<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25974
R-B RUBBER PRODUCTS, INC.
(Name of small business issuer in its charter)
OREGON 93-0967413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
904 E. 10TH AVENUE, MCMINNVILLE, OREGON 97128
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 503-472-4691
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $7,445,403. The
aggregate market value of voting stock held by non-affiliates of the registrant
was $3,335,053 as of February 27, 1998, based upon the last sales price as
reported on the Nasdaq System-Small Cap Market.
The number of shares outstanding of the Registrant's Common Stock as of February
27, 1998 was 2,172,500 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated into Part III of Form 10-KSB, by reference, portions
of its Proxy Statement dated March 20, 1998.
<PAGE>
R-B RUBBER PRODUCTS, INC.
FORM 10-KSB INDEX
PART I
Page
----
Item 1. Description of Business 2
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis or Plan of 6
Operation
Item 7. Financial Statements 10
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange 10
Act
Item 10. Executive Compensation 11
Item 11. Security Ownership of Certain Beneficial Owners and
Management 11
Item 12. Certain Relationships and Related Transactions 11
Item 13. Exhibits and Reports on Form 8-K 11
Signatures 13
1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
R-B Rubber Products, Inc. (the "Company") was incorporated in Oregon in
September 1986. The Company is a vertically integrated rubber recycler and
manufacturer that processes scrap tires and rubber to produce high quality,
durable rubber mats and other protective surfaces. The Company sells its
products to agribusiness concerns, sports and fitness facilities and other
commercial and industrial users.
PRODUCTS
Applications for the Company's products generally fall into one of two
primary markets, agribusiness or fitness. Within each of these, the Company
manufactures and sells a variety of products designed to meet consumer
requirements.
AGRIBUSINESS. Approximately 76 percent of the Company's 1997 sales were
for rubber matting used in agricultural surfacing. These products include
flooring for horse and livestock trailers, stalls and wash areas. Rubber
matting has significant advantages over other flooring options, such as
straw, dirt or wood, because of its improved comfort and safety for the
animal and the reduction of cleaning time and bedding costs.
FITNESS AND SPORTS FACILITIES. Sales of rubber matting for sports and
fitness applications accounted for approximately 18 percent of sales in 1997.
These sales were primarily for weight room flooring in gyms, private clubs,
military bases, colleges and high schools. The Company has been named a
"preferred" or "recommended" vendor for Gold's and World Gyms for more than
three years.
The Company also markets other products including ancillary goods. Some of
these products are manufactured by the Company and some are purchased from
third party vendors. These products include truck bed liners, rubber edging,
drain tiles and thinner specialty mat products. These products accounted for
approximately 6 percent of the Company's sales in 1997.
PRODUCT DISTRIBUTION
The Company sells its products through several channels, including original
equipment manufacturers ("OEMs"), distributors, retailers and directly to the
end-user. This strategy enables the Company to obtain a diversified
distribution of its products while at the same time maintaining direct
contact with many of its end users. In 1997, most sales were to distributors
and retailers.
ORIGINAL EQUIPMENT MANUFACTURERS. In 1997 12 percent of the Company's
revenues were from sales to OEMs. This is primarily from sales to horse
trailer and farm implement manufacturers.
DISTRIBUTORS AND RETAILERS. The majority of the Company's products were
sold through distributor and retailer channels in 1997. These customers
include major agricultural supply retailers, automotive tire and accessory
retailers, as well as fitness equipment suppliers.
2
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END USERS. Individuals contact the Company (via an 800 number) in
response to Company advertisements or referrals from other users. In most
cases, these callers are referred to dealers in their local area. Because of
this, only a relatively small portion of the company's total sales have been
at retail prices, directly to end-users, however the Company believes this
distribution channel is important because of the direct feedback it receives
from these customers.
To facilitate product availability and lower the cost of freight to its
customers, during 1996 the Company added three strategically located
warehouses. These warehouses, located in North Carolina, Missouri and Texas,
enable the Company to transport by rail larger quantities of mats per
shipment. The mats are then shipped in smaller quantities to the customers.
NEW PRODUCTS
The Company has signed a non-binding letter of intent to acquire the assets
of Iowa Mat Company. Upon the closing of this asset purchase, the Company
will add three new products: rubber paving tiles for use in commercial and
agricultural applications, rubber weight plates for fitness and a playground
surface safety pad. These products will use similar raw materials as the
Company's existing products and be distributed through the Company's existing
distribution channels. The Company is introducing an interlocking mat that
should sell well into the fitness market and some agribusiness markets as
well.
COMPETITION
The market for the Company's products is highly competitive. Some of the
Company's competitors may be larger or have greater financial resources than
the Company. The Company is one of the largest manufacturers of heavy rubber
matting in North America. Its principal competition in the agribusiness
market comes from North West Rubber located in British Columbia, Canada and
Kraiberg located in Germany; and in the fitness industry from Humane
Equipment in Wisconsin. The number of competitors within specific product
categories in the rubber mat industry has been decreasing, consequently the
remaining manufacturers, including the Company, have been increasing sales to
fulfill the demand and thereby increasing their market share.
Competitive factors include quality, service (including availability and
timely delivery), price and reliability. The Company believes that it
currently competes favorably with respect to these factors. There can be no
assurance, however, that competitors will not substantially increase their
resources devoted to the development and marketing of products competitive
with those of the Company.
RAW MATERIALS
In 1997, the Company continued to upgrade its plant and equipment, allowing
it to process lower cost and more abundant tire chips, which provided
approximately 33 percent of the Company's raw material requirements in 1997,
compared to approximately 30 percent in 1996. The tire chips are provided
through a local supplier, with which the Company has a supply agreement. The
Company relies primarily on tire grindings or "buffings" from tire recapping
operations to supply the remainder of its raw material requirements. Buffings
require less processing before being used for mat manufacturing, but are more
costly and in tight supply. The Company is currently researching additional
processing improvements that would allow it to process and use additional
tire chips, helping to ensure an adequate supply of such lower cost raw
material in the future.
3
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SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Approximately 22 percent of the Company's net sales were to one customer
during 1997. This customer represented 27 percent of the accounts receivable
balance at December 31, 1997. Two other customers represented approximately
14 percent and 8 percent of the accounts receivable balance at December 31,
1997. Balances outstanding at December 31, 1997 for all customers indicated
above were collected in the first quarter of 1998. Approximately 12 percent
of the Company's 1997 sales were derived from sales to ten major horse
trailer manufacturers in the U.S.
One customer accounted for 16.2 percent of net sales for the year ended
December 31, 1996 and 32 percent of the accounts receivable balance at
December 31, 1996. No other customer accounted for more than 5 percent of net
sales for the year ended December 31, 1996. Three other customers
represented 5.1 percent, 10.1 percent and 11.4 percent of the accounts
receivable balance at December 31, 1996. Balances outstanding at December
31, 1996 for all customers indicated above were collected in the first
quarter of 1997.
BACKLOG
The Company's customers generally order products for immediate
delivery, and the Company generally is able to meet such demand. However, at
December 31, 1997, due to constrained capacity, the Company had a backlog of
approximately $400,000. This backlog turned during the first quarter of
1998. The stated backlog is not necessarily indicative of Company sales for
any future period nor is a backlog any assurance that the Company will
realize a profit from filling the orders. The backlog at December 31, 1996
was approximately $250,000.
INTELLECTUAL PROPERTY
The Company has chosen not to apply for patent protection for its products,
equipment or processes. The company's success and future revenue growth will
depend, in part, upon its ability to protect its trade secrets. The Company
relies on trade secret laws and confidentiality agreements to protect its
proprietary know-how. There can be no assurance that such measures will
provide meaningful protection for the Company's trade secrets or other
proprietary information. The Company's business may be adversely affected by
competitors that independently develop substantially equivalent products,
equipment and processes. The Company will attempt to keep its products,
equipment and processes, and the results of its research and development
programs proprietary, but it may not be able to prevent others from using
some or all of such information or technology without compensation to the
Company. The Company uses the following tradenames: R-B Rubber Products,
Arobitile and Tenderfoot. The Company has trademarked the name Bounce
Back-TM-. The Company is not aware of any conflicting or competing uses of
its tradenames or trademarks.
RESEARCH AND DEVELOPMENT
The Company expensed $71,177 and $13,403 on research and development activities
during the years ended December 31, 1997 and 1996.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants in
the environment and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of certain materials,
substances and wastes. To the best of the Company's knowledge, the Company's
operations are in substantial compliance with
4
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the terms of all applicable environmental laws and regulations as currently
interpreted. While historically the Company has not had to make significant
capital expenditures for environmental compliance, the Company cannot predict
with any certainty its future capital expenditures for environmental
compliance because of continually changing compliance standards and
technology. Furthermore, actions by federal, state and local governments
concerning environmental matters could result in laws or regulations that
could increase the cost of producing the products manufactured by the Company
or otherwise adversely affect the demand for its products. Additionally, the
Company does not currently have any insurance coverage for environmental
liabilities and does not anticipate a need to obtain such coverage in the
future.
EMPLOYEES
At December 31, 1997, the Company employed 62 persons, 59 of which were full
time employees and 3 of which were part time employees. None of the Company's
employees are covered by collective bargaining agreements, and the Company
believes its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters and manufacturing space are housed in the
same facility, which is located in McMinnville, Oregon, approximately 35 miles
west of Portland, Oregon. The facility consists of approximately 24,000 square
feet of space on approximately four acres of land, all of which is owned by the
Company. At December 31, 1997, the Company had an outstanding note payable at
9.24 percent interest, payable $6,895 per month, including interest, through
October 5, 2005 related to this land and facility. Should the Company's
acquisition of the assets of Iowa Mat, Inc. be completed, the Company will
require additional manufacturing space. The Company is also currently
evaluating the possibility of leasing or purchasing land adjacent to its
existing facility in McMinnville, Oregon in order to accommodate additional
growth in the number of sales and administrative personnel.
ITEM 3. LEGAL PROCEEDINGS
As of February 27, 1998, there were no material, pending legal proceedings to
which the Company or its subsidiaries are a party. From time to time, the
Company becomes involved in ordinary, routine or regulatory legal proceedings
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1997.
5
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Association of Securities
Dealers Automated Quotation System -Small Cap Market ("Nasdaq-Small Cap") under
the symbol "RBBR." The following table sets forth the high and low sales prices
as reported by Nasdaq-Small Cap for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 High Low
---------------------------- -------- --------
<S> <C> <C>
Quarter 1 $ 4.00 $ 2.38
Quarter 2 4.13 2.25
Quarter 3 2.50 1.38
Quarter 4 2.13 1.50
Year Ended December 31, 1997
----------------------------
Quarter 1 $ 3.13 $ 1.75
Quarter 2 4.13 2.25
Quarter 3 4.88 2.84
Quarter 4 5.00 3.25
</TABLE>
The number of shareholders of record and approximate number of beneficial
holders on February 27, 1998 was 116 and 695, respectively. There were no cash
dividends declared or paid in fiscal years 1997 or 1996. The Company does not
anticipate declaring such dividends in the foreseeable future.
There were no sales of unregistered securities by the Company during the year
ended December 31, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including Management's Discussion and
Analysis or Plan of Operation contains forward-looking statements that involve a
number of risks and uncertainties. Future market conditions are subject to
supply and demand conditions and decisions of other market participants over
which the Company has no control and which are inherently very difficult to
predict. Accordingly, there can be no assurance that the Company's revenues or
gross margins will improve. In addition, there are other factors that could
cause actual results to differ materially, including competitive pressures,
increased demand for the Company's raw materials, unanticipated difficulties in
integrating acquired technologies or businesses and the risk factors listed from
time to time in the Company's Securities and Exchange Commission reports. The
Company wished to caution the reader that these forward looking statements, such
as the statements concerning new product introductions and future tire chip
processing capabilities, are only predictions and are not statements of
historical fact.
6
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of sales, certain statement of
operations data for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales 100% 100%
Cost of goods sold 62 65
---- ----
Gross profit 38 35
Selling expenses 9 10
General and administrative expenses 16 20
---- ----
Income from operations 13 5
Other expense (2) (2)
---- ----
Income before income taxes 11 3
Provision for (benefit from) income taxes (4) 2
---- ----
Net income 7 5
==== ====
</TABLE>
SALES. Sales increased to $7.4 million in 1997 from $5.3 million in 1996. The
increase is primarily attributable to efforts by the Company to increase
penetration and distribution in its primary markets.
