<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24416
ADFLEX SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3186513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 W. CHANDLER BLVD., CHANDLER, AZ 85224
(602) 963-4584
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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 the filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of March 31,
1999:
COMMON STOCK, $.01 PAR VALUE: 8,983,018 SHARES
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ADFLEX SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 28, 1999 and December 27, 1998............................ 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 28, 1999 and March 31, 1998............ 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 28, 1999 and March 31, 1998............ 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 18
SIGNATURES.................................................................. 19
</TABLE>
EXHIBITS
Exhibit 10.59 Master lease agreement, dated February 11, 1999, between the
Registrant and Copelco Capital, Inc.
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
-------- --------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash & cash equivalents $ 3,473 $ 5,325
Accounts receivable, net 22,607 24,747
Other receivables 818 1,161
Inventories 11,144 9,397
Deferred tax assets -- 2,072
Other current assets 1,591 1,952
-------- --------
Total current assets 39,633 44,654
Property, plant & equipment, net 50,643 55,351
Intangible assets 1,804 1,933
Deferred tax assets -- 6,326
Other assets 47 40
======== ========
$ 92,127 $108,304
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Line of credit $ 16,950 $ 13,000
Notes payable -- 63
Accounts payable 21,219 15,927
Accrued liabilities 8,634 7,183
Current portion of long-term debt and 18,337 24,613
capitalized leases
-------- --------
Total current liabilities 65,140 60,786
Long-term debt and capitalized leases 127 69
Stockholders' equity 26,860 47,449
======== ========
$ 92,127 $108,304
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 28, March 31,
-----------------------------
1999 1998
<S> <C> <C>
Net sales $ 28,638 $ 50,023
Cost of sales 29,016 39,505
-------- --------
Gross profit (loss) (378) 10,518
Operating expenses:
Engineering, research & development 1,364 2,121
Selling, general & administrative 2,593 3,898
Restructuring charges 6,903 --
Amortization of intangible assets 129 129
-------- --------
Total operating expenses 10,989 6,148
-------- --------
Operating income (loss) (11,367) 4,370
Interest income 36 55
Interest expense (879) (586)
Other income (expense), net (66) (186)
-------- --------
Income (loss) before income taxes (12,276) 3,653
Income taxes 8,874 1,022
-------- --------
Net income (loss) $(21,150) $ 2,631
======== ========
Net income (loss) per share:
Basic $ (2.36) $ 0.30
======== ========
Diluted $ (2.36) $ 0.30
======== ========
Number of shares used in computing
net income (loss) per share:
Basic 8,966 8,805
======== ========
Diluted 8,966 8,923
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 28, March 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(21,150) $ 2,631
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,556 2,025
Net (gain) loss on sale of fixed assets 35 --
Restructuring charges 6,903 --
Deferred taxes 8,399 235
Changes in operating assets and liabilities:
Accounts receivable 2,140 (1,980)
Other receivables 343 231
Inventories (1,747) 1,516
Other current assets 361 (197)
Accounts payable and accrued liabilities 6,743 (3,227)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,583 1,234
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (4,658) (8,926)
Increase in other assets (7) 1
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (4,665) (8,925)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net activity on line of credit 3,950 (4,000)
Payments on capitalized lease obligations (36) (42)
Payments on note payable (63) (687)
Issuance of debt 100 5,000
Payments on long-term debt (6,282) --
Issuance of common stock, net of expenses 561 548
-------- --------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,770) 819
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,852) (6,872)
Cash and cash equivalents at beginning of period 5,325 9,092
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,473 $ 2,220
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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ADFLEX SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Preparing financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. Operating results for the three month period ended March 28, 1999 are
not necessarily indicative of the results that may be expected for the year
ended January 2, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 27, 1998.
The accompanying consolidated financial statements have been prepared on
the basis that the Company will continue as a going concern. The Company has
failed to meet certain provisions of its credit agreement during the three
months ended March 28, 1999. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements for the period ended March 28, 1999 do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Management is currently negotiating with funding sources to provide
additional capital to the Company. In addition, management of the Company has
met with the lenders in an attempt to restructure the credit facility, or
otherwise satisfactorily resolve the existing defaults. It is not possible,
however, to predict at this time the success of management's efforts. No
assurance can be given that the outcome of the Company's negotiating efforts
with the lenders will not adversely affect the Company's business, financial
condition, results of operations and cash flows.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
(2) ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable trade $ 23,983 $ 25,748
Allowance for doubtful
accounts and returns (1,376) (1,001)
======== ========
$ 22,607 $ 24,747
======== ========
</TABLE>
6
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(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
-------- --------
<S> <C> <C>
Raw materials $ 8,059 $ 7,437
Work-in-process 4,807 3,743
Finished goods 1,134 1,105
Allowance for obsolescence and
excess inventory (2,856) (2,888)
-------- --------
$ 11,144 $ 9,397
======== ========
</TABLE>
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------ ------
<S> <C> <C>
Salaries and benefits $2,126 $1,987
Accrued interest 882 769
Accrued severance costs -- 500
Accrued income taxes 542 --
Accrued commissions 451 304
Accrued utilities 430 223
Accrued SAP costs 662 917
Other 3,541 2,483
====== ======
$8,634 $7,183
====== ======
</TABLE>
(5) LINE OF CREDIT AND LONG-TERM DEBT
Prior to October 30, 1998, the Company's credit facility consisted of a
$35.0 million term loan and a $25.0 million revolving line of credit arranged by
BankBoston N.A. and a group of other lenders, secured by the Company's assets
and 66-2/3% of the stock of its subsidiaries. On October 30, 1998, the Company
and the banks amended the credit facility to reduce the term loan to $30.0
million, change the amortization schedule of the term loan, reduce the revolver
to $20.0 million, and change the financial covenants. In addition, a required
$5.0 million principal reduction on the term loan was paid from the revolver, as
was a required $5.0 million principal payment due January 20, 1999 and a
required $0.8 million principal payment due March 31, 1999. Additional principal
payments of $0.8 million are due each quarter through September 30, 1999,
followed by quarterly principal payments of $1.3 million through maturity at
December 31, 2002. Borrowing under the revolver is limited to 80% of the
aggregate value of eligible domestic accounts receivable and 70% of the
aggregate value of eligible foreign accounts receivable. Outstanding balances on
the revolver bear interest at prime plus 0.5% or LIBOR plus an applicable margin
ranging from 1.5% to 2.25% based on the Company achieving certain financial
objectives at the end of each quarter. In order to obtain the amendment, the
Company granted the lenders a warrant to purchase an aggregate of 50,000 shares
of common stock at an exercise price of $5.00 per share. The warrant is now
fully vested and expires on December 29, 2002. The lenders have customary demand
and piggyback registration rights in connection with the warrant.
As of March 28, 1999, the Company was in default under certain financial
covenants of the credit facility, giving the banks certain remedies, including
acceleration of maturity of the entire principal balance of the loans. In
accordance with Statement of Financial Accounting Standards No. 78,
Classification of Obligations that are
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Callable by the Creditor, the Company has classified the entire outstanding
balance of the facility as a current liability. Further, the audit of the
Company's financial statements for the year ended December 27, 1998 included a
going-concern qualification from the Company's independent auditors.
At March 28, 1999, $18.3 million was outstanding under the term loan (less
warrant discount of $0.2 million) and the Company had $12.7 million available
for borrowing based on collateral requirements under the revolving line of
credit with an outstanding balance of $17.0 million. The Company is in default
with its amended credit agreement by failing to comply with its obligation to
make a mandatory prepayment of such excess amount of revolver borrowings over
the borrowing base amount.
The banks have not to date exercised their remedies, but have been
negotiating with Company management to restructure the facility or otherwise
satisfactorily resolve the defaults. While management believes that the best
interests of the Company and the banks would be served through a restructured
credit facility that allows the Company to work through current negative market
dynamics, there can be no assurance that the banks will ultimately agree or that
such a restructured facility will ultimately be consummated. In the meantime,
the Company has been aggressively seeking other sources of debt and equity
financing and exploring various strategic options, and has been taking steps to
conserve and manage its cash to allow operations to continue. If the Company
cannot address the concerns of the banks, through a restructured facility, new
financing, strategic option or otherwise, its ability to continue operations
will be jeopardized and it may be forced to seek protection from its creditors
under bankruptcy law.
(6) RESTRUCTURING CHARGES
During 1998 and through the first quarter of 1999, the Company experienced
a substantial decline in sales levels which decreased capacity utilization. In
April 1999, the Company's Board approved a reorganization plan which includes
closing the Company's U.K. facility, downsizing the Company's Mexico facility
and transferring programs from Mexico to the Company's new Thailand facility.
Because of this impairment event, the Company evaluated the ongoing value of the
plant and equipment associated with its Chandler and Mexico facilities as
required by Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Based on this evaluation, the Company determined that assets with a carrying
amount of $10.9 million were impaired and wrote them down to their fair value,
as determined by an appraisal of the plant and equipment completed in March
1999. During the three month period ended March 28, 1999, the Company recorded
restructuring charges of $6.9 million related to the write-down of property,
plant and equipment as discussed above. The Company anticipates recording an
additional charge of $2.6 million during the three month period ending June 27,
1999 for employee termination costs and facility shut-down costs.
