-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SggmZXHN/yYZhKRpglZlacgteRH8Fv5WP4UcnLdZpbsKh6+7/ct8O5tiSVBxx/fk QaYAP9FCz3BdZDUFZ70ivQ== 0000950152-97-003169.txt : 19970425 0000950152-97-003169.hdr.sgml : 19970425 ACCESSION NUMBER: 0000950152-97-003169 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970125 FILED AS OF DATE: 19970424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OFFICEMAX INC /OH/ CENTRAL INDEX KEY: 0000929428 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 341573735 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13380 FILM NUMBER: 97586595 BUSINESS ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKER HEIGHTS STATE: OH ZIP: 44122 BUSINESS PHONE: 2169216900 MAIL ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKE HEIGHTS STATE: OH ZIP: 44122 10-K 1 OFFICE MAX 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended JANUARY 25, 1997 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 1-13380 -------- OFFICEMAX, INC. --------------- (Exact name of registrant as specified in its charter)
OHIO 34-1573735 ---- ----------- (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 921-6900 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 28, 1997 was approximately $1,624,445,672. The number of Common Shares, without par value, of the Registrant outstanding as of March 28, 1997 was 123,835,169. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated April 17, 1997, for use at the Annual Meeting of Shareholders to be held on May 19, 1997 are incorporated by reference in Part III hereof. 2 PART I ITEM 1. BUSINESS GENERAL OfficeMax, Inc. ("OfficeMax" or the "Company"), one of the fastest growing specialty retailers in the United States, last year became the fourth company in U.S. business history to exceed $3 billion in sales in less than nine years from the date founded. At the close of fiscal 1996, the Company operated 564 high volume, deep discount office product superstores in over 220 markets in 47 states and Puerto Rico, as well as three national call centers, 17 delivery centers and a new OfficeMax retail joint venture in Mexico. At March 30, 1997, OfficeMax had 579 office product superstores which is more stores in the United States than any other office product superstore chain. The Company sells its merchandise primarily to small and medium businesses, home office customers and individual consumers. Through its growing delivery and catalog operations, OfficeMax also serves the medium and larger corporate customer. Additionally, the Company operates OfficeMax OnLine on the Internet, which enables customers to buy a wide assortment of OfficeMax merchandise using their personal computers. OfficeMax TriMax Super Centers, the Company's latest store format, range in size from 23,500 to 36,000 square feet. These Super Centers feature an OfficeMax superstore that offers approximately 7,700 supply items together with store-within-a-store modules of FurnitureMax and CopyMax, which are devoted to office furniture and "print-for-pay" services, respectively. The Company's new format now includes a "TechMax" department, which showcases the latest in computers, wireless digital technology and similarly related technology products. HISTORY OfficeMax, which was co-founded by Michael Feuer, its current Chairman and Chief Executive Officer, opened its first superstore in suburban Cleveland, Ohio in July 1988. During the subsequent 28 months, the Company opened 28 superstores and acquired an additional seven stores from Office World, Inc., a deep-discount office products retailer located in the greater Chicago area. In November 1990, Kmart Corporation ("Kmart") acquired a 21.6% equity interest in the Company. As part of this transaction, OfficeMax acquired from Kmart five deep-discount office products superstores that operated under the name "Office Square" in the Chicago, Illinois and Akron/Canton, Ohio markets. In November 1991, Kmart increased its ownership interest in the Company to in excess of 90% by purchasing all of the outstanding capital shares of the Company except for certain shares held by the Company's co-founders. In June 1992, the Company acquired OW Office Warehouse, Inc., a 41 store office product superstore chain with stores located primarily in the Mid-Atlantic region. In March 1993, the Company acquired BizMart, Inc., a 105 store national office products superstore chain with stores located in the Southwest, West and Pacific Northwest regions of the United States. Immediately following each acquisition, the acquired stores were operationally integrated, remodeled, remerchandised and converted to the OfficeMax name, merchandise presentation and format. As a result of these acquisitions and the opening of new superstores, OfficeMax achieved a national presence. On November 2, 1994, the Company completed an initial public offering ("IPO") of its Common Shares at $8.44 per share (adjusted to give effect for 3-for-2 splits of the Company's Common Shares effected in the form of dividends paid on July 12, 1995 and July 9, 1996). The net proceeds from the IPO were paid to Kmart in exchange for certain funding amounts previously provided by Kmart to the Company. As a result of the IPO, Kmart's ownership interest in OfficeMax was reduced to approximately 24.6%. 2 3 On July 20, 1995, the Company completed a primary and secondary offering ("the Secondary Offering") consisting of 8,627,774 primary shares and 28,205,289 secondary shares owned by Kmart. Net proceeds to the Company from the Secondary Offering was $110,177,000. Following completion of the Secondary Offering Kmart no longer owned an interest in OfficeMax. On September 11, 1995, the Company sold its approximate 20% interest in the contract stationer, Corporate Express, Inc. ("Corporate Express"), for $195,831,000, resulting in a pre-tax gain of approximately $118,014,000 ($69,124,000 after-tax gain, or $0.57 per share). INDUSTRY OVERVIEW Over the past approximately eight years, the office products industry has experienced rapid growth which the Company believes is primarily attributable to a shift in the United States to a more service oriented economy and the increasing utilization of technology, such as computers and fax machines, in businesses and homes. The Company believes that these trends will continue to expand the office products industry and will create opportunities for continued growth in market share for operators of high-volume office products superstores such as OfficeMax. Small and Medium-Sized Business Market. The Company's primary target market consists of small and medium-sized businesses, employing between one and 100 employees, home office customers and individual consumers. During the early to mid 1980's, this market was served primarily by traditional office products retailers which typically operated small stores offering limited services and a limited selection of in-stock merchandise purchased from wholesalers or other distributors and sold to the ultimate consumer at manufacturers' or catalog list prices. Conversely, office products superstores, such as OfficeMax, feature a wide selection of name-brand and private label merchandise purchased directly from the manufacturer and sold at deep-discount prices that are typically 30% to 70% below manufacturers' suggested retail and catalog list prices. As a result of their ability to offer selection, service and discount prices, office products superstores are capturing an increasing percentage of the retail office products market in the United States. Large Business Market. Large businesses, employing over 100 people, have historically been served primarily by traditional commercial office suppliers, known as "contract stationers," which provide their large business customers with a wide variety of office products purchased from manufacturers and intermediate wholesalers, generally for next-day delivery. This is a large and very fragmented segment of the office products industry with the six largest contract stationers only controlling 25% of the market. Contract stationers typically utilize an in-house, commissioned sales force to solicit orders from the purchasing departments of their customers, which order merchandise from the contract stationer's or an intermediate wholesaler's catalog. BUSINESS STRATEGY The Company's strategy is to expand its market share, to be a leading provider of office products, supplies and services in each of the markets in which it competes and to continue expanding into new markets, including expansion internationally. The key elements of this strategy are as follows: Extensive Selection of Merchandise in an Easy to Shop Format and Presentation. Each OfficeMax superstore offers approximately 7,700 stock keeping units ("SKU's") of quality, in-stock, name-brand and private label merchandise. This represents a breadth and depth of in-stock items that are not available from traditional office products retailers, specialty office products retailers, mass merchandisers or wholesale clubs. The Company's bold and dramatic merchandise presentation is highlighted by wide aisles, bright lighting with open ceilings, colorful signage and bold graphics. This easy to shop presentation is designed to enhance customer convenience, create an enjoyable shopping experience different from that provided by the Company's competitors and promote impulse buying, thereby increasing sales. 3 4 Everyday Low Prices. The Company's everyday low price policy is to offer deep-discount prices that are typically 30% to 70% below manufacturers' suggested retail and catalog list prices. In addition, the Company guarantees its low prices up to 155%. OfficeMax will match any advertised price or refund the difference on an item purchased within seven days. An additional 55% merchandise credit will be issued if the lower price is from an office products superstore such as Staples, Inc. ("Staples") and Office Depot, Inc. ("Office Depot"). Customer Service. To develop and maintain customer loyalty, OfficeMax has fostered a customer-oriented culture that demands a high level of customer service from each associate. The Company views the quality of its customers' interaction with its associates as critical to its success. Toward this end, the Company emphasizes training and personnel development, seeks to attract and retain well qualified, highly motivated associates, and has centralized most administrative functions at its corporate office and call centers to enable in-store associates to focus primarily on serving the customer. Focused Expansion. The Company enters markets that provide multi-store opportunities combined with markets in which the Company believes a single OfficeMax superstore can be one of the dominant office products suppliers. Prospective locations are evaluated using on-site surveys conducted by real estate experts and field operations personnel coupled with a proprietary real estate selection model, which assesses potential store locations and incorporates computer-generated mapping. The model analyzes a number of factors that have contributed to the success of existing OfficeMax locations including the location's size, visibility, accessibility and parking capacity, potential sales transfer effects on existing OfficeMax stores and relevant demographic information, such as the number of businesses and the income and education levels in the area. New retailing concepts. During the last two years, OfficeMax has launched new retailing concepts, which provide additional products and services to the Company's customers and an opportunity for incremental store traffic, including the store-within-a-store modules, CopyMax and FurnitureMax. CopyMax offers customers a wide range of "print-for-pay" services, from self-service black and white copying to full service state of the art digital printing and publishing. FurnitureMax provides expanded furniture selection and specialized services. The Company's newest format, TechMax, features the latest in communication products. These concepts are discussed in greater detail under the headings "Stores" and "Expansion". Network of delivery centers. The Company's expanded network of delivery centers and catalog call centers have opened up new channels of distribution to drive the core office supply business. The delivery centers service the majority of the markets in which OfficeMax superstores are located, significantly increasing the Company's ability to capture market share in the medium and large business segments. QuadMax-Electronic Retailing. QuadMax, the Company's online electronic retailing division, consists of four components and is designed to capitalize on the emerging and rapidly expanding online computer industry. The OfficeMax OnLine web site, introduced in March 1995, is one component of the QuadMax initiative and features thousands of office products, computers, software and related merchandise. OfficeMax OnLine currently is available on America Online and the Internet through the Company's world wide web site, www.officemax.com. The other three components which are scheduled to be rolled out in 1997 are kiosks, CD-ROM catalogs and OfficeMax Corporate Direct. The touch-screen, networked, in-store kiosks will replace the current in-store paper special order catalog and contribute to improved inventory management. The kiosk technology also enables kiosks to be placed in banks, office buildings, hotels and other facilities with high volumes of business traffic and provide customers with the ability to order more than 20,000 office supplies, furniture, computers and business machines and receive next day delivery via the OfficeMax delivery system. The new interactive CD-ROM catalogs will provide the small office/home office customer with real time information, instant pricing updates and electronic ordering capability. Through OfficeMax Corporate Direct, the Company plans during fiscal 1997 to increase its emphasis on targeting companies employing between 50 and 300 office employees. Corporate Direct is an Internet based purchasing system for these larger companies which is currently being tested in several markets. This initiative will be supported by the Company's existing delivery center facilities, systems and online technology. 4 5 International Opportunities. During the second-half of fiscal 1996, the Company opened two OfficeMax superstores in Mexico City through a joint venture with its Mexican partner, Grupo OpriMax, a Mexican corporation. In fiscal 1997, the joint venture plans to continue to open superstores in Mexico. Additionally, during fiscal 1996 OfficeMax announced the formation of a joint venture with JUSCO Company Ltd., a Japanese corporation, to open office products superstores in Japan. The Company is currently in the process of building an infrastructure for this venture and anticipates opening the first superstore in late 1997 or early 1998. OfficeMax owns a 19% interest in each joint venture. MERCHANDISING The Company's merchandising strategy focuses on offering an extensive selection of quality, name-brand and private label office products at deep-discount prices. OfficeMax superstores feature approximately 7,700 SKU's generally in the categories of office supplies, computers, computer software, business electronics and office furniture. The following table sets forth the approximate percentage of net sales attributable to each merchandise group for the periods presented:
FISCAL YEAR ENDED ----------------- JAN. 25, JAN. 27, JAN. 21, 1997 1996 1995 ---- ---- ---- Office supplies, including "print-for-pay" service (1) 37.7% 40.7% 42.7% Electronics, business machines, computers, software, peripherals and related consumable products such as computer cartridges, ribbons and paper 51.1 47.5 44.7 Office furniture 11.2 11.8 12.6 ---- ---- ----- 100.0% 100.0% 100.0% ===== ===== =====
(1) Excludes consumable supplies relating to computers and business machines. The Company emphasizes a wide selection of name-brand office products, packaged and sold in multi-unit packages for the business customer and single units for the individual consumer. The Company also offers private label products under the OfficeMax(R) label in order to provide customers additional savings on selected commodity products for which management believes national brand recognition is not a key determinant of customer satisfaction. These commodity items include various paper products such as computer and copy paper, legal pads and notebooks, envelopes and similar functional items. Despite their lower selling price, these items typically carry higher gross margins than comparable branded items and help build consumer recognition for the OfficeMax family of Max brand products. The Company's merchandising staff routinely evaluates new name-brand and private label merchandise to maximize profit opportunities and to provide customers with the best value. The Company also includes its toll-free telephone number on the packaging of certain commodity and private label goods to increase repeat sales as commodity goods are used and replenished. PURCHASING AND DISTRIBUTION OfficeMax maintains a centralized buying group of merchandise managers and buyers who average approximately 16 years of retail buying and merchandising experience. Using a detailed merchandise planning system, this buying group selects the merchandise mix for each store in conjunction with systematic, frequent input from field management and store personnel. The Company utilizes a proprietary merchandise replenishment system, "ForeMax," which automatically analyzes and forecasts sales trends for each SKU statistically and then predicts each store's merchandise requirements. 5 6 The Company believes that it has good relationships with its vendors and does not consider itself dependent on any single source for its merchandise. As the number of stores increases pursuant to the Company's store expansion plan, the Company believes that it will be able to continue to obtain sufficient merchandise for all of its stores on a timely basis. The Company currently uses the services of a third party logistics firm to operate independent "ThruMax" cross-docking centers. The Company continues to evaluate its distribution strategy and methods in order to determine how to utilize new and improved technology to increase inventory controls and reduce expenses and delivery lead times. MARKETING, PROMOTIONS AND ADVERTISING OfficeMax directs its marketing efforts at small and medium-sized businesses, home office customers and individual consumers. A multimedia approach is used to attract new customers while re-emphasizing the Company's value message to existing customers. Included in these campaigns are national television commercials, newspaper ads, seasonal spot television and radio commercials, direct mail promotions, circulars, and outdoor billboards, sports arena and other such signage. OfficeMax also publishes full-color catalogs and has introduced catalogs on CD-ROM to further communicate the benefits of shopping at OfficeMax. Advertising campaigns and promotions are conducted continuously throughout the year to reach new and existing customers. To further increase sales, OfficeMax takes advantage of seasonal selling opportunities. Special marketing programs are developed to support the Back-To-School selling period, the Christmas holiday season, plus the January "re-stocking" Back-To-Basics period. Additional marketing opportunities arise during the Mother's Day, Father's Day and Graduation selling periods. STORES The OfficeMax office products superstore concept is based upon a prototype that ranges from approximately 23,500 to 36,000 square feet. These superstores are generally destination oriented locations in high-traffic, suburban strip-mall shopping centers that provide customers easy access and ample store-front parking. Each superstore displays merchandise in accordance with a corporate developed plan-o-gram to ensure that it utilizes optimal display techniques and provides a consistent and attractive shopping environment for customers. The Company continuously re-evaluates the attributes of its prototype store model and periodically makes adjustments to the desired store layout. These changes are integrated into new stores as they are opened and are also considered when the Company remodels existing units. The Company's latest prototype is characterized by an increased degree of visual acuity, a central computer and business electronics section and a segregated CopyMax "print-for-pay" area. Management believes that attractive and up-to-date stores contribute to customer satisfaction and loyalty, leading to increased sales. Prior to fiscal 1996, store remodels occurred regularly at intervals ranging from three to four years. However, because of the success of the Company's latest prototype, 154 existing superstores were remodeled during fiscal 1996 and plans are in place to remodel 120 more during fiscal 1997. All new stores opened after November 30, 1996 were TriMax locations, which feature a version of CopyMax and FurnitureMax along with the traditional OfficeMax superstore. Introduced in July 1995, the store-within-a-store CopyMax units feature a broad assortment of "print-for-pay" services for businesses and consumers ranging from self-service copying to digital printing and publishing as well as color copying, custom printing and related specialty services. Approximately 4,000 to 6,000 square feet are devoted to a full service CopyMax "hub" location, which utilizes the latest digital printing equipment and technology and serves as a centralized production facility. Mini-CopyMax "spoke" locations are either converted business service centers in existing stores that have or will be remodeled, or employed in new locations which total size approximates 23,500 square feet. These spoke locations are served by a hub utilizing the "CopyMax Link" software. This link software, a modem based solution that provides the capability to transmit documents to any CopyMax location, creates a "hub-and-spoke" concept that optimizes equipment in the CopyMax hubs. Customers can also use CopyMax Link software loaded on their computers to download documents for reproduction at a CopyMax location. This link 6 7 technology has enabled the Company to rapidly roll out the CopyMax concept, and the Company has quickly emerged as one of the largest "print-for-pay" operations in the country with 418 locations in fiscal 1996. Another store-within-a-store module, FurnitureMax features an extensive selection of office furniture from the ready-to-assemble products currently sold by OfficeMax to a broader assortment of office chairs, dividers, filing cabinets and higher-end case goods, desks and credenzas. FurnitureMax also offers specialized services such as customized space planning, on site consultation, installation, furniture setup and delivery. Full size FurnitureMax stores are a 4,000 to 8,000 square foot addition to an existing OfficeMax superstore while mini-FurnitureMax units are a 2,000 square foot module. A TechMax department is now included in the Company's newest store format. This module showcases the latest in computers, wireless digital technology, communications products and similarly related technology products and features specially trained associates to serve the TechMax customers. EXPANSION Small and Medium-Sized Business Market. The Company's expansion strategy primarily focuses on new store growth and its new retailing concepts. The Company opened 96 superstores in fiscal 1996 and intends to continue its rapid growth by opening approximately 125-150 additional superstores in fiscal 1997. At the end of fiscal 1996, OfficeMax operated 94 full size FurnitureMax stores of which 70 were opened in fiscal 1996. The Company intends to continue with the rollout of this concept in fiscal 1997 by introducing full size FurnitureMax units in up to 45 new and existing OfficeMax locations across the United States. During fiscal 1996, the Company opened 410 CopyMax units, including the conversion of over 340 existing business service centers to mini-CopyMax units, bringing the total number of units to 418. The Company intends to add approximately 250 CopyMax locations in fiscal 1997, including up to 55 additional full service hubs. Large Business Market. OfficeMax has undertaken several initiatives to better serve the needs of its larger customers, predominately through its catalog and delivery operations. One such initiative is OfficeMax Corporate Direct which features customized online ordering for customers with 50 to 300 office employees. The Company also serves the needs of large businesses through its expanded full-color catalogs featuring approximately 5,000 items and with other specialized catalogs. These catalogs, which are distributed periodically to businesses and individual customers, feature toll-free telephone ordering and typically offer next business day delivery. During fiscal 1996, the Company opened five expanded delivery centers, bringing its total delivery centers to 17. In contrast to the small business, home office and individual consumer customer focus of OfficeMax's retail superstores, OfficeMax Corporate Direct, the expanded OfficeMax catalog and the Company's delivery centers enable larger businesses, municipalities and school systems to purchase from OfficeMax on much the same basis as they could from contract stationers and other traditional office product suppliers. International. The Company has entered into a joint venture agreement with Grupo OpriMax, a Mexican corporation, and opened two OfficeMax stores in Mexico with eight more stores planned in fiscal 1997. In addition, the Company signed an agreement with JUSCO Company Ltd., a Japanese corporation, to open stores in Japan. OfficeMax has a 19% interest in each joint venture. There can be no assurance that any such venture will become operational, or, if it does, that it will be profitable. Ultimately, the Company's international expansion will depend upon general economic and business conditions affecting consumer spending, the availability of desirable locations, the negotiation of acceptable terms and the availability of adequate capital. CUSTOMER SERVICE The Company believes that a fundamental element of its success is its customer-oriented culture that demands a high level of customer service from each of its associates. The Company views the quality of its customers' interaction with its associates as critical to maintaining customer confidence and loyalty. Through its emphasis on 7 8 training and personnel development, the Company believes it attracts and retains well-qualified, highly motivated associates committed to providing superior levels of customer service. Management has undertaken a number of initiatives that demonstrate its commitment to excellent in-store customer service. For example, by centralizing most administrative functions at its corporate offices and call centers, OfficeMax enables its in-store associates to focus primarily on customer service. In addition, the Company has implemented ServiceMax, a program that details customer service standards to be met by each store-level associate and assigns to each superstore one or more associates whose primary responsibility is to ensure that each customer receives prompt, courteous and knowledgeable service. The Company has also developed proprietary Computer Based Training (CBT) to ensure that associates receive the training needed to keep pace with new technology and learn more effective methods of customer service. The Company continually analyzes and refines its methods of conducting business at the store level and in its delivery centers. For example, the Company has formally identified internal best practices, known as MaxPractices, that enable store associates to execute in-store and facility activities more efficiently. The Company views MaxPractices as an ongoing, evolving program of operational excellence to be carried out at each of the Company's locations and its corporate headquarters and call centers. MANAGEMENT INFORMATION SYSTEMS OfficeMax has developed comprehensive operational and administrative controls using centralized computer systems which rapidly collect and disseminate information between corporate headquarters and each store. This system has enabled OfficeMax to enhance customer service and to achieve strong financial controls by enabling management to react quickly and efficiently to critical store-level information. The Company uses, at its headquarters, a platform of Unix-based parallel processors which supports a wide variety of mission critical applications, ranging from merchandise replenishment to order fulfillment, electronic retailing and financial systems. This "open system" architecture provides seamless connectivity to a number of special purpose applications that provide the information required to make timely and accurate decisions. This technology also provides "scalability," the ability to support growth within the same platform. During 1996, the Company launched FutureMax, an information systems replatforming project based on improved client-server systems and technology. FutureMax is comprised of three major application suites, merchandising, inventory management and financial systems, as well as a broad replatforming of the Company's information systems' technical infrastructure. OfficeMax has invested approximately $40 million in the last two years to upgrade systems and controls and intends to continue investing aggressively in this area to support its growth. The Company operates a proprietary in-store computer system called "StoreMax" that allows the daily tracking of inventory receipts through the use of portable handheld radio frequency terminals. These terminals permit store managers to scan a product on the shelf and instantly retrieve product specific information, such as recent sales history, gross profit margin and inventory levels. In-store point-of-sale registers capture sales information at the time of each transaction at the category and SKU level by the use of bar-code scanners that update store-level perpetual inventory levels. This information is transmitted on a daily basis to corporate headquarters, where it is evaluated and used in merchandising and replenishment decisions. In addition, StoreMax is used to transmit data to each store relating to its key day-to-day operations. The Company utilizes an online advanced "frame-relay" network which supports data communication between headquarters and its stores, delivery and call centers. This technology is employed to centralize credit card and check authorization and validate transactions. In addition, the network enhances intra-Company communication and supports electronic maintenance of in-store technology. The Company has also launched a plan to develop its own intranet, known as @Max, which will provide information on demand to all of the Company's associates. 8 9 The Company has implemented a "quick response" program with its vendors for the purpose of reducing inventory levels and increasing inventory turnover. As part of this program, the Company uses electronic data interchange ("EDI"), in lieu of paper copy, for approximately 90% of its purchase orders and approximately 85% of its vendor invoices. EDI provides certain advantages such as immediate confirmation of the price, delivery terms and quantity of merchandise ordered. In addition, the Company has been experimenting with vendor-managed inventory programs with a select number of vendors. Under these programs, the Company shares its sales information for a particular SKU with the vendor and the vendor, rather than the Company, assumes responsibility for replenishment decisions. COMPETITION The office products industry, which includes both national superstores chains and other indirect competitors, is highly competitive. Businesses in the office products industry compete on the basis of pricing, product selection, convenience, customer service and ancillary business offerings. As a result of the consolidation of the office products superstore industry, OfficeMax currently has only two direct competitors, Staples and Office Depot, which are similar to the Company in terms of store format, pricing strategy and product selection. Of the over 20 office products superstore chains that opened between approximately 1986 and 1994 all but OfficeMax, Staples and Office Depot have either been acquired or gone out of business. In addition, if consummated, the proposed merger of Staples and Office Depot would leave the office products superstore industry with OfficeMax and the combined Staples/Office Depot entity as the only two high-volume, national, discount office products superstore chains. While not all OfficeMax stores currently compete with either Staples or Office Depot stores, regardless of whether the merger is consummated, the Company believes it will face increased competition from Staples and Office Depot, or a combination thereof, as the remaining office product superstore chains expand their operations in the same markets. The Company believes that it competes favorably with Staples and Office Depot through consistent execution of its business strategy, the components of which are designed to favorably differentiate OfficeMax from Staples and Office Depot. OfficeMax's indirect competitors include traditional office product retailers, electronics superstore retailers, mass merchandisers and wholesale clubs, and direct mail operators. Although these non-superstore companies sell office products and compete with OfficeMax in limited markets or with respect to limited product categories, OfficeMax does not consider them to be major direct competitors. These companies cannot provide all of the advantages that an office products superstore has to offer such as one-stop shopping convenience, discount prices, customer benefits and a full range of ancillary business services. For example, electronic superstore retailers, such as Circuit City and Best Buy, feature consumer electronics and computers which overlap with only a portion of the merchandise selection provided by OfficeMax. Some of OfficeMax's direct and indirect competitors may have greater financial resources than the Company. There can be no assurance that increased competition will not have an adverse effect on the Company. ASSOCIATES As of March 30, 1997, the Company had approximately 23,500 employees, including 12,419 full-time and 10,983 part-time associates, 1,006 of whom were employed at its Corporate headquarters, divisional offices and call centers and 22,396 of whom were employed at OfficeMax stores and delivery centers. None of the Company's associates is subject to a collective bargaining agreement. Management believes that its relationship with its associates is satisfactory. 9 10 ITEM 2. PROPERTIES OfficeMax superstores are relatively immature, having been opened as of March 30, 1997 an average of 3.2 years operating under the OfficeMax name and format. Of the Company's 579 superstores, 259 have been opened by OfficeMax within the last three years. Management believes that the Company's young stores represent an opportunity for future sales growth as they proceed through the maturation cycle. The Company occupies virtually all of its stores pursuant to long-term leases. These leases generally have terms ranging from 10 to 25 years plus renewal options. Most of these leases require the Company to pay minimum rents, subject to periodic adjustments, plus other charges including utilities, real estate taxes, common area maintenance and, in limited cases, contingent rentals based on sales. Several of the Company's store leases are guaranteed by Kmart Corporation as a result of Kmart's previous equity ownership in the Company. The Company and Kmart are parties to a Lease Guaranty, Reimbursement and Indemnification Agreement, pursuant to which Kmart has agreed to maintain existing guarantees and provide a limited number of additional guarantees, and the Company has agreed, among other things, to indemnify Kmart against liabilities incurred in connection with those guarantees. As of March 30, 1997, OfficeMax had 579 superstores in 48 states and Puerto Rico. The following table details OfficeMax superstores by state and territory:
Alabama 6 Nebraska 3 Alaska 2 Nevada 7 Arkansas 1 New Hampshire 3 Arizona 15 New Jersey 15 California 48 New Mexico 3 Colorado 11 New York 34 Connecticut 8 North Carolina 12 Delaware 1 North Dakota 1 Florida 34 Ohio 42 Georgia 13 Oklahoma 3 Hawaii 3 Oregon 6 Idaho 4 Pennsylvania 26 Illinois 36 Rhode Island 2 Indiana 13 South Carolina 7 Iowa 5 South Dakota 2 Kansas 6 Tennessee 18 Kentucky 3 Texas 49 Louisiana 1 Utah 10 Maine 1 Washington 13 Massachusetts 14 Virginia 12 Michigan 33 West Virginia 3 Minnesota 16 Wisconsin 12 Mississippi 2 Wyoming 2 Missouri 14 Puerto Rico 3 Montana 1
10 11 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its business. The Company believes that no pending litigation to which it is a party will have a material adverse effect on its liquidity, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names, positions and ages of the executive officers of the Company as of March 30, 1997. Each executive officer will serve until his successor is selected by the Board of Directors or until his earlier resignation or removal.