GROSS PROFIT. Gross profit increased to $2.8 million (38 percent of net sales)
for 1997 from $1.8 million (35 percent of net sales) for 1996. The increase as a
percentage of sales is primarily a result of efficiencies gained with increased
sales. The Company continues to lower its raw material cost by modifying its
existing processing equipment in order to more effectively process tire chips
and therefore supplement its raw material supply with such material. The tire
chips are less expensive than the buffings that have been used historically.
Tire chips represented approximately 33 percent of the Company's raw material
supply during 1997 compared to approximately 30 percent in 1996. During the
third and fourth quarters of 1997, however, in order to obtain an adequate raw
material supply, the Company augmented its tire chips more than anticipated with
the more expensive buffings. The Company anticipates the need to continue to
augment its tire chip supply with buffings in the first part of 1998. The
Company is currently researching additional processing improvements that would
allow it to process and use more tire chips, helping to ensure an adequate
supply of such lower cost raw material in the future.
SELLING EXPENSES. Selling expenses increased $171,000 to $680,000 (9 percent of
net sales) in 1997 from $510,000 (10 percent of sales) in 1996. The increase in
dollars is primarily a result of increased sales personnel and costs associated
with promoting the Company's products. The decrease as a percentage of net
sales is a result of efficiencies gained with a larger sales base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.2 million (16 percent of sales) in 1997 compared to $1.0 million
(20 percent of sales) in 1996, primarily as a result of growth of the Company,
partially offset by cost containment efforts. The decreases as a percentage of
net sales are a result of a larger sales base over which to spread the costs.
7
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INCOME TAXES. The Company's effective tax rate in 1997 was 38 percent. In 1996,
the Company recorded a tax benefit of 53 percent of income before taxes due
primarily to the reversal of the valuation allowance that was placed against the
operating loss carryforwards during 1995. The valuation allowance was reversed
based on the Company's analysis of its ability to generate taxable income in
future years.
NET INCOME. Net income increased to $528,000 in 1997 from $264,000 in 1996 due
to the individual line item changes discussed above.
INFLATION. The Company believes that the impact of inflation on its results of
operations for the years ended December 31, 1997 and 1996 was not material.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the private sale of equity securities, cash from
operations, conventional bank financings and leasing arrangements with both
related and unrelated parties. Cash increased $265,000 during 1997 to $292,000
at December 31, 1997. This increase is primarily a result of $936,000 provided
by operations, offset by $307,000 net payments on debt and $290,000 used for the
purchase of property and equipment, net of proceeds from a sales/leaseback
transaction.
Working capital at December 31, 1997 was $1.3 million, including $292,000 of
cash and $910,000 of accounts receivable. The current ratios at December 31,
1997 and 1996 were 3.06:1 and 1.99:1, respectively.
Accounts receivable increased $58,000 to $910,000 at December 31, 1997 compared
to $852,000 at December 31, 1996, primarily as a result of increased sales.
Days sales outstanding decreased to 37 days at December 31, 1997 compared to 46
days at December 31, 1996.
Inventories increased $307,000 to $692,000 at December 31, 1997 from $385,000 at
December 31, 1996 due primarily to the building of finished goods inventory in
order to help ensure adequate quantities are available to meet anticipated
demand. Inventory turned approximately 9 times during 1997 and 1996.
Capital expenditures of $1.3 million during 1997 primarily resulted from the
addition of new equipment and the refurbishing of existing rubber processing
equipment to increase production capacity. Total capital expenditures are
expected to be not more than $3.5 million during 1998 primarily to purchase
and/or refurbish existing rubber processing equipment in order to further
increase production capacity and the capability to use additional tire chips
instead of buffings as well as for the potential purchase of certain product
lines of Iowa Mat Company.
Notes payable, both current and long-term, decreased $307,000 to $907,000 at
December 31, 1997 compared to $1.2 million at December 31, 1996, as a result of
payments on borrowings, net of related proceeds.
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The Company has a $750,000 operating line-of-credit with a commercial bank which
expires August 1, 1998, with interest at .25 percent over the bank's prime rate
(8.75% at December 31, 1997), collateralized by accounts receivable, inventory
and equipment. There was no balance outstanding on this line-of-credit at
December 31, 1997.
Under the terms of this line-of-credit agreement, the Company is required to
maintain the following covenants, to be measured annually at fiscal year end:
Minimum current ratio of 1.10:1
EBITDA/Interest + CMLTD ratio of no less than 1.75:1
Minimum tangible net worth $4,000,000
At December 31, 1997, the Company was in compliance with all of the above
covenants.
The Company has signed a letter of intent to acquire certain of the assets of
Iowa Mat Company for a combination of cash and Common Stock of the Company. The
cash required for closing would be provided from existing cash balances and
conventional debt financing. Should the Company's acquisition of the assets of
Iowa Mat, Inc. be completed, the Company will require additional manufacturing
space.
The Company is also currently evaluating the possibility of leasing or
purchasing land adjacent to its existing facility in McMinnville, Oregon in
order to accommodate additional growth in the number of sales and administrative
personnel.
The Company believes its existing cash, cash generated from operations and
available credit facilities will be sufficient to fund its operations for the
next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS
130 is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company expects to adopt SFAS 130 in the first
quarter of 1998 and does not expect comprehensive income to be materially
different from currently reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in interim and
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company adopted SFAS 131 for its fiscal year beginning January 1, 1998.
Year 2000
The Company has considered the Year 2000 issue and its impact on the Company's
information systems and processes and believes that they are compliant and that
any costs to further address the Year 2000 issue will be immaterial to its
financial position and results of operations.
9
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ITEM 7. FINANCIAL STATEMENTS
The information required by this item begins on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information regarding directors of the registrant required by this item is
included in the Company's definitive proxy statement for its 1998 annual meeting
of shareholders and is incorporated herein by reference.
The names, ages and positions of the Company's executive officers are as
follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION(s) WITH COMPANY SINCE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ronald L. Bogh 53 Chairman of the Board, President and Chief Executive Officer 1996
Brian C. Allen 33 Chief Financial Officer and Treasurer 1998
Paul M. Gilson 50 Senior Vice President, Chief Operating Officer and Secretary 1998
</TABLE>
Ronald L. Bogh founded the Company in 1985 and was named President of the
Company. Mr. Bogh was named the Chairman of the Board in 1995 and Chief
Executive Officer in May 1996. Prior to his acquisition of the Company in 1985,
Mr. Bogh was the Southern U.S. Sales Manager for Cascade Steel in McMinnville,
Oregon. Mr. Bogh earned his B.A. degree from the Oregon College of Education in
1971.
Brian C. Allen, CPA, joined the Company in June 1995 as Controller. In January
1998, Mr. Allen was promoted to Chief Financial Officer and Treasurer. From
1993 until June 1995, Mr. Allen worked for the accounting firm of Deloitte &
Touche LLP. From 1992 to 1993, Mr. Allen worked for the accounting firm of
Perkins & Co. and from 1990 to 1992 at the accounting firm of Arthur Andersen
LLP. Mr. Allen earned a B.S. degree in Business with a major in Accounting from
Oregon State University in 1990.
Paul M. Gilson joined the Company in 1990 as the Vice President of Operations
and has served as Secretary and Treasurer since February 1995. In May 1996, Mr.
Gilson was promoted to Senior Vice President, Chief Operating Officer, Secretary
and Treasurer. Beginning January 1998, Mr. Gilson no longer served as Treasurer.
Prior to joining the Company, he was a commercial account executive with Hagan
Hamilton Insurance in McMinnville, Oregon. Mr. Gilson attended Portland State
University and graduated with a degree in accounting from Northwest College of
Business in Portland, Oregon in 1972.
10
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ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's definitive
proxy statement for its 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Reference is made to Exhibits 3.1 and 3.2 (1)
4.2 Form of Common Stock Certificate (1)
4.3 Form of Representative's Warrant (1)
10.1 R-B Rubber Products, Inc. 1995 Stock Option Plan (1)
10.2 Amendment No. 1 to R-B Rubber Products, Inc. 1995 Stock Option Plan
10.3 Form of Stock Option Agreement (1)
10.4 Commercial loan between the Company and Key Bank, dated September
29, 1995 re: real estate purchase (2)
10.5 Commercial loan between the Company and Key Bank, dated September 1,
1995 re: operating line-of-credit (2)
10.6 Commercial loan between the Company and Key Bank, dated September 1,
1995 re: equipment acquisition line-of-credit (2)
</TABLE>
11
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<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.7 Loan modification agreement between the Company and Key Bank of
Oregon, dated October 21, 1996, regarding the conversion of the
Company's $750,000 equipment line of credit, dated September 1, 1995
into a term loan (4)
10.8 Loan modification and/or extension agreement between the Company and
Key Bank of Oregon, dated August 1, 1997, regarding the Company's
operating line of credit dated September 1, 1995
10.9 Funding Agreement, dated May 12, 1997, by and between Keycorp
Leasing Ltd. And R-B Rubber Products, Inc. (5)
10.10 Master Equipment Lease, dated as of May 12, 1997 by and between
KeyCorp Leasing Ltd. and R-B Rubber Products, Inc.
10.11 Consent to Assignment and Agreement and Assignment of Purchase
Agreement, dated May 12, 1997, by R-B Rubber Products, Inc. to
Keycorp Leasing Ltd. (5)
21 Subsidiaries of the Registrant
23 Consent of Morrison and Liebswager
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2, as amended and filed with the Securities and
Exchange Commission on May 9, 1995 (Commission Registration No. 33-90376).
(2) Incorporated by reference to Exhibits to Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995, as filed with the Securities
and Exchange Commission on March 30, 1996.
(3) Incorporated by reference to Exhibits to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, as filed with the
Securities and Exchange Commission on August 14, 1996.
(4) Incorporated by reference to Exhibits to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, as filed with the
Securities and Exchange Commission on November 8, 1996.
(5) Incorporated by reference to Exhibits to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997, as filed with the
Securities and Exchange Commission on November 5, 1997.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
12
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 20, 1998
R-B RUBBER PRODUCTS, INC.
By:/S/ RONALD L. BOGH
---------------------
Ronald L. Bogh
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in their capacities indicated on the March 20, 1998:
SIGNATURE TITLE
/S/RONALD L. BOGH Chairman of the Board, President
- ----------------- and Chief Executive Officer
Ronald L. Bogh (Principal Executive Officer)
/S/BRIAN C. ALLEN Chief Financial Officer and Treasurer
- ----------------- (Principal Financial and Accounting Officer)
Brian C. Allen
/S/DOUGLAS C. NELSON Vice Chairman of the Board
- --------------------
Douglas C. Nelson
/S/JERRY K. BROWN Director
- -----------------
Jerry K. Brown
/S/EDWARD DERAEVE Director
- -----------------
Edward DeRaeve
/S/JAMES V. REIMANN Director
- -------------------
James V. Reimann
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
R-B Rubber Products, Inc.
McMinnville, Oregon
We have audited the accompanying consolidated balance sheets of R-B Rubber
Products, Inc., as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R-B Rubber Products, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
Morrison & Liebswager, P.C.