During the year ended December 27, 1998, the Company implemented cost and
productivity improvement measures designed to address then prevailing adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the computer, hard disk drive
and communications segments. These actions included the consolidation of
administrative functions, a 27% reduction in staffing, the closing of two
manufacturing plants in Mexico and the transfer of selected manufacturing
programs from Mexico to Thailand. As a result, the Company incurred a special
charge of approximately $1.6 million: $1.0 million related to the workforce
reduction and $0.6 million related to employee severance and termination costs
associated with the closing of the two plants in Mexico. To date, the Company
paid and charged to the liability $0.7 million related to workforce reduction
and $0.6 million related to employee severance and lease termination costs
associated with the closing of the two plants in Mexico. In addition, the
Company determined that approximately $0.3 million of the workforce reduction
costs was not needed as previously anticipated and these costs were reversed
during the three month period ended March 28, 1999.
(7) INCOME TAXES
During the three month period ended March 28, 1999, the Company revised
its projection of future levels of income, and the anticipated jurisdictions in
which this income would be earned caused a reevaluation of the
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criteria of future tax benefits. In the determination of management, it was no
longer more likely than not that the deferred tax assets could be fully utilized
during the carryforward period. Accordingly, the Company did not record an
income tax benefit for the three month period ended March 28, 1999 and the
Company established a valuation reserve for all its existing deferred tax assets
which totaled $8.9 million. The effective tax rate for the three month period
ended March 31, 1998 was 28%.
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January 1998 proposing adjustments to
the Company's income and tax credits for the year, which would result in an
additional assessment of $1.6 million, excluding interest. The major proposed
adjustment, which relates to the allocation of the purchase price of assets
obtained from Rogers Corporation (Rogers) pursuant to acquisition agreements
between the Company and Rogers, would extend the period over which the tax
benefit for the purchase price would be recovered. The Company and the IRS have
reached an agreement to settle all outstanding issues relating to this audit.
The terms of the agreement will require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax provision is
adequate to cover this liability and the final disposition of these matters will
not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net Sales
Net sales for the three month period ended March 28, 1999 decreased to
$28.6 million from $50.0 million during the same period in 1998, representing a
decrease of $21.4 million or 42.8%. The significant reduction in sales was
primarily attributable to soft demand and continued competitive pricing driven
by worldwide factory overcapacity in the flex industry. In addition, during the
three month period ended March 28, 1999, revenues were negatively impacted due
to internal technical difficulties experienced by two OEM customers and an
inventory adjustment made by a third customer.
Gross Profit
Gross profit as a percentage of net sales (gross margin) for the three
months ended March 28, 1999 was negative 1.3% compared to positive 21.0% for the
same period in 1998. The Company's gross margin for the three month period ended
March 28, 1999 was negatively impacted by underutilization of factories caused
by reduced demand and continued aggressive pricing competition.
Operating Expenses
Engineering, research & development expenses decreased approximately $0.8
million to $1.4 million for the three month period ended March 28, 1999 compared
to $2.1 million for the same period in 1998, representing a decrease of 35.7%.
The decrease stems from the reduction in sales activity as well as the
implementation of cost-containment efforts and workforce reduction. Selling,
general & administrative expenses were $2.6 million and $3.9 million for the
three month periods ended March 28, 1999 and March 31, 1998, respectively,
representing 9.1% and 7.8% of net sales for those same periods. The reduction in
selling, general & administrative expenses was due to a combination of factors
including workforce reduction, consolidation of administrative functions,
elimination of employee and manager bonuses and general cuts in discretionary
spending. In connection with the acquisition of Hana's 20% interest in ADFlex
Thailand Limited (ATL) in September 1997, the Company recorded goodwill which is
being amortized over its estimated useful life of five years. Amortization of
intangible assets was $0.1 million, or 0.5% of net sales, for the three month
period ended March 28, 1999.
Interest and Other Income (Expense)
For the three month period ended March 28, 1999, interest expense was $0.9
million related to borrowings under the line of credit, term loan and capital
lease obligations. Interest expense for the same period in 1998 was $0.6 million
related to borrowings under the line of credit and capital lease obligations.
Other income (expense) for
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both periods represents the net impact of bank fees and exchange gains and
losses realized on the settlement of transactions associated with the Company's
foreign subsidiaries. Exchange gains and losses associated with short-term
forward foreign currency exchange contracts are also included in other income
(expense) for the three month periods ended March 28, 1999 and March 31, 1998.
Restructuring Charges
During 1998 and through the first quarter of 1999, the Company experienced
a substantial decline in sales levels which decreased capacity utilization. In
April 1999, the Company's Board approved a reorganization plan which includes
closing the Company's U.K. facility, downsizing the Company's Mexico facility
and transferring programs from Mexico to the Company's new Thailand facility.
Because of this impairment event, the Company evaluated the ongoing value of the
plant and equipment associated with its Chandler and Mexico facilities as
required by Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Based on this evaluation, the Company determined that assets with a carrying
amount of $10.9 million were impaired and wrote them down to their fair value,
as determined by an appraisal of the plant and equipment completed in March
1999. During the three month period ended March 28, 1999, the Company recorded
restructuring charges of $6.9 million related to the write-down of property,
plant and equipment as discussed above. The Company anticipates recording an
additional charge of $2.6 million during the three month period ending June 27,
1999 for employee termination costs and facility shut-down costs.
During the year ended December 27, 1998, the Company implemented cost and
productivity improvement measures designed to address then prevailing adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the computer, hard disk drive
and communications segments. These actions included the consolidation of
administrative functions, a 27% reduction in staffing, the closing of two
manufacturing plants in Mexico and the transfer of selected manufacturing
programs from Mexico to Thailand. As a result, the Company incurred a special
charge of approximately $1.6 million: $1.0 million related to the workforce
reduction and $0.6 million related to employee severance and termination costs
associated with the closing of the two plants in Mexico. To date, the Company
paid and charged to the liability $0.7 million related to workforce reduction
and $0.6 million related to employee severance and lease termination costs
associated with the closing of the two plants in Mexico. In addition, the
Company determined that approximately $0.3 million of the workforce reduction
costs was not needed as previously anticipated and these costs were reversed
during the three month period ended March 28, 1999.
Fluctuations in Operating Results
The Company has experienced substantial fluctuations in its quarterly and
annual operating results in the past, and the Company's future operating results
could vary substantially from quarter to quarter. The Company's operating
results for a particular quarter or longer periods can be materially and
adversely affected by numerous factors, such as the receipt and shipment of
large orders, or conversely the cancellation or delay of orders, plant
utilization, product mix, manufacturing process yields, the timing of
expenditures in anticipation of future sales, raw material availability, product
and price competition, the length of sales cycles and economic conditions in the
electronics industry. Variations in orders and in the mix of products sold by
the Company, together with increased price competition, overall reduced demand
and resulting factory overcapacity have significantly negatively impacted net
sales and gross profit. No assurances can be given that the reorganization plan
recently adopted by the Company will allow the Company to return to
profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its liquidity needs to date primarily through
cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures, expansion of ATL
and funding operating losses. At March 28, 1999, cash and cash equivalents
totaled $3.5 million, compared with $5.3 million as of March 31, 1998.
Prior to October 30, 1998, the Company's credit facility consisted of a
$35.0 million term loan and a $25.0 million revolving line of credit arranged by
BankBoston N.A. and a group of other lenders, secured by the
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Company's assets and 66-2/3% of the stock of its subsidiaries. On October 30,
1998, the Company and the banks amended the credit facility to reduce the term
loan to $30.0 million, change the amortization schedule of the term loan, reduce
the revolver to $20.0 million, and change the financial covenants. In addition,
a required $5.0 million principal reduction on the term loan was paid from the
revolver, as was a required $5.0 million principal payment due January 20, 1999
and a required $0.8 million principal payment due March 31, 1999. Additional
principal payments of $0.8 million are due each quarter through September 30,
1999, followed by quarterly principal payments of $1.3 million through maturity
at December 31, 2002. Borrowing under the revolver is limited to 80% of the
aggregate value of eligible domestic accounts receivable and 70% of the
aggregate value of eligible foreign accounts receivable. Outstanding balances on
the revolver bear interest at prime plus 0.5% or LIBOR plus an applicable margin
ranging from 1.5% to 2.25% based on the Company achieving certain financial
objectives at the end of each quarter. In order to obtain the amendment, the
Company granted the lenders a warrant to purchase an aggregate of 50,000 shares
of common stock at an exercise price of $5.00 per share. The warrant is now
fully vested and expires on December 29, 2002. The lenders have customary demand
and piggyback registration rights in connection with the warrant.
As of March 28, 1999, the Company was in default under certain financial
covenants of the credit facility, giving the banks certain remedies, including
acceleration of maturity of the entire principal balance of the loans. In
accordance with Statement of Financial Accounting Standards No. 78,
Classification of Obligations that are Callable by the Creditor, the Company has
classified the entire outstanding balance of the facility as a current
liability. Further, the audit of the Company's financial statements for the year
ended December 27, 1998 included a going-concern qualification from the
Company's independent auditors.
