman and Wachovia Corporation ("Wachovia") ($817.5 million to each of Lehman and Wachovia) who issued collateral notes to the Note Issuers and guarantees on the performance of the Installment Notes. In December 2004, we completed a securitization transaction in which the Company's interests in the Installment Notes and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries. The subsidiaries pledged the Installment Notes and related guarantees and issued securitized notes (the "Securitization Notes") in the amount of $1,470 million. Recourse on the Securitization Notes is limited to the proceeds from the applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty. As a result, there is no recourse against OfficeMax, and the Securitization Notes have been reported as non-recourse debt in our Consolidated Balance Sheets.

        On September 15, 2008, Lehman filed for bankruptcy. Lehman's bankruptcy filing constituted an event of default under the $817.5 million Installment Note guaranteed by Lehman (the "Lehman

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Guaranteed Installment Note") . We are required for accounting purposes to assess the carrying value of assets whenever circumstances indicate that a decline in value may have occurred. After evaluating the situation, we concluded in late October 2008 that as a result of the Lehman bankruptcy, it was probable that we would be unable to collect all amounts due according to the contractual terms of the Lehman Guaranteed Installment Note. Accordingly, we evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated amount we expect to collect ($81.8 million) by recording a non-cash impairment charge of $735.8 million, pre-tax, in the third quarter of 2008. We based our estimate of the recoverable amount of the Lehman Guaranteed Installment Note on a variety of factors, including consultations with financial advisors and review of the trading prices on outstanding Lehman debt instruments with similar contractual interest rates and maturities.

        Measuring impairment of a loan requires judgment and estimates, and the eventual outcome may differ from our estimate by a material amount. The Lehman Guaranteed Installment Note has been pledged as collateral for the related Securitization Notes, and therefore it may not freely be transferred to any party other than the indenture trustee for the Securitization Note holders. Accordingly, the ultimate amount to be realized on the Lehman Guaranteed Installment Note depends entirely on the proceeds from the Lehman bankruptcy estate, which may not be finally determined for several years. At December 26, 2009 and December 27, 2008, the carrying value of the Lehman Guaranteed Installment Note was $81.8 million. Going forward, we intend to adjust the carrying value of the Lehman Guaranteed Installment Note as further information regarding our share of the proceeds, if any, from the Lehman bankruptcy estate becomes available.

        Recourse on the Securitization Notes is limited to the proceeds from the applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty. Accordingly, the Lehman Guaranteed Installment Note and underlying guarantees by Lehman will be transferred to the holders of the Securitization Notes guaranteed by Lehman in order to settle and extinguish that liability. However, under current generally accepted accounting principles, we are required to continue to recognize the liability related to the Securitization Notes guaranteed by Lehman until such time as the liability has been extinguished, which will occur when the Lehman Guaranteed Installment Note and the related guaranty are transferred to and accepted by the Securitization Note holders. We expect that this will occur no later than the date when the assets of Lehman are distributed and the bankruptcy is finalized. Accordingly, we expect to recognize a non-cash gain equal to the difference between the carrying amount of the Securitization Notes guaranteed by Lehman ($735.0 million at December 26, 2009) and the carrying value of the Lehman Guaranteed Installment Note ($81.8 million at December 26, 2009) in a later period when the liability is legally extinguished. The actual gain to be recognized in the future will be measured based on the carrying amounts of the Lehman Guaranteed Installment Note and the Securitization Notes guaranteed by Lehman at the date of settlement.

        At the time of the sale of our timberland assets in 2004, we generated a significant tax gain. As the timber installment notes structure allowed the Company to defer the resulting tax liability of $543 million until 2020, the maturity date for the Installment Notes, we recognized a deferred tax liability related to this gain in connection with the sale. Due to the Lehman bankruptcy and note defaults, we initially concluded that approximately half of this gain would be accelerated into 2008 for tax purposes and we estimated and paid taxes on this gain in 2008. In estimating the cash taxes, we considered our available alternative minimum tax credits, a portion of which resulted from prior tax payments related to the sale of the timberland assets in 2004, which were used to reduce the net tax payments. After extensive review with our outside tax advisors, we concluded that the recognition of the Lehman portion of the gain was not triggered in 2008, but instead will be triggered when the Lehman Guaranteed Installment Note is transferred to the Securitization Note holders as payment and/or when the Lehman bankruptcy is resolved. Accordingly, we appropriately

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modified our position as we finalized the 2008 tax return, and have requested and received refunds of taxes previously paid in 2008 from the federal government, and anticipate that we will receive an additional amount from the governments in the various states in which we pay taxes. Accordingly, in the Consolidated Balance Sheets as of December 26, 2009, we have reestablished both the deferred tax liability related to the full deferred gain from the sale of the timberland assets and the deferred tax assets relative to available alternative minimum tax credits.

        Through December 26, 2009, we have received all payments due under the Installment Note guaranteed by Wachovia (the "Wachovia Guaranteed Installment Notes"), which have consisted only of interest due on the notes, and made all payments due on the related Securitization Notes guaranteed by Wachovia, again consisting only of interest due. As all amounts due on the Wachovia Guaranteed Installment Notes are current, and we have no reason to believe that we will not collect all amounts due according to the contractual terms of the Wachovia Guaranteed Installment Notes, the notes are stated in our Consolidated Balance Sheet at their original principal amount of $817.5 million. Wachovia exhibited signs of financial distress in the fourth quarter of 2008 and was acquired by Wells Fargo & Company in a stock transaction. The current credit crisis could have additional adverse impact on our business and financial condition if Wachovia (acquired by Wells Fargo & Company in 2008), the other timber notes guarantor, became unable to perform its obligations under the Wachovia Guaranteed Installment Notes, which would result in a significant impairment impact.