NAME POSITION AGE - ---------------- ---------------------------------- --- Michael Feuer Chairman of the Board and 52 Chief Executive Officer John C. Martin President, Retail Stores 47 John C. Belknap Executive Vice President and 50 Chief Financial Officer Frederic M. Comins, Jr. Executive Vice President, 49 Human Resources and Administration Edward L. Cornell Executive Vice President, 48 New Business Development George H. Luckey Executive Vice President, 51 General Merchandise Manager James R. Tener Executive Vice President, 48 Store Operations Mark L. Keschl Senior Vice President, 41 Real Estate Mark L. Race Senior Vice President, 49 Store Planning Jeffrey L. Rutherford Senior Vice President, 36 Finance and Treasurer Ann M. Holt Vice President, Controller 40 Ross H. Pollock Vice President, Secretary and 41 General Counsel
11 12 Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief Executive Officer. He has served as a Director of the Company since its inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer served as President. From May 1970 through March 1988, Mr. Feuer was associated with Fabri-Centers of America, Inc., a publicly held, New York Stock Exchange-listed, national retail chain which then had over 600 stores. In his most recent capacity prior to his departure, Mr. Feuer served Fabri-Centers as Senior Vice President and a member of that company's executive committee. Mr. Martin has served as President, Retail Stores of the Company since March 1996. From November 1993 to March 1996, Mr. Martin served as Executive Vice President, Store Operations of the Company. From March 1993 to November 1993, Mr. Martin served as Senior Vice President of the Company. From March 1992 to March 1993, Mr. Martin served as Vice President, Group Merchandise Manager. From August 1988 to March 1992, Mr. Martin was Senior Vice President Merchandising with Boston Distributors, Inc., a national hard goods distributor. Mr. Martin has also held various merchandise management and vice president positions with Gold Circle Stores and various subsidiaries of Federated Department Stores, Inc. Mr. Belknap has served as Executive Vice President and Chief Financial Officer of the Company since December 1995. From February 1994 to February 1995, Mr. Belknap was Executive Vice President and Chief Financial Officer of Zale Corporation, a 1,200 store jewelry retail chain. From January 1990 to January 1994 and from February 1995 to December 1995, Mr. Belknap was an independent financial consultant. From January 1989 to May 1993, Mr. Belknap also was a director of, and consultant to, Finlay Enterprises, Inc., an operator of leased fine jewelry departments in major department stores nationwide. Prior to 1989, Mr. Belknap was Chief Financial Officer of Seligman & Latz, Kay Corporation, and its subsidiary, Kay Jewelers, Inc. Mr. Comins has served as Executive Vice President, Human Resources and Administration since September 1996. From July 1990 to November 1995, Mr. Comins was associated with Kmart Corporation, serving most recently as Senior Vice President-Executive & Organization Resources. Mr. Cornell has served as Executive Vice President, New Business Development of the Company since December 1995. From February 1993 to December 1995, Mr. Cornell served as Executive Vice President and Chief Financial Officer of the Company. From February 1992 to February 1993, Mr. Cornell served as Senior Vice President and Chief Financial Officer of the Company. From March 1983 to February 1992, Mr. Cornell was associated with Things Remembered, a specialty retail subsidiary of Cole National Corporation, serving most recently as Executive Vice President and Chief Financial Officer. Mr. Cornell has also held various management positions with Wal-Mart Stores, Inc. and Zayre Corporation. Mr. Luckey has served as Executive Vice President, General Merchandise Manager of the Company since February 1993. From July 1989 to February 1993, Mr. Luckey served as Senior Vice President, General Merchandise Manager of the Company. Prior to July 1989, Mr. Luckey was a general merchandising manager for Hypershops, Inc. (operating under the name Biggs), a hypermarket retailer in Cincinnati, Ohio. Mr. Luckey has also held various merchandise management positions with The May Department Stores and Carlisle Department Stores. Mr. Tener has served as Executive Vice President, Store Operations of the Company since April 1996. From March 1995 to April 1996, Mr. Tener was President/Chief Operating Officer of Busybody, Inc., a 50 store fitness equipment retailer. From December 1989 to July 1994, Mr. Tener was Senior Vice President, Operations at Pier 1 Imports, a specialty home furnishing retailer with approximately 650 stores. From December 1988 to December 1989, Mr. Tener was Vice President, Regional Director of Operations at Marshalls, the off-price retailer and a former division of Melville, Inc. Prior to December 1988, Mr. Tener was associated with Gold Circle Stores, a division of Federated Department Stores, Inc., serving in various management and vice president positions for over 18 years. 12 13 Mr. Keschl has served as Senior Vice President, Real Estate of the Company since September 1993. From September 1992 to August 1993, Mr. Keschl worked as a real estate consultant, performing services for The Sports Authority, Inc., a large format sporting goods retailer. From November 1984 to August 1992, Mr. Keschl was associated with Toys-R-Us, Inc., serving most recently as Senior Vice President of Real Estate. Mr. Keschl has also held various real estate related positions with Arbor Drugs, a Michigan based chain of retail drug stores. Mr. Race has served as Senior Vice President, Store Planning of the Company since April 1996. From September 1992 to April 1996, Mr. Race served the Company as Vice President, Store Planning. From July 1991 to September 1992, Mr. Race served as Director of Construction of the Company. Prior to July 1991, Mr. Race was associated with Fabri-Centers of America, Inc. for 13 years where he held various store planning, construction and administrative service positions, including Director of Administrative Services from March 1987 to March 1991. Mr. Rutherford has served as Senior Vice President, Finance and Treasurer of the Company since February 1997. From January 1984 to January 1997, Mr. Rutherford was employed in various positions with the public accounting firm of Arthur Andersen LLP, most recently Senior Manager. Ms. Holt has served as Vice President, Controller of the Company since February 1997. From February 1995 to February 1997, Ms. Holt served as Divisional Vice President in the Financial Accounting group. From March 1992 to February 1995, Ms. Holt served as Director of Financial Accounting. From March 1990 to March 1992, Ms. Holt served as Assistant Controller of the Company. Prior to joining OfficeMax, Ms. Holt was associated with Milo Beauty and Barber Supply, Inc., a national distributor of beauty and barber supplies, for 13 years where she held various accounting and finance positions. Mr. Pollock has served as Vice President, Secretary and General Counsel of the Company since January 1997. From September 1988 to December 1996, Mr. Pollock practiced law with the law firm of Benesch, Friedlander, Coplan & Aronoff in its Cleveland, Ohio office. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The range of the high and low sales prices on the New York Stock Exchange for the Company's Common Shares during fiscal 1995 and fiscal 1996 is listed below:
Fiscal 1995 High Low - ----------- ---- --- 1st Quarter 12-1/8 9-7/8 2nd Quarter 14-3/8 9-3/4 3rd Quarter 17 14 4th Quarter 17-5/8 11-7/8 Fiscal 1996 High Low - ----------- ---- --- 1st Quarter 19-1/4 13-5/8 2nd Quarter 18-1/8 12-1/4 3rd Quarter 15-3/4 12-1/8 4th Quarter 15-1/4 9-7/8
The Company has never paid cash dividends on its common shares. The Company does not anticipate paying any cash dividends on its common shares in the foreseeable future because it intends to retain its earnings to finance the expansion of its business and for general corporate purposes. The declaration and payment will be at the discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends and other factors deemed relevant by the Company's Board of Directors. As of March 28, 1997, the Company had approximately 3,400 shareholders of record. On March 31, 1997, the closing market value per share was $ 13.00. 14 15 ITEM 6. SELECTED FINANCIAL DATA The selected financial data as of and for the fiscal years ended January 23, 1993, January 22, 1994, January 21, 1995, January 27, 1996 and January 25, 1997 is set forth below: (Dollars in millions, except per share and store data)
- ----------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal Fiscal Fiscal 1996 1995(1) 1994 1993 1992(2) - ----------------------------------------------------------------------------------------------------- OPERATING DATA Sales $ 3,179.3 $ 2,542.5 $ 1,841.2 $ 1,421.8 $ 528.2 Gross profit 690.3 572.0 418.8 312.8 116.8 Operating income 105.5 86.3 55.6 20.0 0.5 Net income (loss) 68.8 125.8 30.4 10.8 (0.7) Earnings and pro forma earnings per common share(3) 0.55 1.04 0.27 0.09 -- OTHER FINANCIAL AND OPERATING DATA Percentage increase in sales 25.0% 38.1% 29.5% 169.2% 115.6% Comparable store sales increase(4) 11.0% 16.7% 17.0% 18.2% 28.5% End of period stores 564 468 388 328 179 FINANCIAL POSITION Working capital $ 488.8 $ 499.4 $ 211.9 $ 113.6 $ 30.6 Total assets 1,867.3 1,587.9 1,257.5 1,009.7 448.6 Total debt, including capital lease obligations 20.0 -- 0.3 0.8 1.3 Shareholders' equity 1,063.6 990.9 748.6 608.5 258.2 (1) Net income and earnings per common share includes $69.1 million, or $0.57 per share, after-tax gain from sale of Corporate Express, Inc. (2) Data for the period ended January 23, 1993 reflect partial year results from the acquisition of OW Office Warehouse on June 30, 1992. (3) Pro forma earnings per Common Share data for fiscal 1993 and 1994 give effect to the offering, the proceeds from the offering paid to Kmart and the issuance of additional Kmart shares and management shares as if such transactions had taken place at the beginning of that period. (4) Comparable store sales include the sales of a store beginning on the first day of the 53rd week of its operation, except for stores acquired from BizMart. Stores acquired from BizMart were first included in the comparable store sales calculation on August 21, 1994 to correspond to the 53rd week following substantial completion of their remodeling, remerchandising and conversion to the OfficeMax name, merchandise presentation and format.
15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales for fiscal 1996 increased 25% to $3,179,274,000 versus $2,542,513,000 in fiscal 1995, which had one additional week. This followed a 38% increase in fiscal 1995, of which 2.5% was attributable to the additional week, from $1,841,212,000 in fiscal 1994. The fiscal 1996 sales increase was primarily attributable to a full year's sales from the 80 stores opened during fiscal 1995, a comparable store increase of 11% and the additional partial year's sales from 96 new stores and 5 new delivery centers opened during fiscal 1996. Comparable stores sales in fiscal 1995 increased 17% from fiscal 1994. Cost of merchandise sold, including buying and occupancy costs, increased as a percentage of sales to 78.3% in fiscal 1996 from 77.5% in fiscal 1995, which increased from 77.3% in fiscal 1994. Correspondingly, gross profit as a percent of sales was 21.7% for fiscal 1996 compared to 22.5% and 22.7% for fiscal 1995 and 1994, respectively. The gross profit decline in fiscal 1996 and 1995 was primarily attributable to increased lower margin computer sales as a percentage of the total merchandise mix, offset by continued leveraging of occupancy costs and improved margins in paper-related merchandise and other supply categories. Store operating and selling expenses, which consist primarily of store payroll, operating and advertising expense, decreased to 15.8% of sales in fiscal 1996 from 16.5% of sales in fiscal 1995 and 17.1% of sales in fiscal 1994. These decreases were primarily as a result of leveraging advertising and payroll expense over higher sales volumes and continued expense control offset by increased non-capitalizable remodeling expense. Pre-opening expense was $10,649,000, $6,818,000 and $5,309,000 for fiscal 1996, 1995 and 1994, respectively, reflecting 96, 80 and 70 new store openings and the other retail units described below. Pre-opening expense averaged approximately $75,000 for an OfficeMax superstore for all three years, consisting primarily of store payroll, supplies and grand opening advertising. Additionally, in fiscal 1996 and 1995, pre-opening expense included the costs associated with opening 70 and 22 FurnitureMax units, respectively, which averaged approximately $25,000 per store, and 66 and eight CopyMax hub stores, respectively, which averaged approximately $35,000 per store. The Company's policy is to expense these items during the first full month of the store's operation. Consequently, pre-opening expenses in each period are generally a function of the number of new stores opened during that period. General and administrative expenses decreased slightly as a percentage of sales to 1.9% in fiscal 1996 from 2.0% in fiscal 1995. General and administrative expenses were 1.9% in fiscal 1994. These expenditures include information systems, infrastructure and management staffing to accommodate the Company's rapid growth. The slight decrease reflects the Company's rigorous cost control measures and the leveraging effect of a 25% sales increase. As the Company continues to aggressively develop and rollout new initiatives, general and administrative expenses are anticipated to grow slightly as a percentage of sales. Goodwill amortization was $9,390,000 in fiscal 1996, as compared to $9,414,000 in fiscal 1995 and $9,428,000 in fiscal 1994. Goodwill is capitalized and amortized over 40 years using the straight line method. Operating income for fiscal 1996 increased to $105,456,000, or 3.3% of sales, as compared to operating income of $86,253,000 and $55,629,000, or 3.4% and 3.0% of sales, in fiscal 1995 and 1994, respectively, as a result of the factors discussed above. 16 17 Interest income, net was $7,485,000 for fiscal 1996, as compared to $7,198,000 and $562,000 in fiscal 1995 and 1994, respectively. Interest income for fiscal 1996 and 1995 was primarily attributable to interest earned on cash received from the Company's July 20, 1995 public offering and the sale of its interest in the contract stationer, Corporate Express, Inc. Fiscal 1994 results reflected net cash transfers between the Company and Kmart Corporation as equity transactions and, accordingly, did not reflect interest expense on intercompany transactions. Equity income from affiliate was $2,178,000 in fiscal 1995 and represents the Company's proportionate share of income reported by Corporate Express, Inc. through September 10, 1995, the date prior to which the Company sold its entire interest in Corporate Express, Inc. In fiscal 1994, equity income from affiliate was $141,000 and represents the Company's proportionate share of income for the two months after OfficeMax increased its ownership interest in Corporate Express, Inc. and, accordingly, began to account for its investment under the equity method of accounting. Gain on sale of affiliate was $118,014,000 in fiscal 1995 resulting from the Company selling its entire interest in Corporate Express, Inc. Income taxes were $44,136,000 in fiscal 1996, $87,880,000 in fiscal 1995 and $25,975,000 in fiscal 1994 with effective tax rates of 39.1%, 41.1% and 46.1%, respectively. The effective tax rates for all three years were different from the statutory income tax rate primarily as a result of tax exempt interest, state and local taxes, equity income from affiliate and non-deductible goodwill amortization expense. Net income, as a result of the foregoing factors, was $68,805,000 in fiscal 1996. Net income in fiscal 1995 was $125,763,000 which includes a net after-tax gain of $69,124,000 resulting from the Company's sale of its entire interest in Corporate Express, Inc. Excluding the gain from the sale of Corporate Express, Inc., net income for fiscal 1995 was $56,639,000. This compares to $30,357,000 in fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES Net cash used for operations in fiscal 1996 was $24,313,000. Funding required for working capital was due to the additional inventory requirements for 96 new superstores and 5 new delivery centers, increased inventory levels in existing superstores reflecting primarily seasonal and computer merchandise buying opportunities, offset by higher accounts payable. Net cash used for investing activities was $106,748,000 for fiscal 1996, principally as a result of the purchase of fixed assets. Net cash provided by financing was $23,309,000 for fiscal 1996 and included the proceeds received from the corporate headquarters' mortgage and the sale of shares under the Company's share purchase plans. In fiscal 1997, the Company plans to open approximately 125 to 150 additional superstores, 45 FurnitureMax stores, 55 CopyMax stores, and remodel 120 existing superstores. Management estimates that the Company's cash requirements for the openings and remodels, exclusive of pre-opening expenses, will be approximately $1,200,000, $215,000, $430,000 and $196,000, respectively, for each additional OfficeMax superstore, FurnitureMax, CopyMax and store remodel. For an OfficeMax store, the requirements include an average of approximately $450,000 for leasehold improvements, fixtures, point-of-sales terminals and other equipment in the stores, and approximately $750,000 for the portion of store inventory that is not financed by accounts payable to vendors. Pre-opening expenses are expected to average approximately $75,000 for an OfficeMax superstore, $25,000 for a FurnitureMax store and $35,000 for a CopyMax store. The Company expects its funds generated from operations as well as its current cash reserves, and, when necessary, seasonal short-term borrowings will be sufficient to finance its operations and capital requirements, including its expansion strategy. Available through May 1999, the Company has a $100 million revolving credit facility against which no borrowings existed as of January 25, 1997. In addition, the Company is continually evaluating its financing options including an increase in its revolving credit facility. 17 18 SEASONALITY AND INFLATION The Company's business is somewhat seasonal, with sales and operating income higher in the third and fourth quarters, which include the Back-to-School period and the holiday selling season, respectively, followed by the traditional new year office supply restocking month of January. Sales in the second quarter's summer months are the slowest of the year primarily because of lower office supplies consumption during the summer vacation period. Management believes inflation has not had a material effect on the Company's financial condition or operating results for the periods presented. FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K, in future filings by the Company with the Securities and Exchange Commission (the "Commission"), in the Company's press releases, and in oral statements made by or with the approval of an authorized executive officer of the Company constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued by the Commission. The Company desires to take advantage of the "Safe Harbor" Provisions Effect Act. The words "believe," "expect," "anticipate," "intend," "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. The future operating results of the Company may be affected by general economic conditions and a number of other factors, including without limitation, the following: Recognizing that the Company's two direct competitors are attempting to merge, and that they may have greater resources than the Company, no assurance can be given that this merger, if consummated, will not have an adverse effect on the Company's business. The Company's expansion into new geographic markets in which its competitors are already established, and expansion of the Company's competitors into markets in which the Company is currently operating, have had, and may continue to have, an adverse effect on the Company's operations. In addition, the Company believes that it will face increased competition in the future as the Company and its competitors continue to expand their operations and scope of services. Any attempt by the Company or any of its competitors to reduce prices systematically to gain market share or otherwise could result in industry wide reduced prices and lower gross margins. Over the last few years, the Company's rapid growth has resulted largely from the Company's aggressive new store opening strategy. While the Company intends to continue pursuing an aggressive new store expansion strategy by opening approximately 125-150 new superstores in fiscal 1997 and by continuing to consider strategic acquisitions, there is no guarantee that the Company's historic growth rate can or will continue or that such new store openings or acquisitions will occur. The Company's ability to open new superstores at its planned rate is dependent on a number of factors, some of which are beyond the control of the Company. In addition, the Company's expansion strategy includes clustering new stores in existing markets, which results in some transfer of sales from existing stores to the new locations. While management believes that its aggressive expansion strategy will improve its overall market position and, ultimately, its profitability, there can be no assurance that this will occur. 18 19 The Company intends to continue to expand the operations of its related businesses, CopyMax, FurnitureMax and most recently QuadMax: Electronic Retailing -- initiatives which are still being developed and refined. The expansion of these related businesses requires the investment of significant cash and resources, which may diminish the Company's overall success and profitability. There is no guarantee that CopyMax, FurnitureMax or QuadMax ultimately will be profitable. The Company is largely dependent on the services of Michael Feuer, the Company's Co-Founder, Chairman and Chief Executive Officer, and its senior management. The loss of Mr. Feuer or any of the Company's other senior management could have an adverse impact on the Company. The Company has entered into a joint venture agreement with locally-based companies in each of Mexico and Japan. The Company is also exploring the possibility of expansion into other international markets as well. There is no guarantee that the Company will develop or maintain significant operations internationally or that any such operations will be successful. Any international operations established by the Company will be subject to risks similar to those affecting its North American operations in addition to a number of other risks, including lack of complete operating control, lack of local business experience, foreign currency fluctuations, language and other cultural barriers and political and economic instability. While the Company intends to continue investing aggressively in FutureMax, an information systems replatforming project based on improved client server systems and technology, to support the Company's rapid growth, there can be no assurance that these upgraded systems and controls will enhance the Company's profitability. In addition, although the Company continues to evaluate its distribution strategy and methods in order to determine how to utilize new and improved technology to increase inventory controls, reduce expenses and delivery lead times, there can be no assurance that changes in the Company's current distribution methods will accomplish these goals. The foregoing factors could affect the Company's actual results and could cause the Company's actual results during fiscal 1997 and beyond to be materially different from any anticipated results expressed in any forward-looking statement made by or on behalf of the Company. The Company expects that its current cash and cash equivalents and funds available under its revolving credit facility will be sufficient to fund its planned store openings and other operating cash needs for at least the next 12 months. However, there can be no assurance that the Company will not require additional sources of financing prior to that time as a result of unanticipated cash needs, acquisitions or other opportunities or disappointing operating results. There also can be no assurance that any additional funds required by the Company will be available to the Company on satisfactory terms. 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants ............................................. 20 Consolidated Statements of Income - Fiscal years ended January 25, 1997, January 27, 1996 and January 21, 1995 .................................... 21 Consolidated Balance Sheets - January 25, 1997 and January 27, 1996 ........... 22 Consolidated Statements of Cash Flows - Fiscal years ended January 25, 1997, January 27, 1996 and January 21, 1995 .................. 23 Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended January 25, 1997, January 27, 1996 and January 21, 1995 .................. 24 Notes to Consolidated Financial Statements .................................... 25
REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders of OfficeMax, Inc. In our opinion, the consolidated financial statements listed in the index on this page present fairly, in all material respects, the financial position of OfficeMax, Inc. and its subsidiaries at January 25, 1997 and January 27, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 25, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Cleveland, Ohio February 27, 1997 20 21 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Sales $ 3,179,274 $ 2,542,513 $ 1,841,212 Cost of merchandise sold, including buying and occupancy costs 2,489,016 1,970,536 1,422,400 ------------ ------------ ------------ Gross profit 690,258 571,977 418,812 Store operating and selling expenses 503,161 418,391 314,130 Pre-opening expenses 10,649 6,818 5,309 General and administrative expenses 61,602 51,101 34,316 Goodwill amortization 9,390 9,414 9,428 ------------ ------------ ------------ Total operating expenses 584,802 485,724 363,183 ------------ ------------ ------------ Operating income 105,456 86,253 55,629 Interest income, net 7,485 7,198 562 ------------ ------------ ------------ Income before income taxes and equity income from affiliate 112,941 93,451 56,191 Equity income from affiliate -- 2,178 141 Gain on sale of affiliate -- 118,014 -- ------------ ------------ ------------ Income before income taxes 112,941 213,643 56,332 Income taxes 44,136 87,880 25,975 ------------ ------------ ------------ Net income $ 68,805 $ 125,763 $ 30,357 ============ ============ ============ EARNINGS PER COMMON SHARE DATA (PRO FORMA IN FISCAL 1994): Earnings per common share $ 0.55 $ 1.04 $ 0.27 ============ ============ ============ Weighted average number of common shares outstanding 125,133,000 120,679,000 114,387,000 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements. 21 22 OFFICEMAX, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
- -------------------------------------------------------------------------------- JANUARY 25, JANUARY 27, 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current Assets: Cash and equivalents $ 258,111 $ 365,863 Accounts receivable, net of allowances of $861 and $659, respectively 39,455 27,039 Merchandise inventories 894,407 636,211 Other current assets 28,691 20,009 ----------- ----------- Total current assets 1,220,664 1,049,122 Property and Equipment: Buildings and land 16,843 5,966 Leasehold improvements 167,527 101,624 Furniture and fixtures 224,582 148,581 ----------- ----------- Total property and equipment 408,952 256,171 Less: Accumulated depreciation and amortization (116,084) (75,795) ----------- ----------- Property and equipment, net 292,868 180,376 Other assets and deferred charges 19,994 15,236 Goodwill, net of accumulated amortization of $41,842 and $32,452, respectively 333,744 343,134 ----------- ----------- $ 1,867,270 $ 1,587,868 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable-trade $ 490,417 $ 348,605 Accrued expenses and other liabilities 138,671 81,602 Accrued salaries and related expenses 32,504 33,482 Advertising payable 23,144 44,802 Taxes other than income taxes 45,865 41,222 Mortgage loan, current portion 1,300 - ----------- ----------- Total current liabilities 731,901 549,713 Mortgage loan 18,700 - Other long-term liabilities 53,105 47,266 ----------- ----------- Total liabilities 803,706 596,979 ----------- ----------- Commitments and contingencies (Note 5) - - Shareholders' equity: Common stock, without par value; 200,000,000 shares authorized; 123,766,614 and 123,496,170 shares issued and outstanding, respectively 854,094 850,557 Deferred stock compensation (1,149) (1,482) Retained earnings 210,619 141,814 ----------- ----------- Total shareholders' equity 1,063,564 990,889 ----------- ----------- $ 1,867,270 $ 1,587,868 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 22 23 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
- ------------------------------------------------------------------------------------------------ FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED FOR): OPERATIONS Net income $ 68,805 $ 125,763 $ 30,357 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 51,613 41,209 34,409 Deferred income taxes (2,529) (1,578) 11,394 Increase in other long-term liabilities 5,855 17,854 6,423 Gain on sale of affiliate -- (118,014) -- Other-net 409 (1,662) (469) Changes in current assets and current liabilities: Increase in inventories (258,196) (168,034) (62,788) Increase in accounts payable 141,812 16,444 92,576 Other-net (32,082) 49,246 10,782 --------- --------- --------- Net cash provided by (used for) operations (24,313) (38,772) 122,684 --------- --------- --------- INVESTING Capital expenditures (101,039) (81,433) (42,565) Acquisitions -- -- (46,365) Transfer of cash on deposit with related party -- 141,017 (141,017) Proceeds from sale of affiliate -- 195,831 -- Increase in other long-term assets (5,187) -- -- Other-net (522) 700 600 --------- --------- --------- Net cash provided by (used for) investing (106,748) 256,115 (229,347) --------- --------- --------- FINANCING Reduction in long-term debt and capital lease obligations (16) (295) (463) Net equity transactions with Kmart -- -- 95,839 Proceeds from initial public offering -- -- 421,343 Payment to Kmart for the proceeds received from initial public offering -- -- (421,343) Proceeds from mortgage loan 20,000 -- -- Proceeds from issuance of common stock, net 3,325 115,582 12,776 --------- --------- --------- Net cash provided by financing 23,309 115,287 108,152 --------- --------- --------- CASH AND CASH EQUIVALENTS Net increase (decrease) for the period (107,752) 332,630 1,489 Balance, beginning of period 365,863 33,233 31,744 --------- --------- --------- Balance, end of period $ 258,111 $ 365,863 $ 33,233 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 23 24 OFFICEMAX, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------------------- COMMON SHARES ADDITIONAL DEFERRED NOTES ------------- PAID-IN STOCK RECEIVABLE RETAINED NUMBER AMOUNT CAPITAL COMPENSATION COMMON SHARE EARNINGS TOTAL - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 22, 1994 52,607,667 $ 187,198 $ 410,307 -- -- $ 11,005 $ 608,510 Net equity transactions with Kmart -- -- 95,839 -- -- -- 95,839 Recapitalization prior to initial public offering -- 110,114 (84,803) -- -- (25,311) -- Issuance of common shares at initial public offering 52,726,500 421,343 -- -- -- -- 421,343 Payment to Kmart at initial offering -- -- (421,343) -- -- -- (421,343) Issuance of common shares to Kmart at initial public offering 7,165,742 -- -- -- -- -- -- Sale of shares under management share purchase plan(including tax benefit) 790,577 6,989 -- (1,623) (5,053) -- 313 Sale of shares under employee share purchase plan (including tax benefit) 1,318,305 10,064 -- -- -- -- 10,064 Exercise of stock options 11,796 47 -- -- -- -- 47 Issuance of stock options -- 721 -- (721) -- -- -- Issuance of common shares under director plan 6,521 75 -- (75) -- -- -- Reduction in notes receivable, common share stock -- -- -- -- 3,251 -- 3,251 Amortization of deferred compensation -- -- -- 195 -- -- 195 Net income -- -- -- -- -- 30,357 30,357 ------------------------------------------------------------------------------------------ BALANCE AT JANUARY 21, 1995 114,627,108 736,551 -- (2,224) (1,802) 16,051 748,576 Issuance of common shares under director plan 17,678 226 -- (226) -- -- -- Issuance of common shares at July 20,1995 offering 8,627,774 110,177 -- -- -- -- 110,177 Exercise of stock options 53,067 243 -- -- -- -- 243 Sale of shares under employee share purchase plan (including tax benefit) 170,543 3,360 -- -- -- -- 3,360 Amortization of deferred compensation -- -- -- 968 -- -- 968 Reduction of notes receivable, common share stock -- -- -- -- 1,802 -- 1,802 Net income -- -- -- -- -- 125,763 125,763 ------------------------------------------------------------------------------------------ BALANCE AT JANUARY 27, 1996 123,496,170 850,557 -- (1,482) -- 141,814 990,889 Issuance of common shares under director plan 18,749 212 -- (150) -- -- 62 Exercise of stock options 164,980 926 -- -- -- -- 926 Sale of shares under management share purchase plan(including tax benefit) (7,848) 681 -- (475) -- -- 206 Sale of shares under employee share purchase plan (including tax benefit) 94,563 1,718 -- -- -- -- 1,718 Amortization of deferred compensation -- -- -- 958 -- -- 958 Net Income -- -- -- -- -- 68,805 68,805 ------------------------------------------------------------------------------------------ BALANCE AT JANUARY 25, 1997 123,766,614 $ 854,094 -- ($1,149) -- $ 210,619 $1,063,564 ==========================================================================================
See accompanying Notes to Consolidated Financial Statements. 24 25 OFFICEMAX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of high-volume, deep-discount office products superstores. At January 25, 1997, the Company owned and operated 564 stores in 47 states and Puerto Rico and had a 19% investment in a joint venture in Mexico which operates OfficeMax superstores similar to those in the U.S. The Company's initial public offering (the "Offering") on November 2, 1994 resulted in 80,325,000 common shares, without par value, being sold to the public. At the time of the Offering, Kmart Corporation ("Kmart") owned a 92.7% equity interest in the Company. The proceeds from the Offering were paid to Kmart and 7,165,742 common shares (the "additional Kmart Shares") were issued to Kmart, reducing Kmart's ownership in the Company to approximately 25%. Additionally, the Company, at the time of the Offering, issued 790,577 common shares (the "Management Shares") pursuant to a Management Share Purchase Plan adopted in connection with the Offering. See Note 2 for further discussion of the Company's historical relationship with Kmart. On July 20, 1995, the Company sold 8,627,774 of its common shares in a public offering (the "Secondary Offering"). Net proceeds from the sale of these shares amounted to $110,177,000, after deducting underwriters' discounts and commissions. As part of the Secondary Offering, Kmart sold all of its remaining shares. BASIS OF PRESENTATION The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments in affiliates, representing less than 20% of the ownership of such companies, are accounted for under the cost method and loans, which the Company makes from time to time to these affiliates, are recorded in other assets. The Company's fiscal year ends on the Saturday prior to the last Wednesday in January. Fiscal years 1996 ("fiscal 1996") and fiscal year 1994 ("fiscal 1994") consisted of 52 weeks and ended on January 25, 1997 and January 21, 1995, respectively. Fiscal year 1995 ("fiscal 1995") consisted of 53 weeks and ended on January 27, 1996. On May 22, 1996, the Board of Directors declared a three-for-two stock split in the form of a 50% share dividend payable July 9, 1996 to shareholders of record as of June 3, 1996. All share, average share and per share amounts included in the accompanying consolidated financial statements and notes thereto give retroactive effect to the share dividend. Certain reclassifications have been made to prior year amounts to conform to the current presentation. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. EARNINGS PER COMMON SHARE Earnings per common share is based on the weighted average of common and common equivalent shares outstanding in fiscal 1996 and fiscal 1995. Common equivalent shares relate to outstanding stock options. The pro forma earnings per common share data for fiscal 1994 has been prepared assuming that the Offering and the issuance of the Additional Kmart Shares and Management Shares had taken place at the beginning of the period. Options outstanding under the Company's option plans and options granted in connection with the Offering are treated as common share equivalents for purposes of pro forma earnings per common share. The pro 25 26 forma earnings per common share data are not necessarily indicative of what actual earnings per common share would have been had such transactions occurred on the basis assumed.
The pro forma weighted average number of common shares outstanding for fiscal 1994 is as follows: Common Shares outstanding during year 52,685,000 Common Share equivalents for options outstanding 842,000 Pro forma adjustments: Common Shares offered by the Company in the Offering 52,727,000 Additional Kmart shares 7,165,000 Management Shares 790,000 Common Share equivalents for options granted in connection with the Management Shares 178,000 ----------- Total pro forma weighted average number of shares 114,387,000 ===========
CASH AND EQUIVALENTS Cash and equivalents includes short-term investments with original maturities of 90 days or less. Marketable securities are classified as held-to-maturity. These securities are carried at amortized cost of $190,674,000 at January 25, 1997 and consist primarily of investments in commercial paper and government securities with maturities of ninety days or less. INVENTORIES Inventories are valued at the lower of average cost or market. ACCOUNTS RECEIVABLE Accounts receivable primarily consists of amounts due from vendors under rebate, cooperative advertising and other contractual programs and trade receivables not financed through outside programs. Also included in this balance is a receivable (for a credit) due from a service provider. See Note 5 for further discussion. PROPERTY AND EQUIPMENT Components of property and equipment are recorded at cost and depreciated over their respective estimated useful lives using the straight-line method for financial statement purposes and accelerated methods for income tax purposes. Most store properties are leased, and improvements are amortized over the lesser of the term of the lease or 20 years. Other annual rates used in computing depreciation are 14% - 20% for store fixtures and 20% - 33% for other fixtures and equipment. INCOME TAXES The Company uses the liability method whereby income taxes are recognized during the year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax bases of assets and liabilities. GOODWILL Goodwill is amortized over 40 years using the straight-line method. The Company evaluates the recoverability of goodwill and reviews the amortization period on an annual basis by comparing the undiscounted cash flows from operating activities with the carrying value of goodwill. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. 26 27 CURRENT LIABILITIES Under the Company's cash management system, checks issued pending clearance result in overdraft balances for accounting purposes and are included in the accounts payable balance. The amounts reclassified were $107,317,000 and $75,027,000 for fiscal 1996 and 1995, respectively. FINANCIAL INSTRUMENTS The recorded value of the Company's financial instruments, which includes short term securities, accounts receivable, accounts payable and mortgage payable, approximates fair value. Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash investments. The Company invests its excess cash in high quality securities placed with major banks and financial institutions. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. STOCK BASED COMPENSATION Effective January 27, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," ("FAS123"). As provided for under FAS123, the Company has elected to continue to account for stock based compensation under the provisions of Accounting Principles Boards ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in FAS123 had been applied, are presented in Note 10. PRE-OPENING EXPENSES Costs associated with the opening of a new store are expensed during the first month of the store's operation. NOTE 2. RELATIONSHIP AND INTERCOMPANY AGREEMENTS WITH KMART CORPORATION INTERCOMPANY AGREEMENT Prior to the Offering, all amounts necessary to fund the Company's working capital and expansion, to the extent not provided through internally generated funds, were provided by Kmart. These amounts have been reflected in the Company's consolidated financial statements as equity transactions, and the Company recorded such transactions as additional paid-in capital. Net equity transactions in fiscal 1994 totaled $95,839,000 and consisted primarily of cash management and the additional investment in Corporate Express, Inc. For the period subsequent to the Offering and prior to July 20, 1995, Kmart provided the Company participation in certain centrally managed employee benefit and self-insurance programs. The Company had a similar arrangement with Kmart prior to the Offering, including the allocation of administrative costs related to Kmart's specialty retail division. This agreement terminated on July 20, 1995. CASH MANAGEMENT AGREEMENT Prior to the Offering and for a period of 180 days after the Offering, Kmart provided the Company with cash management services and financing, including the investment of surplus cash. The Company's historical financial statements reflect net funding provided by Kmart to the Company as adjustments of Kmart's investment in the Company and, accordingly, do not reflect interest expense on net cash transfers between the Company and Kmart. Had such transactions, except those relating to acquisitions, between the Company and Kmart been accounted for as short-term loans, and assuming the Company's anticipated incremental borrowing rate under its Revolving Credit Facility was in effect throughout the period, on a pro forma basis the Company would have incurred interest expense of $1,600,000 for fiscal 1994. Under the agreement, which expired on May 8, 1995, the Company had $141,017,000 in excess cash on deposit with Kmart at January 21, 1995. 27 28 LEASE GUARANTEE AGREEMENT Kmart continues to guarantee certain of the Company's leases in effect at the date of the Offering and provides guarantees which it previously committed to with respect to stores opened after the Offering and prior to the end of fiscal 1995. Such lease guarantees are provided by Kmart at no cost to the Company. The Company has agreed to indemnify Kmart for any losses incurred by Kmart as a result of actions, omissions or defaults on the part of OfficeMax, as well as for all amounts paid by Kmart pursuant to Kmart's guarantees of the Company's leases. The agreement contains certain financial and operating covenants, including restrictions on the Company's ability to pay dividends, incur indebtedness, incur liens or merge with another entity. TAX ALLOCATION AND INDEMNIFICATION AGREEMENT The Company remains severally liable, with Kmart and Kmart's other subsidiaries, for Kmart's federal tax liabilities for any period in which the Company was included in the Kmart consolidated return. However, Kmart will indemnify the Company for any federal income tax liability of Kmart or any of Kmart's subsidiaries (other than that which is attributable to the Company) that the Company may be required to pay; further, the Company will indemnify Kmart for any of the Company's federal income tax liabilities which Kmart may be required to pay. The Company was included in the consolidated United States federal income tax return filed by Kmart for the taxable period ending on or before November 9, 1994, the settlement date of the Offering. Accordingly, the provision for federal income taxes and the related payments or refunds of tax relating to this period were determined on a consolidated basis. The Company's federal income tax provision and related tax payments or refunds have been reflected in the Company's financial statements in accordance with Kmart's tax allocation policy. The Company's income tax provisions computed on a stand alone company basis in fiscal 1994 would not have been materially different from those recorded in its financial statements. NOTE 3. ACQUISITIONS AND INVESTMENTS CORPORATE EXPRESS On September 11, 1995, the Company sold its interest in Corporate Express, Inc. ("Corporate Express") for $195,831,000, resulting in a gain of $118,014,000 (after-tax gain of $69,124,000, or $0.57 per share). Prior to the sale of its investment, the Company owned approximately 20% of Corporate Express. NOTE 4. DEBT LINE OF CREDIT The Company has entered into a credit agreement for a $100 million revolving credit facility ("Revolving Credit Facility") with its principal bank and a syndicate of five other domestic banks. The Revolving Credit Facility provides for borrowings bearing an interest rate based on the principal bank's prime rate or reserve adjusted LIBOR plus .20% to .325%. In addition, the Company must also pay on a quarterly basis fees ranging from .125% to .175% per annum on the available and unused portion of the Revolving Credit Facility. The Revolving Credit Facility expires May 8, 1999, but can be extended for one year provided the Company meets certain requirements. Standby letters of credit issued in connection with the Company's self insurance program are considered outstanding amounts under the Revolving Credit Facility and totaled $10,675,000 and $6,975,000 as of January 25, 1997 and January 27, 1996, respectively. There were no borrowings under the Revolving Credit Facility as of January 25, 1997 and January 27, 1996. MORTGAGE On January 16, 1997, the Company entered into a $20 million mortgage agreement (the "Mortgage") secured by its Shaker Hts., Ohio international corporate headquarters. The Mortgage has a fixed term of 10 years, quarterly amortization payments of $325,000 plus interest at 6.99% per annum (after giving effect to an interest rate swap) with a final payment of $7 million due at maturity. Maturities of long term borrowings will be $1.3 million over each of the next five years. 28 29 The Revolving Credit Facility and the Mortgage contain similar financial covenants with respect to consolidated net worth, fixed charge coverage, funded indebtedness and consolidated leverage ratios. NOTE 5. COMMITMENTS AND CONTINGENCIES The Company is currently in discussions with a service provider concerning amounts that the Company claims it is entitled to pursuant to the terms of an ongoing service contract. The Company has remitted all amounts currently due under the terms of the agreement and has recorded a receivable for a credit of approximately $15 million based on management's interpretation of the terms and conditions of the contract. There are also various other claims, lawsuits and pending actions against the Company incident to the Company's operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. However, in the event of an unanticipated final determination in respect of certain outstanding matters, the Company's consolidated net income for the period in which such determination occurs could be materially affected. NOTE 6. PRIVATE LABEL CREDIT CARD PROGRAM The Company has an arrangement with a financial services company ( the "Issuer") whereby the Issuer manages two private label credit card programs for the Company. The credit card accounts, and receivables generated thereby, are owned by the Issuer. Under the terms of the agreement, the Issuer charges the Company a fee to cover the Issuers' cost of providing credit and collecting the receivables which are non-recourse to the Company. NOTE 7. INCOME TAXES The provision (benefit) for income taxes consists of:
- ------------------------------------------------------------------------------------- FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------- Current Federal $39,275 $72,277 $10,382 State and local 5,815 16,839 4,200 Foreign 1,575 342 - Deferred (2,529) (1,578) 11,393 ------------------------------------------- Total income taxes $44,136 $87,880 $25,975 ============================================
A reconciliation of the federal statutory rate to the Company's effective tax rate follows:
- ------------------------------------------------------------------------------------- FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, 1997 1996 1995 - ---------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 3.4% 5.2% 4.8% Goodwill amortization 2.9% 1.5% 5.9% Tax exempt interest (1.6)% (.6)% - Other (.6)% - .4% ---------------------------------------- Total income taxes 39.1% 41.1% 46.1% =========================================
29 30
Deferred tax assets (liabilities) resulted from the following: - -------------------------------------------------------------------- FISCAL YEAR JAN. 25, JAN. 27, (In thousands) 1997 1996 - -------------------------------------------------------------------- Deferred tax assets (liabilities): Federal tax loss carryforwards $ - $ 946 Inventory 2,400 1,587 Property and equipment (1,494) (462) Accrued expenses not currently deductible 32,736 29,042 ------------------------- Total deferred tax assets $33,642 $31,113 ==========================
NOTE 8. LEASES DESCRIPTION OF LEASING ARRANGEMENTS The Company conducts operations primarily in leased facilities. Store leases are generally for terms of 10 to 25 years with multiple five to ten year renewal options which allow the Company the option to extend the life of the lease up to 20 years beyond the initial noncancellable term at escalated rents. Certain leases provide for additional rental payments based on a percent of sales in excess of a specified base. Also, certain leases provide for payment by the Company of executory costs (taxes, maintenance and insurance). LEASE COMMITMENTS Future minimum lease payments and future minimum rentals at January 25, 1997 were as follows:
FISCAL YEAR OPERATING (In thousands) LEASES - -------------------------------------------------- 1997 .................... $ 185,297 1998 .................... 179,804 1999 .................... 172,631 2000 .................... 162,963 2001 .................... 145,119 Later Years ....................... 964,859 ---------- Total minimum lease payments....... $1,810,673 ==========
RENTAL EXPENSE A summary of operating lease rental expense and short-term rentals follows:
- -------------------------------------------------------------------- FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, (In thousands) 1997 1996 1995 - -------------------------------------------------------------------- Minimum rentals $153,637 $117,294 $93,013 Percentage rentals 783 555 365 ----------------------------------------- Total $154,420 $117,849 $93,378 ========================================
30 31 NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------------------------------------------- FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21, (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Cash transactions: Cash paid for interest $ - $ 218 $ 51 Cash paid for income taxes $26,060 $80,556 $3,528 Non-cash transactions: Liabilities accrued for Property and Equipment acquired $53,956 - -