At March 28, 1999, $18.3 million was outstanding under the term loan (less
warrant discount of $0.2 million) and the Company had $12.7 million available
for borrowing based on collateral requirements under the revolving line of
credit with an outstanding balance of $17.0 million. The Company is in default
with its amended credit agreement by failing to comply with its obligation to
make a mandatory prepayment of such excess amount of revolver borrowings over
the borrowing base amount.
The banks have not to date exercised their remedies, but have been
negotiating with Company management to restructure the facility or otherwise
satisfactorily resolve the defaults. While management believes that the best
interests of the Company and the banks would be served through a restructured
credit facility that allows the Company to work through current negative market
dynamics, there can be no assurance that the banks will ultimately agree or that
such a restructured facility will ultimately be consummated. In the meantime,
the Company has been aggressively seeking other sources of debt and equity
financing and exploring various strategic options, and has been taking steps to
conserve and manage its cash to allow operations to continue. If the Company
cannot address the concerns of the banks, through a restructured facility, new
financing, strategic option or otherwise, its ability to continue operations
will be jeopardized and it may be forced to seek protection from its creditors
under bankruptcy law.
Net cash provided by operating activities for the three month period ended
March 28, 1999 was $4.6 million compared with $1.2 million for the same period
in 1998. During these same periods net income (loss) was ($21.2) million and
$2.6 million, respectively. Decreased sales levels for the three month period
ended March 28, 1999 resulted in the Company maintaining a low level of working
capital, primarily a decreased level of accounts receivable which was offset by
an increase in current liabilities.
Net cash used in investing activities was $4.7 million for the three
months ended March 28, 1999 compared with $8.9 million for the same period in
1998, which primarily stemmed from capital expenditures. During the three month
period ended March 28, 1999, the Company invested a total of $4.0 million to
complete construction of the new Thailand facility. To date, capital
expenditures total $7.0 million and the total estimated cost of the Thailand
facility is approximately $9.5 million. In addition, capital expenditures during
the three month period ended March 28, 1999 included $0.7 million related to
machinery and equipment additions. Capital expenditures during the periods were
financed from existing cash balances and from borrowings under the Company's
bank line of credit. The Company currently expects to record an additional $5.3
million in capital expenditures in 1999 to support
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worldwide manufacturing operations, primarily for machinery and equipment
systems in North America and Thailand.
Net cash used in financing activities for the three months ended March 28,
1999 was $1.8 million compared with cash provided by financing operations of
$0.8 million for the same period in 1998. The Company remitted $5.8 million of
principal payments on its term loan during the three month period ended March
28, 1999. Net borrowings on the Company's bank line of credit totaled $4.0
million during the three months ended March 28, 1999 compared to net repayments
of $4.0 million for the same period in 1998. The Company borrowed an additional
$5.0 million on its term loan during the three months ended March 31, 1998 of
which $4.0 million was used to pay down the Company's bank line of credit. The
Company generated $0.6 million and $0.5 million in the three months ended March
28, 1999 and March 31, 1998, respectively, through sales of its Common Stock.
During the year ended December 31, 1997, the Company paid $0.5 million at
closing and issued a note in the principal amount of $1.0 million and agreed to
pay $1.3 million at various dates through December 31, 1998 in connection with
the acquisition of Hana's 20% interest in ATL. The Company remitted the last
principal payment of the agreement of $0.1 million during the three month period
ended March 28, 1999. As required by the terms of the note, the Company remitted
$0.7 million during the three months ended March 31, 1998. Funding for these
payments came from the Company's line of credit. For the three months ended
March 28, 1999, non-cash financing activities included the following: $0.1
million of equipment acquired under capital lease obligations, $0.3 million
reversal of debt issuance costs and warrants vested March 14, 1999 in connection
with the third amendment to the credit agreement.
Management believes that the level of working capital should continue to
grow at a rate generally consistent with the growth of the Company's operations.
As discussed above, the Company is aggressively seeking to restructure its
existing credit facility while at the same time pursuing alternate sources of
debt, equity capital and other strategic options. No assurances can be given
that such financing or capital will be available on terms acceptable to the
Company. The current stock price is adversely affecting the Company's ability to
obtain equity financing. If the Company is unable to restructure its existing
debt or obtain new financing, its ability to continue operations will be
jeopardized and the Company may be forced to seek protection from its creditors
under bankruptcy law.
OTHER MATTERS
Foreign Operations
The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Lamphun, Thailand. While the Company believes that it
has established good relationships with its labor force and the local
governments, the spread of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. While the
Company transacts business predominately in U.S. Dollars and most of its net
sales are collected in U.S. Dollars, a portion of its sales and expenses are
denominated in other currencies. Changes in the relation of other currencies to
the U.S. Dollar will affect the Company's cost of goods sold and operating
margins and could result in exchange gains or losses. In order to reduce the
impact of certain foreign currency fluctuations, the Company enters into
short-term forward foreign currency exchange contracts (hedges) in the regular
course of business to manage its exposure. The forward exchange contracts
generally require the Company to exchange U.S. Dollars for foreign currencies at
maturity, at rates agreed to at inception of the contracts. The gains or losses
on hedges of transaction exposure are included in income in the period in which
the exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in income. No assurance can be given that the
Company's hedging strategies will prevent future currency fluctuations from
adversely affecting the Company's business, financial condition, results of
operations and cash flows.
Expansion of Thailand Operations
In February 1999, the qualification process was completed and production
began at the new Thailand facility. The facility provides 100,000 square feet of
manufacturing space - 65,000 feet for flex finishing and 35,000 feet for
assembly. The facility, which increased the total assembly area by nearly 50%,
includes state-of-the-art clean rooms and the production capability to process
up to 750,000 circuit assemblies per week. The new flex finishing area features
advanced surface finishing, laser processing and automated optical profiling
technologies.
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The total estimated cost of the facility is approximately $9.5 million. The
Company anticipates that the new Thailand facility will enable it to attain
increased efficiencies, improved margins and significant cost reductions that
are crucial to mitigating competitive price pressures in Asia and help sustain
the Company's implementation of a complete flexible circuit interconnect
solution including design, fabrication, assembly and testing. No assurance can
be given that the Company's expansion strategies will result in the improvements
and cost reductions as anticipated.
Environmental Regulations
The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which revealed a
limited amount of soil contamination that may require remediation. Based on
these studies, the Company believes that the costs associated with remediation
will not have a material adverse effect on its operations or financial
condition. However, given the uncertainties associated with environmental
contamination, there can be no assurance that such costs will not have a
material adverse impact on the Company. Pursuant to the agreements governing the
Rogers Corporation (Rogers) acquisition, Rogers has retained all environmental
liabilities relating to the purchased assets prior to the closing date of the
acquisition. While Rogers currently has sufficient assets to fulfill its
obligations under the acquisition agreements, if environmental liabilities
requiring remediation are discovered and the Company was unable to enforce the
acquisition agreement against Rogers, the Company could become subject to costs
and damages relating to such environmental liabilities. Any such costs and
damages imposed on the Company could materially adversely affect the Company's
business, financial condition, results of operations and cash flows.
In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the seller submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997. The seller is awaiting acknowledgement that the
remediation plan has been approved and no further action is required by the
Mexican authorities. The seller's obligation for cost of remediation is limited
to $2.5 million. A total of $1.0 million was originally held in escrow pending
the seller's performance of its environmental obligations under the agreement.
One third of the escrow balance was used to conduct the remediation, one third
was released to the seller according to the agreement and one third remains in
escrow and will be released to the seller upon closure of the issue by the
Mexican authorities with certification that no further action is required.
The Company believes it has been operating its facilities in substantial
compliance in all material respects with existing environmental laws. However,
the Company cannot predict the nature, scope or effect of legislation or
regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not previously been applied. Compliance with more
stringent laws or regulations, or more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the Company's business, financial condition, results of
operations and cash flows.
