OfficeMax 2008 Annual Report Download - page 36

As a result of these transactions, we received $1,470 million ($735 million from investors in the
Securitization Notes guaranteed by Lehman) in cash and over 15 years we expected to earn
approximately $82.5 million per year in interest income on the Installment Notes receivable
($41.8 million from interest on the Lehman guaranteed Installment Note) and expected to incur
annual interest expense of approximately $80.5 million on the Securitization Notes ($40.7 million
from interest on the Securitization Notes guaranteed by Lehman). The pledged Installment Notes
receivable and Securitization Notes were scheduled to mature in 2020 and 2019, respectively. The
Securitization Notes have an initial term that is approximately three months shorter than the
Installment Notes. We expected to refinance our ownership of the Installment Notes in 2019 with a
short-term secured borrowing to bridge the period from initial maturity of the Securitization Notes to
the maturity of the Installment Notes.
On September 15, 2008, Lehman, the guarantor of half of the Installment Notes and the
Securitization Notes, filed a petition in the United States Bankruptcy Court for the Southern District
of New York seeking relief under chapter 11 of the United States Bankruptcy Code. On
September 17, 2008, the OMXSPE delivered notices to the trustee for the affected Securitization
Note holders, the issuer of the affected Installment Notes and to Lehman, which stated that as a
result of Lehman’s bankruptcy filing, an event of default had occurred under the $817.5 million
Installment Note guaranteed by Lehman (the ‘‘Lehman Guaranteed Installment Note’’).
After evaluating the situation, we concluded in late October 2008 that due to the uncertainty of
collection of the Lehman Guaranteed Installment Note as a result of the Lehman bankruptcy, the
carrying value of the Lehman Guaranteed Installment Note was impaired. Accordingly, we recorded
a non-cash pre-tax impairment charge of $735.8 million in the third quarter of 2008. We are required
for accounting purposes to assess the carrying value of assets whenever circumstances indicate
that a decline in value may have occurred. 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’’, under the guidance
in paragraph 16 of SFAS No. 140, ‘‘Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities’’, which will occur when the Lehman Guaranteed Installment Note and
the guaranty are transferred to and accepted by the 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, the non-cash charge is expected to be followed by a non-cash gain in a later period
when the liability is legally extinguished.
On October 29, 2008, Lehman failed to pay the $21.5 million interest payment due to the
Installment Note issuer, which in turn did not make the $20.9 million interest payment due the
OMXSPE. As a result, the OMXSPE did not make the interest payment due to the holders of the
Securitization Notes guaranteed by Lehman because it is only obligated to make interest payments
on the Securitization Notes to the extent it receives interest payments on the related Installment
Notes. We stopped accruing interest income on the Lehman Guaranteed Installment Note as of the
last payment date April 29, 2008. However, we recorded the ongoing interest expense on the
Lehman guaranteed portion of the Securitization Notes until the default date, October 29, 2008. This
resulted in $20.4 million of additional interest expense that will only be paid if the corresponding
interest income is collected.
At the time of the Sale, we generated a tax gain and recognized the related deferred tax
liability. The timber note structure allowed the Company to defer the resulting tax liability of
$543 million until 2019, the maturity date for the Installment Notes. Due to the impairment,
approximately half of this tax gain was accelerated into 2008 and the related taxes were due. We
had available alternative minimum tax credits, a portion of which resulted from prior tax payments
related to the Sale, which were used to reduce the cash tax payment triggered by the Lehman
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