OfficeMax 2008 Annual Report Download - page 62

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, OMX Timber Finance Investments I, L.L.C. (‘‘OMX Timber I’’) and OMX Timber
Finance Investments II, L.L.C. (‘‘OMX Timber II’’) (collectively the ‘‘OMXSPEs’’) that were originally
intended to be qualifying special purpose entities. The OMXSPEs subsequently failed to qualify and
are currently variable interest entities. The OMXSPEs pledged the Installment Notes and related
guarantees and issued Securitization Notes in the amount of $1,470 million ($735 million through
the structure supported by the Lehman guaranty and $735 million through the structure supported
by the Wachovia guaranty). Recourse on the Securitization Notes is limited to the applicable
pledged Installment Notes and underlying Lehman and Wachovia guarantees. The Securitization
Notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying
interest of 5.54% and 5.42%, respectively.
As a result of these transactions, we received $1,470 million ($735 million from investors in the
Securitization Notes guaranteed by Lehman) in cash from the OMXSPEs, and over 15 years the
OMXSPEs were 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 payable 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.
The Note Issuers are variable-interest entities (the ‘‘VIEs’’) under FASB Interpretation 46R,
‘‘Consolidation of Variable Interest Entities.’’ The OMXSPEs are considered to be the primary
beneficiary of the Note Issuers, and therefore, the VIEs are required to be consolidated with the
OMXSPEs, which are also the issuers of the Securitization Notes. The accounts of the OMXSPEs
have been consolidated into those of their ultimate parent, OfficeMax. The effect of our
consolidation of the OMXSPEs is that the securitization transaction is treated as a financing, and
both the Installment Notes receivable and the Securitization Notes payable are reflected in our
Consolidated Balance Sheets.
On September 15, 2008, Lehman, 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, attorneys for OMX Timber II delivered notices to the trustee under the
indenture applicable to the Securitization Notes guaranteed by Lehman, to the issuer of the
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 in Installment Note guaranteed by Lehman
(the ‘‘Lehman Guaranteed Installment Note’’). These notices stated that OMX Timber II was
assessing all rights and remedies available to it, was not waiving or agreeing to forbear in the
exercise of any of its rights, and reserved the right to exercise any rights available to it in the future.
OMX Timber II does not believe the events described in its notices constituted an event of default
under the indenture.
We concluded in late October 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
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
58