Dependence on Electronics Industry
The Company's principal customers are electronics original equipment
manufacturers and contract manufacturers. The electronics industry as a whole is
characterized by intense competition, relatively short product life cycles and
significant fluctuations in product demand. In addition, the electronics
industry is generally subject to rapid technological change and product
obsolescence. Discontinuance of products or modifications developed in
connection with next generation products containing flexible circuit
interconnects manufactured by the Company has had and could continue to have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows. Further, various sectors of the electronics
industry are subject to economic cycles and have in the past experienced, and
are likely in the future to experience, periods of slowdown. A slowdown or any
other event leading to excess capacity or a downturn in the electronics industry
has resulted and may continue to result in intensified price competition,
reduced gross margins and a decrease in unit volume, all of which have had
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<PAGE> 14
and would continue to have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
Concentration Risk
The Company provides flexible interconnect products to a diverse group of
markets. Through ongoing diversification and new market expansion efforts,
primarily directed toward the communications and consumer markets, the Company
is continuing its efforts to reduce its dependence on the hard disk drive (HDD)
market. Sales to the HDD market accounted for 28% of net sales compared to 34%
of net sales for the three month periods ended March 28, 1999 and March 31,
1998, respectively. This decrease was due, in part, to internal technical
problems experienced by two HDD customers as well as continued diversification
efforts. Though the Company is continuing its efforts to reduce its dependence
on the HDD industry, net sales attributable to this market are expected to
continue to represent the largest portion of net sales for the foreseeable
future and could return to a majority of the Company's net sales. The loss of
any HDD customer, or a substantial reduction in orders by any significant
customer, including reductions due to market, competitive or economic
conditions, have had and would continue to have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
Competition
The flexible circuit interconnect market is differentiated by customers,
applications and geography, with each niche having its own combination of
complex packaging and interconnection requirements. The Company believes that it
competes principally on the basis of design capability, price, quality and
response time to design changes and technological advancements in underlying
applications and the ability to offer a total flexible circuit interconnect
solution. During periods of economic slowdown in the electronics industry and
other periods when excess capacity exists, electronic OEMs become more price
sensitive. During the year ended December 27, 1998 and the three month period
ended March 28, 1999, there was a worldwide slowdown in the electronics industry
and to maintain market share, many of the Company's primary foreign competitors
with lower cost structures decreased their prices to unprecedented levels. This
had a material adverse effect on the Company's pricing during those periods. The
Company believes that once a customer has selected a particular vendor to design
and manufacture a flexible circuit interconnect, the customer generally relies
upon that vendor's design for the life of that specific application and, to the
extent possible, subsequent generations of similar applications. Accordingly, it
is difficult to achieve significant sales to a particular customer with respect
to any application once another vendor has been selected to design and
manufacture the flexible circuit interconnect used in that application. While
this market paradigm may provide a barrier to the Company's competitors in the
markets served by the Company, it also may present an obstacle to the Company's
entry into other markets.
The Company experiences competition worldwide from a number of leading
foreign and domestic providers, such as Nippon Mektron ("NOK"), Fujikura Ltd.
("Fujikura"), Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl, Inc.
("Sheldahl"), Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based
suppliers substantially larger than the Company with greater financial and other
resources. M-Flex, Sheldahl and Parlex are U.S.-based flexible circuit
manufacturers that have lower sales of polyimide flexible circuits than the
Company and have historically targeted suppliers of computers, communication and
automotive services, and the military, respectively. Expansion of the Company's
existing products or services could expose the Company to new competition.
Moreover, new developments in the electronics industry could render existing
technology obsolete or less competitive and could potentially introduce new
competition into the market. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products or services that will offer superior price or performance
features to those of the Company or that new competitors will not enter the
Company's markets. Finally, as many of the Company's competitors are based in
foreign countries, they have cost structures and prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies.
The Company also competes in assembly matters with leading flexible
circuit assembly providers such as Smartflex Systems, Inc. and Solectron. The
Company believes that competition in assembly matters is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
that it will compete favorably with these competitors because it offers its
customers a complete flexible circuit interconnect solution including design,
fabrication, assembly and testing (referred to as the one-stop shop strategy).
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<PAGE> 15
The Company's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results. The
Company will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to make the technological advances necessary to maintain
its competitive position in the flexible circuit interconnect market. There can
be no assurance that existing or future competitors will not be able to
duplicate the Company's strategies, that the Company will be able to compete
successfully in the future, or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Volatility of Stock Price
The trading price of the Company's Common Stock is expected to continue to
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company's customers, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's Common Stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's Common Stock.
Income Taxes
During the three month period ended March 28, 1999, the Company revised
its projection of future levels of income, and the anticipated jurisdictions in
which this income would be earned caused a reevaluation of the criteria of
future tax benefits. In the determination of management, it was no longer more
likely than not that the deferred tax assets could be fully utilized during the
carryforward period. Accordingly, the Company did not record an income tax
benefit for the three month period ended March 28, 1999 and the Company
established a valuation reserve for all its existing deferred tax assets which
totaled $8.9 million. The effective tax rate for the three month period ended
March 31, 1998 was 28%.
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January 1998 proposing adjustments to
the Company's income and tax credits for the year, which would result in an
additional assessment of $1.6 million, excluding interest. The major proposed
adjustment, which relates to the allocation of the purchase price of assets
obtained from Rogers Corporation (Rogers) pursuant to acquisition agreements
between the Company and Rogers, would extend the period over which the tax
benefit for the purchase price would be recovered. The Company and the IRS have
reached an agreement to settle all outstanding issues relating to this audit.
The terms of the agreement will require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax provision is
adequate to cover this liability and the final disposition of these matters will
not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Impact of Year 2000
The Year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year which, if left
uncorrected, could result in a system failure or miscalculations causing
disruptions of operations. With the complete implementation of the SAP R/3
software system in October 1998, the Company's manufacturing and cost control
system functions properly with respect to dates in the year 2000 and beyond. The
software replaced the Company's previous manufacturing and cost control system
and its implementation took place for a variety of reasons, not separately
identified as a Year 2000 remediation. Therefore, the Company does not consider
the implementation of the SAP R/3 system a direct Year 2000 remediation cost and
the direct costs associated with addressing the Company's Year 2000 issues have
been immaterial to date. In addition, the Company is in the process of
implementing a formal remediation plan to ensure the Company is
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<PAGE> 16
compliant with respect to Year 2000 issues. The plan includes five phases
representing a major Year 2000 activity or segment - awareness, assessment,
renovation, validation and implementation.
Awareness. All Year 2000 projects with regard to internal systems are
approved at the Board of Directors level and evaluated and reviewed by a Senior
Management Steering Committee on a monthly basis. The Company's plan of action
applies to all geographic locations where products and services are provided to
customers and project managers have been assigned to each location to coordinate
Year 2000 projects worldwide.
Assessment and Renovation. The Company has completed a detailed inventory
of processes, applications, hardware, operating systems and databases where Year
2000 issues may exist. To date, an assessment of all information technology
(IT)-related systems (e.g. hardware and software systems) has been fully carried
out. With the complete implementation of SAP finalized in October 1998, all
worldwide application-driven processes for the Company are Year 2000 compliant.
For example, processes required to support production and fulfillment of
customer orders (order entry, receiving/warehousing, procurement/materials,
manufacturing, product test, distribution/shipping and invoicing) are in
compliance with the Year 2000 issue after complete implementation of SAP in
October 1998. In addition, 97% of internal network hardware and software systems
are Year 2000 compliant to date. The scope of the Company's full assessment also
includes non-IT areas such as all facilities/plant equipment, manufacturing
process and testing equipment, lab equipment and telephone communications
systems which all have been assessed. The majority of the non-IT areas were in
compliance with the Year 2000 issue and items that were not in compliance
required only minor modifications with insignificant costs incurred. In
addition, the Company has implemented programs with outside suppliers to ensure
their readiness with respect to Year 2000 issues. The Company is currently
tracking and managing this through periodic questionnaires to suppliers. To
date, the Company has received and analyzed questionnaires related to 100% of
the critical suppliers of the Company and 85% of non-critical suppliers. Based
on the information provided, all critical suppliers are in compliance with the
Year 2000 issue.
Validation. Upon completion of the SAP software implementation, the
Company began its validation phase by testing, verifying and validating the
performance, functionality, and integration of the SAP manufacturing and cost
control software system in an operational environment. The Company anticipates
this phase of IT-related systems to continue throughout 1999. During the three
month period ended March 28, 1999, the Company also began its validation phase
of all non-IT areas that will continue throughout 1999.
Implementation. Upon completion of the validation phase of all IT as well
as non-IT areas for Year 2000 compliance, the Company plans to identify and
implement any necessary contingency plans and modify existing disaster recovery
plans throughout 1999.
In addition, the Company has evaluated software and hardware systems
associated with IT areas as well as all equipment related to non-IT areas and
concluded that there are no identified risks that would have a material exposure
to contingencies related to the Year 2000 issue. There can be no assurances that
the systems of customer, suppliers and other companies on which the Company
relies will be timely converted and will not have an adverse effect on the
Company' systems or operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains forward-looking statements that involve risks and
uncertainties, including but not limited to, the risks of concentration of sales
in markets, and in particular the HDD market, and customers, which have caused
and in the future could cause materially adverse fluctuations in operating
results; the risks of being a supplier to the electronics industry in general,
which is characterized by rapid technological change, product obsolescence and
price competition, which have and could materially adversely affect operating
results; the risk of loss of market share through competition and pricing
pressures from competitors and/or customers; the risk that growth in demand for
products that use flex, and the corresponding demand for flex, will not continue
to increase as anticipated; the risk that the Company's fully integrated
one-stop shop strategy will not continue to be accepted by customers, and the
risk that competitors may seek to duplicate this strategy, which could
materially adversely affect operating results; the risk that the outcome of the
Company's negotiating efforts with the lenders and other sources
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<PAGE> 17
of debt and equity capital will not adversely affect the Company's business,
financial condition, results of operations and cash flows; the risk that the
Company's expansion of manufacturing facilities in Thailand will not result in
sustainable, increased efficiencies, cost savings or improved margins as
anticipated or at the time anticipated; general risks inherent in international
operations, including currency fluctuations and government-mandated wage
increases; general manufacturing risks, including environmental risks related to
manufacturing operations and clean-up of the Mexican manufacturing facility; the
risk that other computer systems on which the Company relies, such as suppliers
and customers, will function properly with respect to dates in the year 2000 and
thereafter; the risk that all of the foregoing factors or other factors could
cause fluctuations in the price of the Company's Common Stock; and other risks
detailed herein and in the Company's Annual Report on Form 10-K for the year
ended December 27, 1998 and other Securities and Exchange Commission filings.