Certified Public Accountants
Dated: March 18, 1998
F-1
<PAGE>
R-B RUBBER PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $291,990 $26,547
Accounts receivable, net of allowances of $6,216 and $4,898 910,480 851,976
Inventories, net 692,073 385,242
Prepaid expenses and other 37,738 35,132
Deferred tax asset - 161,027
---------- ----------
Total Current Assets 1,932,281 1,459,924
Property, Plant and Equipment, net of accumulated
depreciation and valuation allowance of $1,727,139
and $1,270,240 4,066,562 4,291,178
Other Assets 276,693 202,019
---------- ----------
Total Assets $ 6,275,536 $5,953,121
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable - bank $ - $88,000
Notes payable - other - 112,770
Accounts payable 404,210 344,659
Payroll and related benefits payable 68,747 54,583
Interest payable 4,363 10,485
Income taxes payable 19,180 -
Current portion of long-term debt 134,507 121,635
---------- ----------
Total Current Liabilities 631,007 732,132
Long-Term Debt, net of current portion 772,866 891,493
Deferred Income Taxes 238,034 224,010
Shareholders' Equity:
Common stock, no par value, 20,000,000 shares authorized;
2,172,500 shares issued and outstanding 3,797,442 3,797,442
Additional paid-in capital 282,849 282,849
Retained earnings 553,338 25,195
---------- ----------
Total Shareholders' Equity 4,633,629 4,105,486
---------- ----------
Total Liabilities and Shareholders' Equity $ 6,275,536 $5,953,121
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
R-B RUBBER PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---------- ----------
<S> <C> <C>
Net sales $7,445,403 $5,293,835
Cost of sales 4,625,670 3,455,172
---------- ----------
Gross profit 2,819,733 1,838,663
---------- ----------
Operating expenses:
Selling 680,820 509,772
General and administrative 1,167,019 1,040,979
---------- ----------
1,847,839 1,550,751
---------- ----------
Operating income 971,894 287,912
---------- ----------
Other income (expense)
Interest income 1,344 807
Interest expense (125,113) (116,738)
Loss on sale of equipment (5) (3,667)
Other income, net 8,054 4,420
---------- ----------
(115,720) (115,178)
---------- ----------
Income before benefit from income taxes 856,174 172,734
Income tax (expense) benefit (328,031) 91,511
---------- ----------
Net income $528,143 $264,245
---------- ----------
Basic net income per share $0.24 $0.12
---------- ----------
---------- ----------
Shares used in basic net income per share 2,172,500 2,172,500
---------- ----------
---------- ----------
Diluted net income per share $0.24 $0.12
---------- ----------
---------- ----------
Shares used in diluted net income per share 2,223,164 2,186,500
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
R-B RUBBER PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
---------------------- Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
--------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,172,500 $3,797,442 $ 282,849 $(239,050) $3,841,241
Net income - - - 264,245 264,245
--------- ---------- --------- --------- -------------
Balance at December 31, 1996 2,172,500 3,797,442 282,849 25,195 4,105,486
Net income - - - 528,143 528,143
--------- ---------- --------- --------- -------------
Balance at December 31, 1997 2,172,500 3,797,442 282,849 553,338 4,633,629
--------- ---------- --------- --------- -------------
--------- ---------- --------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
R-B RUBBER PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $528,143 $264,245
Adjustments to reconcile net income (loss) to net cash
flows provided by (used in) operating activities:
Depreciation and amortization 514,197 413,337
(Gain) loss on sale/retirement of equipment (5) 3,667
Deferred income taxes 175,051 (91,511)
(Increase) decrease in:
Accounts receivable, net (58,504) (432,201)
Inventories, net (306,831) (19,254)
Income taxes receivable - 124,565
Prepaid expenses and other (2,606) 30,042
Increase (decrease) in:
Income taxes payable 19,180 -
Accounts payable 59,551 (64,640)
Payroll and related benefits payable 14,164 23,788
Interest payable (6,122) 3,047
---------- ----------
Net cash provided by (used in) operating activities 936,218 255,085
Cash flows from investing activities:
Payments for purchase of property and equipment (1,297,732) (694,856)
Proceeds from sale of fixed assets 5 158,272
Other assets (74,674) (48,551)
---------- ----------
Net cash used in investing activities (1,372,401) (585,135)
Cash flows from financing activities:
Proceeds from (payments on) short-term debt, net (200,770) 200,770
Proceeds from long-term debt 16,000 96,753
Payments on long-term debt (121,755) (54,219)
Proceeds from sale/leaseback transaction 1,008,151 -
---------- ----------
Net cash provided by financing activities 701,626 243,304
Increase (decrease) in cash and cash equivalents 265,443 (86,746)
Cash and cash equivalents:
Beginning of period 26,547 113,293
---------- ----------
End of period $291,990 $26,547
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
R-B RUBBER PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. R-B Rubber Products, Inc. (the "Company") was incorporated in
Oregon in September 1986. The Company is a vertically integrated rubber
recycler that manufactures and sells high quality, durable rubber protective
surfaces for a variety of applications within the transportation,
agriculture, sports and fitness, playground and manufacturing industries
throughout the U.S.
The accompanying consolidated financial statements include the accounts of
the Company and all of its previously wholly owned subsidiary, Strata
Surfacing, Inc. Intercompany transactions and balances have been eliminated
in consolidation. On July 1, 1997, the Company divested itself of its 100
percent owned subsidiary, Strata Surfacing, Inc. There was no gain or loss
associated with this transaction.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Management believes that the estimates used are
reasonable.
REVENUE RECOGNITION. Revenue from the sale of products is recognized at time
of shipment to the customer.
CONCENTRATIONS OF RISK AND SIGNIFICANT CUSTOMERS. Approximately 22 percent of
the Company's net sales were to one customer during 1997. Such customer
represented 27 percent of the accounts receivable balance at December 31,
1997. Two other customers represented approximately 14 percent and 8 percent
of the accounts receivable balance at December 31, 1997. Balances
outstanding at December 31, 1997 for all customers indicated above were
collected in the first quarter of 1998. Approximately 12 percent of the
Company's 1997 sales were derived from sales to ten major horse trailer
manufacturers in the U.S.
Approximately 16 percent of the Company's net sales were to one customer
during 1996. Such customer represented 32 percent of the accounts receivable
balance at December 31, 1996. Three other customers represented
approximately 5 percent, 10 percent and 11 percent of the accounts receivable
balance at December 31, 1996. Approximately 17 percent of the Company's 1996
sales were derived from sales to ten major horse trailer manufacturers in the
U.S.
The Company invests its excess cash with high credit quality financial
institutions, which bear minimal risk. The Company has not experienced any
losses on its investments.
F-6
<PAGE>
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of cash on hand
and highly liquid investments with maturities at the date of purchase of 90
days or less. Frequently, the Company has had funds in excess of the FDIC
insurance limits on deposit in an FDIC-insured bank. The bank is large and
the exposure is considered nominal.
INVENTORIES. Inventories are stated at lower of cost, using average costs,
which approximates the first-in, first-out (FIFO) method, or market, and
include materials, labor and manufacturing overhead. Unsalable or unusable
items are carried at scrap value and reprocessed.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Expenditures for maintenance and repairs are charged to expense as
incurred, whereas major improvements are capitalized as additions. Research
and development costs relating to processing and production equipment are
capitalized. Depreciation is provided using the straight-line method over
the estimated useful lives of the applicable assets as follows:
Buildings and Improvements: 30 years
Machinery and Transportation Equipment: 5 - 14 years
Office Furniture and Equipment: 3 - 7 years
RESEARCH AND DEVELOPMENT. Included in general and administrative expense are
expenditures for research and development of $71,177 and $13,403 for the
years ended December 31, 1997 and 1996, respectively.
ADVERTISING COSTS. Advertising costs are expensed when incurred. Total
advertising costs expensed were $59,159 and $59,562 for the years ended
December 31, 1997 and 1996, respectively.
INCOME TAXES. Deferred income taxes result from temporary differences in the
reporting of certain expenses (principally depreciation and research and
development) for financial and tax purposes.
NET INCOME PER SHARE. Beginning December 31, 1997, basic earnings per share
(EPS) and diluted EPS are computed using the methods prescribed by Statement
of Financial Accounting Standard No. 128, EARNINGS PER SHARE (SFAS 128).
Basic EPS is calculated using the weighted average number of common shares
outstanding for the period and diluted EPS is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Prior period amounts have been restated to conform with the
presentation requirements of SFAS 128.
F-7
<PAGE>
Following is a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996
- ----------------------------- ------------------------------ --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to Common
Shareholders 528,143 2,172,500 $ 0.24 $ 264,245 2,172,500 $ 0.12
------- -------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 62,843 - 14,205
-------------------- ----------------------
DILUTED EPS
Income available to Common
Shareholders 528,143 2,235,843 $ 0.24 $ 264,245 2,186,705 $ 0.12
------- -------
</TABLE>
2. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts at December 31, 1997 and 1996 was $6,216
and $4,898, respectively. Bad debt expense was $61 and $15,902 for the years
ended December 31, 1997 and 1996, respectively.
3. INVENTORIES
At December 31, inventories by major classification consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw Materials $ 97,325 $ 64,080
Finished Goods 575,435 312,962
Other 19,313 8,200
-------- --------
$ 692,073 $ 385,242
-------- --------
-------- --------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
At December 31, property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 167,750 $ 167,750
Buildings and improvements 783,442 682,418
Machinery and transportation equipment 4,605,969 4,466,875
Office furniture and equipment 196,434 126,557
------------ ------------
5,753,595 5,443,600
Less - accumulated depreciation (1,727,139) (1,219,775)
------------ ------------
4,026,456 4,223,825
Less - valuation allowance on equipment held for
resale - (50,465)
Construction in progress 40,106 117,818
------------ ------------
$ 4,066,562 $ 4,291,178
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was $514,197 and $413,337 for the years ended December
31, 1997 and 1996, respectively. Amounts included above recorded as capital
leases totaled $64,711 at December 31, 1997 and 1996.
F-8
<PAGE>
5. CREDIT FACILITIES AND OTHER SHORT-TERM DEBT
The Company has a $750,000 operating line-of-credit with a commercial bank
which expires August 1, 1998, with interest at .25 percent over the bank's
prime rate (8.75% at December 31, 1997), collateralized by accounts
receivable, inventory and equipment. There was no outstanding balance on this
line-of-credit at December 31, 1997.
Under the terms of the line-of-credit agreement, the Company is required to
maintain the following covenants, to be measured annually at fiscal year end:
Minimum current ratio of 1.10:1
EBITDA/Interest + CMLTD ratio of no less than 1.75:1
Minimum tangible net worth $4,000,000
At December 31, 1997, the Company was in compliance with all of the above
covenants.
6. LONG-TERM DEBT
Obligations under long-term debt arrangements at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Bank term note (converted equipment line-of-credit) at
8.98 percent, payable in 59 payments of $8,555,
including interest, through September 2001,
collateralized by accounts receivable, inventory and
equipment $ 332,447 $ 401,675
Bank term note at 8.58 percent, payable in monthly
Amounts of $505, including interest, through December
5, 2000, collateralized by equipment 16,000 -
Real estate mortgage at 9.24 percent interest, payable in
monthly amounts of $6,895, including interest, through
October 5, 2005, collateralized by land and buildings 514,912 547,990
Capital leases payable in a monthly amount of $2,011
through November 12, 2000, collateralized by
equipment
44,014 63,463
------------ ------------
907,373 1,013,128
Less - current portion 134,507 121,635
------------ ------------
Long-term debt, net of current portion $ 772,866 $ 891,493
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
Principal payments under long-term debt obligations for the next five years
and thereafter at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 134,507
1999 147,162
2000 148,948
2001 131,213
2002 53,017
Thereafter 292,526
---------
$ 907,373
---------
---------
</TABLE>
7. OPERATING LEASES
During 1995, the Company entered into a tax credit sale-leaseback. The
Company sold certain equipment, which qualifies for State of Oregon Business
Energy Tax Credits, to a commercial bank and leased the property back net of
related credits. The Company received $549,160 proceeds from the sale. It is
leasing the property back for 84 monthly payments of $6,330 each beginning
December 10, 1995 and terminating November 10, 2002. The lease is categorized
as an operating lease. The Company has an option to reacquire the property at
60 months into the lease for a payment in the amount of $176,778, the
estimated fair market value at that time.
During 1997, the company entered into a tax credit sale-leaseback. The
Company sold certain equipment, which qualifies for State of Oregon Business
Energy Tax Credits, to a commercial bank and leased the property back net of
related credits. The Company received $1,008,151 of proceeds from the sale.
It is leasing the property back for 84 monthly payments of $11,218 each,
beginning January 1, 1998 and terminating November 10, 2002. The lease is
categorized as an operating lease. The Company has an option to reacquire
the property at 72 months into the lease for a payment in the amount of
$131,655, the estimated fair market value at that time.
The Company also leases certain vehicles and equipment under operating leases
expiring in various years through 1998.
Minimum lease payments for the next five years and thereafter under
non-cancelable operating leases having remaining terms in excess of one year
at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 215,826
1999 210,570
2000 210,570
2001 210,570
2002 204,240
Thereafter 269,220
------------
$ 1,320,996
------------
------------
</TABLE>
Total rental expense related to operating leases was $89,598 and $96,086 for
the years ended December 31, 1997 and 1996, respectively.
F-10
<PAGE>
8. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires that
deferred taxes be established for all temporary differences between the book and
tax basis of assets and liabilities.