NOTE 10. EMPLOYEE BENEFIT PLANS STOCK PURCHASE PLANS In connection with the Offering, the Company adopted a Management Share Purchase Plan (the "Management Plan"), an Employee Share Purchase Plan (the "Employee Plan") and a Director Plan (the "Director Plan"). Under the Management Plan, the Company's senior management personnel are required to use 20%, and may use up to 100%, of their annual incentive bonuses to purchase restricted common shares of the Company at a 20% discount from the fair value of the same number of unrestricted common shares. In addition, senior management personnel were given a one-time opportunity to invest up to $1 million each to purchase restricted common shares at the time of the Offering at a 20% discount from the initial public offering price, net of underwriting discounts and commissions. For each restricted common share purchased, the Company granted the employee an option to purchase one additional restricted common share at the initial public offering price less underwriting discounts and commissions. Restricted common shares purchased under the Management Plan will generally be restricted from sale or transfer for three years from date of purchase. The maximum number of common shares reserved for issuance under the Management Plan is 1,242,227. The Company recognized compensation expense for the discount on the restricted common shares of $643,000, $541,000 and $135,000 for fiscal 1996, 1995 and 1994, respectively. The Employee Plan is available to all full-time employees of the Company who are not covered under the Management Plan and who have worked at least 1,000 hours during a period of 12 consecutive months. Each eligible employee has the right to purchase, on a quarterly basis, the Company's common shares at a 15% discount from the fair market value per common share. Shares purchased under the Employee Plan are generally restricted from sale for one year from date of purchase. The maximum number of shares eligible for purchase under this plan is 2,958,761. The Company does not record compensation expense with respect to shares purchased under the Employee Plan. The Director Plan covers all directors of the Company who are not officers or employees of the Company. Each participant will receive all of their annual retainer in the form of restricted shares paid at the beginning of the relevant calendar year and all of their meeting fees in the form of unrestricted common shares paid at the end of the calendar quarter in which the meetings occurred. The restrictions on such shares generally lapse one year from the date of grant. The maximum number of shares reserved for issuance under the Director Plan is 112,929. SAVINGS PLAN Employees of the Company who meet certain service requirements are eligible to participate in the Company's 401(k) savings plan. Participants may contribute 2% to 15% of annual earnings, subject to statutory limitations. Effective August 25, 1995, the Company began matching 25% of the first 3% of the employee's 31 32 contribution. The Company approved an increase of the matching contribution to 50% of the first 3%, effective February 1, 1997. Such matching Company contributions are invested in shares of the Company's common stock and become vested 50% after two years of service and 100% after three years of service. The charge to operations for the Company's matching contribution amounted to $322,000 and $132,000 in fiscal 1996 and 1995, respectively. STOCK OPTION PLANS In fiscal 1996, the OfficeMax, Inc. 1994 Stock Option Plan (the "1994 Plan") was amended and restated as the Equity-Based Award Plan. As part of the amendment to the 1994 Plan, the OfficeMax, Inc. Employee Non-Qualified Share Option Plan was terminated and all outstanding options were merged into the Equity-Based Award Plan. The Equity-Based Award Plan provides for the issuance of share appreciation rights, restricted shares and up to 11,647,343 options to purchase common shares. Options granted under the Equity-Based Award Plan become exercisable from one to seven years after the date of grant and expire ten years from date of grant. Options may be granted only at option prices not less than the fair market value per common share on the date of the grant except that in connection with the Offering, options to purchase common shares were granted at the initial public offering price less underwriting discounts and commissions. The Company recognized compensation expense on these grants of $188,000, $240,000 and $60,000 for fiscal 1996, 1995 and 1994, respectively. Other stock option plans include a share option plan adopted in 1988 (the "1988 Plan"). As of January 25, 1997 there were 57,313 vested options outstanding and no further grants may be made under the 1988 Plan. The related shares have been placed in escrow for future exercise. Exercisable options outstanding were 965,019 and 546,677 at January 25, 1997 and January 27, 1996, respectively. Option activity for each of the last three years was as follows:
- -------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- Outstanding at January 22, 1994 1,784,639 $5.49 Granted 1,629,110 8.00 Exercised (11,796) 4.01 Cancelled (250,310) 6.18 --------------------------------- Outstanding at January 21, 1995 3,151,643 6.74 Granted 1,290,299 11.79 Exercised (53,067) 4.58 Cancelled (473,225) 7.20 --------------------------------- Outstanding at January 27, 1996 3,915,650 8.38 Granted 3,416,719 14.54 Exercised (164,983) 5.61 Cancelled (356,094) 9.84 --------------------------------- Outstanding at January 25, 1997 6,811,292 11.46 =================================
STOCK BASED COMPENSATION Under FAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants in fiscal 1996 and 1995, 32 33 respectively, were expected volatility of 41.8% and 43.1% and risk-free interest rates of 6.21% and 7.23%. A dividend yield of zero and an expected life of 5 years were used in the model for both years. The following table summarizes information about options outstanding at January 25, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------------------------------------------------------------- RANGE OF OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED EXERCISE PRICES AVERAGE AVERAGE AVERAGE EXERCISE PRICE REMAINING LIFE EXERCISE PRICE - --------------------------------------------------------------------------------------------------------- $4.007 831,935 $ 4.01 4.58 831,935 $4.01 $7.993 to $8.447 1,395,376 8.08 7.34 133,084 8.45 $10.67 to $11.55 1,122,020 11.50 8.09 - - $14.00 to $14.63 3,351,622 14.49 9.10 - - $15.29 to $17.09 110,339 16.58 9.04 - -
Consistent with the method prescribed by FAS 123, the weighted average fair value at the date of grant was $6.58 and $5.78 for options granted in fiscal 1996 and 1995, respectively. Giving effect to such compensation costs, pro forma net earnings and pro forma earnings per share would have been $65,440,000 and $0.52, respectively, for fiscal 1996 and $124,305,000 and $1.03, respectively, for fiscal 1995. The pro forma amounts listed above do not take into consideration the pro forma compensation expense related to grants made prior to fiscal 1995. 33 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 34 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding Directors is contained under the caption "Election of Directors" in the Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year which information under such caption is incorporated herein by reference. The information required by Item 10 regarding Executive Officers is contained under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K which information under such caption is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is contained on pages 6 through 10 of the Proxy Statement and under the captions "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" contained in the Proxy Statement which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement which information under such captions is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 35 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements See Index on page 20 of this Annual Report. (a)(2) Financial Statement Schedules: None (a)(3) Exhibits: See Exhibit Index contained herein at pages 38 and 39. (b) Reports on Form 8-K: None 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OFFICEMAX, INC. DATE: April 24, 1997 By: /s/ Michael Feuer ------------------- Michael Feuer, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Michael Feuer Chairman and Chief April 24, 1997 - -------------------- Executive Officer and Director Michael Feuer (Principal Executive Officer) /s/ John C. Belknap Executive Vice President, Chief April 24, 1997 - --------------------- Financial Officer (Principal John C. Belknap Financial and Accounting Officer) /s/ Raymond L. Bank Director April 24, 1997 - ----------------------- Raymond L. Bank /s/ Burnett W. Donoho Director April 24, 1997 - ---------------------------- Burnett W. Donoho /s/ Carl D. Glickman Director April 24, 1997 - ------------------------- Carl D. Glickman /s/ D. Dwayne Hoven Director April 24, 1997 - ------------------------- D. Dwayne Hoven /s/ James F. McCann Director April 24, 1997 - -------------------- James F. McCann /s/ Sydell L. Miller Director April 24, 1997 - -------------------- Sydell L. Miller
37 38 EXHIBIT INDEX -------------
Sequential Page No. or Incorporation Exhibit No. Description of Exhibit by Reference - ----------- ---------------------- ------------ 3.1 Second Amended and Restated Articles of Incorporation of the Company. (3) 3.2 Code of Regulations of the Company. (3) 4.1 Specimen Stock Certificate. (1) 10.1 Credit Agreement dated December 22, 1994 by and among the Company and Society National (3) Bank, as agent, National City Bank, Mellon Bank, N.A., The First National Bank of Chicago and Corestates Bank, N.A. 10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and KeyBank National Association. 10.3 Amended and Restated Employment Agreement dated as of March 9, 1995 by and between (3) Michael Feuer and the Company. 10.4 Share purchase agreement dated August 25, 1995 by and among the Company, Corporate (4) Express, Inc. and Synergom, Inc. relating to the purchase by Corporate Express from OfficeMax of the outstanding Corporate Express Common Stock owned by OfficeMax. 10.5 OfficeMax Employee Share Purchase Plan. (1) 10.6 OfficeMax Management Share Purchase Plan. (1) 10.7 OfficeMax Director Share Plan. (1) 10.8 OfficeMax Equity-Based Award Plan. (5) 10.9 Shareholder Agreement dated August 30, 1994 among the Company, Kmart Corporation and (1) each of Michael Feuer and Robert Hurwitz. 10.10 Intercompany Agreement dated November 9, 1994 between the Company and Kmart Corporation. (2) 10.11 Tax Allocation Agreement dated November 9, 1994 between the Company and Kmart (2) Corporation. 10.12 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, 1994 (2) between the Company and Kmart Corporation. 10.13 Cash Management Agreement dated November 9, 1994 between the Company and Kmart (2) Corporation. 10.14 Registration Rights Agreement dated November 9, 1994 between the Company and Kmart (2) Corporation
38 39 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule (1) Included as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-83528) and incorporated herein by reference. (2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q (No. 1-13380) for the quarter ended October 22, 1994, and incorporated herein by reference. (3) Included as an exhibit to the Company's Annual Report on Form 10-K (No. 1-13380) for the fiscal year ended January 21, 1995, and incorporated herein by reference. (4) Included as an exhibit to the Company's Annual Report on Form 10-K (No. 1-13380) for the fiscal year ended January 27, 1996, and incorporated herein by reference. (5) Included as an exhibit to the Company's Quarterly Report on Form 10-Q (No. 1-13380) for the quarter ended July 27, 1996, and incorporated herein by reference. 39 EX-10.2 2 EXHIBIT 10.2 1 Exhibit 10.2 MORTGAGE LOAN AGREEMENT ----------------------- THIS MORTGAGE LOAN AGREEMENT is made as of the 6th day of November, 1996 by and between OFFICEMAX, INC., an Ohio corporation (hereinafter sometimes called the "Borrower") and KEYBANK NATIONAL ASSOCIATION, a national banking association, Cleveland, Ohio (hereinafter sometimes called the "Bank"). RECITALS: --------- The Borrower has applied to the Bank for a mortgage loan (the "Loan") in an amount of up to the Commitment Amount. The proceeds of the Loan are to be used to reimburse or restore to the Borrower sums paid by the Borrower for or in connection with the acquisition of the Land and the Building and the planning for, construction of and completion of the Expansion. The Bank is willing to make the Loan to the Borrower on the terms and subject to the conditions herein set forth. AGREEMENTS: ----------- NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual agreements hereinafter set forth, the Borrower and the Bank hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 DEFINITIONS. As used in this Agreement, the following capitalized terms shall have the following meanings: "ADJUSTED LIBOR" means a rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the nearest 1/100th of 1%) by DIVIDING (i) the applicable LIBOR rate by (ii) 1.00 MINUS the Reserve Percentage, and which Adjusted LIBOR shall be automatically adjusted on and as of the effective date of any change in the Reserve Percentage. "AGREEMENT" means this Mortgage Loan Agreement, as the same may from time to time be amended, supplemented, restated or otherwise modified. "ALTA POLICY" means the loan policy of title insurance covering the Property required pursuant to Section 4.2(k). "APPRAISAL" shall have the meaning assigned to such term in Section 4.2(f). "ASSIGNMENT OF RENTS" means the Assignment of Lessor's Interest in Leases and Rents with respect to the Property of even date with the Note granted by the Borrower to the Bank and substantially in the form of Exhibit E hereto, as the same may from time to time be amended, supplemented, restated or otherwise modified. -1- 2 "BANK" has the meaning assigned to such term in the preamble of this Agreement. "BANK DEBT" means, collectively, every Indebtedness and liability now or hereafter owing by the Borrower to the Bank, whether owing by only the Borrower or by the Borrower with one or more others in a several, joint or joint and several capacity, whether owing absolutely or contingently, whether created by loan, overdraft, guaranty of payment or other contract or by quasi-contract, tort, statute or other operation of Law, whether incurred directly to the Bank or acquired by the Bank by purchase, pledge or otherwise, and whether participated from the Bank in whole or in part. "BANKING DAY" means a day of the year on which banks are not required or authorized to close in Cleveland, Ohio; provided, however, that, when used in connection with the determination of LIBOR, "Banking Day" shall mean any such day on which banks are open for dealings in or quoting deposit rates for dollar deposits in the London interbank market. "BASIS POINT" means one-hundredth of one percent (0.01%) per annum. "BORROWER" has the meaning assigned to such term in the preamble of this Agreement. "BORROWER PROPERTY" means any real property and improvements owned, leased, used, operated or occupied by the Borrower or any of its Subsidiaries or any of their respective corporate predecessors, including any soil, surface water or groundwater on or under such real property and improvements. "BUILDING" means the existing two story office building occupied by the Borrower as its international headquarters and situated on the Land, including, as and when constructed, the Expansion. "CLOSING DATE" means the date the Loan is advanced to the Borrower pursuant to Section 3.1(a). "COMMITMENT" means the agreement of the Bank, subject to the terms and conditions hereof, until June 30, 1997, to advance the Loan to the Borrower in the original principal amount of the Commitment Amount. "COMMITMENT AMOUNT" means the lesser of (i) one hundred percent (100%) of the fair market value of the Land and the Improvements, after completion of the Expansion, as set forth in the Appraisal and (ii) Twenty-three Million Dollars ($23,000,000). -2- 3 "COMMITMENT LETTER" means that certain commitment letter in respect of the Loan, dated March 14, 1996, by and between the Bank and the Borrower. "CONSOLIDATED ASSETS" means, as at the date of any determination, the net book value of all assets of the Borrower and its Subsidiaries as of such date classified as assets in accordance with generally accepted accounting principles and determined on a consolidated basis. "CONSOLIDATED CURRENT ASSETS" means, as at the date of any determination, the Consolidated Assets of the Borrower and its Subsidiaries as of such date classified as current assets in accordance with generally accepted accounting principles and determined on a consolidated basis. "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of determination, an amount equal to (i) all liabilities of the Borrower and its Subsidiaries as of such date classified as current liabilities in accordance with generally accepted accounting principles and determined on a consolidated basis (including, without limitation, all accrued taxes, all principal installments of any Long-Term Indebtedness maturing within twelve months of the date of determination), MINUS (ii) the amount which is the lesser of (A) the unpaid principal balance of the Outside Loans on such date (zero, if none are outstanding) or (B) the remainder (but not less than zero) derived by subtracting the aggregate outstanding principal balance of the Loan on such date from the Total Commitment Amount; provided, however, that the aggregate outstanding principal balance of the Loan on such date, not in excess of the Total Commitment Amount, shall not be treated as a current liability. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" has the meaning assigned to such term in Section 5.17. "CONSOLIDATED LEVERAGE RATIO" has the meaning assigned to such term in Section 5.23. "CONSOLIDATED LIABILITIES" means, as at any date of determination, all liabilities of the Borrower and its Subsidiaries as of such date classified as liabilities in accordance with generally accepted accounting principles and determined on a consolidated basis. "CONSOLIDATED NET FIXED LEASE CHARGES" means, for any fiscal period, all rental expenses, other than percentage rent, (whether accrued or paid in cash) arising from all capitalized leases or operating leases of the Borrower and its Subsidiaries for such period LESS all sublease rental payments arising from such capitalized leases or operating leases for such period, in each -3- 4 case, as determined on a consolidated basis and in accordance with generally accepted accounting principles. "CONSOLIDATED NET INTEREST EXPENSE" means, for any fiscal period, all expense of the Borrower and its Subsidiaries for such fiscal period classified as interest expense for such period, LESS income of the Borrower and its Subsidiaries for such fiscal period classified as interest income for such period, in each case, in accordance with generally accepted accounting principles and determined on a consolidated basis. "CONSOLIDATED NET PRE-TAX EARNINGS" means, for any fiscal period, the earnings (or losses) experienced by the Borrower and its Subsidiaries for such period, before provision for any income taxes, as determined on a consolidated basis and in accordance with generally accepted accounting principles. "CONSOLIDATED NET WORKING CAPITAL" means, as at any date of determination, the excess of (i) the Consolidated Current Assets as of such date, over (ii) the Consolidated Current Liabilities as of such date. "CONSOLIDATED NET WORTH" means, as at any date of determination, the excess of (i) all Consolidated Assets (after deducting all applicable reserves and excluding any re-appraisal or write-up of assets after the date of this Agreement) of the Borrower and its Subsidiaries as of such date, OVER (ii) all Consolidated Liabilities of the Borrower and its Subsidiaries as of such date, in each case determined on a consolidated basis in accordance with generally accepted accounting principles. "CONTROLLED GROUP" means a controlled group of corporations as defined in Section 1563 of the Internal Revenue Code of 1986, as may be amended from time to time, of which any the Borrower or any Subsidiary is a part. "CREDIT AGREEMENT" means the Credit Agreement dated December 22, 1994, among the Borrower, as borrower thereunder; the Bank, as agent for the lenders thereunder; and the Bank and various other banks as lenders thereunder, as the same may be amended, supplemented or otherwise modified. "CUMULATIVE FISCAL EARNINGS" has the meaning assigned to such term in Section 5.16. "CUMULATIVE FISCAL PERIOD" means, in respect of any Fiscal Year, the following fiscal period or periods, as the case may be, of that Fiscal Year that have been completed: (a) the period comprised of the first Fiscal Quarter of such Fiscal Year, (b) the period comprised of the first and second Fiscal Quarters of such Fiscal Year, (c) the period comprised of the first, second -4- 5 and third Fiscal Quarters of such Fiscal Year and (d) the period comprised of all Fiscal Quarters of such Fiscal Year. "DEFAULT UNDER ERISA" means (a) the occurrence or existence of a material "accumulated funding deficiency" (as defined in ERISA) in respect of any Plan within the scope of Section 302(a) of ERISA or (b) any failure by Borrower or any Subsidiary to make a full and timely payment of premiums required by Section 4001 of ERISA in respect of any Plan, or (c) the occurrence or existence of any material liability under Section 4062, 4063, 4064, 4069, 4201, 4217 or 4243 of ERISA in respect of any Plan, or (d) the occurrence or existence of any material breach of any other Law or regulation in respect of any such Plan, or (e) the institution or existence of any action for the forcible termination of any such Plan which is within the scope of Section 4001(a)(3) or (15) or ERISA. As used in this definition, "material" means the measure of a matter of significance which shall be determined as being an amount equal to or greater than Ten Million Dollars ($10,000,000). "DISTRIBUTION" means any payment made, liability incurred and other consideration (other than any stock dividend, or stock split or similar distributions payable only in capital stock of the Borrower or any redemption in cash of fractional shares of the Borrower's capital stock in the ordinary course of the Borrower's business) given (i) for the purchase, acquisition, redemption or retirement of any capital stock of the Borrower or (ii) as a dividend, return of capital or other distribution of any kind in respect of the Borrower's capital stock outstanding at any time. "ENVIRONMENTAL LAWS" means any federal, state or local Law, regulation, ordinance, or order pertaining to the protection of the environment and the health and safety of the public, including (but not limited to) the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 USC Sections 9601 ET SEQ.; the Resource Conservation and Recovery Act ("RCRA"), 42 USC Sections 6901 ET SEQ., the Hazardous Materials Transportation Act, 49 USC Sections 1801 ET SEQ., the Federal Water Pollution Control Act (33 USC Sections 1251 ET SEQ.), the Toxic Substances Control Act (15 USC Sections 2601 ET SEQ.) and the Occupational Safety and Health Act (29 USC Sections 651 ET SEQ.), and all similar state, regional or local Laws, treaties, regulations, statutes or ordinances, common Law, civil Laws, or any case precedents, rulings, requirements, directives or requests having the force of Law of any foreign or domestic governmental -5- 6 authority, agency or tribunal, and all foreign equivalents thereof, as the same have been or hereafter may be amended, and any and all analogous future Laws, treaties, regulations, statutes or ordinances, common Law, civil Laws, or any case precedents, rulings, requirements, directives or requests having the force of Law of any foreign or domestic governmental authority, agency or tribunal and the regulations promulgated pursuant thereto, which governs: (i) the existence, cleanup and/or remedy of contamination on property; (ii) the emission or discharge of Hazardous Materials into the environment; (iii) the control of hazardous wastes; (iv) the use, generation, transport, treatment, storage, disposal, removal or recovery of Hazardous Materials; or (v) the maintenance and development of wetlands. "ERISA" means the Employee Retirement Income Security Act of 1974 (Public Law 93406), as amended, and in the event of any amendment affecting any section thereof referred to in this Agreement, that reference shall be reference to that section as amended, supplemented, replaced or otherwise modified. "ERISA AFFILIATE" of any Person means any other Person that for purposes of Title IV of ERISA is a member of such Person's Controlled Group, or under common control with such Person, within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended from time to time. "ERISA REGULATOR" means any governmental agency (such as the Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation) having any regulatory authority over any Plan. "EUROCURRENCY LIABILITIES" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EVENT OF DEFAULT" has the meaning assigned to such term in Article 7. "EXPANSION" means the expansion of the Building of approximately 101,000 square feet, to be constructed after the date hereof, as more fully described in the Plans and Specifications. "FED FUNDS RATE" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Banking Day, for the next preceding Banking Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Banking Day, the average of the quotations for such day on such transactions received by the Agent from three (3) federal funds brokers of recognized standing selected by it. "FISCAL QUARTER" means any of the four consecutive three-month fiscal accounting periods collectively forming a Fiscal -6- 7 Year of the Borrower consistent with the Borrower's past practice. "FISCAL YEAR" means the Borrower's regular annual accounting period which shall end January 25, 1997, in respect of the Borrower's current annual accounting period, and which thereafter shall consist of successive twelve-month periods ending on the Saturday immediately preceding the last Wednesday in January of each calendar year. "FOUR FISCAL QUARTER PERIOD" means a period consisting of four consecutive Fiscal Quarters, whether or not in the same Fiscal Year. "FUNDED SENIOR DEBT" means, as at the date of any determination, the sum of all Indebtedness of the