Actual results in the future could differ materially from those described in
forward-looking statements as a result of such risks and uncertainties. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(10.59) Master lease agreement, dated February 11, 1999, between the
Registrant and Copelco Capital, Inc.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended March 28, 1999.
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SIGNATURES
Pursuant to the requirements 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.
ADFlex Solutions, Inc.
Date: May 12, 1999 By /s/ Donald E. Frederick
--------------------------------------
Donald E. Frederick
Vice President Finance, Secretary and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.59 Master lease agreement, dated February 11, 1999, between the
Registrant and Copelco Capital, Inc.
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.59
COPELCO Master Lease No. 0898770
C A P I T A L
700 EAST GATE DRIVE MASTER LEASE AGREEMENT
MT. LAUREL, NJ
08054-5404 LESSOR: COPELCO CAPITAL, INC.
(609) 231-9600
(800) 257-8451
LESSEE: ADFLEX SOLUTIONS, INC., A DELAWARE CORPORATION
TERMS AND CONDITIONS OF LEASE
I. LEASE OF EQUIPMENT.
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
equipment described in one or more equipment schedules (the "Equipment
Schedule") substantially in the form of Exhibit A attached hereto, that may
hereafter be executed by Lessor and Lessee (the equipment, together with all
replacement parts, repairs, additions, substitutions and accessories shall be
referred to as the "Equipment") on the terms and conditions contained in this
Lease ("Lease") and in any Equipment Schedule. This Lease and each of the terms,
covenants, conditions, provisions and agreements herein contained will be
incorporated into each Equipment Schedule in full to the same extent as if each
of the terms, covenants, conditions, provisions and agreements had been repeated
and set forth in full therein, and this Master Lease Agreement shall control and
be effective as to all such Schedules except to the extent that the Master Lease
Agreement may be inconsistent with the terms and provisions of such Equipment
Schedule, in which event the terms and provisions of such Equipment Schedule
shall prevail. Each Equipment Schedule shall constitute a separate lease and a
distinct and independent obligation of the Lessee. The parties intend this Lease
to be a "Finance Lease" under Article 2A of the Uniform Commercial Code.
II. ORDER AND DELIVERY OF EQUIPMENT; LESSOR'S RIGHT TO TERMINATE.
Lessee hereby requests Lessor to order the Equipment from the Vendor named on
the Equipment Schedule and to arrange for delivery of the Equipment to Lessee at
Lessee's expense, and to lease the Equipment to Lessee. If the Equipment is not
delivered to and accepted by Lessee in form satisfactory to Lessor, within
ninety (90) days from the date Lessor orders the Equipment, Lessor may terminate
the applicable Equipment Schedule and its obligations thereunder. Lessee
acknowledges receipt of a copy of Lessor's purchase order for the Equipment.
III. ACCEPTANCE.
Lessee shall, as Lessor's agent, immediately inspect the Equipment after it is
delivered and installed. Lessee agrees that on the date the Equipment is
available for first use (the "Acceptance Date"), it shall execute and deliver to
Lessor a Delivery and Acceptance Certificate substantially in the form of
Exhibit B attached. Notwithstanding the foregoing, unless Lessee shall notify
Lessor in writing otherwise within five (5) days after the Acceptance Date,
Lessee shall be deemed to have irrevocably accepted the Equipment. THIS LEASE
AND ALL EQUIPMENT SCHEDULES ARE NONCANCELABLE and Lessee agrees to pay the total
rent for the term, which shall be the total amount of all rental payments stated
in any Equipment Schedule (the "Rent" or "Rental Payment"), plus any other sums
provided for herein.
IV. TERM AND RENT.
(A) The initial term ("Initial Term") of any Equipment Schedule to which this
Lease relates shall commence on the Acceptance Date and shall be of such
duration as is prescribed in such Equipment Schedule plus the Interim Term (as
hereinafter defined). Advance Rent and any Security Deposit as provided in any
Equipment Schedule shall be payable upon the execution of the applicable
Equipment Schedule and shall not be refundable if the Initial Term for any
reason does not commence or if this Lease or the applicable Equipment Schedule
is duly terminated by Lessor. Rental Payments shall commence (the "Commencement
Date") on the first day of the month following the Acceptance Date unless the
Acceptance Date is the first day of the applicable period, in which case the
Commencement Date shall be the first day of the applicable period. Interim Rent
shall be payable upon demand for the period between the Acceptance Date and the
first day of the month following the Acceptance Date ("Interim Term") at a daily
rate equal to the periodic rental provided in any Equipment Schedule divided by
the number of days in the period. Subsequent rental payments shall be due
periodically in advance on the first day of each successive period thereafter
until all Rent and other sums chargeable to Lessee hereunder are paid in full.
LESSEE'S OBLIGATION TO PAY RENT AND LESSEE'S OTHER MONETARY OBLIGATIONS
HEREUNDER ARE ABSOLUTE AND UNCONDITIONAL AND ARE NOT SUBJECT TO ANY ABATEMENT,
SET-OFF, DEFENSE OR COUNTERCLAIM FOR ANY REASON WHATSOEVER. Any Security Deposit
shall secure all obligations of Lessee hereunder and may be applied at Lessor's
discretion to any past due obligation of Lessee and to the extent not applied
shall be returned to Lessee, without interest, at the expiration of the
applicable Equipment Schedule. All payments of Rent shall be made to Lessor at
the address Lessor shall designate in writing.
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<PAGE> 2
(B) Whenever any payment is not made by Lessee within ten (10) days of when due
hereunder, Lessee agrees to pay to Lessor, as additional rent, interest on all
monies due Lessor from and after the date same is due at the rate of one and
one-quarter (1-1/4%) percent per month until paid, but as to each of the
foregoing in no event more than the maximum rate permitted by law.
(C) As used herein, "Actual Cost" means the cost to Lessor of purchasing and
delivering the Equipment to Lessee, including taxes, transportation and other
charges.
V. NO WARRANTIES BY LESSOR, DISCLAIMER OF IMPLIED WARRANTIES AND WAIVER OF
DEFENSES.
LESSOR IS NOT THE MANUFACTURER OR SUPPLIER OF OR A DEALER IN THE EQUIPMENT, AND
MAKES NO WARRANTY, EXPRESSED OR IMPLIED, TO ANYONE, AS TO THE SUITABILITY,
DURABILITY, DESIGN, CONDITION, CAPACITY, PERFORMANCE OR ANY OTHER ASPECT OF THE
EQUIPMENT OR ITS MATERIAL OR WORKMANSHIP INCLUDING THE WARRANTY OF
MERCHANTABILITY AND FITNESS FOR USE OR PURPOSE. AS TO LESSOR AND ITS ASSIGNS,
LESSEE LEASES THE EQUIPMENT "AS IS." LESSEE REPRESENTS THAT IT HAS SELECTED THE
EQUIPMENT AND THE SUPPLIER AND ACKNOWLEDGES THAT LESSOR HAS NOT RECOMMENDED THE
SUPPLIER. LESSOR SHALL HAVE NO OBLIGATION TO INSTALL, MAINTAIN, ERECT, TEST,
ADJUST, OR SERVICE THE EQUIPMENT, ALL OF WHICH LESSEE SHALL PERFORM, OR CAUSE
THE SAME TO BE PERFORMED BY QUALIFIED THIRD PARTIES. LESSOR AND LESSOR'S
ASSIGNEE SHALL NOT BE LIABLE TO LESSEE OR OTHERS FOR ANY LOSS, DAMAGE OR EXPENSE
OF ANY KIND OR NATURE CAUSED DIRECTLY OR INDIRECTLY BY ANY EQUIPMENT HOWEVER
ARISING, OR THE USE OR MAINTENANCE THEREOF OR THE FAILURE OF OPERATION THEREOF,
OR THE REPAIRS, SERVICE OR ADJUSTMENT THERETO. NO REPRESENTATION OR WARRANTY AS
TO THE EQUIPMENT OR ANY OTHER MATTER BY THE SUPPLIER OR OTHERS SHALL BE BINDING
ON LESSOR NOR SHALL THE BREACH OF SUCH RELIEVE LESSEE OF, OR IN ANY WAY AFFECT,
ANY OF LESSEE'S OBLIGATIONS TO LESSOR HEREIN. IF THE EQUIPMENT IS UNSATISFACTORY
FOR ANY REASON, LESSEE SHALL MAKE CLAIM ON ACCOUNT THEREOF SOLELY AGAINST
SUPPLIER, AND ANY OF SUPPLIER'S VENDORS, AND SHALL NEVERTHELESS PAY LESSOR ALL
RENT AND OTHER SUMS PAYABLE UNDER THIS LEASE. LESSOR HEREBY ASSIGNS TO LESSEE,
SOLELY FOR THE PURPOSE OF PROSECUTING SUCH A CLAIM, ALL (IF ANY) OF THE RIGHTS
WHICH LESSOR MAY HAVE AGAINST SUPPLIER AND SUPPLIER'S VENDORS FOR BREACH OF
WARRANTY OR OTHER REPRESENTATIONS RESPECTING THE EQUIPMENT. REGARDLESS OF CAUSE,
LESSEE WILL NOT ASSERT ANY CLAIM WHATSOEVER AGAINST LESSOR FOR LOSS OF
ANTICIPATORY PROFITS OR ANY OTHER INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES,
NOR SHALL LESSOR BE RESPONSIBLE FOR ANY DAMAGES OR COSTS WHICH MAY BE ASSESSED
AGAINST LESSEE IN ANY ACTION FOR INFRINGEMENT OF ANY UNITED STATES LETTERS
PATENT. LESSOR MAKES NO WARRANTY AS TO THE TREATMENT OF THIS LEASE FOR TAX OR
ACCOUNTING PURPOSES. NOTWITHSTANDING ANY FEES WHICH MAY BE PAID BY LESSOR TO
SUPPLIER OR ANY AGENT OF SUPPLIER, LESSEE UNDERSTANDS AND AGREES THAT NEITHER
SUPPLIER NOR ANY AGENT OF SUPPLIER IS AN AGENT OF LESSOR OR IS AUTHORIZED TO
WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE.