Note Agreements

        In November 2008, we repurchased all of the $19.1 million of 7.0% senior notes outstanding by using proceeds relating to restricted investments that were pledged for this debt.

Other

        We have various unsecured debt outstanding, including approximately $189.9 million of industrial revenue bonds due in varying amounts through 2029. At December 27, 2008, approximately $69.2 million of these obligations were the subject of a preliminary potential adverse determination regarding the deductibility of interest on the bonds from the Internal Revenue Service ("IRS"). In the fourth quarter of 2009, the IRS conceded the position. The bonds are expected to be held to their full maturity and continue to be classified as long-term debt in the Consolidated Balance Sheets at December 26, 2009.

        The Company made capital contributions to Grupo OfficeMax, commensurate with our ownership percentage in the joint venture of $6.0 million and $6.7 million in 2009 and 2008, respectively.

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Contractual Obligations

        In the following table, we set forth our contractual obligations as of December 26, 2009. Some of the figures included in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the amounts we will actually pay in future periods may vary from those reflected in the table.

        Debt includes amounts owed on our note agreements, revenue bonds and credit agreements assuming the debt is held to maturity. The amounts above include both current and non-current liabilities. Obligations related to interest on debt are not included in the table above because the timing and amount of any required payments cannot be reasonably estimated. However, the table under the heading "Financial Instruments" in this Management's Discussion and Analysis of Financial Condition and Results of Operations presents principal cash flows and related weighted average interest rates by expected maturity dates. For obligations with variable interest rates, the table sets forth payout amounts based on rates as of December 26, 2009 and does not attempt to project future rates. Not included in the table above are contingent payments for uncertain tax positions of $8.2 million. These amounts are not included due to our inability to predict the timing of settlement of these amounts.

        There is no recourse against OfficeMax on the securitized timber notes payable as recourse is limited to proceeds from the applicable pledged installment notes receivable and underlying guarantees. The debt remains outstanding until it is legally extinguished, which will be when the Installment Note and guaranty are transferred to and accepted by the securitized note holders.

        We enter into operating leases in the normal course of business. We lease our retail store space as well as certain other property and equipment under operating leases. Some of our retail store leases require percentage rentals on sales above specified minimums and contain escalation clauses. These minimum lease payments do not include contingent rental expense. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. For more information, see Note 8, "Leases", of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in this Form 10-K. Lease obligations for closed facilities are included in operating leases and a liability equal to the fair value of these obligations is included in the Company's Consolidated Balance Sheets. For more information, see Note 2, "Facility Closure Reserves" of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in this Form 10-K.

        Our Consolidated Balance Sheet as of December 26, 2009 includes $277.2 million of liabilities associated with our retirement and benefit and other compensation plans and $245.0 million of other long-term liabilities. Certain of these amounts have been excluded from the above table as

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either the amounts are fully or partially funded, or the timing and/or the amount of any cash payment is uncertain. Actuarially-determined liabilities related to pension and postretirement benefits are recorded based on estimates and assumptions. Key factors used in developing estimates of these liabilities include assumptions related to discount rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit payment patterns and other factors. Changes in assumptions related to the measurement of funded status could have a material impact on the amount reported.

        In accordance with an amended and restated joint venture agreement, the minority owner of Grupo OfficeMax, our joint venture in Mexico, can elect to put its 49% interest in the joint venture to OfficeMax if certain earnings targets are achieved. Earnings targets are calculated quarterly on a rolling four-quarter basis. Accordingly, the targets can be achieved in one quarter but not in the next. If the earnings targets are achieved and the minority owner elects to put its ownership interest to OfficeMax, the redemption value would be calculated based on the joint venture's earnings for the last four quarters before interest, taxes and depreciation and amortization, and the current market multiples of similar companies. At December 26, 2009, Grupo OfficeMax met the earnings targets and the estimated redemption value of the minority owner's interest was $21.1 million. While this estimated value is less than the book value at December 26, 2009, other valuation methodologies yield an estimated fair value that is consistent with the December 26, 2009 book value.

        In addition to the contractual obligations quantified in the table above, we have other obligations for goods and services entered into in the normal course of business. These contracts, however, are either not enforceable or legally binding or are subject to change based on our business decisions.

Off-Balance-Sheet Activities and Guarantees

        Note 15, "Commitments and Guarantees," of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" in this Form 10-K describes certain of our off-balance sheet arrangements as well as the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees and the maximum potential undiscounted amounts of future payments we could be required to make.

Seasonal Influences

        Our business is seasonal, with OfficeMax, Retail showing a more pronounced seasonal trend than OfficeMax, Contract. Sales in the second quarter and summer months are historically the slowest of the year. Sales are stronger during the first, third and fourth quarters that include the important new-year office supply restocking month of January, the back-to-school period and the holiday selling season, respectively.

Disclosures of Financial Market Risks

Financial Instruments

        Our debt is predominantly fixed-rate. At December 26, 2009, the estimated current fair value of our debt, based on quoted market prices when available or then-current interest rates for similar obligations with like maturities, including the timber notes, was approximately $723.8 million less than the amount of debt reported in the Consolidated Balance Sheet. As previously discussed, there is no recourse against OfficeMax on the securitized timber notes payable as recourse is limited to proceeds from the applicable pledged installment notes receivable and underlying guarantees. The debt and receivable related to the timber notes have fixed interest rates and the estimated fair values of the timber notes are reflected in the following table.

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