Borrower and its Subsidiaries in respect of (i) the outstanding principal amount of the Obligations of the Borrower to the Bank under this Agreement at such date and any other Bank Debt at such date and (ii) the principal amount of any other outstanding Indebtedness for Borrowed Money, other than Subordinated Indebtedness. "GUARANTOR" means one who pledges his credit or property in any manner for the payment or other performance of the Indebtedness, contract or other obligation of another and includes (without limitation) any guarantor (whether of collection or payment), any obligor in respect of a standby letter of credit or surety bond issued for the obligor's account, and surety, any co-maker, any endorser, and anyone who agrees conditionally or otherwise to make any loan, purchase or investment in order thereby to enable another to prevent or correct a default of any kind. "GUARANTY" means the obligation of a Guarantor. "HAZARDOUS MATERIAL" means and include (i) any asbestos or other material composed of or containing asbestos which is, or may become, even if properly managed, friable, (ii) petroleum and any petroleum product, including crude oil or any fraction thereof, and natural gas or synthetic natural gas liquids or mixtures thereof, (iii) any hazardous, toxic or dangerous waste, substance or material defined as such in (or for purposes of) CERCLA or RCRA, any so-called "Superfund" or "Superlien" law, or any other applicable Environmental Laws, and (iv) any other substance whose generation, handling, transportation, treatment or disposal is regulated pursuant to any Environmental Laws. "IMPROVEMENTS" means, collectively, the Building, the Expansion (as and when constructed), roadways, parking areas, utility facilities and other improvements to the Land. -7- 8 "INDEBTEDNESS" means, with respect to any Person, without duplication, (i) Indebtedness for Borrowed Money, (ii) obligations to pay the deferred purchase price of property or services, (iii) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (iv) all obligations of such Person as an account party in respect of letters of credit or banker's acceptances, (v) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, (vi) obligations secured by any Lien on the properties or assets of the Person, (vii) obligations of such Person in respect of currency, interest rate swap, foreign exchange or comparable transactions and (viii) obligations under direct or indirect Guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (viii) above. "INDEBTEDNESS FOR BORROWED MONEY" means, with respect to any Person, without duplication, all obligations of such Person for money borrowed including, without limitation, all notes payable, and drafts accepted representing extensions of credit, all obligations evidenced by bonds, debentures, notes or other similar instruments (including, without limitation, Subordinated Indebtedness), capitalized lease or purchase money obligations and obligations upon which interest charges are customarily paid or discounted, and all Guaranties of such obligations for money borrowed. "INTEREST PERIOD" means, initially, the period commencing on the date of the Initial Credit Event (and, subsequently, the date of a Rate Conversion or Rate Continuation) and ending on the numerically corresponding day of the period selected by the Borrower pursuant to the provisions hereof. The duration of each such Interest Period shall be one, two, three or six months, in each case as the Borrower may select, upon delivery to the Bank of a Rate Conversation/Continuation Request therefor in accordance with Section 3.2 hereof; provided, however, that: (i) no Interest Period may end on a date later than the last day of the Term; (ii) if there is no such numerically corresponding day in the month that is such, as the case may be, first, second, third or sixth month after the commencement of an Interest Period, such Interest Period shall end on the last day of such month; (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Banking Day, the last day of such Interest Period shall be -8- 9 extended to occur on the next succeeding Banking Day; provided, however, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the immediately preceding Banking Day; and (iv) the Borrower may not select any Interest Period ending after the date of any scheduled reduction in the principal amount of the Loan unless, after giving effect to such selection, the aggregate unpaid principal amount of the Loan accruing interest at the Prime Rate, taken together with the principal amount of any then outstanding LIBOR Portions having Interest Periods ending on or prior to the date of such scheduled principal reduction, shall be at least equal to the amount of such scheduled principal reduction. "LAND" means all of that certain tract of real property owned by the Borrower situated in the City of Shaker Heights, Ohio and being more particularly described on Schedule 1.1A attached hereto and made a part hereof. "LAST LIBOR" has the meaning assigned to such term in Section 3.3(c). "LAW" means any law, treaty, regulation, statute or ordinance, common law, civil law, or any case precedent, ruling, requirement, directive or request having the force of law of any foreign or domestic governmental authority, agency or tribunal. "LIBOR" means, with respect to any Interest Period, an interest rate per annum (rounded upward to the nearest 1/16th of 1%) equal to the average of the per annum rates at which deposits in immediately available funds in United States dollars approximately equal in principal amount to the Loan and for a maturity comparable to the Interest Period are offered to the Reference Bank by prime banks in any Eurodollar market reasonably selected by the Reference Bank, determined as of 11:00 a.m. London time (or as soon thereafter as practicable), two (2) Banking Days prior to the beginning of the relevant Interest Period. "LIBOR BASED RATE" means, as to any Interest Period, the per annum rate of interest equal to Adjusted LIBOR, PLUS ninety (90) Basis Points. "LIBOR PORTION" has the meaning assigned to such term in Section 3.2(b). -9- 10 "LIBOR PREPAYMENT COMPENSATION RATE" has the meaning assigned to such term in Section 3.3(c). "LIEN" means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property. "LOAN" means the mortgage loan described in Article 3 hereof. "LOAN COMMITMENT FEE" has the meaning assigned to such term in Section 3.4(a). "LONG-TERM INDEBTEDNESS" means, as at the date of any determination, all Indebtedness for Borrowed Money of the Borrower or its Subsidiaries (i) which matures no earlier than one (1) year from the time of determination, or (ii) which matures less than one (1) year from the time of determination but which may have its maturity extended, at the option of the obligor thereunder, to one (1) year or later from the time of determination. "MATERIAL ADVERSE EFFECT" means the occurrence or existence of (a) a material adverse effect on the business, operations or financial condition of the Borrower and its Subsidiaries on a consolidated basis, or (b) a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement, or (c) a material adverse effect on the legality, validity or enforceability of the Borrower's obligations under this Agreement. "MATERIAL PLAN CHANGE" means any change to the Plans and Specifications which provides for any (i) material diminution in the size of the Expansion or in the quality of construction thereof or (ii) change in the type or utility of the Expansion. "MORTGAGE" means the Open-End Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing with respect to the Property of even date with the Note granted by the Borrower to the Bank, in substantially the form of Exhibit D attached hereto, as from time to time supplemented or amended. "NOTE" means the note or notes executed and delivered pursuant to Section 3.1(b) hereof. "OBLIGATIONS" means the obligations of the Borrower under this Agreement, including, without limitation, the outstanding principal and accrued interest in respect of the Loan, any Indebtedness of the Borrower to the Bank in respect of any currency, interest rate swap, foreign exchange or comparable -10- 11 transactions, all fees owing to the Bank, and any expenses, taxes, compensation or other amounts owing under this Agreement or the Note, including, without limitation, pursuant to Sections 3.3, 3.4, 3.7, 3.8, 3.9 or 10.4 and any and all other amounts owed by the Borrower to the Bank pursuant to this Agreement or the Note. "OTHER TAXES" has the meaning assigned to such term in Section 3.9. "OUTSIDE LOANS" has the meaning assigned to such term in Section 5.11. "PERMITTED ENCUMBRANCES" means the utility, access and other easements, rights-of-way, mineral rights, restrictions and other matters set forth on Schedule 1.1B attached hereto and made a part hereof. "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, limited liability company, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "PERSONAL PROPERTY" means all of the Borrower's right, title and interest in and to the Intangible Personal Property (as defined in the Mortgage) and in and to all furniture, furnishings, fixtures, equipment, rents and other personal property of every kind and nature (other than inventory, as defined in Chapter 1309, Ohio Revised Code), whether tangible or intangible, now or hereafter acquired and owned by the Borrower located at, used in connection with, derived from or relating to the Land, the Improvements or other Personal Property; provided, however, that personal property in the nature of the Borrower's office desks and chairs, other office furniture and furnishings, and office computers used in the operation and management of the Borrower's business shall not be deemed to be Personal Property. "PLAN" means any employee pension benefit plan subject to Title IV of the Employee Retirement Income Security Act of 1974, as amended, established or maintained by the Borrower, any Subsidiary, or any member of the Controlled Group, or any such Plan to which the Borrower, any Subsidiary, or any member of the Controlled Group is required to contribute on behalf of any of its employees (other than a Multi-Employer Plan, as that term is defined in Section 414(f) of the Internal Revenue Code as currently in effect). "PLANS AND SPECIFICATIONS" has the meaning assigned to such term in Section 4.1(c). -11- 12 "POSSIBLE DEFAULT" means an event, condition or thing which constitutes, or which with the lapse of any applicable grace period or the giving of notice or both would constitute, any Event of Default referred to in Article 7 hereof and which has not been appropriately waived by the Bank in writing or fully corrected prior to becoming an actual Event of Default. "PREPAYMENT LIBOR" has the meaning assigned to such term in Section 3.3(c). "PRIME RATE" shall mean the higher of (i) the per annum rate equal to the Fed Funds Rate PLUS one and one-half percent (1.5%) or (ii) that interest rate established from time to time by the Bank as the Bank's Prime Rate (or equivalent rate otherwise named), whether or not such rate is publicly announced; the Prime Rate may not necessarily be the lowest interest rate charged by the Bank for commercial or other extensions of credit. "PROPERTY" means, collectively, the Land, the Improvements and the Personal Property. "RATE CONTINUATION" means, at the conclusion of any given Interest Period, the election of a successive Interest Period of the same duration pursuant to Section 3.2. "RATE CONVERSION" means, at the conclusion of any given Interest Period, the election of a conversion from one permissible Interest Period to another permissible Interest Period pursuant to Section 3.2. "RATE CONVERSION/CONTINUATION REQUEST" means a request for Rate Conversion or Rate Continuation in the form of Exhibit B hereto made pursuant to Section 3.2. "RECEIVABLE" means a claim for moneys due or to become due, whether classified as a contract right, account, chattel paper, instrument, general intangible or otherwise. "REFERENCE BANK" means the Cayman Islands branch office of the Bank. "REGULATORY CHANGE" means any change in United States federal, state or foreign Laws or regulations or the adoption or making of any interpretations, directives or requests of or under any United States federal, state or foreign Laws or regulations (whether or not having the force of Law) by any court or governmental authority charged with the interpretation or administration thereof. "RELATED WRITING" means any assignment, mortgage, security agreement, note, guaranty, subordination agreement, financial statement, certificate, audit report or other writing furnished -12- 13 by the Borrower or any of its officers to the Bank pursuant to or otherwise in connection with this Agreement, including, without limitation, the Mortgage, the Assignment of Rents and the Swap Agreement. "REPORTABLE EVENT" means a reportable event as that term is defined in Title IV of the Employee Retirement Income Security Act of 1974, as amended, except actions of general applicability by the Secretary of Labor under Section 110 of such Act. "RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) for a member bank of the Federal Reserve System in Cleveland, Ohio, in respect of "Eurocurrency Liabilities". "SEC" means the Securities and Exchange Commission. "SUBORDINATED INDEBTEDNESS" means all Indebtedness of the Borrower or its Subsidiaries, now or hereafter existing, that is expressly subordinated and made junior to the payment and performance in full of the Obligations and which subordination is evidenced by written agreement in form and substance satisfactory to the Bank. "SUBSIDIARY" means an existing or future corporation, the majority of the outstanding capital stock or voting power, or both, of which is owned at the time in question by the Borrower or by any Subsidiary of the Borrower or by any combination of the Borrower and such company. "SWAP AGREEMENT" means the Master Exchange Agreement between the Borrower and the Bank dated January 2, 1996. "SWINGLINE FACILITY" means the discretionary line of credit offered to the Borrower, in an aggregate principal amount not to exceed Five Million Dollars ($5,000,000), pursuant to the Credit Agreement. "TAXES" has the meaning assigned to such term in Section 3.9(a). "TERM" means the term of the Loan, namely, the period from the Closing Date through March 31, 2007, or the Loan's earlier maturity, whether by acceleration, prepayment or otherwise. -13- 14 The foregoing definitions shall be applicable to the singular and plurals of the foregoing defined terms. SECTION 1.2 COMPUTATION OF TIME PERIODS. In this Agreement in the computation of periods of time from a specific date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with generally accepted accounting principles, as in effect from time to time; provided, however, that, for purposes of determining satisfaction of the financial tests set forth in the definitions of Consolidated Net Worth and compliance with the covenants set forth in Article 5, all terms of an accounting or financial nature shall be construed in accordance with generally accepted accounting principles as in effect on the date of this Agreement and in all cases shall be applied on a basis consistent with those applied in the preparation of the audited financial statements referred to in Section 6.5. SECTION 1.4 CALENDAR QUARTERS. In this Agreement "calendar quarter" shall mean any of the four three-month periods during a calendar year ending on March 31, June 30, September 30 and December 31 of such year. ARTICLE 2 AMOUNT AND NATURE OF CREDIT SECTION 2.1 AMOUNT AND NATURE OF CREDIT. Subject to the terms and conditions set forth in this Agreement, the Bank hereby agrees to advance the Loan to the Borrower in an original principal amount, specified by the Borrower to the Bank in writing no later than five (5) Banking Days prior to the Closing Date, not to exceed the Commitment Amount. SECTION 2.2 PURPOSE OF FACILITY. The Borrower shall use the proceeds of the Loan hereunder to reimburse or restore to the Borrower sums paid by the Borrower for or in connection with the acquisition of the Land and the Building and the planning for, construction of and completion of the Expansion. ARTICLE 3 THE LOAN SECTION 3.1 THE LOAN. (a) ADVANCE OF LOAN; CLOSING DATE. On a date designated by the Borrower in a written notice delivered to the Bank not more than 45 days, nor less than 20 days, prior to the date so designated, which in no event shall be later than June 30, 1997 -14- 15 (the "Closing Date"), the Bank will advance the Loan to the Borrower, subject to the terms and conditions of this Agreement, including, without limitation, the Borrower's satisfaction of all of the conditions precedent set forth in Article 4 hereof. If the Loan is not advanced by the close of business June 30, 1997, the Commitment shall expire, unless such failure to be advanced timely was caused by default by the Bank in the performance of any obligation hereunder. (b) NOTE. The obligation of the Borrower to repay the Loan and to pay interest thereon shall be evidenced by a term loan note (the "Note") of the Borrower substantially in the form of Exhibit A hereto, with appropriate insertions, dated the Closing Date and payable to the order of the Bank in the face principal amount of the Loan. SECTION 3.2 INTEREST. (a) RATES. The Borrower shall pay interest on the unpaid principal amount of the Loan from time to time outstanding from the date of advance of the Loan until such principal amount shall be paid in full (i) as to those portions of the principal of the Loan designated by the Borrower as LIBOR Portions, at the LIBOR Based Rate for the Interest Period applicable to each such LIBOR Portion then comprising a part of the Loan, payable (A) on the last day of each Interest Period and (B) if such Interest Period has a duration of more than three months, also three months after the first day of such Interest Period and on the last day of such Interest Period and (C) also on the last day of the Term (whether by reason of acceleration or otherwise), and (ii) as to the remainder of the principal of the Loan, at the Prime Rate, payable (A) on the last day of each calendar quarter and (B) also on the last day of the Term (whether by reason of acceleration or otherwise). (b) SELECTION OF LIBOR PORTIONS AND INTEREST PERIODS; RATE CONVERSION AND CONTINUATION. On a date which is at least three (3) Banking Days prior to the Closing Date, the Borrower shall designate to the Bank the portions of the Loan, if any, as to which the initial Interest Period will be, respectively, one (1) month, two (2) months, three (3) months and six (6) months (each such portion of the Loan then and thereafter designated, or deemed designated, by the Borrower pursuant to the terms of this Section 3.2 to bear interest at the LIBOR Based Rate for a particular Interest Period being a "LIBOR Portion"). Each LIBOR Portion shall be in an amount of One Million Dollars ($1,000,000) or an integral multiple thereof. Thereafter, the Borrower shall have the right to cause a Rate Conversion or Rate Continuation in respect of a LIBOR Portion, upon request delivered by the Borrower to the Bank not later than 12:00 noon (Cleveland, Ohio time) (i) on the day which is three (3) Banking Days prior to the Banking Day upon which the Borrower desires to continue any given -15- 16 Interest Period applicable to a LIBOR Portion for an additional Interest Period of the same duration, or (ii) on the day which is three (3) Banking Days prior to the Banking Day upon which the Borrower desires to convert any given Interest Period applicable to a LIBOR Portion into a different permissible Interest Period. Each such designation or request for a conversion or continuation (a "Rate Conversion/Continuation Request") shall be transmitted by the Borrower to the Bank, by telecopier, telex or cable (in the case of telex or cable, confirmed in writing prior to the effective date of the Rate Conversion or Rate Continuation requested), in substantially the form of Exhibit B hereto, specifying the Interest Period elected. The Borrower may make Rate Conversion/Continuation Requests telephonically so long as written confirmation thereof is received by the Bank by 1:00 p.m. (Cleveland, Ohio time) on the same day of such telephonic Rate Conversion/Continuation Request. The Bank may rely on such telephonic Rate Conversion/Continuation Request to the same extent that the Bank may rely on a written Rate Conversion/ Continuation Request. Each Rate Conversion/Continuation Request, whether telephonic or written, shall be irrevocable and binding on the Borrower and subject to the indemnification provisions of this Article 3. The Borrower shall bear all risks related to giving any Rate Conversion/Continuation Request telephonically or by such other method of transmission as Borrower shall elect. (c) INTEREST RATE DETERMINATION. (i) BANK DETERMINATION; NOTICE. The Bank shall determine the Adjusted LIBOR in accordance with the definition of LIBOR Rate and Adjusted LIBOR set forth in Section 1.1. The Bank shall give prompt notice to the Borrower of the applicable interest rate determined by the Bank for purposes of this Section 3.2. (ii) FAILURE OF BORROWER TO ELECT. If the Borrower fails to deliver to the Bank a Rate Conversion/Continuation Request as required herein prior to the expiration of an Interest Period, as to the LIBOR Portion applicable to such Interest Period, the Borrower shall be deemed to have selected an Interest Period with a duration of one (1) month, unless such one month duration would contravene the requirements of the definition of Interest Period in Section 1.1, in which case the Borrower shall be deemed to have elected to have such portion of the Loan principal bear interest at the Prime Rate. SECTION 3.3 REPAYMENTS AND PREPAYMENTS OF PRINCIPAL; PREPAYMENT COMPENSATION. (a) REPAYMENT. The Borrower shall repay to the Bank the outstanding principal amount of the Loan in consecutive quarter- -16- 17 annual installments, the first of which shall be due on the last day of the calendar quarter immediately following the calendar quarter in which the Closing Date occurs, and the last of which shall be due on March 31, 2007. Each such installment, other than the last such installment, shall be in an amount equal to one sixty-eighth (1/68) of the original principal amount of the Loan; and the last such installment, on March 31, 2007, shall be in the amount of the entire remaining unpaid principal balance of the Loan. (b) PERMITTED PREPAYMENTS. The Borrower may prepay the Loan, or any portion thereof, (i) as to any LIBOR Portion or any portion thereof, not later than 12:00 noon (Cleveland, Ohio time), upon at least two (2) Banking Days' notice to the Bank stating the proposed date and principal amount of the prepayment, or (ii) as to any portion of the Loan on which interest is accruing at the Prime Rate, not later than 12:00 noon (Cleveland, Ohio time), upon notice to the Bank at least prior to that hour; and, upon such notice, shall prepay the principal amount of the Loan so proposed, together with accrued interest to the date of such prepayment on the principal amount prepaid. Any prepayment of a LIBOR Portion of the Loan, or any portion thereof, shall obligate the Borrower to reimburse the Bank in respect thereof pursuant to Section 3.3(c). (c) PREPAYMENT COMPENSATION. If any LIBOR Portion or any portion thereof is prepaid (or as to which the interest rate on such Portion or portion thereof is converted to the Prime Rate) on a date which is other than the last day of the Interest Period applicable thereto, the Borrower shall pay to the Bank prepayment compensation as herein provided. In case of any prepayment, the Borrower agrees that if Adjusted LIBOR, as determined as of 11:00 a.m. London time, two (2) Banking Days prior to the date of prepayment (hereafter, "Prepayment LIBOR") shall be lower than the last Adjusted LIBOR previously determined (hereinafter, "Last LIBOR"), then the Borrower shall, upon written notice by the Bank, promptly pay to the Bank, in immediately available funds, compensation for such prepayment measured by a rate (the "LIBOR Prepayment Compensation Rate") which shall be equal to the difference between the Last LIBOR and the Prepayment LIBOR. In determining the Prepayment LIBOR, the Bank shall apply a rate equal to Adjusted LIBOR for a deposit approximately equal to the amount of such prepayment which would be applicable to an Interest Period commencing on the date of such prepayment and having a duration as nearly equal as practicable to the remaining duration of the actual Interest Period during which such prepayment is to be made. The prepayment compensation shall be computed for the period commencing with the date on which such prepayment is to be made to that date which coincides with the last day of the Interest Period previously established in respect of the portion so prepaid. -17- 18 SECTION 3.4 FEE. (a) LOAN COMMITMENT FEE. Simultaneously with the Borrower's execution hereof, the Borrower has paid to the Bank a Loan Commitment Fee (the "Loan Commitment Fee") equal to Two Hundred and Thirty Thousand Dollars ($230,000). (b) FEE NONREFUNDABLE. The Borrower agrees that the Loan Commitment Fee shall be deemed earned by the Bank in full upon its execution and delivery of this Agreement and shall not be refundable under any circumstances, except in the case of a default by the Bank in the performance of any obligation hereunder. SECTION 3.5 DEFAULT INTEREST; LATE CHARGE. If any principal, interest or fees due under this Agreement shall not be paid when due (after giving effect to the five (5) day grace period set forth in Section 7.1), or if the Note shall not be paid at maturity, whether such maturity occurs by reason of lapse of time or by operation of any provision of acceleration of maturity therein contained, the unpaid principal thereof and the unpaid interest and fees thereon shall bear interest, payable on demand, at a rate per annum which shall be equal at all times to the greater of (i) two hundred (200) Basis Points in excess of the rate per annum required to be paid on the Loan immediately prior to the date on which such amount became due or (ii) two hundred (200) Basis Points in excess of the Bank's