The provision for (benefit from) income taxes is as follows:
<TABLE>
December 31, 1997 1996
- ------------ ---------- ----------
<S> <C> <C>
Current:
Federal $ 144,744 $ (161,027)
State 7,052 -
---------- ----------
151,796 (161,027)
Deferred:
Federal 175,089 69,516
State 1,146 -
---------- ----------
176,235 69,516
---------- ----------
$ 328,031 $ (91,511)
---------- ----------
---------- ----------
</TABLE>
A reconciliation between the statutory federal income tax rate and the effective
federal income tax rate is as follows:
<TABLE>
December 31, 1997 1996
- ------------ ------- -------
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
State taxes, net of federal income tax benefit 4.4 6.6
Valuation allowance - (93.5)
Other (0.1) -
------- -------
Effective tax rate 38.3% (52.9)%
------- -------
------- -------
</TABLE>
At December 31, 1997, the Company recognized current tax benefits to the extent
of tax attribute carryovers available.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Total deferred tax
assets at December 31, 1997 and 1996 were zero and $161,029, respectively.
Total deferred tax liabilities at December 31, 1997 and 1996 were $238,034 and
$224,010, respectively. The Company does not have a valuation allowance against
its deferred tax benefits based on anticipated future income sufficient to
realize such benefits. Individually significant components of the Company's
deferred tax assets and liabilities at December 31 were as follows:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Loss and credit carryforwards $ - $ 143,255
Idle asset valuation allowance - 17,158
Tax depreciation greater than book depreciation (134,408) (109,053)
Capitalized research and development expenses (103,626) (114,957)
</TABLE>
F-11
<PAGE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
December 31, 1997 1996
- ------------ -------- --------
<S> <C> <C>
Cash paid during the period for interest $131,235 $134,308
Cash paid during the period for income taxes 133,800 -
Equipment acquired under capital lease - 22,675
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
During 1995, the Company entered into an agreement to purchase tire derived
rubber products in chip form. The commitment called for minimum purchases of 400
standard tons of product per month beginning February 1, 1996 through December
31, 1997. The minimum committed purchase totaled $14,400 monthly. Total
purchases under this agreement amounted to $175,865 and $101,385 during the
years ended December 31, 1997 and 1996, respectively.
11. SHAREHOLDERS' EQUITY
WARRANTS. At December 31, 1997 the Company had outstanding warrants to purchase
95,000 shares of the Company's Common Stock at $5.10 per share which expire May
9, 2000.
STOCK OPTION PLAN. In March 1995, the Company adopted its 1995 stock option
plan (the "1995 Plan"). The 1995 Plan provides for the issuance of incentive
stock options to employees of the Company and non-statutory stock options to
employees, directors and consultants of the Company. Options granted generally
vest over a three-year period, but may vest over a different period at the
discretion of the Plan Administrator. Options granted under the 1995 Plan are
typically exercisable for a period of 7 years from the date of grant. The
exercise price of options granted under the 1995 Plan must be equal to or
greater than the fair market value of the Company's Common Stock on the date of
grant for incentive stock option under Section 422 of the Code and not less than
85 percent of the fair market value on the date of grant for non-statutory stock
options. Subject to shareholder approval, the Board of Directors of the Company
approved an additional 150,000 shares of the Company's Common Stock to be
reserved under the 1995 Plan. Assuming shareholder approval of the increase in
the number of shares reserved under the 1995 Plan, at December 31, 1997, the
Company had 300,000 shares of Common Stock reserved for future issuance under
the 1995 Plan. The exercise price of all options granted was equal to the market
price of the stock on the grant date.
F-12
<PAGE>
Activity under the 1995 Plan is summarized as follows:
<TABLE>
Weighted
Shares Shares Average
Available for Subject to Exercise Price
Grant Options Per Share
------------- ---------- --------------
<S> <C> <C> <C>
Balances, December 31, 1995 115,000 35,000 $ 3.00
Options granted (121,500) 121,500 1.80
Options canceled 53,000 (53,000) 3.02
Options exercised - - -
------------- ---------- --------------
Balances, December 31, 1996 46,500 103,500 1.58
Additional shares reserved 150,000 - -
Options granted (101,000) 101,000 3.68
Options canceled - - -
Options exercised - - -
------------- ---------- --------------
Balances, December 31, 1997 95,500 204,500 $ 2.61
------------- ---------- --------------
------------- ---------- --------------
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123. During 1995, the Financial
Accounting Standards Board issued SFAS 123 which defines a fair value based
method of accounting for an employee stock option and similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by APB 25. Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1997 and 1996 using the Black-Scholes
option pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
<TABLE>
For the Year Ended December 31, 1997 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate 6% 6%
Expected dividend yield 0% 0%
Expected lives 2.04 years 1.77 years
Expected volatility 62.8% 33%
</TABLE>
F-13
<PAGE>
Using the Black-Scholes methodology, the total value of options granted during
1997 and 1996 was $250,927 and $17,487, respectively, which would be amortized
on a pro forma basis over the vesting period of the options. The weighted
average fair value of options granted during 1997 and 1996 was $2.48 and $2.13,
respectively. If the Company had accounted for its stock-based compensation
plans in accordance with SFAS 123, the Company's net income and net income per
share would approximate the pro forma disclosures below:
<TABLE>
For the Year Ended December 31, 1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
As Pro As Pro
Reported Forma Reported Forma
--------- --------- --------- ---------
Net income $ 528,143 $ 511,253 $ 264,245 $ 253,442
Net income per share - basic $ 0.24 $ 0.23 $ 0.12 $ 0.12
Net income per share - diluted $ 0.24 $ 0.23 $ 0.12 $ 0.12
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
- ------------------------------------------ -----------------------------------
Weighted
Average Weighted Number of Weighted
Range of Number Remaining Average Shares Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.50 - 1.75 103,500 1.42 $ 1.58 61,500 $ 1.58
1.875 - 3.75 101,000 2.04 3.68 5,000 3.75
- ------------- ----------- ----------- -------- ----------- --------
$ 1.50 - 3.75 204,500 1.72 $ 2.61 66,500 $ 1.74
- ------------- ----------- ----------- -------- ----------- --------
- ------------- ----------- ----------- -------- ----------- --------
</TABLE>
At December 31, 1996 options to purchase 53,500 shares of the Company's Common
Stock were exercisable at an average exercise price of $1.57.
12. RELATED PARTY TRANSACTIONS
PLANT IMPROVEMENTS. During 1997 and 1996 the Company paid $120,675 and
$162,582, respectively, to a contracting firm owned by Mr. DeRaeve, a Director
of the Company, for capital improvements to its plant.
LEGAL SERVICES. During 1997 and 1996, the Company paid Mr. Brown, a Director of
the Company, $1,589 and $3,207, respectively, for legal services provided.
All related party transactions were conducted at arms-length rates and
conditions.
F-14
<PAGE>
13. SUBSEQUENT EVENTS
In January 1998, the Company signed a Non-Competition, Price Guaranty and
Release Agreement (the "Agreement") with Mr. Doug Nelson, the Company's former
Chief Financial Officer. Mr. Nelson remains on the Board of Directors.
Pursuant to the Agreement, the Company is required to pay Mr. Nelson an amount
equal to the difference between the gross selling price per share of the
Company's Common Stock for up to 2,000 shares per month and $4.00 per share for
each share sold at less than $4.00 per share. The maximum amount that the
Company is obligated to pay Mr. Nelson is $59,000 in any given calendar year.
As of December 31, 1997, Mr. Nelson held 439,000 shares of the Company's Common
Stock.
In March 1998, the Company signed a non-binding letter of intent to acquire
certain assets and technology of Iowa Mat Company, Inc., a privately owned
company. If completed, the transaction will be funded through a combination of
cash and Common Stock of the Company and will be accounted for under the
purchase method of accounting.
F-15
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO THE R-B RUBBER PRODUCTS, INC.
1995 STOCK OPTION PLAN
The R-B Rubber Products, Inc. 1995 Stock Option Plan is hereby amended,
effective December 2, 1997, subject to shareholder approval, to revise the
share number reference in the second sentence of Section 3 to read "300,000
shares," instead of "150,000 shares."
In all other respects, the R-B Rubber Products, Inc. 1995 Stock Option Plan
shall remain the same.
<PAGE>
EXHIBIT 10.8
MODIFICATION AND/OR EXTENSION AGREEMENT
DATE: August 1, 1997
BORROWER: R-B RUBBER PRODUCTS, INC.
LENDER: KEYBANK NATIONAL ASSOCIATION
NOTE: Dated September 1, 1995, original principal amount of
$500,000.00.
Loan #: 121729-9501
FOR VALUE RECEIVED. Borrower and Lender hereby agree to modify the
above-referenced Loan and Promissory Note and/or Loan Agreement as follows:
1. MODIFICATION AND/OR EXTENSION PROVISIONS.
a. The maturity date of the loan is hereby extended to August 1, 1998.
b. The maximum loan amount that Borrower may borrow under the Loan
shall be increased to $750,000.00.
c. Effective as of August 1, 1997, the interest rate shall change to
a variable rate equal to The Lender's Announced Prime Rate (the
"Index") plus one quarter percent (0.025%) per annum. The rate
shall adjust daily, based on changes in the Index. Borrower
shall make monthly payments of accrued interest only, beginning
with the payment due on September 1, 1997, and continuing until
maturity, when all outstanding principal and interest must be
paid in full.
2. CONDITIONS. The modifications and/or extension described above are
subject to and conditioned upon Borrower's full satisfaction of all of
the following conditions on or before, August 1, 1997, time being of
the essence.
a. There shall be no uncured event of default under the Loan, nor
any event or condition which with notice or the passage of time
would be an event of default thereunder.
b. Borrower shall deliver to Lender a fully executed original of
this Loan Modification and/or Extension Agreement.
c. All expenses incurred by Lender in connection with this Agreement
(including without limitation, attorney fees, recording charges
for title policy update(s), escrow charges, costs of obtaining
updated or additional appraisal(s) or collateral valuations, if
required by Lender) shall be paid by borrower.
d. Borrower shall pay Lender in cash an extension fee of $1,875.00.
e. Modification of Financial Covenants and Ratios in Business Loan
Agreement dated, October 29, 1996. Borrower covenants and agrees
that while this Agreement is in effect, Borrower will: Maintain a
ratio of Current Assets to Current Liabilities in excess of 1.10
to 1.00 measured quarterly: Maintain a minimum Tangible Net
Worth of not less than $4,000,000.00, measured quarterly.
Additional Financial Covenant. Maintain a minimum
EBITDA/Interest + CMLTD ratio of 1.75 to 1.00 measured fiscal
year end. EBITDA is defined as earnings before interest, taxes,
depreciation and amortization. CMLTD is defined as current
maturities-long term debt, as stated in the last fiscal year end
financial statement, payable in the current year.
<PAGE>
3. GENERAL PROVISIONS. Except as modified above, all other provisions of
the Note and any other documents securing or relation to the Loan (the
"Loan Documents") remain in full force and effect. All security given
for the Loan and all guarantees of the Loan (as applicable) shall
continue in full force. Borrower warrants and represents to Lender
that it has full right, power and authority to enter into this
agreement and to perform all its obligations hereunder, and that all
information and material submitted to Lender in connection with this
modification are accurate and complete. Borrower warrants that no
default exists under the Loan Documents. Borrower reaffirms its
obligation to pay the Loan in full and reaffirms the validity and
enforceability of the Loan Documents, without set-off, counterclaim or
defense. Borrower acknowledges that:
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY A BANK
AFTER OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE
NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE
BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED
BY THAT BANK TO BE ENFORCEABLE.
KEYBANK NATIONAL ASSOCIATION BORROWER:
R-B RUBBER PRODUCTS, INC.
________________________________________
TOM CORRY Authorized Officer __________________________________
AUTHORIZED OFFICER
<PAGE>
EXHIBIT 10.10
MASTER EQUIPMENT LEASE AGREEMENT
THIS MASTER EQUIPMENT LEASE AGREEMENT dated as of May 12, 1997 is made
by and between KEYCORP LEASING LTD., a Delaware corporation with its
principal place of business at 54 State Street, Albany, New York 12207
("Lessor"), and R-B RUBBER PRODUCTS, INC., an Oregon corporation with its
principal place of business at 904 East 10th Avenue, McMinnville, OR 97128
("Lessee").
TERMS AND CONDITIONS OF LEASE
1. LEASE. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Equipment, subject to and upon the terms and conditions set
forth herein. Each Equipment Schedule shall constitute a separate and
enforceable lease incorporating all the terms and conditions of this Master
Equipment Lease Agreement as if such terms and conditions were set forth in
full in such Equipment Schedule. In the event that any term or condition of
any Equipment Schedule conflicts with or is inconsistent with any term or
condition of this Master Equipment Lease Agreement, the terms and conditions
of the Equipment Schedule shall govern.