VI. TITLE; PERSONAL PROPERTY.
The Equipment is, and shall at all times be owned by Lessor and Lessee shall
have no interest in the Equipment except that of a lessee. The Lessee shall have
no right to purchase or otherwise acquire title to or ownership of any of the
Equipment. If Lessor supplies Lessee with labels indicating that the Equipment
is owned by Lessor, Lessee shall affix such labels to and keep them in a
prominent place on the Equipment. LESSEE HEREBY AUTHORIZES LESSOR TO INSERT IN
ANY EQUIPMENT SCHEDULE THE SERIAL NUMBERS AND OTHER IDENTIFICATION DATA OF
EQUIPMENT WHEN DETERMINED BY LESSOR. To protect Lessor's rights in the Equipment
in the event this Lease is determined to be a security agreement, Lessee hereby
grants to Lessor a security interest in the Equipment, and all proceeds,
products, rents or profits from the sale, casualty loss or other disposition
thereof. Lessee hereby authorizes Lessor, at Lessee's expense, to cause this
Lease, or any statement or other instrument in respect of this Lease showing the
interest of Lessor in the Equipment, including Uniform Commercial Code financing
statements, to be filed or recorded and re-filed and re-recorded, and grants
Lessor the right to execute Lessee's name thereto. Lessee agrees to execute,
deliver and file any statement or instrument requested by Lessor for such
purpose, and if certificates of title are issued or outstanding with respect to
any of the Equipment, Lessee will cause the interest of Lessor to be properly
noted thereon, and agrees to pay or reimburse Lessor for any reasonable
searches, filings, recordings, stamp fees or taxes related to the filing or
recording of any such instrument or statement, plus Lessor's handling charges.
Lessee shall, at its expense, protect and defend Lessor's title against all
persons claiming against or through Lessee and shall at all times keep the
Equipment free from any legal process or encumbrance whatsoever including
without limitation liens, attachments, levies and executions, and shall give
Lessor immediate written notice thereof and shall indemnify Lessor from any loss
caused thereby. Lessee shall, upon Lessor's request, execute or obtain from
third parties and deliver to Lessor such estoppel certificates, landlord's
waivers and such further instruments and assurances as Lessor deems necessary or
advisable for the confirmation or perfection of Lessor's rights hereunder. The
Equipment is, and shall at all times be and remain, personal property
notwithstanding that the Equipment or any part thereof may now be or hereafter
become, in any manner, affixed or attached to real property or any improvements
thereon.
2
<PAGE> 3
VII. MAINTENANCE, USE AND LOCATION.
Lessee shall, at its own cost and expense, maintain the Equipment in good
operating condition and repair and protect the Equipment from deterioration
other than normal wear and tear; shall use the Equipment in the regular course
of its business, within its normal operating capacity, without abuse; shall
comply with all laws, ordinances, regulations, requirements and rules with
respect to the use, maintenance and operation of the Equipment; shall not make
any modification, alteration or addition to the Equipment without the prior
written consent of Lessor, which shall not be unreasonably withheld, except for
engineering changes recommended by and made by the manufacturer; shall install
on the Equipment all engineering changes offered by the manufacturer without
charge which enhance the safety of the Equipment; shall not so affix the
Equipment to realty as to change its nature to real property or a fixture; and
shall keep the Equipment at the location shown herein, and shall not remove the
Equipment without prior written consent of Lessor. Lessee will grant access to
the Equipment to Lessor and Lessor's designee during normal working hours for
inspection, repair, preventative maintenance, installation of engineering
changes and for any other reasonable purpose. Lessee shall, during the term of
this Lease, at its own expense, enter into and maintain in force a contract with
the manufacturer or other acceptable maintenance company covering the
maintenance of the Equipment and furnish a copy thereof to Lessor upon request.
If Lessor incurs any costs or expenses to bring the Equipment up to good working
order and appearance, Lessee shall immediately reimburse Lessor for all such
costs or expenses.
VIII. RETURN OF EQUIPMENT; END OF LEASE OPTION.
After the end of the Initial Term and after each renewal term thereafter, this
Lease shall be automatically renewed and shall continue until such time as the
Lessee shall give the Lessor written notice of termination, not less than ninety
(90) days and not more than one hundred eighty (180) days prior to the end of
the then current term. Unless Lessee purchases the Equipment or the term of an
Equipment Schedule is renewed, within ten (10) days of the expiration or earlier
termination of the then current term, the Lessee shall, at its expense,
deinstall, inspect, test and pack the Equipment and return the Equipment
(including all cable, wiring, connectors, accessories and attachments thereto),
freight and insurance prepaid, to such location as designated by Lessor in
writing, in good repair, condition and working order, ordinary wear and tear
resulting from proper use thereof only excepted. Further, the Equipment shall
conform to any additional specifications set forth in the applicable Equipment
Schedule. Lessee shall have the Equipment certified by the manufacturer as
acceptable for the manufacturer's standard maintenance contract (to the extent
available) and such certification shall be presented to Lessor at least fourteen
(14) days prior to redelivery to Lessor. If Lessee fails to return the Equipment
as provided herein, Lessee shall pay Lessor a sum equal to four (4) months rent
as liquidated damages to compensate Lessor for the economic loss suffered by
Lessor as a result of its inability to realize the residual value of the
Equipment when anticipated. In addition, for the use of the Equipment, Lessee
agrees to pay Lessor periodic Rent equal to 100% of the average annual Rental
Payment (adjusted, if necessary, to the period indicated on the applicable
Equipment Schedule) provided herein. Nothing contained herein is intended to
relieve Lessee of its obligations to return the Equipment to Lessor as provided
herein or restrict Lessor's right to recover the Equipment in the event of the
failure of Lessee to so return the Equipment at the expiration or termination of
the applicable Equipment Schedule.
IX. RISK OF LOSS.
Lessee shall bear all risks of loss or damage to the Equipment ("Loss") from any
cause whatsoever, from the date of the shipment of the Equipment to Lessee until
its return to Lessor. Lessee shall promptly notify Lessor of any Loss and no
Loss shall relieve Lessee of the obligation to pay Rent or of any other
obligation under this Lease and any Equipment Schedule. In the event of a Loss,
Lessee, at the option of Lessor, shall either (a) repair the Equipment so as to
place it in as good condition as prior to the Loss, (b) replace the Equipment
with substantially identical Equipment in good condition and working order with
documentation creating clear title thereto in Lessor; or (c) pay to Lessor upon
demand the sum of the following amounts: (i) the aggregate Rent and other sums
then due and owing under the Equipment Schedule to which the Equipment is
subject plus (ii) the applicable stipulated loss value attached to the Equipment
Schedule and made part thereof (the "Stipulated Loss Values") opposite the Rent
payment number preceding the date of the Loss, or, if no Stipulated Loss Values
are attached to the Equipment Schedule, then the present value of all unpaid
Rent and other sums due during the unexpired term of the Equipment Schedule
discounted at six (6%) percent per annum simple interest or the lowest rate
permitted by law plus Lessor's anticipated value of the Equipment at the end of
the Initial Term or applicable renewal term. Upon Lessor's receipt of
replacement Equipment or payment as provided in (b) or (c) hereof, Lessee and/or
Lessee's insurer shall be entitled to Lessor's interest in said item for salvage
purposes, in its then condition and location, without warranty, express or
implied.