Prime Rate from time to time in effect. The Borrower acknowledges that this calculation will result in the accrual of interest on interest and the Borrower expressly consents and agrees to this provision. If any payment of principal or interest on the Note (other than the final installment of principal due March 31, 2007) or any payment of any other fee or payment payable by the Borrower hereunder or under any Related Writing is not paid within five (5) days after the same becomes due and payable, the Borrower shall pay to the Bank on demand a late charge equal to the greater of (x) Twenty-Five Dollars ($25) or (y) five percent (5%) of the amount of such overdue payment. SECTION 3.6 PAYMENTS AND COMPUTATIONS. (a) PAYMENTS. The Borrower shall make each payment hereunder and under the Note with respect to principal of, interest on, and other amounts relating to the Loan, not later than 11:00 A.M. (Cleveland, Ohio time) on the day when due in dollars to the Bank in immediately available funds by deposit of such funds to the Bank's account maintained at the Bank's offices at 127 Public Square, Cleveland, Ohio 44114 or such other place as the Bank from time to time may designate in writing. Payments received after 12:00 noon (Cleveland, Ohio time) on any day shall be deemed to have been received on the next succeeding Banking Day. -18- 19 (b) AUTHORIZATION TO CHARGE ACCOUNT. If and to the extent payment owed to the Bank is not made when due hereunder or under the Note, the Borrower hereby authorizes the Bank to charge any amount so due from time to time against any or all of the Borrower's general deposit accounts with the Bank. (c) COMPUTATIONS OF INTEREST AND FEES. All computations of interest and fees shall be made by the Bank on the basis of a year of 360 days in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Bank of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) PAYMENT NOT ON BANKING DAY. Whenever any payment hereunder or under the Note shall be stated to be due on a day other than a Banking Day, such payment shall be made on the next succeeding Banking Day, except, that, if such extension would cause payment of interest on or principal of the Loan to be made in the next following calendar month, such payment shall be made on the immediately preceding Banking Day. Any such extension or reduction of time shall in such case be included in the computation of payment of interest. SECTION 3.7 RESERVES; TAXES; INDEMNITIES. (a) RESERVES OR DEPOSIT REQUIREMENTS. If at any time any Law, treaty or regulation (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority shall impose (whether or not having the force of Law), modify or deem applicable any reserve and/or special deposit requirement (other than reserves included in the Reserve Percentage, the effect of which is reflected in the LIBOR interest rate in question) against assets held by, or deposits in or for the amount of any loans by, the Bank, and the result of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost to the Bank of making or maintaining hereunder the Loan bearing an interest rate calculated based on LIBOR or to reduce the amount of principal or interest received by the Bank with respect to the Loan), then upon demand by the Bank the Borrower shall pay to the Bank from time to time on Interest Adjustment Dates with respect to such loans, as additional consideration hereunder, additional amounts sufficient to fully compensate and indemnify the Bank for such increased cost or reduced amount, assuming (which assumption the Bank need not corroborate) such additional cost or reduced amount was allocable to the Loan, provided that the Bank also contemporaneously charges proportionately equivalent amounts to other borrowers whose LIBOR loans cause the Bank to incur increased costs for similar reasons -19- 20 and as to whom the Bank has the legal right to do so. A certificate as to the increased cost or reduced amount as a result of any event mentioned in this Section 3.7(a), setting forth the calculations therefor, shall be promptly submitted by the Bank to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Notwithstanding any other provision of this Agreement, after any such demand for compensation by the Bank, the Borrower, upon at least three (3) Banking Days' prior written notice to the Bank, may prepay the Loan or, pursuant to the terms of Section 3.2, elect to have the LIBOR Portions of the Loan bear interest at the Prime Rate. Any such prepayment or conversion to Prime Rate shall entitle the Bank to the prepayment compensation, if any, provided for in Section 3.3 hereof. The Bank will notify the Borrower as promptly as practicable of the existence of any event which will likely require the payment by the Borrower of any such additional amount under this Section. (b) IMPOSITION OF TAXES. In the event that by reason of any Law, regulation or requirement or in the interpretation thereof by an official authority, or the imposition of any requirement of any central bank whether or not having the force of Law, the Bank shall, with respect to this Agreement or any transaction under this Agreement, be subjected to any tax, levy, impost, charge, fee, duty, deduction or withholding of any kind whatsoever (other than any tax imposed upon the total net income of the Bank) and if any such measures or any other similar measure shall result in an increase in the cost to the Bank of making or maintaining any loan bearing an interest rate calculated based on LIBOR or in a reduction in the amount of principal, interest or Loan Commitment Fee receivable by the Bank in respect thereof, then the Bank shall promptly notify the Borrower stating the reasons therefor. The Borrower shall thereafter pay to the Bank upon demand from time to time on each Interest Adjustment Date, as additional consideration hereunder, such additional amounts as will fully compensate the Bank for such increased cost or reduced amount, provided that the Bank also contemporaneously charges proportionately equivalent amounts to other borrowers whose LIBOR loans cause the Bank to incur increased costs for similar reasons and as to whom the Bank has the legal right to do so. A certificate as to any such increased cost or reduced amount, setting forth the calculations therefor, shall be submitted by the Bank to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Notwithstanding any other provision of this Agreement, after any such demand for compensation by the Bank, the Borrower, upon at least three (3) Banking Days prior written notice to the Bank may prepay the Loan or, pursuant to the terms of Section 3.2, elect to have the LIBOR Portions of the Loan bear interest at the Prime Rate. Any such prepayment or conversion to Prime Rate shall entitle the Bank to prepayment compensation, if any, provided for in Section 3.3 hereof. -20- 21 (c) EURODOLLAR DEPOSIT UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE. In the event that the Bank shall have determined that dollar deposits of the relevant amount for an Interest Period is not available to the Reference Bank in the applicable Eurodollar market or that, by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the LIBOR rate applicable to such Interest Period, as the case may be, the Bank shall promptly give notice of such determination to the Borrower, and the Borrower shall be obligated to prepay each LIBOR Portion of the Loan on the last day of the then current Interest Period applicable thereto or, pursuant to the terms of Section 3.2, elect to have such Portion thereafter bear interest at the Prime Rate. Any such prepayment or conversion to Prime Rate shall entitle the Bank to prepayment compensation, if any, provided for in Section 3.3 hereof. (d) INDEMNITY. Without prejudice to any other provisions of this Article 3, the Borrower hereby agrees to indemnify the Bank against any loss or expense which the Bank may sustain or incur as a consequence of any default by the Borrower in payment when due of any amount due hereunder, including, but not limited to, any loss of profit, premium or penalty incurred by the Bank in respect of funds borrowed by it for the purpose of making or maintaining the Loan, as determined by the Bank in the exercise of its sole but reasonable discretion. A certificate as to any such loss or expense shall be promptly submitted by the Bank to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. (e) CHANGES IN LAW RENDERING LIBOR LOANS UNLAWFUL. If at any time any new Law, or any change in any existing Law, or any interpretation thereof by any governmental or other regulatory authority charged with the administration thereof, shall make it unlawful for the Bank to continue to have outstanding an extension of credit bearing interest determined in accordance with LIBOR with moneys obtained in the Eurodollar market, the Bank shall by written notice to the Borrower declare each LIBOR Portion of the Loan due and payable in full, and the Borrower shall, on the earlier of (i) the last day of the then current Interest Period or (ii) if required by such Law, interpretation, or guideline, on such date as shall be specified in such notice, prepay all LIBOR Portions of the Loan in full, provided that, in lieu of prepayment, pursuant to the terms of Section 3.2, the Borrower may elect to have such LIBOR Portions bear interest at the Prime Rate. Any such prepayment or conversion to Prime Rate shall entitle the Bank to prepayment compensation as provided in Section 3.3 hereof. SECTION 3.8 CAPITAL ADEQUACY. If after the date of this Agreement the Bank shall have determined that any applicable Law, rule, regulation or guideline regarding capital adequacy, or any -21- 22 change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of Law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital allocated to the transactions contemplated by this Agreement (or the capital of its holding company) as a consequence of its obligations hereunder to a level below that which the Bank (or its holding company) could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies or the policies of its holding company with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within 30 days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank (or its holding company) for such reduction, provided that the amounts allocated to the Borrower hereunder are done so in good faith and equitably as compared with the amounts allocated for similar reasons to other indebtedness owing to the Bank (or institutions of such holding company) by other borrowers thereof. The Bank will designate a different lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. A certificate of the Bank claiming compensation under this section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. Failure on the part of the Bank to demand compensation for any reduction in return on capital with respect to any period shall not constitute a waiver of the Bank's rights to demand compensation for any reduction in return on capital in such period or in any other period. The protection of this Section 3.8 shall be available to the Bank regardless of any possible contention of the invalidity or inapplicability of the Law, regulation or other condition which shall have been imposed. SECTION 3.9 TAXES. (a) TAXES; WITHHOLDING. Any and all payments by the Borrower hereunder, under the Note or the other Related Writings shall be made, in accordance with the provisions of Article 3, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the Laws of which the Bank is organized or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as -22- 23 "Taxes"). If the Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under the Note to the Bank, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.9) the Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Law. All such Taxes shall be paid by the Borrower prior to the date on which penalties attach thereto or interest accrues thereon; provided, however, that, if any such penalties or interest become due, the Borrower shall make prompt payment thereof to the appropriate governmental authority. The Borrower shall indemnify the Bank for the full amount of such Taxes (including any Taxes on amounts payable under this Section 3.9) paid by the Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. Any indemnification payment shall be made within thirty (30) days from the date the Bank makes written demand therefor. (b) STAMP TAXES. The Borrower agrees to pay, and will indemnify the Bank for, any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Note or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the Note (hereinafter referred to as "Other Taxes"). (c) OTHER TAXES. The Borrower will indemnify the Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.9) paid by the Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Any indemnification payment shall be made within thirty (30) days from the date the Bank makes written demand therefor. (d) REQUEST FOR REFUND. At the reasonable request of the Borrower, the Bank shall apply at the Borrower's expense for a refund in respect of Taxes or Other Taxes previously paid by the Borrower pursuant to this Section 3.9 if in the opinion of the Bank there is a reasonable basis for such refund. Notwithstanding the foregoing, the Bank shall not be obligated to pursue such refund if, in its sole good faith judgment, such action would be disadvantageous to it. If the Bank subsequently receives from a taxing authority a refund of any Tax previously paid by the Borrower and for which the Borrower has indemnified the Bank pursuant to this Section 3.9, the Bank shall within thirty (30) -23- 24 days after receipt of such refund, and to the extent permitted by applicable Law, pay to the Borrower the net amount of any such recovery after deducting taxes and expenses attributable thereto. (e) FURNISHING OF CERTIFICATE. Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Bank the original or a certified copy of a receipt evidencing payment thereof. The Borrower hereby represents and warrants to the Bank as of the date hereof that no Taxes are payable in respect of any payment made hereunder. If Taxes ever become payable in respect of any payment hereunder or under the Note made during a Fiscal Quarter and such Taxes are not timely paid, thereafter the Borrower will furnish to the Bank, within (30) days after the end of such Fiscal Quarter, a certificate from the Borrower stating that any payments made during such Fiscal Quarter are exempt from or not subject to Taxes, or shall pay such Taxes and furnish notice to the Bank as provided for in the first sentence hereof (except only those so long as and to the extent that the same shall be contested in good faith by appropriate proceedings, if in the judgment of the Bank any such delay in payment will not adversely affect the Bank in any material respect). (f) SURVIVAL OF PROVISION. Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and liabilities of the Borrower contained in this Section 3.9 shall survive the payment in full of the Loan, interest thereon and termination of the Commitment hereunder. ARTICLE 4 OPENING COVENANTS; CONDITIONS TO CLOSING SECTION 4.1 OPENING COVENANTS. Prior to or concurrently with the execution and delivery of this Agreement, the Borrower shall furnish to the Bank the following: (a) BORROWER CERTIFICATE. A certificate executed by an authorized officer of the Borrower and a secretary or assistant secretary of the Borrower certifying (a) the resolutions of the Board of Directors of the Borrower authorizing the execution, performance and delivery of this Agreement, the Note and all other Related Writings, (b) the names and signatures of the officers of the Borrower executing or attesting to such documents, (c) as true, correct and in full force and effect without amendment or revocation on the Closing Date the Articles of Incorporation and Regulations of the Borrower and (d) the absence of any Event of Default or Possible Default; (b) CERTIFIED ORGANIZATIONAL DOCUMENTS; GOOD STANDING CERTIFICATES. The Articles of Incorporation or Certificate of Incorporation of the Borrower, certified by the office of the -24- 25 Secretary of State of Ohio, and a certificate of good standing for the Borrower, certified by such office; (c) PLANS AND SPECIFICATIONS. Plans and specifications in respect of the Expansion (collectively, and as hereinafter modified, the "Plans and Specifications"; provided that (i) the Borrower shall give the Bank at least five (5) Banking Days' prior notice of any change thereto, and (ii) any Material Plan Change shall be approved by the Bank in writing, which approval shall not be withheld or delayed unreasonably). (d) ENGINEER'S CERTIFICATION. A certification by a registered engineer (or other evidence reasonably satisfactory to the Bank) that utilities are available and are adequate to service all of the Improvements, including the Expansion for the present and currently contemplated future use of the Property. (e)LEASES. True copies of all leases, if any, existing or proposed, covering any portion of the Property. (f) LOAN COMMITMENT FEE. Payment of the full amount of the Loan Commitment Fee, in immediately available funds; (g) PAYMENT OF THE BANK'S LEGAL FEES. Evidence of payment to the Bank of the legal fees and expenses of the Bank; and (h) CREDIT AGREEMENT CONSENT AND WAIVER. A consent by the "Bank" parties to the Credit Agreement to the Lien of the Mortgage and the Assignment of Rents notwithstanding the provisions of Section 8.10 of the Credit Agreement and a waiver by such "Bank" parties of the sharing provisions of Section 11.4 of the Credit Agreement with respect to the proceeds of foreclosure of (or deed in lieu thereof), or other sums realized from, the Lien and security interest of the Mortgage and the Assignment of Rents, which consent and waiver shall be joined in by the Borrower and any guarantors of its obligations under the Credit Agreement, and which shall be in form and substance reasonably satisfactory to the Bank. SECTION 4.2 PRIOR TO THE ADVANCE OF THE LOAN. As conditions to the Bank's advance of the Loan, (i) as of the Closing Date, there shall not have occurred or arisen any event or condition which would have a Material Adverse Effect on the Borrower, and (ii) prior to or concurrently with the closing of the Loan on the Closing Date, the Borrower shall furnish to the Bank, at the cost and expense of the Borrower, originals or copies of the following: (a) NOTE. The Note, in favor of the Bank, in the principal amount of the Loan, duly executed by the Borrower; -25- 26 (b) LEGAL OPINION. A favorable opinion of counsel for the Borrower substantially in the form of Exhibit C hereto; (c) BORROWER CERTIFICATE. A certificate executed by an authorized officer of the Borrower and a secretary or assistant secretary of the Borrower certifying (a) as true, correct and in full force and effect without amendment or revocation on such date, the Articles of Incorporation and Regulations of the Borrower and (b) the absence of any Event of Default or Possible Default; (d) ENGINEERING REPORT. A certification from a licensed architect or engineer certifying that the Expansion is fully completed and is in all material respects in accordance with the Plans and Specifications, that all Improvements comply in all material respects with building code and other applicable governmental requirements and that there are no known material violations. (e) CERTIFICATE OF OCCUPANCY. The Certificate of Occupancy, or temporary Certificate of Occupancy permitting the use and occupancy of the Property for the Borrower's headquarters in the ordinary course and without material variance from the Borrower's customary operation, satisfactory to the Bank, in respect of the Property, including the Expansion; (f) APPRAISAL. A written appraisal (the "Appraisal") acceptable to the Bank reporting the fair market value of the Property (including the Expansion), conducted by an appraiser who is a Member of the Appraisal Institute and who is selected and engaged by the Bank; provided that the Bank will consult with the Borrower regarding the appraiser so selected in advance of such engagement, and, provided, further, however, that an objection by the Borrower in connection with such selection shall not be binding on the Bank. The cost of the Appraisal will be paid by the Borrower. The Appraisal shall be prepared in accordance with the Uniform Standards of Professional Appraisal Practice applicable to Federally Related Transactions as set out in Appendix A to the real estate appraisal regulations adopted by the Office of the Comptroller of the Currency pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") (Sub-part C of 12 C.F.R. 34) and shall be prepared in response to an engagement letter to be issued by the Bank. (g) NO ADVERSE FILINGS. A certificate of the Borrower, in form and substance reasonably satisfactory to the Bank, to which Uniform Commercial Code searches of the Secretary of State of Ohio and the Recorder of Cuyahoga County are attached, indicating that there are no filings relating to, or which could relate to, the Property or the Personal Property of the Borrower other than those made under the mortgage identified in Schedule B-I of the -26- 27 ALTA Policy and hereunder, or to secure other Indebtedness of the Borrower to the Bank or as to Personal Property only, as permitted herein. (h) FLOOD INSURANCE. Evidence satisfactory to the Bank indicating whether the Property is located within a one hundred year flood plain or identified as a special flood hazard area as defined by the Federal Insurance Administration, and, if the Property is located in such a flood plain or special flood hazard area, evidence of Federal flood insurance in the maximum amount available, naming the Bank and its successors and assigns as loss payee; (i) ENVIRONMENTAL SITE ASSESSMENT. A satisfactory Phase I environmental site assessment report reasonably satisfactory to the Bank, with wetlands certification, prepared for and certified to the Bank by a consultant selected from the Bank's approved list of environmental consultants (or the Borrower may satisfy this requirement by updating an existing site assessment issued on or after October 14, 1995 by such an approved consultant and satisfactory to the Bank). (j) EVIDENCE OF FILING. Evidence satisfactory to the Bank that (i) the Mortgage and the Assignment of Rents, duly executed by the Borrower, have been filed for record in the real estate records of Cuyahoga County, Ohio, and (ii) Uniform Commercial Code financing statements in form and substance satisfactory to the Bank have been filed in the Uniform Commercial Code records of the Secretary of State of Ohio and Cuyahoga County, Ohio. (k) TITLE INSURANCE. A loan policy of title insurance issued by First American Title Insurance Company or other insurer reasonably satisfactory to the Bank showing the Mortgage as a first and best lien upon a fee simple estate in the Land and the Improvements, subject only to the Permitted Encumbrances, containing variable interest rate, zoning (or, at the Borrower's option, in lieu of such endorsement other evidence, which may consist of written confirmation from the City of Shaker Heights, reasonably satisfactory to the Bank that the use of the Property for general office purposes comports with all applicable zoning and other land use ordinances or other governmental requirements), and comprehensive endorsements, containing none of the so-called "standard exceptions", and otherwise satisfactory to the Bank in its reasonable discretion. (l) SURVEY. An ALTA/ACSM survey (conducted under "urban" standards) jointly certified to both the Bank and the title insurance company depicting the Land and showing the location of the Building and other Improvements, lot lines, building lines, easements, streets, access ways to public streets, right of ways, the absence of encroachments which would have a material adverse effect on the value of the Property or its utility for office and -27- 28 related purposes and otherwise comporting in all material respects (as reasonably determined by the Bank) with the Survey Requirements set forth on Exhibit F hereto. (m) COMPLIANCE WITH AGREEMENT. The Borrower and each of its Subsidiaries shall in all material respects be in compliance with all other terms and provisions set forth herein and in each other Related Writing on its part to be observed or performed, and at the time of and immediately after the advance of the Loan, no Event of Default or Possible Default shall have occurred and be continuing. (n) FINANCIAL STATEMENTS. A certification by the Borrower's Chief Financial Officer that since the closing date of the Borrower's most recent financial statements delivered to the Bank pursuant to Section 5.1 hereof, no event or condition has occurred or arisen that would affect adversely the credit or security relied upon by the Bank in entering into this Agreement. (o) DRAWINGS. A complete set of construction drawings for the Building, including the Expansion, to the extent, if any, necessary to reflect any changes to the Expansion which are of the type or amount which require the Bank's consent pursuant to the terms of Section 4.1(c), above. (p) PROPERTY INSURANCE. A certificate or other evidence satisfactory to the Bank that the property insurance covering the Improvements required by Section 4.4 of the Mortgage is in full force and effect. (q) NO DAMAGE. Evidence reasonably satisfactory to the Bank (which may take the form of a certificate of an authorized officer of the Borrower) that none of the Improvements have been damaged to any material degree (or, if damaged, that they have been repaired), and no portion of the Land or Improvements is subject to any condemnation proceeding. (r) OTHER DOCUMENTS. Such other documents or materials as the Bank may reasonably request upon reasonable notice to the Borrower. ARTICLE 5 COVENANTS From and after the date hereof through the entire Term and for so long thereafter as any of the Obligations remain unpaid and outstanding, or the Bank shall have the Commitment outstanding, the Borrower agrees to perform and observe and to cause each Subsidiary to perform and observe, all of the following provisions: SECTION 5.1 FINANCIAL STATEMENTS. -28- 29 (a) QUARTERLY FINANCIAL STATEMENTS. The Borrower will furnish