2. DISCLAIMER OF WARRANTIES. LESSOR MAKES NO (AND SHALL NOT BE DEEMED
TO HAVE MADE ANY) WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN, OPERATION OR CONDITION
OF, OR THE QUALITY OF THE MATERIAL, EQUIPMENT OR WORKMANSHIP IN, THE
EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, THE
STATE OF TITLE THERETO OR ANY COMPONENT THERETO, THE ABSENCE OF LATENT OR
OTHER DEFECTS (WHETHER OR NOT DISCOVERABLE), AND LESSOR HEREBY DISCLAIMS THE
SAME; IT BEING UNDERSTOOD THAT THE EQUIPMENT IS LEASED TO LESSEE "AS IS" AND
ALL SUCH RISKS, IF ANY, ARE TO BE BORNE BY LESSEE. NO DEFECT IN, OR
UNFITNESS OF, THE EQUIPMENT, OR ANY OF THE OTHER FOREGOING MATTERS, SHALL
RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR OF ANY OTHER OBLIGATION
HEREUNDER. LESSEE HAS MADE THE SELECTION OF THE EQUIPMENT FROM THE SUPPLIER
BASED ON ITS OWN JUDGMENT AND EXPRESSLY DISCLAIMS ANY RELIANCE UPON ANY
STATEMENTS OR REPRESENTATIONS MADE BY LESSOR. LESSOR IS NOT RESPONSIBLE FOR
ANY REPAIRS, SERVICE, MAINTENANCE OR DEFECT IN THE EQUIPMENT OR THE OPERATION
THEREOF. IN NO EVENT SHALL LESSOR BE LIABLE FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES (WHETHER UNDER THE UCC OR OTHERWISE), INCLUDING,
WITHOUT LIMITATION, ANY LOSS, COST OR DAMAGE TO LESSEE OR OTHERS ARISING FROM
ANY OF THE FOREGOING MATTERS, INCLUDING, WITHOUT LIMITATION, DEFECTS,
NEGLIGENCE, DELAYS, FAILURE OF DELIVERY OR NON-PERFORMANCE OF THE EQUIPMENT.
ANY WARRANTY BY THE SUPPLIER IS HEREBY ASSIGNED TO LESSEE BY LESSOR WITHOUT
RECOURSE. SUCH WARRANTY SHALL NOT RELEASE LESSEE FROM ITS OBLIGATION TO
LESSOR TO PAY RENT, TO PERFORM ALL OTHER OBLIGATIONS HEREUNDER AND TO KEEP,
MAINTAIN AND SURRENDER THE EQUIPMENT IN THE CONDITION REQUIRED BY SECTIONS 12
AND 13 HEREOF. Lessee's execution and delivery of a Certificate of
Acceptance shall be conclusive evidence as between Lessor and Lessee that the
Items of Equipment described therein are in all of the foregoing respects
satisfactory to Lessee, and Lessee shall not assert any claim of any nature
whatsoever against Lessor based on any of the foregoing matters; PROVIDED,
HOWEVER, that nothing contained herein shall in any way bar, reduce or defeat
any claim that Lessee may have against the Supplier or any other person
(other than Lessor).
3. NON-CANCELABLE LEASE. THIS LEASE IS A NET LEASE AND LESSEE'S
OBLIGATION TO PAY RENT AND PERFORM ITS OBLIGATIONS HEREUNDER ARE ABSOLUTE,
IRREVOCABLE AND UNCONDITIONAL UNDER ANY AND ALL CIRCUMSTANCES WHATSOEVER AND
SHALL NOT BE SUBJECT TO ANY RIGHT OF SET OFF, COUNTERCLAIM, DEDUCTION,
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DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE AGAINST THE SUPPLIER, LESSOR OR
ANY OTHER PARTY. LESSEE SHALL HAVE NO RIGHT TO TERMINATE (EXCEPT AS
EXPRESSLY PROVIDED HEREIN) OR CANCEL THIS LEASE OR TO BE RELEASED OR
DISCHARGED FROM ITS OBLIGATION HEREUNDER FOR ANY REASON WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, DEFECTS IN, DESTRUCTION OF, DAMAGE TO OR
INTERFERENCE WITH ANY USE OF THE EQUIPMENT (FOR ANY REASON WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, WAR, ACT OF GOD, STRIKE OR GOVERNMENTAL
REGULATION), THE INVALIDITY, ILLEGALITY OR UNENFORCEABILITY (OR ANY
ALLEGATION THEREOF) OF THIS LEASE OR ANY PROVISION HEREOF, OR ANY OTHER
OCCURRENCE WHATSOEVER, WHETHER SIMILAR OR DISSIMILAR TO THE FOREGOING,
WHETHER FORESEEN OR UNFORESEEN.
4. DEFINITIONS. Unless the context otherwise requires, as used in this
Lease, the following terms shall have the respective meanings indicated below
and shall be equally applicable to both the singular and the plural forms
thereof:
(a) "APPLICABLE LAW" shall mean all applicable Federal, state,
local and foreign laws (including, without limitation, any Environmental Law,
industrial hygiene and occupational safety or similar laws), ordinances,
judgments, decrees, injunctions, writs and orders of any Governmental Authority
and rules, regulations, orders, licenses and permits of any Governmental
Authority.
(b) "APPRAISAL PROCEDURE" shall mean the following procedure for
obtaining an appraisal of the Fair Market Sales Value or the Fair Market Rental
Value. Lessor shall provide Lessee with the names of three independent
Appraisers. Within ten (10) business days thereafter, Lessee shall select one
of such Appraisers to perform the appraisal. The selected Appraiser shall be
instructed to perform its appraisal based upon the assumptions specified in the
definition of Fair Market Sales Value or Fair Market Rental Value, as
applicable, and shall complete its appraisal within twenty (20) business days
after such selection. Any such appraisal shall be final, binding and conclusive
on Lessee and Lessor and shall have the legal effect of an arbitration award.
Lessee shall pay the fees and expenses of the selected Appraiser.
(c) "APPRAISER" shall mean a person engaged in the business of
appraising property who has at least ten years' experience in appraising
property similar to the Equipment.
(d) "AUTHORIZED SIGNER" shall mean those officers of Lessee, set
forth on an incumbency certificate (in form and substance satisfactory to
Lessor) delivered by Lessee to Lessor, who are authorized and empowered to
execute this Lease, the Equipment Schedules and all other documents the
execution of which is contemplated hereby.
(e) "CERTIFICATE OF ACCEPTANCE" shall mean a certificate of
acceptance, in form and substance satisfactory to Lessor, executed and
delivered by Lessee in accordance with Section 7 hereof indicating, among
other things, that the Equipment described therein has been accepted by
Lessee for all purposes of this Lease.
(f) "DEFAULT" shall mean any event or condition which, with the
passage of time or the giving of notice, or both, would constitute an Event of
Default.
(g) "ENVIRONMENTAL LAW" shall mean any federal, state, or local
statute, law, ordinance, code, rule, regulation, or order or decree
regulating, relating to or imposing liability upon a person in connection
with the use, release or disposal of any hazardous, toxic or dangerous
substance, waste, or material as same may relate to the Equipment or its
operation.
(h) "EQUIPMENT" shall mean an item or items of personal property
designated from time to time by Lessee which are described on an Equipment
Schedule and which are being or will be leased by Lessee pursuant to this Lease,
together with all replacement parts, additions and accessories incorporated
therein or affixed thereto.
(i) "EQUIPMENT GROUP" shall consist of all Items of Equipment
listed on a particular Equipment Schedule.
(j) "EQUIPMENT LOCATION" shall mean the location of the Equipment,
as set forth on an Equipment Schedule, or such other location (approved by
Lessor) as Lessee shall from time to time specify in writing.
(k) "EQUIPMENT SCHEDULE" shall mean each equipment lease schedule
from time to time executed by Lessor and Lessee with respect to an Equipment
Group, pursuant to and incorporating by reference all of the terms and
conditions of this Master Equipment Lease Agreement.
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<PAGE>
(l) "EVENT OF DEFAULT" shall have the meaning specified in Section
22 hereof.
(m) "FAIR MARKET RENTAL VALUE" or "FAIR MARKET SALE VALUE" shall
mean the value of each Item of Equipment for lease or sale, unless otherwise
specified herein as determined between Lessor and Lessee, or, if Lessor and
Lessee are unable to agree, pursuant to the Appraisal Procedure, which would be
obtained in an arms-length transaction between an informed and willing lessor or
seller (under no compulsion to lease or sell) and an informed and willing lessee
or buyer (under no compulsion to lease or purchase). In determining the Fair
Market Rental Value or Fair Market Sale Value of the Equipment, (a) such Fair
Market Rental Value or Fair Market Sale Value shall be calculated on the
assumption that the Equipment is in the condition and repair required by
Sections 12 and 13 hereof, and (b) there shall be excluded from the calculation
thereof the value of any upgrades and attachments made pursuant to Section 14
hereof in which the Lessor does not own an interest; PROVIDED, HOWEVER, that,
unless otherwise provided in such Section 22, for purposes of Section 22 of the
Lease, Fair Market Sale Value of the Equipment shall be determined based upon
the actual facts and circumstances then prevailing without regard to the
assumptions in clause (a) above.
(n) "GOVERNMENTAL ACTION" shall mean all authorizations, consents,
approvals, waivers, filings and declarations of any Governmental Authority,
including, without limitation, those environmental and operating permits
required for the ownership, lease, use and operation of the Equipment.
(o) "GOVERNMENTAL AUTHORITY" shall mean any foreign, Federal,
state, county, municipal or other governmental authority, agency, board or
court.
(p) "GUARANTOR" shall mean any guarantor of Lessee's obligations
hereunder.
(q) "ITEM OF EQUIPMENT" shall mean each item of the Equipment.
(r) "LATE PAYMENT RATE" shall mean an annual interest rate equal
to the lesser of 18% or the maximum interest rate permitted by Applicable Law.
(s) "LEASE", "HEREOF", "HEREIN" and "HEREUNDER" shall mean, with
respect to an Equipment Group, this Master Equipment Lease Agreement and the
Equipment Schedule on which such Equipment Group is described, including all
addenda attached thereto and made a part thereof.
(t) "LIEN" shall mean all mortgages, pledges, security interests,
liens, encumbrances, claims or other charges of any kind whatsoever.
(u) "PURCHASE AGREEMENT" shall mean any purchase agreement or
other contract entered into between the Supplier and Lessee for the acquisition
of the Equipment to be leased hereunder.
(v) "RELATED EQUIPMENT SCHEDULE" shall have the meaning set forth
in Section 27 hereof.
(w) "RENEWAL NOTICE" shall have the meaning set forth in Section
32 hereof.
(x) "RETURN NOTICE" shall have the meaning set forth in Section 13
hereof.
(y) "RENT" shall mean the periodic rental payments due hereunder
for the leasing of the Equipment, as set forth on the Equipment Schedules, and,
where the context hereof requires, all such additional amounts as may from time
to time be payable under any provision of this Lease.
(z) "RENT COMMENCEMENT DATE" shall mean, with respect to an
Equipment Group, the date on which Lessor disburses funds for the purchase of
such Equipment Group, as determined by Lessor in its sole discretion.
(aa) "RENT PAYMENT DATE" with respect to an Equipment Group, shall
have the meaning set forth in the Equipment Schedule associated therewith.
(ab) "STIPULATED LOSS VALUE" shall mean, as of any Rent Payment
Date and with respect to an Item of Equipment, the amount determined by
multiplying the Total Cost for such Item of Equipment by the percentage
specified in the applicable Stipulated Loss Value Supplement opposite such Rent
Payment Date.
(ac) "STIPULATED LOSS VALUE SUPPLEMENT" with respect to an
Equipment Group, shall have the meaning set forth in the Equipment Schedule
associated therewith.
(ad) "SUPPLIER" shall mean the manufacturer or the vendor of the
Equipment, as set forth on each Equipment Schedule.
(ae) "TERM" shall mean the Initial Term, as defined in Section 8
hereof, and any Renewal Term, as defined in Section 8 hereof.
