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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
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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
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OFFICEMAX, INC.
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(Exact name of registrant as specified in its charter)
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OHIO 34-1573735
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
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3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 921-6900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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
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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.
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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%.
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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.
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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.
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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:
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FISCAL YEAR ENDED
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JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
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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
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100.0% 100.0% 100.0%
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(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.
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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
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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
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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.
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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.
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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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
10
<PAGE> 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.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------- ---------------------------------- ---
<S> <C> <C>
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
</TABLE>
11
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Fiscal 1995 High Low
- ----------- ---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
1996 1995(1) 1994 1993 1992(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
</TABLE>
15
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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
<PAGE> 21
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 22
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 25, JANUARY 27,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 23
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- ------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
OPERATIONS
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 24
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES ADDITIONAL DEFERRED NOTES
------------- PAID-IN STOCK RECEIVABLE RETAINED
NUMBER AMOUNT CAPITAL COMPENSATION COMMON SHARE EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
==========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
The pro forma weighted average number of common shares outstanding for
fiscal 1994 is as follows:
<S> <C>
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
===========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
============================================
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective tax
rate follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
=========================================
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) resulted from the following:
- --------------------------------------------------------------------
FISCAL YEAR JAN. 25, JAN. 27,
(In thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
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
==========================
</TABLE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
(In thousands) LEASES
- --------------------------------------------------
<S> <C>
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
==========
</TABLE>
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $153,637 $117,294 $93,013
Percentage rentals 783 555 365
-----------------------------------------
Total $154,420 $117,849 $93,378
========================================
</TABLE>
30
<PAGE> 31
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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 - -
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
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
=================================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------
RANGE OF OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
EXERCISE PRICES AVERAGE AVERAGE AVERAGE
EXERCISE PRICE REMAINING LIFE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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 - -
</TABLE>
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
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
34
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/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
</TABLE>
37
<PAGE> 38
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequential Page No.
or Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ------------
<S> <C> <C>
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
</TABLE>
38
<PAGE> 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
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
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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).
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<PAGE> 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
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<PAGE> 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).
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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-
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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.
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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.
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(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
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<PAGE> 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.
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(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
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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
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"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)
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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
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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;
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(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
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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
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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.
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(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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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(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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Name State of Incorporation
---- ----------------------
OfficeMax Corp. OH
BizMart, Inc. DE
BizMart (Texas), Inc. DE
OMX, Inc. NV
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JAN-25-1997
<CASH> 258,111
<SECURITIES> 0
<RECEIVABLES> 39,455
<ALLOWANCES> 861
<INVENTORY> 894,407
<CURRENT-ASSETS> 1,220,664
<PP&E> 408,952
<DEPRECIATION> 116,084
<TOTAL-ASSETS> 1,867,270
<CURRENT-LIABILITIES> 731,901
<BONDS> 0
<COMMON> 0
0
854,094
<OTHER-SE> 209,470
<TOTAL-LIABILITY-AND-EQUITY> 1,867,270
<SALES> 3,179,274
<TOTAL-REVENUES> 3,179,274
<CGS> 2,489,016
<TOTAL-COSTS> 2,489,016
<OTHER-EXPENSES> 584,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 112,941
<INCOME-TAX> 44,136
<INCOME-CONTINUING> 68,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,805
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