to the Bank promptly and in any case within fifty (50) days after the end of each of the first three (3) Fiscal Quarters of each of its Fiscal Years, unaudited consolidated balance sheets of the Borrower and its Subsidiaries as at the end of that period and the unaudited consolidated statements of income and reconciliations of consolidated cash flows for that period (either by delivery of the Borrower's Form 10-Q Quarterly Report for such period or by separate delivery of such financial statements), all prepared on a consolidated basis and in accordance with generally accepted accounting principles (except for certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles which are condensed or omitted pursuant to the rules and regulations of the SEC which condensation or omissions do not, in the view of the Borrower, make the information in such financial statements inadequate or misleading), consistently applied, and otherwise in form and detail reasonably satisfactory to the Bank and certified by a financial officer of the Borrower. (b) ANNUAL FINANCIAL STATEMENTS. The Borrower will furnish to the Bank promptly and in any case within ninety-five (95) days after the end of each of its Fiscal Years, a complete annual audit report of the Borrower and its Subsidiaries for that year (either by delivery of the Borrower's Form 10-K Annual Report for such period or by separate delivery of such financial statements), all prepared on a consolidated basis and in accordance with generally accepted accounting principles except as disclosed therein, and in form and detail reasonably satisfactory to the Bank and certified by Price Waterhouse (or another firm of independent public accountants reasonably satisfactory to the Bank), together with a certificate by the accountant setting forth any Events of Default or Possible Defaults coming to its attention during the course of its audit or, if none, a statement to that effect. (c) OFFICER'S CERTIFICATES. The Borrower will furnish to the Bank, promptly upon the Bank's written request, such other information about the financial condition, properties and operations of the Borrower and its Subsidiaries as the Bank may from time to time reasonably request, which information shall be submitted in form and detail reasonably satisfactory to the Bank and certified by a financial officer of the Borrower or the Subsidiary in question and the Borrower will in any event furnish to the Bank the following: (i) concurrently with the financial statements delivered in connection with clause (a) and (b) above, a certificate of a responsible financial officer of the Borrower, certifying that (A) to his knowledge and belief, those -29- 30 financial statements fairly present in all material respects the financial condition and results of operations of the Borrower and its Subsidiaries (subject, in the case of interim financial statements, to routine year-end audit adjustments) and (B) no Possible Default then exists or if any does, a brief description thereof and of the Borrower's intentions in respect thereof, and (ii) within fifty (50) days after the end of any Fiscal Quarter and within ninety-five (95) days after the end of any Fiscal Year, a certificate of a responsible financial officer of the Borrower, in the form of Exhibit G hereto, setting forth the calculations necessary to determine whether or not the Borrower and its Subsidiaries are in compliance with the general financial standards set forth in Sections 5.16, 5.17, 5.18, 5.19 and 5.20. (d) PUBLICLY-FILED INFORMATION. The Borrower will furnish to the Bank, promptly when filed (in final form) or sent, a copy of (i) each registration statement (other than on Form S- 8), Form 10-K annual report, Form 10-Q quarterly report, Form 8-K current report or similar document filed by the Borrower with the SEC (or any similar federal agency having regulatory jurisdiction over the Borrower's securities) and (ii) each proxy statement, annual report or other document sent by the Borrower to its stockholders or other security-holders generally (or any trustee for transmission to any such holders under any indenture which secures any of its securities or pursuant to which such securities are issued). SECTION 5.2 NOTICE. (a) NOTICE OF DEFAULT; MISREPRESENTATION. The Borrower shall give the Bank (i) prompt written notice as soon as possible, and in any event within five (5) days, after any responsible officer of the Borrower or any Subsidiary (A) knows of the occurrence of any Possible Default or of any development which in such officer's reasonable belief would or might reasonably be expected to result in a Material Adverse Effect or (B) reasonably believes that any representation or warranty made in this Agreement or any Related Writing shall for any reasons have ceased in any material respect to be true and complete and (ii) a statement on behalf of the Borrower executed by any responsible officer of the Borrower or such Subsidiary setting forth the details of such Possible -30- 31 Default or such development and the action that the Borrower has taken or proposes to take with respect thereto. (b) NOTICE OF DEFAULT UNDER ERISA. If any responsible officer of the Borrower shall receive written notice from any ERISA Regulator or otherwise have actual knowledge that a Default under ERISA exists with respect to any Plan, the Borrower shall notify the Bank of the occurrence of such Default under ERISA within five (5) days after receiving such notice or obtaining such knowledge and shall, so long as the Default under ERISA has not been corrected to the satisfaction of, or waived in writing by, the party giving notice, the Borrower shall thereafter treat as a current liability (if not otherwise so treated) all liability of the Borrower or its Subsidiary that would arise by reason of the termination of or withdrawal from such Plan if such Plan was then terminated. (c) NOTICE OF LITIGATION. The Borrower shall give the Bank prompt, and in any event within five (5) days of the date any responsible officer of the Borrower or any of its Subsidiaries becomes aware of, notice of (i) any suit at Law or in equity filed against the Borrower or any of its Subsidiaries involving money or property valued in excess of Five Million Dollars ($5,000,000), except where the same is fully covered by insurance (subject to normal deductibles) and the insurer has accepted liability therefor, and (ii) any litigation, investigation or proceeding before or by any administrative or governmental agency, department, bureau, commission or board the effect of which would or might reasonably be expected to have a Material Adverse Effect. (d) ENVIRONMENTAL REPORTING. The Borrower shall give the Bank prompt, and in any event within ten (10) days of the date the Borrower or any of its Subsidiaries receives or transmits, as the case may be, copies of all material communications with any government or governmental agency relating to Environmental Laws. SECTION 5.3 INSURANCE. The Borrower shall (a) keep itself and all of its insurable properties insured at all times to such extent, by such insurers (or by a sound program of self-insurance reasonably satisfactory to the Bank), and against such hazards and liabilities as is generally and prudently done by like businesses, it being understood that all such insurance coverage at the date of this Agreement meets the standards contemplated by this Section 5.3, and shall comply with the insurance provisions of the Mortgage and, if the Property is located in a one hundred year flood plain or a special flood hazard area, keep the Property insured with maximum coverage of Federal flood hazard insurance, (b) give the Bank prompt written notice of each material change in insurance coverage and the details of the change and (c) promptly upon the Bank's written request, furnish to the Bank such information about any such insurance as the Bank -31- 32 may from time to time reasonably request, which information shall be prepared in form and detail satisfactory to the Bank and certified by an officer of the Borrower or the applicable Subsidiary. The review and approval by the Bank of any such self-insurance program proposed by the Borrower will be conducted solely for the benefit of the Bank to protect its interests hereunder in respect of the Borrower's and its Subsidiaries' payment and performance of the Obligations and shall not be construed to imply that the Bank has reviewed or approved the soundness or propriety of such plan as it may affect the Borrower, the Subsidiaries or any other Person; and the Bank shall have no liability in respect of any such program. SECTION 5.4 TAX OBLIGATIONS. The Borrower shall pay in full prior in each case to the date when penalties would attach, all taxes, assessments and governmental charges and levies (except only those so long as and to the extent that the same shall be contested in good faith by appropriate and timely proceedings) for which the Borrower may be or become liable or to which any or all of the Property may be or become subject. SECTION 5.5 RECORDS. The Borrower shall (a) at all times maintain true and complete records and books of account and, without limiting the generality of the foregoing, maintain appropriate reserves for possible losses and liabilities, all in accordance with generally accepted accounting principles and (b) upon reasonable notice and at all reasonable times permit the Bank to examine its books and records and to make excerpts therefrom and transcripts thereof. SECTION 5.6 FRANCHISES. The Borrower shall preserve and maintain at all times its corporate existence, and, to the extent the termination thereof would have a Material Adverse Effect, its corporate rights and franchises; PROVIDED, HOWEVER, that this Section 5.6 shall not prevent any merger or consolidation permitted by Section 5.9 hereof. SECTION 5.7 ERISA COMPLIANCE. The Borrower shall not incur any material accumulated funding deficiency within the meaning of the ERISA and the regulations thereunder, or any material liability to the Pension Benefit Guaranty Corporation, established thereunder in connection with any Plan. The Borrower shall furnish to the Bank (i) simultaneously with a filing with the Pension Benefit Guaranty Corporation of a notice regarding any Reportable Event and in any event within thirty (30) days after a responsible officer of the Borrower knows that any Reportable Event with respect to any Plan has occurred, a statement of any responsible financial officer of the Borrower setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event given to the Pension Benefit Guaranty Corporation if a copy of such -32- 33 notice is available to the Borrower , (ii) promptly after the filing thereof with the Internal Revenue Service, copies of each annual report with respect to each Plan established or maintained by the Borrower for each plan year, including (x) where required by Law, a statement of assets and liabilities of such Plan as of the end of such plan year and statements of changes in fund balance and in financial position, or a statement of changes in net assets available for plan benefits, for such plan year, certified by Price Waterhouse (or another firm of independent public accountants of recognized standing reasonably satisfactory to the Bank) and (y) an actuarial statement of such Plan applicable to such plan year, certified by an enrolled actuary of recognized standing reasonably satisfactory to the Bank, and (iii) promptly after receipt thereof a copy of any notice the Borrower or any member of the Controlled Group may receive from the Pension Benefit Guaranty Corporation or the Internal Revenue Service with respect to any Plan administered by the Borrower; PROVIDED, HOWEVER, that this latter clause shall not apply to notices of general application promulgated by the Pension Benefit Guaranty Corporation or the Internal Revenue Service. The Borrower shall notify the Bank promptly of any taxes assessed, proposed to be assessed or which the Borrower has reason to believe may be assessed against the Borrower by the Internal Revenue Service with respect to any Plan and any filing which relates to the withdrawal by the Borrower from a Multi-Employer Plan. As used in this subsection "material" means the measure of a matter of significance which shall be determined as being an amount equal to or greater than Ten Million Dollars ($10,000,000). SECTION 5.8 RESERVED. SECTION 5.9 MERGERS AND CONSOLIDATIONS; ASSET TRANSFERS. The Borrower shall not (a) be a party to any consolidation, control share acquisition, majority share acquisition or other business combination or merger, or (b) lease, sell or otherwise transfer any assets comprising any material portion of the Property (other than such chattels, if any, as may have become obsolete or no longer useful in the continuance of its present business) except in the normal course of its present business; provided, however, that, if no Possible Default shall then exist or immediately thereafter will begin to exist, this Section 5.9 shall not apply to (i) any merger of any Subsidiary with the Borrower, subject, however, to the condition that the Borrower shall be the surviving corporation, or (ii) any transfer of assets from the Borrower to any Subsidiary or any Subsidiary to the Borrower or (iii) any merger of the Borrower with any other entity so long as the Borrower is the surviving corporation, or (iv) any merger of the Borrower with, or any purchase or other acquisition of all or a substantial part of the assets of, any corporation or other business enterprise engaged in the same or similar businesses of the Borrower; provided, (1) the financial -33- 34 covenants set forth in Sections 5.16, 5.18 and 5.19 shall have been met on a pro forma, consolidated basis, as of the end of the preceding Fiscal Quarter of the Borrower, and (2), in the event of a merger, the Borrower is the surviving corporation. SECTION 5.10 LIENS. The Borrower shall not suffer or permit any of the Property now owned or hereafter acquired by it to be or become encumbered by any mortgage, security interest, financing statement or Lien of any kind or nature whatsoever, except Permitted Encumbrances. SECTION 5.11 INDEBTEDNESS FOR BORROWED MONEY. The Borrower shall not create, incur or suffer to exist any Indebtedness for Borrowed Money of any kind if, at the time of the incurrence of such Indebtedness or immediately thereafter, an Event of Default or a Possible Default exists or would exist. SECTION 5.12 COMPLIANCE WITH LAWS. The Borrower shall comply in all respects with its Articles of Incorporation or Certificate of Incorporation, as the case may be, and Regulations or By-laws, as the case may be, and all applicable occupational safety and health Laws, federal and state securities Laws, product safety Laws, Environmental Laws and every other Law, treaty, rule, regulation, determination of an arbitrator, and every lawful governmental order or determination if non-compliance with such Law or order would have a Material Adverse Effect; provided, however, that this Section 5.12 shall not apply to any noncompliance if and to the extent that the same is being contested in good faith by timely and appropriate proceedings which are effective to stay enforcement thereof and against which appropriate reserves have been established. SECTION 5.13 PROPERTIES. The Borrower shall maintain all assets materially necessary to its continuing operations in good working order and condition, ordinary wear and tear excepted. SECTION 5.14 CHANGE IN NATURE OF BUSINESS. The Borrower shall not make any material change in the nature of its business as carried on at the date hereof; provided, however, that this Section 5.14 shall not prohibit the Borrower from expanding its business operations into any geographic area where such operations are not currently located. SECTION 5.15 USE OF PROCEEDS. The Borrower shall use the proceeds of the Loan only for the purposes specified in Section 2.2. SECTION 5.16 CONSOLIDATED NET WORTH. The Borrower will not suffer or permit its Consolidated Net Worth as of the date of the Initial Credit Event and as at the end of any Fiscal Quarter to be less than the "Required Minimum Amount" in effect at such time. The "Required Minimum Amount" shall be (i) as of the date -34- 35 of the Initial Credit Event, the greater of (A) Six Hundred Million Dollars ($600,000,000) and (B) an amount equal to the Consolidated Net Worth of the Borrower as at the close of the Fiscal Quarter immediately preceding the date of the Initial Credit Event MINUS Forty-Five Million Dollars ($45,000,000); and (ii) as at the end of any Cumulative Fiscal Period ending after the Closing Date: (a) the Required Minimum Amount PLUS (b) an aggregate amount equal to fifty percent (50%) of Borrower's consolidated net earnings (if any and only to the extent a positive number) for such Cumulative Fiscal Period, in each case calculated after taxes and cumulating income and losses for all Fiscal Quarters within such Cumulative Fiscal Period (such amount being "Cumulative Fiscal Earnings") PLUS (c) an aggregate amount equal to all Cumulative Fiscal Earnings (if any and only to the extent a positive number) attributable to Fiscal Years ending after the Closing Date and not including the Fiscal Year during which said Cumulative Fiscal Period is occurring (which aggregate amount shall not be reduced by consolidated net losses (if any) reported for any Fiscal Year ending after the Closing Date), PLUS (d) an amount equal to the total net proceeds received by the Borrower at any time from any stock or other equity offering or any conversion of Subordinated Indebtedness into equity after the Closing Date (excluding stock offerings under any employee benefit plan of the Borrower or its Subsidiaries). SECTION 5.17 CONSOLIDATED FIXED CHARGE COVERAGE. The Borrower shall not suffer or permit, as at the end of any Four Fiscal Quarter Period, the ratio (the "Consolidated Fixed Charge Coverage Ratio") of: (i) Consolidated Net Pre-Tax Earnings of the Borrower and its Subsidiaries attributable to such period plus Consolidated Net Fixed Lease Charges attributable to such period PLUS Consolidated Net Interest Expense attributable to such period PLUS depreciation and amortization charges of the Borrower and its Subsidiaries attributable to such period, to (ii) Consolidated Net Fixed Lease Charges attributable to such period PLUS Consolidated Net Interest Expense attributable to such period PLUS scheduled principal payments in respect of any Long- Term Indebtedness of the Borrower and its Subsidiaries during such period, to be less as at such date than 1.45 to 1.00. SECTION 5.18 CONSOLIDATED CURRENT FUNDED INDEBTEDNESS. The Borrower shall not suffer or permit, as at the end of any Fiscal Quarter, the ratio of: (i) Consolidated Current Assets at such date to (ii) Consolidated Current Liabilities at such date PLUS, without duplication, Funded Senior Debt at such date to be less -35- 36 than 1.15 to 1.00 as at the end of any Fiscal Quarter of any Fiscal Year. SECTION 5.19 CONSOLIDATED LEVERAGE RATIO. The Borrower shall not suffer or permit, as at the end of any Fiscal Quarter, the ratio (the "Consolidated Leverage Ratio") of: (i) Funded Senior Debt outstanding as at such date to (ii) the sum of Funded Senior Debt outstanding as at such date PLUS the Subordinated Indebtedness PLUS Consolidated Net Worth as at such date to be greater than .45 to 1.00. SECTION 5.20 DIVIDENDS. The Borrower shall not make any Distribution to its shareholders upon and during the continuance of an Event of Default or Possible Default under Sections 7.1, 7.2 (by reference to a breach of Section 5.16 or Section 5.17 only), 7.8 or 7.9. SECTION 5.21 RESERVED. SECTION 5.22 RESERVED. SECTION 5.23 PROTECTION OF SECURITY INTEREST IN PERSONAL PROPERTY. Subject only to Permitted Encumbrances, the Borrower shall maintain the lien and security interest created by the Mortgage as a first lien upon the Personal Property subject thereto and take such actions and execute and deliver to the Bank such instruments and documents as the Bank may reasonably require from time to time in connection therewith, including without limitation any supplemental security agreements, Form UCC-1 or UCC-2 financing statements, continuation statements or other instruments and documents extending or perfecting the security interest of the Bank in and to such Personal Property as it may exist from time to time, it being understood that personal property in the nature of the Borrower's office desks and chairs and office computers used in the operation and management of the Borrower's business shall not be so encumbered. ARTICLE 6 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Bank as follows: SECTION 6.1 EXISTENCE. The Borrower is a corporation duly organized and validly existing and in good standing under the Laws of the state of its incorporation and is duly qualified and authorized to do business wherever it owns any real estate or personal property or transacts any substantial business, except in jurisdictions in which failure to so qualify would not have a Material Adverse Effect. SECTION 6.2 POWER, AUTHORIZATION AND CONSENT. The execution, delivery and performance of this Agreement and the -36- 37 Note and of all Related Writings by the Borrower to which it is party (a) are within the Borrower's corporate power and authority, (b) have been duly authorized by all necessary or proper action of the Borrower, (c) do not require the consent or approval of any governmental body, agency, authority or any other Person which has not been obtained and (d) will not violate (i) any provision of Law applicable to the Borrower, (ii) any provision of the Borrower's certificate or articles of incorporation or by-laws or regulations, or (iii) any material agreement or material indenture by which the Borrower or the property of the Borrower is bound, except where such violation specified in this clause (iii) would not have a materially adverse effect on the Borrower, or (e) will not result in the creation or imposition of any lien or encumbrance on any property or assets of the Borrower except as provided herein. SECTION 6.3 LITIGATION; PROCEEDINGS. No action, suit, investigation or proceeding is now pending or, to the knowledge of Borrower, threatened, against the Borrower or any of its Subsidiaries, at Law, in equity or otherwise, or with respect to this Agreement or any Related Writing, before any court, board, commission, agency or instrumentality of any federal, state, local or foreign government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators which would or might reasonably be expected to have a Material Adverse Effect. SECTION 6.4 ERISA COMPLIANCE. Neither the Borrower nor any Subsidiary has incurred any material accumulated funding deficiency within the meaning of the ERISA, and the regulations thereunder. No Reportable Event has occurred with respect to any Plan which may result in any material liability against the Borrower. The Pension Benefit Guaranty Corporation, established under ERISA, has not asserted that the Borrower has incurred any material liability in connection with any Plan. No Lien has been attached and no person has, to the best of the Borrower's knowledge, threatened to attach a lien on any property of the Borrower as a result of the Borrower's failing to comply with ERISA or regulations. As used in this subsection, "material" means the measure of a matter of significance which shall be determined as being an amount equal to or greater than Ten Million Dollars ($10,000,000). SECTION 6.5 FINANCIAL CONDITION. The consolidated financial statements of the Borrower and its Subsidiaries for the Fiscal Year ending January 27, 1996, previously delivered to the Bank have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with those used during their next preceding Fiscal Year (except as noted therein) and fairly and accurately present in all material respects their then financial condition and operations for the Fiscal Year then ending (including, without limiting the -37- 38 generality of the foregoing, a disclosure of all material contingent liabilities). There has been no material change in the B financial condition, properties or business of the Borrower or any Subsidiary since that date. SECTION 6.6 RESERVED. SECTION 6.7 SOLVENCY. The Borrower has received consideration which is the reasonable equivalent value of the obligations and liabilities that the Borrower has incurred to the Bank. The Borrower is not insolvent as defined by any applicable state or federal Law, nor will the Borrower be rendered insolvent by the execution and delivery of this Agreement or the Note to the Bank. The Borrower is not engaged or about to engage in any business or transaction for which the assets retained by it shall be an unreasonably small capital, taking into consideration the obligations to the Bank incurred hereunder. The Borrower does not intend to, nor does it believe that it will, incur debts beyond its ability to pay them as they mature. SECTION 6.8 DEFAULT. No Possible Default exists hereunder, nor will any begin to exist immediately after the execution and delivery hereof. SECTION 6.9 LAWFUL OPERATIONS. The operations of the Borrower are in compliance as of the date hereof and the Closing Date with all requirements imposed by Law or regulation, whether federal, state or local including (without limitation) all Environmental Laws, occupational safety and health Laws and zoning ordinances except where the noncompliance with any such Laws could not be reasonably expected to result in a Material Adverse Effect; PROVIDED, HOWEVER, that this Section 6.9 shall not apply to any noncompliance if and to the extent that the same is being contested in good faith by timely and appropriate proceedings which are effective to stay enforcement thereof and against which appropriate reserves have been established. SECTION 6.10 INVESTMENT COMPANY ACT STATUS. The Borrower is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. Section 80(a)(1), et seq.). SECTION 6.11 REGULATION G/REGULATION U/REGULATION X COMPLIANCE. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock", (as defined by Regulation U of the Board of Governors of the Federal Reserve System of the United States (as amended from time to time)) and all official rulings and interpretations thereunder or thereof and at no time shall more than 25% of the value of the assets of the Borrower or the Borrower and its Consolidated -38- 39 Subsidiaries that are subject to any "arrangement" (as such term is used in section 221.2(g) of Regulation U) be represented by "margin stock". No part of the proceeds of the Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or to extend credit to others for the purpose of purchasing "margin stock" or to carry or to extend credit to others for the purpose of carrying stock which will be "margin stock" after giving effect to the Loan or (ii) for any purpose that entails a violation of, or is inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System of the United States, including Regulation G, U or X. SECTION 6.12 FULL DISCLOSURE. No information, exhibits or reports furnished by the Borrower to the Bank omits to state any fact necessary to make the statements contained therein not materially misleading in light of the circumstances and purposes for which such information was provided. The Borrower has provided all information requested by the Bank and all such information is complete and accurate in all material respects. ARTICLE 7 EVENTS OF DEFAULT Each of the following shall constitute an event of default (an "Event of Default") hereunder: SECTION 7.1 PAYMENTS. If the principal of or interest on the Note, or any reimbursement, payment or amount or fee due the Bank under this Agreement shall not be paid in full punctually when due and payable, or within five (5) days thereafter. SECTION 7.2 COVENANTS. If the Borrower or any Subsidiary shall fail or omit to perform and observe (a) any agreement or other provision (other than those referred to in Section 7.1 hereof or in either of clause (b) or clause (c) of this Section 7.2) contained or referred to in this Agreement that is on the Borrower's or such Subsidiary's part to be complied with and such Possible Default shall not have been fully corrected within thirty (30) days after the giving of written notice thereof to the Borrower by the Bank that the specified Possible Default is to be remedied or (b) any agreement or other provision contained in any one or more of Sections 5.2, 5.3, 5.5, 5.10, 5.11 or 5.24 hereof and such Possible Default shall not have been fully corrected within fifteen (15) days after the occurrence of such Possible Default or (c) any agreement or other provision contained in any one or more of Sections 5.9, 5.16, 5.17, 5.18, 5.19, 5.20, 5.22, or 5.23 hereof or (d) any agreement or other provision contained or referred to in any Related Writing, including, without limitation, the Mortgage and the Assignment of Rents, that is on the Borrower's part to be complied with and after such notice or grace period or both, if any, provided for -39- 40 in such Related Writing (or, if no notice or grace period is specified in such Related Writing, within thirty (30) days after the giving of written notice thereof to the Borrower by the Bank that such failure or omission to perform or observe is to be remedied). SECTION 7.3 WARRANTIES. If any representation, warranty or statement made in or pursuant to this Agreement or any Related Writing or any other material information furnished by the Borrower to the Bank or any other holder of the Note shall be false or erroneous in any material respect when furnished or made or deemed furnished or made hereunder. SECTION 7.4 CROSS DEFAULT. If (a) the Borrower, after any applicable notice or grace period or both, (i) defaults in the payment of any principal or interest due and owing upon any other Indebtedness for Borrowed Money (including, without limitation, loans under the Swingline Facility or Outside Loans) in excess of Five Million Dollars ($5,000,000) in principal amount or (ii) defaults in the performance of any other agreement, term or condition contained in any promissory note, agreement or other instrument under which such Indebtedness is evidenced, created, constituted, secured or governed which default causes, or permits the holder of such Indebtedness the right to cause, the acceleration of the maturity thereof, or (b) an "Event of Default" exists under the Credit Agreement. SECTION 7.5 CHANGE OF CONTROL. If (x) any "person" or "group" (other than the "executive officers" of the Borrower as of the date hereof and their respective immediate family members, heirs, devises, legatees or trusts for the benefit of any of the foregoing) shall become the "beneficial owner" (as those terms are respectively used in the Securities and Exchange Act of 1934, as amended, and the rules and regulations thereunder) of more than thirty-three and one-third percent (33-1/3%) (or, in the case of Kmart Corporation, forty percent (40%)) of the outstanding voting stock of the Borrower or shall otherwise acquire the power (whether by contract, by proxy or otherwise) to elect a majority of the Borrower's Board of Directors or (y) during any twelve (12) month period, individuals who were directors of the Borrower at the beginning of such period or were elected to the Board of Directors of the Borrower with the approval of a majority of such directors shall cease to constitute a majority of the Board of Directors. SECTION 7.6 TERMINATION OF PLAN OR CREATION OF WITHDRAWAL LIABILITY. If (a) any Reportable Event occurs and the Bank, in its sole and reasonable determination, deems such Reportable Event to constitute grounds (i) for the termination of any Plan by the Pension Benefit Guaranty Corporation or (ii) for the appointment by the appropriate United States district court of a trustee to administer any Plan and such Reportable Event shall -40- 41 not have been fully corrected or remedied to the reasonable satisfaction of the Bank within thirty (30) days after giving of written notice of such determination to the Borrower by the Bank or (b) any Plan shall be terminated within the meaning of Title IV of ERISA (other than a Standard Termination, as that term is defined in Section 4041(b) of ERISA), or (c) a trustee shall be appointed by the appropriate United States district court to administer any Plan, or (d) the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan or (e) there occurs a withdrawal by the Borrower or any Subsidiary from a Multi- Employer Plan which results or may result in a withdrawal liability in an amount equal to or greater than Ten Million Dollars ($10,000,000). SECTION 7.7 VALIDITY OF AGREEMENTS. If this Agreement or the Note of this Agreement or any other Related Writing, which Related Writing provides for the payment of money or the subordination or limitation of rights with respect to any Indebtedness, shall for any reason cease to be, or be asserted by the Borrower not to be, a legal, valid and binding obligation of any party thereto (other than the Bank) enforceable in accordance with its terms. SECTION 7.8 SOLVENCY OF SUBSIDIARIES. If any Subsidiary which, as of the last day of the fiscal year of that Subsidiary most recently ended, had assets having a book value, in the aggregate, of equal to or more than ten percent (10%) of the book value of the Consolidated Assets as of such date, determined in accordance with generally accepted accounting principles, consistently applied, shall (a) generally not pay its debts as such debts become due, or (b) make a general assignment for the benefit of creditors, or (c) apply for or consent to the appointment of a receiver, a custodian, a trustee, an interim trustee or liquidator of itself or all or a substantial part of its assets, or (d) be adjudicated a debtor or have entered against it an order for relief under Title 11 of the United States Code, as the same may be amended from time to time, or (e) file a voluntary petition in bankruptcy or file a petition or an answer seeking reorganization or an arrangement with creditors or seeking to take advantage of any other law (whether federal or state) relating to relief of debtors, or admit (by answer, by default or otherwise) the material allegations of a petition filed against it in any bankruptcy, reorganization, insolvency or other proceeding (whether federal or state) relating to relief of debtors, or (f) suffer or permit to continue unstayed and in effect for thirty (30) consecutive days any judgment, decree or order, entered by a court of competent jurisdiction, which approves a petition seeking its reorganization or appoints a receiver, custodian, trustee, interim trustee or liquidator of itself or of all or a substantial part of its assets, or (g) take -41- 42 or omit to take any other action in order thereby to effect any of the foregoing. SECTION 7.9 THE BORROWER'S SOLVENCY. If the Borrower shall (a) discontinue business, or (b) generally not pay its debts as such debts become due, or (c) make a general assignment for the benefit of creditors, or (d) apply for or consent to the appointment of a receiver, a custodian, a trustee, an interim trustee or liquidator of all or a substantial part of its assets, or (e) be adjudicated a debtor or have entered against it an order for relief under Title 11 of the United States Code, as the same may be amended from time to time, or (f) file a voluntary petition in bankruptcy or file a petition or an answer seeking reorganization or an arrangement with creditors or seeking to take advantage of any other Law (whether federal or state) relating to relief of debtors, or admit any answer, by default or otherwise) the material allegations of a petition filed against it in any bankruptcy, reorganization, insolvency or other proceeding (whether federal or state) relating to relief of debtors, or (g) suffer or permit to continue unstayed and in effect for thirty (30) consecutive days any judgment, decree or order entered by a court or governmental commission of competent jurisdiction, which assumes custody or control of the Borrower or BizMart approves a petition seeking reorganization of the Borrower or any other judicial modification of the rights of its creditors, or appoints a receiver, custodian, trustee, interim trustee or liquidator for the Borrower or of all or a substantial part of its assets, or (h) take, or omit to take, any action in order thereby to effect any of the foregoing. SECTION 7.10 JUDGMENTS. If (a) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 (unless such judgment (i) shall have been reserved for by the Borrower on the date hereof or (ii) shall be insured and the insurance carrier shall have acknowledged in writing liability in respect of the full amount thereof or shall have been ordered by a court of competent jurisdiction to pay such judgment) shall be rendered against the Borrower, any Subsidiary or any combination thereof, and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or (b) any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Subsidiary to enforce any such judgment. ARTICLE 8 REMEDIES UPON DEFAULT Notwithstanding any contrary provision or inference herein or elsewhere, -42- 43 SECTION 8.1 OPTIONAL DEFAULTS. If any Event of Default referred to in Sections 7.1 through and including 7.8 or in Section 7.10 shall occur and be continuing, the Bank shall have the right in its discretion to accelerate the maturity of all of the Borrower's Obligations to the Bank (if it be not already due and payable), whereupon all of the Borrower's Obligations to the Bank (including but not limited to the Note) shall become and thereafter be immediately due and payable in full without any presentment or demand and without any further or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 8.2 AUTOMATIC DEFAULTS. If any Event of Default referred to in Section 7.9 shall occur, the principal of and interest on the Note, and all of the Borrower's other Bank Debt, shall thereupon become and thereafter be immediately due and payable in full (if it be not already due and payable), all without any presentment, demand or notice of any kind, which are hereby waived by the Borrower. SECTION 8.3 OFFSETS. If there shall occur or exist any or Event of Default or Possible Default referred to in Section 7.9 or if the maturity of the Note is accelerated pursuant to Section 8.1 or 8.2, the Bank shall have the right at any time to set off against, and to appropriate and apply toward the payment of, any and all Debt then owing by the Borrower to the Bank, whether or not the same shall then have matured, any and all deposit balances and all other indebtedness then held or owing by the Bank to or for the credit or account of the Borrower, all without notice to or demand upon the Borrower or any other person, all such notices and demands being hereby expressly waived by the Borrower. ARTICLE 9 SALES AND PARTICIPATIONS SECTION 9.1 SALE OF PARTICIPATION. The Bank shall have the right at any time or times to sell one or more participation or subparticipations to a financial institution, as the case may be, in all or any part of (a) the Loan, (b) the Note and (c) this Agreement and the other Related Writings. SECTION 9.2 BENEFITS OF PARTICIPANT. The provisions of Sections 3.7, 3.8 and 3.9 shall inure to the benefit of each purchaser of a participation or subparticipation (provided that each such participant shall look solely to the seller of its participation for those benefits and the Borrower's liabilities, if any, under any of those sections shall not be increased as a result of the sale of any such participation). SECTION 9.3 RIGHTS RESERVED. In the event the Bank shall sell any participation or subparticipation, the Bank shall, as between itself and the purchaser, retain all of its rights -43- 44 (including, without limitation, rights to enforce against the Borrower this Agreement and the Related Writings) and duties pursuant to this Agreement and the Related Writings. SECTION 9.4 NO DELEGATION. No participation or subparticipation shall operate as a delegation of any duty of the seller thereof. Under no circumstance shall any participation or subparticipation be deemed a novation in respect of all or any part of the seller's obligations pursuant to this Agreement. SECTION 9.5 CONFIDENTIALITY. The Bank hereby (a) acknowledges that the Borrower and each of its Subsidiaries have many trade secrets and much financial, environmental and other data and information the confidentiality of which is important to their business and (b) agrees to keep confidential any such trade secret, data or information designated in writing by the Borrower or any of its Subsidiaries as confidential, except that this Section shall not preclude the Bank from furnishing any such secret, data or information: (i) as may be required by order of any court of competent jurisdiction or requested by any governmental agency having any regulatory authority over that Bank or its securities or in response to legal process, (ii) to any other party to this Agreement, (iii) or to any affiliate of the Bank or to any actual or prospective participant or subparticipant (so long as such affiliate or prospective participant or subparticipant is a financial institution which executes a confidentiality agreement in respect of confidential information relating to the Borrower and its Subsidiaries in form and substance appropriate, in the Bank's judgment, under the then current circumstances) of all or part of the Bank's rights arising out of or in connection with the Related Writings and this Agreement or any thereof so long as such affiliate, prospective participant or subparticipant to whom disclosure is made agrees to be bound by the provisions of this Section 9.5, (iv) to anyone if it shall have been already publicly disclosed (other than by the Bank in contravention of this Section 9.5), (v) to the extent reasonably required in connection with the exercise of any right or remedy under this Agreement or any Related Writing, (vi) to the Bank's legal counsel, auditors and accountants and (vii) in connection with any legal proceedings instituted by or against the Bank. ARTICLE 10 MISCELLANEOUS SECTION 10.1 AMENDMENTS, CONSENTS. No amendment, modification, termination, or waiver of any provision of this Agreement or of the Note, nor consent to any variance therefrom, shall be effective unless the same shall be in writing and signed by the Bank (and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given). -44- 45 SECTION 10.2 NO WAIVER; CUMULATIVE REMEDIES. No omission or course of dealing on the part of the Bank or the holder of the Note in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and in addition to any other rights, powers or privileges held by operation of Law, by contract or otherwise. SECTION 10.3 NOTICES. All notices, requests, demands and other communications provided for hereunder shall be in writing and, if to the Borrower, mailed or delivered to it (including, without limitation, delivery by facsimile transmission), addressed to it at the address specified on the signature pages of this Agreement, with copies to Todd DuChene, Esq., OfficeMax, Inc., 3065 Warrensville Center Road, Shaker Heights, Ohio 44122 and Robert Markey, Esq., Baker & Hostetler, 3200 National City Center, 1900 East Ninth Street, Cleveland, Ohio 44114, if to the Bank, mailed or delivered to it (including, without limitation, delivery by facsimile transmission), addressed to the address of the Bank specified on the signature pages of this Agreement. All notices, statements, requests, demands and other communications provided for hereunder shall be deemed to be given or made when delivered or forty-eight (48) hours after being deposited in the mails with postage prepaid by registered or certified mail or delivered to a telegraph company, addressed as aforesaid, except that notices from the Borrower to the Bank pursuant to any of the provisions hereof, including, without limitation, Articles 3, 4, 5 and 6 hereof, shall not be effective until received by the Bank. SECTION 10.4 COSTS AND EXPENSES; ENVIRONMENTAL INDEMNIFICATION. The Borrower agrees to pay on demand all reasonable costs and expenses of the Bank in connection with the preparation, execution, delivery, modification, administration and amendment of this Agreement (including, without limitation, any amendment), the Note, the Related Writings and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto (including any reasonable interdepartmental charges) and with respect to advising the Bank as to its rights and responsibilities under this Agreement. Without limiting the generality of the foregoing, such costs and expenses shall include: (a) reasonable attorneys' and paralegals' costs, expenses and disbursements of counsel to the Bank; (b) extraordinary expenses of the Bank in connection with the administration of this Agreement, the Note, any other Related Writing and the other instruments and documents to be delivered hereunder; (c) the reasonable fees and out-of-pocket expenses of special counsel for the Bank with respect thereto and of local counsel, if any, who may be retained by said -45- 46 special counsel with respect thereto; (d) costs and expenses (including reasonable attorneys and paralegal costs, expenses and disbursements) for any amendment, supplement, waiver, consent, or subsequent closing in connection with this Agreement, the Note, or any other Related Writing and the transactions contemplated thereby; (e) sums paid or incurred to pay any amount or take any action required of the Borrower under this Agreement, the Note or any Related Writing that the Borrower fails to pay or take; (f) the cost of any appraisal, survey, environmental audit or the retention of any other professional service or consultant commenced after the occurrence and continuation of an Event of Default and deemed reasonably necessary by the Bank; (g) costs of inspections and periodic review of the records of the Borrower or any of its Subsidiaries, including, without limitation, travel, lodging, and meals for inspections of the Borrower's operations by the Bank up to one time per year and at any time after the occurrence and during the continuation of an Event of Default; (h) costs and expenses (including, without limitation, attorneys' fees) paid or incurred to obtain payment of the Obligations (including the Obligations arising under this Section 10.4), enforce the provisions of the Credit Agreement, the Note, or any other Related Writing, or to defend any claims made or threatened against the Bank arising out of the transactions contemplated hereby (including without limitation, preparations for and consultations concerning any such matters); and (i) title insurance premiums, and costs of preparation of the survey, appraisal, architect's and engineer's report, environmental site assessment in respect of the Property, and mortgage recordation fees and taxes. The Borrower further agrees to pay on demand all costs and expenses of the Bank, if any (including reasonable counsel fees and expenses), in connection with the restructuring or the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Note, any other Related Writing and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 10.4. The foregoing shall not be construed to limit any other provisions of this Agreement, the Note, or any Related Writing regarding costs and expenses to be paid by the Borrower. All of the foregoing costs and expenses may be charged, in the Bank's sole discretion, to the Borrower's loan account as an addition to the Loan (notwithstanding existence of any Possible Default or Event of Default or the failure of the conditions of Article 4 to have been satisfied). The Borrower further agrees to indemnify the Bank against, and hold the Bank harmless from, any loss, costs, damages, or expense (including, without limitation, the fees and expenses of counsel to the Bank) that the Bank may incur, directly or indirectly, as a result of or in connection with the assertion against the Bank of any claim relating to the presence or removal of any Hazardous Material or other environmental contamination on the Property, or any violation of any Environmental Law in respect of the Property, -46- 47 unless such Hazardous Material, environmental condition or violation of Environmental Law was caused solely by the Bank's gross negligence or willful misconduct. SECTION 10.5 APPROVAL OF PLANS. The Bank's review and approval of the Plans and Specifications and, to the extent required hereunder, any modifications thereof, is solely for the Bank's credit purpose and shall not be deemed to create any responsibility or liability in the Bank. SECTION 10.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. SECTION 10.7 BINDING EFFECT; ASSIGNMENT. This Agreement shall become effective when it shall have been executed by the Borrower and by the Bank and thereafter shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. No person, other than the Bank, shall have or acquire any obligation to grant the Borrower the Loan hereunder. The Bank may at any time sell, assign, transfer, or grant a participation pursuant to Article 9 hereof. SECTION 10.8 GOVERNING LAW. This Agreement, the Note and any Related Writing shall be governed by and construed in accordance with the Laws of the State of Ohio and the respective rights and obligations of the Borrower and the Bank shall be governed by Ohio Law. SECTION 10.9 SEVERABILITY OF PROVISIONS; CAPTIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. The several captions to sections and subsections herein are inserted for convenience only and shall be ignored in interpreting the provisions of this Agreement. SECTION 10.10 ENTIRE AGREEMENT. This Agreement and the Related Writings referred to in or otherwise contemplated by this Agreement set forth the entire agreement of the parties as to the transactions contemplated by this Agreement. SECTION 10.11 JURY TRIAL WAIVER. THE BORROWER AND THE BANK WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY -47- 48 DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN THE BORROWER AND THE BANK ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. SECTION 10.12 JURISDICTION; VENUE; INCONVENIENT FORUM. (a) JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY OHIO STATE COURT OR FEDERAL COURT OF THE UNITED STATED OF AMERICA SITTING IN CUYAHOGA COUNTY, OHIO, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE OR ANY RELATED WRITING, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH OHIO STATE OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, THE NOTE OR ANY RELATED WRITING IN THE COURTS OF ANY JURISDICTION. (b) VENUE; INCONVENIENT FORUM. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBLIGATION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE OR ANY OTHER RELATED WRITING IN ANY OHIO STATE OR FEDERAL COURT SITTING IN OHIO. EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. THE BORROWER CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE. -48- 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers or agents thereunto duly authorized, as of the date first above written. OFFICEMAX, INC. By: /s/ John C. Belknap --------------------------- Title: EVP & CFO ------------------------ 3065 Warrensville Center Road Shaker Heights, Ohio 44122 Attention: -------------------- Telecopy: (216) 491-4040 KEYBANK NATIONAL ASSOCIATION By: /s/ Frank J. Jancar --------------------------- Title: Vice President ----------------------- 127 Public Square Cleveland, Ohio 44114 Attention: Large Corporate Telecopy: (216) 689-4981 -49- EX-21 3 EXHIBIT 21 1 EXHIBIT 21 LIST OF SUBSIDIARIES Name State of Incorporation ---- ---------------------- OfficeMax Corp. OH BizMart, Inc. DE BizMart (Texas), Inc. DE OMX, Inc. NV EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-85994) of OfficeMax, Inc. of our report dated February 27, 1997 appearing on page 20 of the Annual Report on Form 10-K for the year ended January 25, 1997. /s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP Cleveland, Ohio April 24, 1997 EX-27 5 EXHIBIT 27
5 This schedule contains summary financial information extracted from the financial statements of OfficeMax, Inc. for the twelve months ended January 25, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-25-1997 JAN-28-1996 JAN-25-1997 258,111 0 39,455 861 894,407 1,220,664 408,952 116,084 1,867,270 731,901 0 0 0 854,094 209,470 1,867,270 3,179,274 3,179,274 2,489,016 2,489,016 584,802 0 0 112,941 44,136 68,805 0 0 0 68,805 .55 .55
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