(af) "TOTAL COST" shall mean, with respect to an Item of Equipment,
(1) the acquisition cost of such Item of Equipment (including Lessor's
capitalized costs), as set forth on the
3
<PAGE>
Equipment Schedule on which such Item of Equipment is described, or (2) if no
such acquisition cost is specified, the Supplier's invoice price for such
Item of Equipment plus Lessor's capitalized costs, or (3) if no such
acquisition cost is specified and no such invoice price is obtainable, an
allocated price for such Item of Equipment based on the Total Cost of all
Items of Equipment set forth on the Equipment Schedule on which such Item of
Equipment is described, as determined by Lessor in its sole discretion.
5. SUPPLIER NOT AN AGENT. LESSEE UNDERSTANDS AND AGREES THAT (i)
NEITHER THE SUPPLIER, NOR ANY SALES REPRESENTATIVE OR OTHER AGENT OF THE
SUPPLIER, IS (1) AN AGENT OF LESSOR OR (2) AUTHORIZED TO MAKE OR ALTER ANY
TERM OR CONDITION OF THIS LEASE, AND (ii) NO SUCH WAIVER OR ALTERATION SHALL
VARY THE TERMS OF THIS LEASE UNLESS EXPRESSLY SET FORTH HEREIN.
6. ORDERING EQUIPMENT. Lessee has selected and ordered the Equipment
from the Supplier and, if appropriate, has entered into a Purchase Agreement
with respect thereto. Lessor shall accept an assignment from Lessee of
Lessee's rights, but none of Lessee's obligations, under any such Purchase
Agreement. Lessee shall arrange for delivery of the Equipment so that it can
be accepted in accordance with Section 7 hereof. If an Item of Equipment is
subject to an existing Purchase Agreement between Lessee and the Supplier,
Lessee warrants that such Item of Equipment has not been delivered to Lessee
as of the date of the Equipment Schedule applicable thereto. If Lessee
causes the Equipment to be modified or altered, or requests any additions
thereto prior to the Rent Commencement Date, Lessee (i) acknowledges that any
such modification, alteration or addition to an Item of Equipment may affect
the Total Cost, taxes, purchase and renewal options, if any, Stipulated Loss
Value and Rent with respect to such Item of Equipment, and (ii) hereby
authorizes Lessor to adjust such Total Cost, taxes, purchase and renewal
options, if any, Stipulated Loss Value and Rent as appropriate. Lessee
hereby authorizes Lessor to complete each Equipment Schedule with the serial
numbers and other identification data of the Equipment Group associated
therewith, as such data is received by Lessor.
7. DELIVERY AND ACCEPTANCE. Upon acceptance for lease by Lessee of any
Equipment delivered to Lessee and described in any Equipment Schedule, Lessee
shall execute and deliver to Lessor a Certificate of Acceptance. LESSOR SHALL
HAVE NO OBLIGATION TO ADVANCE FUNDS FOR THE PURCHASE OF THE EQUIPMENT UNLESS AND
UNTIL LESSOR SHALL HAVE RECEIVED A CERTIFICATE OF ACCEPTANCE RELATING THERETO
EXECUTED BY LESSEE. Such Certificate of Acceptance shall constitute Lessee's
acknowledgment that such Equipment (a) was received by Lessee, (b) is
satisfactory to Lessee in all respects and is acceptable to Lessee for lease
hereunder, (c) is suitable for Lessee's purposes, (d) is in good order, repair
and condition, (e) has been installed and operates properly, and (f) is subject
to all of the terms and conditions of this Lease (including, without limitation,
Section 2 hereof).
8. TERM; SURVIVAL. With respect to any Item of Equipment, unless
otherwise specified thereon, the initial term of this Lease (the "Initial Term")
shall commence on the date on which such Item of Equipment is delivered to
Lessee, and, unless earlier terminated as provided herein, shall expire on the
final Rent Payment Date for such Item of Equipment. With respect to an Item of
Equipment, any renewal term of this Lease (individually, a "Renewal Term"), as
contemplated hereby, shall commence immediately upon the expiration of the
Initial Term or any prior Renewal Term, as the case may be, and, unless earlier
terminated as provided herein, shall expire on the date on which the final
payment of Rent is due and paid hereunder. All obligations of Lessee hereunder
shall survive the expiration, cancellation or other termination of the Term
hereof.
9. RENT. With respect to Each Item of Equipment, Lessee shall pay the
Rent set forth on the Equipment Schedule applicable to such Item of Equipment,
commencing on the Rent Commencement Date, and, unless otherwise set forth on
such Equipment Schedule, on the same day of each payment period thereafter for
the balance of the Term. Rent shall be due whether or not Lessee has received
any notice that such payments are due. All Rent shall be paid to Lessor at its
address set forth on the Equipment Schedule, or as otherwise directed by Lessor
in writing.
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<PAGE>
10. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to the
Equipment Location and shall not be removed therefrom without Lessor's prior
written consent. Lessor shall have the right to enter upon the Equipment
Location and inspect the Equipment at any reasonable time. Lessor may, without
notice to Lessee, remove the Equipment if the Equipment is, in the opinion of
Lessor, being used beyond its capacity or is in any manner improperly cared for,
abused or misused. At Lessor's request, Lessee shall affix labels stating that
the Equipment is owned by Lessor permanently in a prominent place on the
Equipment and shall keep such labels in good repair and condition.
11. USE; ALTERATIONS. Lessee shall use the Equipment lawfully and only in
the manner for which it was designed and intended and so as to subject it only
to ordinary wear and tear. Lessee shall comply with all Applicable Law. Lessee
shall immediately notify Lessor in writing of any existing, pending or
threatened investigation, inquiry, claim or action by any Governmental Authority
in connection with any Applicable Law or Governmental Action which could
adversely affect the Equipment or this Lease. Lessee, at its own expense, shall
make such alterations, additions or modifications or improvements to the
Equipment as may be required from time to time to meet the requirements of
Applicable Law or Governmental Action. Except as otherwise permitted herein,
Lessee shall not make any alterations, additions, modifications or improvements
to the Equipment without Lessor's prior written consent.
12. REPAIRS AND MAINTENANCE. Lessee, at Lessee's own cost and expense,
shall (a) keep the Equipment in good repair, good operating condition and
working order and in compliance with the manufacturer's specifications, and
(b) enter into and keep in full force and effect during the Term hereof a
maintenance agreement with the manufacturer of the Equipment, or a
manufacturer-approved maintenance organization, to maintain, service and
repair the Equipment so as to keep the Equipment in as good operating
condition and working order as it was when it first became subject to this
Lease and in compliance with the manufacturer's specifications. Upon
Lessor's request, Lessee shall furnish Lessor with an executed copy of any
such maintenance agreement. An alternate source of maintenance may be used
by Lessee with Lessor's prior written consent. Lessee, at its own cost and
expense and within a reasonable period of time, shall replace any part of any
Item of Equipment that becomes worn out, lost, stolen, destroyed, or
otherwise rendered permanently unfit or unavailable for use (whether or not
such replacement is covered by the aforesaid maintenance agreement), with a
replacement part of the same manufacture, value, remaining useful life and
utility as the replaced part immediately preceding the replacement (assuming
that such replaced part is in the condition required by this Lease). Such
replacement part shall be free and clear of all Liens. Notwithstanding the
foregoing, this paragraph shall not apply to any Loss or Damage (as defined
in Section 16 hereof) of any Item of Equipment.
13. RETURN OF EQUIPMENT. Upon the expiration (subject to Section 32
hereof and except as otherwise provided in an Equipment Schedule) or earlier
termination of this Lease, Lessee, at its sole expense, shall return the
Equipment to Lessor by delivering such Equipment F.A.S. or F.O.B. to such
location or such carrier (packed for shipping) as Lessor shall specify. Lessee
agrees that the Equipment, when returned, shall be in the condition required by
Section 12 hereof. All components of the Equipment shall have been properly
serviced, following the manufacturer's written operating and servicing
procedures, such that the Equipment is eligible for a manufacturer's standard,
full service maintenance contract without Lessor's incurring any expense to
repair or rehabilitate the Equipment. If, in the opinion of Lessor, any Item of
Equipment fails to meet the standards set forth above, Lessee agrees to pay on
demand all costs and expenses incurred in connection with repairing such Item of
Equipment and restoring it so as to meet such standards, assembling and
delivering such Item of Equipment. Lessee shall give Lessor ninety (90) days
written notice (the "Return Notice") that Lessee is returning the Equipment as
provided for above. If Lessee fails to return any Item of Equipment as required
hereunder, then, all of Lessee's obligations under this Lease (including,
without limitation, Lessee's obligation to pay Rent for such Item of Equipment
at the rental then applicable under this Lease) shall continue in full force and
effect until such Item of Equipment shall have been returned in the condition
required hereunder.
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14. EQUIPMENT UPGRADES/ATTACHMENTS. In addition to the requirements of
Section 11 hereof, Lessee, at its own expense, may from time to time add or
install upgrades or attachments to the Equipment during the Term; PROVIDED, that
such upgrades or attachments (a) are readily removable without causing material
damage to the Equipment, (b) do not materially adversely affect the Fair Market
Sale Value, the Fair Market Rental Value, residual value, productive capacity,
utility or remaining useful life of the Equipment, and (c) do not cause such
Equipment to become "limited use property" within the meaning of Revenue
Procedure 76-30, 1976-2 C.B. 647 (or such other successor tax provision), as of
the applicable delivery date or the time of such upgrade or attachment. Any
such upgrades or attachments which are not required by Section 11 hereof and
which can be removed without causing damage to or adversely affecting the
condition of the Equipment, or reducing the Fair Market Sale Value, the Fair
Market Rental Value, residual value, productive capacity, utility or remaining
useful life of the Equipment shall remain the property of Lessee; and upon the
expiration or earlier termination of this Lease and provided that no Event of
Default exists, Lessee may, at its option, remove any such upgrades or
attachments and, upon such removal, shall restore the Equipment to the condition
required hereunder.
15. SUBLEASE AND ASSIGNMENT. (a) WITHOUT LESSOR'S PRIOR WRITTEN CONSENT,
LESSEE SHALL NOT (i) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE
OF THIS LEASE, THE EQUIPMENT OR ANY INTEREST THEREIN, OR (ii) SUBLET OR LEND THE
EQUIPMENT TO, OR PERMIT THE EQUIPMENT TO BE USED BY, ANYONE OTHER THAN LESSEE OR
LESSEE'S QUALIFIED EMPLOYEES.
(b) Lessor, at any time with or without notice to Lessee, may sell,
transfer, assign and/or grant a security interest in this Lease, any Equipment
Schedule or any Item of Equipment. In any such event, any such purchaser,
transferee, assignee or secured party shall have and may exercise all of
Lessor's rights hereunder with respect to the items to which any such sale,
transfer, assignment and/or security interest relates, and LESSEE SHALL NOT
ASSERT AGAINST ANY SUCH PURCHASER, TRANSFEREE, ASSIGNEE OR SECURED PARTY ANY
DEFENSE, COUNTERCLAIM OR OFFSET THAT LESSEE MAY HAVE AGAINST LESSOR. Lessee
acknowledges that no such sale, transfer, assignment and/or security interest
will materially change Lessee's duties hereunder or materially increase its
burdens or risks hereunder. Lessee agrees that upon written notice to Lessee of
any such sale, transfer, assignment and/or security interest, Lessee shall
acknowledge receipt thereof in writing and shall comply with the directions and
demands of Lessor's successor or assign.
16. LOSS OF OR DAMAGE TO EQUIPMENT. (a) Lessee shall bear the entire risk
of loss, theft, destruction, disappearance of or damage to any and all Items of
Equipment ("Loss or Damage") from any cause whatsoever during the Term hereof
until the Equipment is returned to Lessor in accordance with Section 13 hereof.
No Loss or Damage shall relieve Lessee of the obligation to pay Rent or of any
other obligation under this Lease.