X. INSURANCE.
Lessee shall keep the Equipment insured against all risks of loss or damage from
every cause whatsoever for not less than the full replacement value thereof or
the amount stated in Section IX(c) herein, whichever is greater, and shall carry
public liability and property damage insurance covering the Equipment and its
use in amounts customary for such Equipment. All such insurance shall be in form
and amount and with companies acceptable to Lessor and name Lessor and its
assignee as loss payee, as their interests may appear, with respect to property
damage coverage and as additional insureds, with respect to public liability
coverage. Lessee shall pay the premiums therefor and deliver said policies, or
duplicates thereof or certificates of coverage therefor to Lessor, with long
form Lender's Loss Payable endorsement upon the policy or policies or by
independent instrument, that provides Lessor a right to thirty (30) days'
written notice before the policy can be altered or canceled and the right
without obligation to payment of premium. Should Lessee fail to provide such
insurance coverage, Lessor may obtain such coverage for its benefit or for the
benefit of Lessee and charge Lessee therefor. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact to make claim for, receive payment of, and execute and
endorse all documents, checks, or drafts for loss or damage under any said
insurance policies and to apply the proceeds in furtherance of the exercise of
Lessor's options as provided herein.
3
<PAGE> 4
XI. TAXES AND CHARGES.
This Lease is intended to be a net lease, and all payments hereunder are
intended to be net to Lessor to the extent permitted by applicable law. Lessee
shall pay directly (or, at Lessor's option, reimburse Lessor for) all license
fees, assessments and other government charges, and all sales, use,
excise, franchise, personal property and any other similar tax or taxes (herein
collectively called "Charges") now or hereafter imposed, levied or assessed by
any state, federal or local government or agency upon any of the Equipment or
upon the leasing, purchase, ownership, use, possession, financing or operation
thereof, or upon the receipt of rental payments therefor, even if Lessee's
status provides for its exemption from the Charges (excluding income taxes on
Rental Payments, except any such tax on Rental Payments which is a substitution
for, or relieves Lessee from, the payment of taxes which Lessee would otherwise
be obligated to pay or reimburse Lessor as herein provided) before the same
shall become in default or subject to the payment of any penalty or interest.
Lessee shall supply Lessor with receipts or other evidence of payment of all
Charges as may reasonably be requested by Lessor. Lessee shall further comply
with all state and local laws requiring the filing of ad valorem or other tax
returns relating to any Charges. Lessee shall notify the Lessor of the
imposition of, or, to Lessee's knowledge, the proposed imposition of, any
Charges by supplying to Lessor (within five (5) days after receipt thereof by
Lessee) a copy of the invoice or other documents respecting such Charges. Unless
otherwise directed by Lessor in writing, Lessor shall pay all personal property
taxes with respect to the Equipment and Lessee shall reimburse Lessor therefor
upon demand. Each year upon Lessor's receipt of a written request by Lessee,
Lessor will provide Lessee with confirmation of the Taxes and Charges Lessor
paid relative to the Equipment in the then prior calendar year.
XII. LEASE IRREVOCABILITY AND OTHER COVENANTS AND REPRESENTATIONS OF LESSEE.
LESSEE AGREES THAT THIS LEASE AND EACH EQUIPMENT SCHEDULE ARE IRREVOCABLE FOR
THE FULL TERM HEREOF AND THEREOF AND LESSEE'S OBLIGATIONS UNDER THIS LEASE AND
EACH EQUIPMENT SCHEDULE ARE ABSOLUTE AND SHALL CONTINUE WITHOUT ABATEMENT AND
REGARDLESS OF ANY DISABILITY OF LESSEE TO USE THE EQUIPMENT OR ANY PART THEREOF
BECAUSE OF ANY REASON INCLUDING, BUT NOT LIMITED TO WAR, ACT OF GOD,
GOVERNMENTAL REGULATIONS, STRIKE, LOSS, DAMAGE, DESTRUCTION, OBSOLESCENCE,
FAILURE OF OR DELAY IN DELIVERY, FAILURE OF THE EQUIPMENT TO OPERATE PROPERLY,
TERMINATION BY OPERATION OF LAW, OR ANY OTHER CAUSE. LESSEE REPRESENTS THAT: IT
IS DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF THE
JURISDICTION IN WHICH THE ACTIVITIES OF LESSEE REQUIRE SUCH QUALIFICATION; THIS
LEASE HAS BEEN AND EACH EQUIPMENT SCHEDULE WILL BE DULY AUTHORIZED BY ALL
NECESSARY ACTION ON ITS PART, IS A VALID, BINDING AND LEGALLY ENFORCEABLE
OBLIGATION OF LESSEE IN ACCORDANCE WITH ITS TERMS AND IS NOT IN ANY RESPECT
INCONSISTENT WITH OR IN VIOLATION OF LESSEE'S CERTIFICATE OR ARTICLES OF
INCORPORATION OR BY-LAWS OR ANY LAW, REGULATION, ORDER OR AGREEMENT BINDING UPON
LESSEE; THE EQUIPMENT SHALL BE USED BY LESSEE SOLELY FOR BUSINESS PURPOSES; AND
THAT ALL FINANCIAL AND OTHER INFORMATION SUBMITTED TO LESSOR WAS AND WILL BE
TRUE AND CORRECT IN ALL MATERIAL RESPECTS, TO THE BEST OF LESSEE'S KNOWLEDGE.
XIII. FINANCIAL STATEMENTS.
Lessee agrees to deliver to Lessor annual financial statements and such
quarterly financial statements, as Lessor requests.
XIV. DEFAULT AND REMEDIES.
(A) The occurrence of any one or more of the following shall be deemed to be an
"Event of Default": (a) Lessee fails to pay any Rent or any other amount
hereunder when due; or (b) Lessee is in default under any other agreement
between Lessee and Lessor or upon an event of default under any other agreement
entered into by guarantors, the vendor of the Equipment, principals of Lessee or
others, which agreement(s) was or were executed to induce Lessor to enter into
this Lease or the applicable Equipment Schedule; or (c) Lessee fails to perform
or observe any of the terms, covenants or conditions contained in this Lease,
any Equipment Schedule or other lease or other agreement between Lessor and
Lessee, other than as provided above, and Lessee fails to cure any such breach
within ten (10) days after notice thereof or (d) any representation of Lessee
contained in this Lease or any other agreement between Lessor and Lessee, or in
any credit or other information submitted to Lessor in connection with this
transaction is untrue or incorrect; or (e) Lessee sells substantially all of its
assets out of the ordinary course of business, merges or consolidates with any
other person, or any single entity or person acquires fifty percent (50%) or
more of Lessee's issued and outstanding stock of any class; or (f) Lessee
becomes insolvent or makes an assignment for the benefit of creditors; or (g) a
receiver, trustee, conservator or liquidator of Lessee or of all or a
substantial part of its assets is appointed with or without the application or
consent of Lessee; or (h) a petition is filed by or against Lessee under the
Bankruptcy Code or any amendment thereto, or under any other insolvency law or
laws, providing for the relief to debtors; or (i) the occurrence of or any
notice of default or if an event occurs or state of facts exist which with the
passage of time, the giving of notice or both would constitute an event of
default under any agreement between Lessee and Bank Boston, N.A., or any
subsequent provider of a substantially similar credit facility, in force during
the term of this Master Lease;.
(B) Upon an Event of Default, the Lessor may, to the extent permitted by
applicable law, exercise any one or more of the following remedies:
(i) Terminate this Lease with respect to all or any part of the
Equipment;
(ii) Recover from Lessee all Rent and other amounts then due and as
they shall thereafter become due hereunder and under the Equipment
Schedules;
(iii) To the extent permitted by applicable law, take possession of any
or all items of Equipment, wherever the same may be located, without
demand or notice, without any court order or other process of law and
without liability to Lessee for any damages occasioned by such taking
of possession, and any such taking of possession shall not constitute a
termination of this Lease;
4
<PAGE> 5
(iv) Declare the entire unpaid balance of Rent and other amounts for
the unexpired term of each Equipment Schedule immediately due and
payable and recover from Lessee, with respect to any and all items of
Equipment (with or without repossessing same), the Stipulated Loss
Value attached to each Equipment Schedule opposite the Rent Payment
number preceding the date of such Event of Default or, if no Stipulated
Loss Values are attached to the applicable Equipment Schedule, then the
present value of all unpaid Rent and other sums due during the
unexpired term of that Equipment Schedule discounted at six (6%)
percent per annum simple interest (or the lowest discount rate
permitted by law), plus Lessor's anticipated value of the Equipment at
the end of the Initial Term or any applicable renewal term of the
Equipment Schedule;
(v) Upon repossession or surrender of any Equipment, Lessor shall sell,
lease or otherwise dispose of such Equipment in a commercially
reasonable manner, with or without notice and on public or private bid,
and apply the net proceeds thereof (after deducting all expenses,
including attorneys' fees incurred in connection therewith), to the sum
of (iv) above;
(vi) Declare any other Equipment Schedules and leases between Lessor
and Lessee in default and exercise any of the remedies provided for
herein; and
(vii) Pursue any other remedy available at law or in equity, including
but not limited to seeking damages or specific performance and/or
obtaining an injunction.
