OfficeMax 2007 Annual Report Download - page 78

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outstanding debt instruments due to changes in interest rates. The Company has from time to time
entered into interest rate swap agreements that effectively convert the interest rate on certain
fixed-rate debt to a variable rate. The Company has designated these interest rate swap
agreements as hedges of the changes in fair value of the underlying debt obligation attributable to
changes in interest rates and accounted for them as fair value hedges. Changes in the fair value of
interest rate swaps designated as hedging instruments that effectively offset the variability in the fair
value of outstanding debt obligations are reported in operations. These amounts offset the gain or
loss (that is, the change in fair value) of the hedged debt instrument that is attributable to changes
in interest rates (that is, the hedged risk) which is also recognized currently in operations. The
Company has also from time to time entered into interest rate swap agreements that effectively
convert floating rate debt to a fixed rate obligation. These swaps have been designated as hedges
of floating interest rate payments attributable to changes in interest rates and accounted for as cash
flow hedges, with changes in the fair value of the swap recorded to accumulated other
comprehensive income (loss) until the hedged transaction occurs, at which time it is reclassified to
operations.
Additional Consideration Agreement
Pursuant to an Additional Consideration Agreement between OfficeMax and Boise Cascade,
L.L.C., the Company may have been required to make substantial cash payments to, or receive
substantial cash payments from, Boise Cascade, L.L.C. As described below, the Additional
Consideration Agreement terminated in the first quarter of 2008. Under the Additional Consideration
Agreement, the Sale proceeds were adjusted upward or downward based on paper prices following
the Sale, subject to annual and aggregate caps. Specifically, the Company agreed to pay Boise
Cascade, L.L.C. $710,000 for each dollar by which the average market price per ton of a specified
benchmark grade of cut-size office paper during any 12-month period ending on September 30 was
less than $800. Boise Cascade, L.L.C. agreed to pay us $710,000 for each dollar by which the
average market price per ton exceeded $920. Under the terms of the agreement, neither party was
obligated to make a payment in excess of $45 million in any one year. Payments by either party
were also subject to an aggregate cap of $125 million that declined to $115 million in the fifth year
and $105 million in the sixth year.
In connection with recording the Sale in 2004, the Company recognized a $42 million projected
future obligation related to the Additional Consideration Agreement based on internal estimates and
published industry paper price projections. The Company recognized accretion expense totaling
approximately $6.0 million in the Consolidated Statements of Income (Loss) in 2006 and 2005.
The Company recorded changes in the fair value of the Additional Consideration Agreement in
net income (loss) in the period they occur; however, any potential payments from Boise Cascade,
L.L.C. to us were not recorded in net income (loss) until all contingencies had been satisfied, which
was generally at the end of a 12-month measurement period ending on September 30. Due to
increases in actual and projected paper prices, the change in fair value of this obligation resulted in
the recognition of non-operating income in our Consolidated Statement of Income (Loss) of
$48.0 million in 2006 and $32.5 million in 2007. Based upon actual and projected paper prices at
December 29, 2007 and December 30, 2006, we did not recognize an asset or liability in our
Consolidated Balance Sheet related to the Additional Consideration Agreement.
In February 2008, Boise Cascade, L.L.C. sold a majority interest in its paper and packaging
and newsprint businesses to Aldabra 2 Acquisition Corp. As a result of this transaction, the
Additional Consideration Agreement terminated and no further payments will be required of either
party.
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