(b) In the event of Loss or Damage to any Item of Equipment, Lessee,
at the option of Lessor, shall within thirty (30) days following such Loss or
Damage: (1) place such Item of Equipment in good condition and repair, in
accordance with the terms hereof; (2) replace such Item of Equipment with
replacement equipment (acceptable to Lessor) in as good condition and repair,
and with the same value, remaining useful economic life and utility, as such
replaced Item of Equipment immediately preceding the Loss or Damage (assuming
that such replaced Item of Equipment is the condition required by this Lease),
which replacement equipment shall be free and clear of all Liens; or (3) pay to
Lessor the sum of (i) all Rent due and owing hereunder with respect to such Item
of Equipment (at the time of such payment) plus (ii) the Stipulated Loss Value
as of the Rent Payment Date next following the date of such Loss or Damage with
respect to such Item of Equipment, as set forth on the Schedule applicable
thereto. Upon Lessor's receipt of the payment required under subsection (3)
above, Lessee shall be entitled to Lessor's interest in such Item of Equipment,
in its then condition and location, "as is" and "where is", without any
warranties, express or implied. If Lessee replaces the Item of Equipment
pursuant to subsection (b) above, title to such replacement equipment shall
immediately (and without further act) vest in Lessor and thereupon shall be
deemed to constitute Items of Equipment and be fully subject to this Lease as if
originally leased hereunder. If Lessee fails to either restore or replace the
Item of Equipment pursuant to subsection (1) or (2) above, respectively, Lessee
shall make the payment under subsection (3) above.
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17. INSURANCE. (a) Lessee, at all times during the Term hereof (until the
Equipment shall have been returned to Lessor) and at Lessee's own cost and
expense, shall maintain (1) insurance against all risks of physical loss or
damage to the Equipment (including theft and collision for Equipment consisting
of motor vehicles) in an amount not less than the full replacement value thereof
or the Stipulated Loss Value thereof, whichever is greater, and (2) commercial
general liability insurance (including blanket contractual liability coverage
and products liability coverage) for personal and bodily injury and property
damage in an amount satisfactory to Lessor.
(b) All insurance policies required hereunder shall (1) require 30
days' prior written notice of cancellation or material change in coverage to
Lessor (any such cancellation or change, as applicable, not being effective
until the thirtieth (30th) day after the giving of such notice); (2) name
"KeyCorp and its subsidiaries and affiliated companies, including KeyCorp
Leasing Ltd." as an additional insured under the public liability policies and
name Lessor as sole loss payee under the property insurance policies; (3) not
require contributions from other policies held by Lessor; (4) waive any right of
subrogation against Lessor; (5) in respect of any liability of any of Lessor,
except for the insurers' salvage rights in the event of a Loss or Damage, waive
the right of such insurers to set-off, to counterclaim or to any other
deduction, whether by attachment or otherwise, to the extent of any monies due
Lessor under such policies; (6) not require that Lessor pay or be liable for any
premiums with respect to such insurance covered thereby; (7) be in full force
and effect throughout any geographical areas at any time traversed by any Item
of Equipment; and (8) contain breach of warranty provisions providing that, in
respect of the interests of Lessor in such policies, the insurance shall not be
invalidated by any action or inaction of Lessee or any other person (other than
Lessor) and shall insure Lessor regardless of any breach or violation of any
warranty, declaration or condition contained in such policies by Lessee or by
any other person (other than Lessor). Prior to the first date of delivery of
any Item of Equipment hereunder, and thereafter not less than 15 days prior to
the expiration dates of the expiring policies theretofore delivered pursuant to
this Section, Lessee shall deliver to Lessor a duplicate original of all
policies (or in the case of blanket policies, certificates thereof issued by the
insurers thereunder) for the insurance maintained pursuant to this Section.
18. GENERAL TAX INDEMNIFICATION. Lessee shall pay when due and shall
indemnify and hold Lessor harmless from and against (on an after-tax basis) any
and all taxes, fees, withholdings, levies, imposts, duties, assessments and
charges of any kind and nature (together with interest and penalties
thereon)(including, without limitation, sales, use, gross receipts, personal
property, ad valorem, business and occupational, franchise, value added,
leasing, leasing use, documentary, stamp or other taxes) imposed upon or against
Lessor, Lessor's assigns, Lessee or any Item of Equipment by any Governmental
Authority with respect to any Item of Equipment or the manufacturing, ordering,
sale, purchase, shipment, delivery, acceptance or rejection, ownership, titling,
registration, leasing, subleasing, possession, use, operation, removal, return
or other dispossession thereof or upon the rents, receipts or earnings arising
therefrom or upon or with respect to this Lease, excepting only all Federal,
state and local taxes on or measured by Lessor's net income (other than income
tax resulting from making any alterations, improvements, modifications,
additions, upgrades, attachments, replacements or substitutions by Lessee).
Whenever this Lease terminates as to any Item of Equipment, Lessee shall, upon
written request by Lessor, advance to Lessor the amount determined by Lessor to
be the personal property or other taxes on said item which are not yet payable,
but for which Lessee is responsible, provided Lessor provides Lessee with copies
of tax bills supporting Lessor's request.
19. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to perform or
comply with any of its obligations contained herein, Lessor may (but shall not
be obligated to do so) itself perform or comply with such obligations, and the
amount of the reasonable costs and expenses of Lessor incurred in connection
with such performance or compliance, together with interest on such amount at
the Late Payment Rate, shall be payable by Lessee to Lessor upon demand. No
such performance or compliance by Lessor shall be deemed a waiver of the rights
and remedies of Lessor or any assignee of Lessor against Lessee hereunder or be
deemed to cure the default of Lessee hereunder.
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20. DELINQUENT PAYMENTS; INTEREST. If Lessee fails to pay any Rent or
other sums under this Lease when the same becomes due, Lessee shall pay to
Lessor a late charge equal to five percent (5%) of such delinquent amount. Such
late charge shall be payable by Lessee upon demand by Lessor and shall be deemed
Rent hereunder. In no event shall such late charge exceed the maximum amounts
permitted under Applicable Law.
21. PERSONAL PROPERTY; LIENS. Lessor and Lessee hereby agree that the
Equipment is, and shall at all times remain, personal property notwithstanding
the fact that any Item of Equipment may now be, or hereafter become, in any
manner affixed or attached to real property or any improvements thereon. Lessee
shall at all times keep the Equipment free and clear from all Liens. Lessee
shall (i) give Lessor immediate written notice of any such Lien, (ii) promptly,
at Lessee's sole cost and expense, take such action as may be necessary to
discharge any such Lien, and (iii) indemnify and hold Lessor, on an after-tax
basis, harmless from and against any loss or damage caused by any such Lien.
22. EVENTS OF DEFAULT; REMEDIES. (a) As used herein, the term "Event of
Default" shall mean any of the following events: (1) Lessee fails to pay any
Rent within ten (10) days after the same shall have become due; (2) Lessee or
any Guarantor becomes insolvent or makes an assignment for the benefit of its
creditors; (3) a receiver, trustee, conservator or liquidator of Lessee or any
Guarantor or of all or a substantial part of Lessee's or such Guarantor's assets
is appointed with or without the application or consent of Lessee or such
Guarantor, respectively; (4) a petition is filed by or against Lessee or any
Guarantor under any bankruptcy, insolvency or similar legislation; (5) Lessee or
any Guarantor violates or fails to perform any provision of either this Lease or
any other loan, lease or credit agreement or any acquisition or purchase
agreement with Lessor or any other party; (6) Lessee violates or fails to
perform any covenant or representation made by Lessee herein; (7) any
representation or warranty made herein or in any Lease, certificate, financial
statement or other statement furnished to Lessor shall prove to be false or
misleading in any material respect as of the date on which the same was made;
(8) Lessee makes a bulk transfer of furniture, furnishings, fixtures or other
equipment or inventory; or (9) there is a material adverse change in Lessee's or
any Guarantor's financial condition since the first Rent Commencement Date of
any Equipment Schedule executed in connection herewith. An Event of Default
with respect to any Equipment Schedule hereunder shall, at Lessor's option,
constitute an Event of Default for all Equipment Schedules hereunder and any
other agreements between Lessor and Lessee.
(b) Upon the occurrence of an Event of Default, Lessor may do one or
more of the following as Lessor in its sole discretion shall elect: (1) proceed
by appropriate court action or actions, either at law or in equity, to enforce
performance by Lessee of the applicable covenants of this Lease or to recover
damages for the breach thereof; (2) sell any Item of Equipment at public or
private sale; (3) hold, keep idle or lease to others any Item of Equipment as
Lessor in its sole discretion may determine; (4) by notice in writing to Lessee,
terminate this Lease, without prejudice to any other remedies hereunder; (5)
demand that Lessee, and Lessee shall, upon written demand of Lessor and at
Lessee's expense forthwith return all Items of Equipment to Lessor or its order
in the manner and condition required by, and otherwise in accordance with all of
the provisions of this Lease, except those provisions relating to periods of
notice; (6) enter upon the premises of Lessee or other premises where any Item
of Equipment may be located and, without notice to Lessee and with or without
legal process, take possession of and remove all or any such Items of Equipment
without liability to Lessor by reason of such entry or taking possession, and
without such action constituting a termination of this Lease unless Lessor
notifies Lessee in writing to such effect; (7) by written notice to Lessee
specifying a payment date, demand that Lessee pay to Lessor, and Lessee shall
pay to Lessor, on the payment date specified in such notice, as liquidated
damages for loss of a bargain and not as a penalty, any unpaid Rent due prior to
the payment date specified in such notice plus whichever of the following
amounts Lessor, in its sole discretion, shall specify in such notice (together
with interest on such amount at the Late Payment Rate from the payment date
specified in such notice to the date of actual payment): (i) an amount, with
respect to an Item of Equipment, equal to the Rent payable for such Item of
Equipment for the remainder of the then current Term thereof, after discounting
such Rent to present worth as of the payment date specified in such notice on
the basis of a per annum rate of discount equal to five percent (5%) from the
respective dates upon which such Rent would have been paid had
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this Lease not been terminated; or (ii) the Stipulated Loss Value, computed
as of the payment date specified in such notice or, if such payment date is
not a Rent Payment Date, the Rent Payment Date next following the payment
date specified in such notice (provided, however, that, with respect to any
Item of Equipment returned to or repossessed by Lessor, the amount
recoverable under this clause (ii) shall be reduced (but not below zero) by
an amount equal to the Fair Market Sales Value (taking into account its
actual condition) of such Item of Equipment; (8) cause Lessee, at its
expense, to promptly assemble any and all Items of Equipment and return the
same to Lessor at such place as Lessor may designate in writing; and (9)
exercise any other right or remedy available to Lessor under applicable law
or proceed by appropriate court action to enforce the terms hereof or to
recover damages for the breach hereof or to rescind this Lease. In addition,
Lessee shall be liable, except as otherwise provided above, for any and all
unpaid Rent due hereunder before or during the exercise of any of the
foregoing remedies, and for legal fees and other costs and expenses incurred
by reason of the occurrence of any Event of Default or the exercise of
Lessor's remedies with respect thereto, including without limitation the
repayment in full of any costs and expenses necessary to be expended in
repairing any Item of Equipment in order to cause it to be in compliance with
all maintenance and regulatory standards imposed by this Lease. If an Event
of Default occurs, to the fullest extent permitted by law, Lessee hereby
waives any right to notice of sale and further waives any defenses, rights,
offsets or claims against Lessor because of the manner or method of sale or
disposition of any Items of Equipment. None of Lessor's rights or remedies
hereunder are intended to be exclusive of, but each shall be cumulative and
in addition to any other right or remedy referred to hereunder or otherwise
available to Lessor or its assigns at law or in equity. No express or
implied waiver by Lessor of any Event of Default shall constitute a waiver of
any other Event of Default or a waiver of any of Lessor's rights.
23. NOTICES. All notices and other communications hereunder shall be in
writing and shall be transmitted by hand, overnight courier or certified mail
(return receipt requested), postage prepaid. Such notices and other
communications shall be addressed to the respective party at the address set
forth above or at such other address as any party may from time to time
designate by notice duly given in accordance with this Section. Such notices
and other communications shall be effective upon receipt.