(C) Lessee shall be liable and shall pay to Lessor all expenses incurred by
Lessor in connection with the enforcement of any of Lessor's remedies, including
all expenses of repossessing, storing, shipping, repairing, and selling the
Equipment, and Lessor's reasonable attorney's fees. Lessor and Lessee
acknowledge the difficulty in establishing a value for the unexpired lease term
and owing to such difficulty agree that the provisions of this Section XIV
represent an agreed measure of damages and are not to be deemed a forfeiture or
penalty.
(D) All remedies of Lessor hereunder are cumulative, are in addition to any
other remedies provided for by law, and may, to the extent permitted by law, be
exercised concurrently or separately. The exercise of any one remedy shall not
be deemed to be an election of such remedy or to preclude the exercise of any
other remedy. No failure on the part of Lessor to exercise and no delay in
exercising any right or remedy shall operate as a waiver thereof or modify the
terms of this Lease or any Equipment Schedule. A waiver of default shall not be
a waiver of any other or subsequent default. If this Lease is determined to be
subject to any laws limiting the amount chargeable or collectible by Lessor then
Lessor's recovery shall in no event exceed the maximum amounts permitted by law.
XV. INDEMNITY.
Lessee shall indemnify and hold Lessor, its agents, employees, successors and
assigns, harmless from and against any and all claims, actions, suits,
proceedings, costs, expenses, damages and liabilities, including attorney's
fees, arising out of, connected with, or resulting from the Equipment, any
Equipment Schedule or this Lease, including without limitation, the manufacture,
selection, delivery, possession, use, lease, operation, removal or return of the
Equipment.
XVI. REPRODUCTION OF DOCUMENTS.
This Lease, any Equipment Schedule and all related documents, including (a)
amendments, addendums, consents, waivers and modifications which may be executed
contemporaneously or subsequently herewith, (b) documents received by the Lessor
from the Lessee, and (c) financial statements, certificates and other
information previously or subsequently furnished to the Lessor, may be
reproduced by the Lessor by any photographic, photostatic, microfilm,
micro-card, miniature photographic, compact disk reproduction or other similar
process and the Lessor may destroy any original document so reproduced. The
Lessee agrees and stipulates that any such reproduction shall, to the extent
permitted by applicable law, be admissible in evidence as the original itself in
any judicial or administrative proceeding (whether or not the original is in
existence and whether or not the reproduction was made by the Lessor in the
regular course of business) and, that any enlargement, facsimile or further
reproduction of the reproduction shall likewise be admissible in evidence.
XVII. ASSIGNMENT; WAIVER OF DEFENSES; QUIET ENJOYMENT.
LESSEE SHALL NOT ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE OF,
ENCUMBER OR PERMIT A LIEN UPON OR AGAINST ANY INTERESTS IN THIS LEASE, ANY
EQUIPMENT SCHEDULE OR THE EQUIPMENT OR PERMIT THE EQUIPMENT TO BE USED BY
ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES WITHOUT LESSOR'S PRIOR WRITTEN
CONSENT. Lessor may, without consent or with prior notice to Lessee, assign or
transfer this Lease or any Equipment Schedule or grant a security interest in
any Equipment, any Rental Payments, or any other sums due or to become due
hereunder, and in such event Lessor's assignee, transferee or grantee shall have
all the rights, powers, privileges, and remedies of Lessor hereunder. Lessee
agrees that, following its receipt of notice of any assignment by Lessor of this
Lease, any Equipment Schedule or the Rental Payments payable hereunder, it will
pay the Rent Payments due hereunder directly to the assignee (or to whomever the
assignee shall designate). Lessee agrees that no assignee of Lessor shall be
bound to perform any duty, covenant, condition or warranty attributable to
Lessor, and Lessee further agrees not to raise any claim or defense arising out
of this Lease or otherwise which it may have against Lessor as a defense,
counterclaim, or offset to any action by an assignee or secured party hereunder.
Upon Lessor's request, Lessee
5
<PAGE> 6
will execute a consent and acknowledgment of Lessor's assignment to its
assignee. Nothing contained herein is intended to relieve Lessor of any of its
obligations. Provided Lessee is not in default hereunder, Lessee shall quietly
use and enjoy the Equipment, subject to the terms hereof.
XVIII. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS.
In the event Lessee fails to comply with any provisions of this Lease, Lessor
shall have the right, but shall not be obligated, to effect such compliance on
behalf of Lessee upon ten (10) business days prior written notice to Lessee. In
such event, all monies expended by, and all expenses of Lessor in effecting such
compliance shall be deemed to be additional rent, and shall be paid by Lessee to
Lessor at the time of the next rent payment, together with interest at the rate
of one and one-quarter(1-1/4%) percent per month but in no event more than the
maximum permitted by law.
XIX. GOVERNING LAW; JURISDICTION AND VENUE; WAIVER OF TRIAL BY JURY AND RIGHTS
AND REMEDIES UNDER THE UNIFORM COMMERCIAL CODE.
This Lease shall be governed by the laws of the State of New Jersey, provided,
however, in the event this Lease or any provision hereof is not enforceable
under the laws of the State of New Jersey, then the laws of the state where the
Equipment is located shall govern. LESSEE AND LESSOR EACH CONSENT TO THE NON
EXCLUSIVE PERSONAL JURISDICTIONS OF THE FEDERAL AND STATE COURTS OF THE STATES
OF NEW JERSEY AND ARIZONA WITH RESPECT TO ANY ACTION ARISING OUT OF THIS LEASE,
ANY EQUIPMENT SCHEDULE OR THE EQUIPMENT, PROVIDED, HOWEVER, LESSOR AND LESSEE
MAY, IN THEIR SOLE DISCRETION, ENFORCE THIS LEASE AND ANY EQUIPMENT SCHEDULE IN
ANY COURT HAVING LAWFUL JURISDICTION THEREOF. THIS MEANS ANY LEGAL ACTION
ARISING OUT OF THIS LEASE MAY BE FILED IN NEW JERSEY OR ARIZONA, AND LESSOR OR
LESSEE MAY BE REQUIRED TO DEFEND AND LITIGATE ANY SUCH ACTION IN NEW JERSEY OR
ARIZONA. LESSEE AND LESSOR AGREE THAT SERVICE OF PROCESS IN ANY SUIT MAY BE MADE
BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE OTHER PARTY AT THE
ADDRESS SET FORTH HEREIN. TO THE EXTENT PERMITTED BY LAW, LESSEE WAIVES TRIAL BY
JURY IN ANY ACTION BY OR AGAINST LESSOR HEREUNDER AND WAIVES ANY AND ALL RIGHTS
AND REMEDIES GRANTED TO LESSEE BY ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE AND
ANY RIGHTS NOW OR HEREAFTER GRANTED BY STATUTE OR OTHERWISE THAT MAY LIMIT OR
MODIFY LESSOR'S RIGHTS AS DESCRIBED IN THIS LEASE OR THE EQUIPMENT SCHEDULES.
XX. GENERAL.
This Lease shall inure to the benefit of and is binding upon the heirs,
legatees, personal representatives, successors and permitted assigns of the
parties hereto. Time is of the essence of this Lease. This Lease and any
Equipment Schedule shall be effective when accepted by Lessor. This Lease and
the Equipment Schedules contain the entire agreement between Lessor and Lessee
with respect to the subject matter hereof, and all negotiations and
understandings have been merged herein. No modification of this Lease shall be
effective unless in writing and executed by both Lessor and Lessee. All
covenants and obligations of Lessee to be performed pursuant to this Lease,
including all payments to be made by Lessee hereunder, shall survive the
expiration or earlier termination of this Lease. If more than one Lessee is
named in this Lease, the liability of each shall be joint and several. In the
event any provision of this Lease shall be unenforceable, then such provision
shall be deemed deleted, however, all other provisions hereof shall remain in
full force and effect. Service of all notices under this Lease shall be
sufficient if given personally, mailed to the party intended at its address set
forth herein, or at such other addresses said party may provide in writing from
time to time by certified mail, or overnight mail service, or sent via facsimile
transmission. Any such notice mailed to said address shall be deemed effective
seven (7) days after it is deposited in the United States mail, duly addressed
and with postage prepaid; all notices sent by other means shall be deemed
effective when received.
IN WITNESS WHEREOF, the parties have executed this Lease as of February 11,
1999.
LESSEE: ADFLEX SOLUTIONS, INC.
BY: /s/ ALISA PADGETT GARCIA
----------------------------------------------
ALISA PADGETT GARCIA, TREASURER
- -------------------------------------------------
(PRINT OR TYPE NAME & TITLE OF ABOVE SIGNATURE)
ATTEST: /S/ CAROLE B. WITTEN
------------------------------------------
CAROLE B. WITTEN
LESSOR: COPELCO CAPITAL, INC.
BY: /s/ DANIEL J. FERGUSON
---------------------------------------------
DANIEL J. FERGUSON, VICE PRESIDENT
- -------------------------------------------------
(PRINT OR TYPE NAME & TITLE OF ABOVE SIGNATURE)
6
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<PERIOD-START> DEC-28-1998
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0
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