24. GENERAL INDEMNIFICATION. Lessee shall pay, and shall indemnify and
hold Lessor harmless on an after-tax basis from and against, any and all
liabilities, causes of action, claims, suits, penalties, damages, losses, costs
or expenses (including attorneys' fees), obligations, liabilities, demands and
judgments, and Liens, of any nature whatsoever (collectively, a "Liability")
arising out of or in any way related to: (a) this Lease or any other written
agreement entered into in connection with the transactions contemplated hereby
and thereby (including, without limitation, a Purchase Agreement, if any) or any
amendment, waiver or modification of any of the foregoing or the enforcement of
any of the terms hereof or any of the foregoing, (b) the manufacture, purchase,
ownership, selection, acceptance, rejection, possession, lease, sublease,
operation, use, maintenance, documenting, inspection, control, loss, damage,
destruction, removal, storage, surrender, sale, use, condition, delivery,
nondelivery, return or other disposition of or any other matter relating to any
Item of Equipment or any part or portion thereof (including, in each case and
without limitation, latent or other defects, whether or not discoverable, any
claim for patent, trademark or copyright infringement and any and all
Liabilities in any way relating to or arising out of injury to persons,
properties or the environment or any and all Liabilities based on strict
liability in tort, negligence, breach of warranties or violations of any
regulatory law or requirement, (c) a failure to comply fully with any
Environmental Law with respect to the Equipment or its operation or use, and (d)
Lessee's failure to perform any covenant, or breach of any representation or
warranty, hereunder; PROVIDED, that the foregoing indemnity shall not extend to
the Liabilities to the extent resulting solely from the gross negligence or
willful misconduct of Lessor. Lessee shall deliver promptly to Lessor (i)
copies of any documents received from the United States Environmental Protection
Agency or any state, county or municipal environmental or health agency and (ii)
copies of any documents submitted by Lessee or any of its subsidiaries to the
United States Environmental Protection Agency or any state, county or municipal
environmental or health agency concerning the Equipment or its operation.
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25. SEVERABILITY; CAPTIONS. Any provision of this Lease or any Equipment
Schedule which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability shall not invalidate or render
unenforceable such provision in any other jurisdiction. Captions are intended
for convenience or reference only, and shall not be construed to define, limit
or describe the scope or intent of any provisions hereof.
26. LESSOR'S EXPENSE. Lessee shall pay all costs and expenses of Lessor,
including attorneys' fees and the fees of any collection agencies, incurred by
Lessor in enforcing any of the terms, conditions or provisions hereof or in
protecting Lessor's rights hereunder.
27. RELATED EQUIPMENT SCHEDULES. In the event that any Item of Equipment
covered under any Equipment Schedule hereunder may become attached or affixed
to, or used in connection with, Equipment covered under another Equipment
Schedule hereunder (a "Related Equipment Schedule"), Lessee agrees that, if
Lessee elects to exercise a purchase or renewal option under any such Equipment
Schedule, or if Lessee elects to return the Equipment under any such Equipment
Schedule pursuant to Section 13 hereof, then Lessor, in its sole discretion, may
require that all Equipment leased under all Related Equipment Schedules be
similarly disposed of.
28. FINANCIAL AND OTHER DATA. During the Term hereof, Lessee shall
furnish Lessor, as soon as available and in any event within 60 days after the
end of each quarterly period (except the last) of each fiscal year, and, as soon
as available and in any event within 120 days after the last day of each fiscal
year, financial statements of Lessee and each Guarantor, in each case certified
by an independent public accountant if customarily available or requested.
Lessee shall also furnish such other financial reports, information or data as
Lessor may reasonably request from time to time.
29. COMMITMENT FEE REQUIREMENT. An amount equal to the first periodic
payment of Rent must accompany each Lessee proposal for an Equipment Schedule
hereunder. THIS COMMITMENT FEE IS NON-REFUNDABLE; provided, however, that, upon
Lessor's acceptance of Lessee's proposal to enter into such Equipment Schedule,
such commitment fee shall be applied to the first periodic payment of Rent
thereunder.
30. NO AFFILIATION WITH THE SUPPLIER. Lessee hereby represents and
warrants to Lessor that, except as previously disclosed in writing to Lessor,
neither Lessee nor any of its officers or directors (if a corporation) or
partners (if a partnership) has, directly or indirectly, any financial interest
in the Supplier.
31. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and
warrants that: (a) Lessee is a corporation duly organized and validly existing
in good standing under the laws of the state of its incorporation; (b) the
execution, delivery and performance of this Lease and all related instruments
and documents: (1) have been duly authorized by all necessary corporate action
on the part of Lessee, (2) do not require the approval of any stockholder,
partner, trustee, or holder of any obligations of Lessee except such as have
been duly obtained, and (3) do not and will not contravene any law, governmental
rule, regulation or order now binding on Lessee, or the charter or by-laws of
Lessee, or contravene the provisions of, or constitute a default under, or
result in the creation of any lien or encumbrance upon the property of Lessee
under, any indenture, mortgage, contract or other agreement to which Lessee is a
party or by which it or its property is bound; (c) this Lease and all related
instruments and documents, when entered into, will constitute legal, valid and
binding obligations of Lessee enforceable against Lessee in accordance with the
terms thereof; (d) there are no pending actions or proceedings to which Lessee
is a party, and there are no other pending or threatened actions or proceedings
of which Lessee has knowledge, before any court, arbitrator or administrative
agency, which, either individually or in the aggregate, would adversely affect
the financial condition of Lessee, or the ability of Lessee to perform its
obligations hereunder; (e) Lessee is not in default under any obligation for the
payment of borrowed money, for the deferred purchase price of property or for
the payment of any rent under any lease agreement which, either individually or
in the aggregate, would have the same such effect; (f) under the laws of the
state(s) in which the Equipment
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is to be located, the Equipment consists solely of personal property and not
fixtures; (g) the financial statements of Lessee (copies of which have been
furnished to Lessor) have been prepared in accordance with generally
acceptable accounting principles consistently applied ("GAAP"), and fairly
present Lessee's financial condition and the results of its operations as of
the date of and for the period covered by such statements, and since the date
of such statements there has been no material adverse change in such
conditions or operations; (h) the address stated above is the chief place of
business and chief executive office, or in the case of individuals, the
primary residence, of Lessee; (i) Lessee does not conduct business under a
trade, assumed or fictitious name; and (j) the Equipment is being leased
hereunder solely for business purposes and that no item of Equipment will be
used for personal, family or household purposes.
32. RENEWAL AND PURCHASE OPTIONS. With respect to an Equipment Schedule
and the Equipment Group set forth thereon, so long as no Default or Event of
Default shall have occurred and is continuing, then, upon not less than ninety
(90) days prior written notice to Lessor, (the "Renewal Notice") Lessee may (a)
at the expiration of the Initial Term, or any Renewal Term, purchase all, but
not less than all, of the Equipment Group for the Fair Market Sale Value of such
Equipment Group, payable in cash to Lessor upon the expiration of the Initial
Term or any Renewal Term, as the case may be, (b) at the expiration of the
Initial Term, renew this Lease on a month to month basis at the same Rent
payable at the expiration of the Initial Term, or (c) at the expiration of the
Initial Term, renew this Lease for a minimum period of not less than twelve (12)
consecutive months at the then current Fair Market Rental Value. If Lessee
fails to give Lessor the Return Notice or the Renewal Notice at least ninety
(90) days before the expiration of the Initial Term, Lessee shall be deemed to
have chosen option (b) above. If Lessee exercises option (a) above, Lessee
shall purchase the Equipment "as is" and "where is" and without any warranties,
express or implied, by Lessor.
33. LESSEE'S WAIVERS. To the extent permitted by Applicable Law, Lessee
hereby waives (a) any and all rights and remedies which it may now have or which
at any time hereafter may be conferred upon it by statute (including, without
limitation, Article 2A of the Uniform Commercial Code, as applicable) or
otherwise, (1) which may limit or modify Lessor's rights or remedies hereunder,
(2) to terminate, cancel, quit, repudiate or surrender this Lease, except as
expressly provided herein; (3) to reject, revoke acceptance or accept partial
delivery of the Equipment; (4) to recover damages from Lessor for any breach of
warranty or for any other reason PROVIDED, HOWEVER, that no such waiver shall
preclude Lessee from asserting any such claim against Lessor in a separate cause
of action; or (5) to setoff or deduct all or any part of any claimed damages
resulting from Lessor's default, if any, under this Lease.
34. UCC FILINGS. LESSEE HEREBY APPOINTS LESSOR OR ITS ASSIGNEE AS ITS
TRUE AND LAWFUL ATTORNEY IN FACT, IRREVOCABLY AND COUPLED WITH AN INTEREST, TO
EXECUTE AND FILE ON BEHALF OF LESSEE ALL UCC FINANCING STATEMENTS WHICH IN
LESSOR'S SOLE DISCRETION ARE NECESSARY OR PROPER TO SECURE LESSOR'S INTEREST IN
THE EQUIPMENT IN ALL APPLICABLE JURISDICTIONS.
35. MISCELLANEOUS. Time is of the essence with respect to this Lease.
ANY FAILURE OF LESSOR TO REQUIRE STRICT PERFORMANCE BY LESSEE OR ANY WAIVER BY
LESSOR OF ANY PROVISION HEREIN SHALL NOT BE CONSTRUED AS A CONSENT OR WAIVER OF
ANY PROVISION OF THIS LEASE. Neither this Lease nor any Equipment Schedule may
be amended except by a writing signed by Lessor and Lessee. This Lease and each
Equipment Schedule shall be binding upon, and inure to the benefit of, the
parties hereto, their permitted successors and assigns. This Lease will be
binding upon Lessor only if executed by a duly authorized officer or
representative of Lessor at Lessor's principal place of business as set forth
above. This Lease, and all other documents (the execution and delivery of which
by Lessee is contemplated hereunder), shall be executed on Lessee's behalf by
Authorized Signers of Lessee. THIS LEASE IS BEING DELIVERED IN THE STATE OF NEW
YORK AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
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36. JURY TRIAL WAIVER. LESSOR AND LESSEE HEREBY WAIVE TRIAL BY JURY IN
ANY ACTION OR PROCEEDING TO WHICH LESSOR OR LESSEE MAY BE PARTIES ARISING OUT OF
OR IN ANY WAY PERTAINING TO THIS LEASE. THIS WAIVER IS MADE KNOWINGLY,
WILLINGLY AND VOLUNTARILY BY THE LESSOR AND THE LESSEE WHO EACH ACKNOWLEDGE THAT
NO REPRESENTATIONS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF
TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT.
37. MORE THAN ONE LESSEE. If more than one person or entity executes this
Lease, each Equipment Schedule, and all addenda or other documents executed in
connection herewith or therewith, as "Lessee," the obligations of "Lessee"
contained herein and therein shall be deemed joint and several and all
references to "Lessee" shall apply both individually and jointly.
38. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing, Lessee shall peaceably hold and quietly enjoy the Equipment without
interruption by Lessor or any person or entity claiming through Lessor.
39. ENTIRE AGREEMENT. This Lease, together with all Equipment Schedules,
riders and addenda executed by Lessor and Lessee collectively constitute the
entire understanding or agreement between Lessor and Lessee with respect to the
leasing of the Equipment, and there is no understanding or agreement, oral or
written, which is not set forth herein or therein. By initialing below, Lessee
hereby further acknowledges the conditions of this Section 39.
Lessee's Initials:_______________
40. EXECUTION IN COUNTERPARTS. This Master Equipment Lease Agreement may
be executed in several counterparts, each of which shall be an original and all
of which shall constitute but one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the
day and year first above written.
LESSOR:
KEYCORP LEASING LTD.
By: ________________________________________
Name:
Title:
LESSEE:
R-B RUBBER PRODUCTS, INC.
By: ________________________________________
Name:
Title:
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EQUIPMENT SCHEDULE NO. 01
EQUIPMENT SCHEDULE NO. 01 dated as of December 22, 1997 (this "Schedule")
between KEYCORP LEASING, A DIVISION OF KEY CORPORATE CAPITAL INC. ("Lessor"),
and R-B RUBBER PRODUCTS, INC., an Oregon corporation ("Lessee").
I N T R O D U C T I O N :
Lessor and Lessee have heretofore entered into that certain Master
Equipment Lease Agreement dated as of May 12, 1997 (the "Master Lease"; the
Master Lease and this Schedule hereinafter collectively referred to as, this
"Lease"). Unless otherwise defined herein, capitalized terms used herein shall
have the meanings specified in the Master Lease. The Master Lease provides for
the execution and delivery of a Schedule substantially in the form hereof for
the purpose of confirming the acceptance and lease of the Equipment under this
Lease as and when delivered by Lessor to Lessee in accordance with the terms
thereof and hereof.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
1. EQUIPMENT. Pursuant to the terms and conditions of this Lease, Lessor
hereby leases to Lessee, and Lessee hereby leases from Lessor, the equipment
listed on EXHIBIT A attached hereto (the "Equipment"). The aggregate Total Cost
of such Equipment is $1,033,397.65.
2. TERM. The Initial Term of this Lease with respect to the Equipment
described on this Schedule shall commence on the date on which such Equipment is
delivered to Lessee, and, unless earlier terminated as provided herein, shall
expire on a date which is eighty-four (84) months after the Rent Commencement
Date (the "Initial Term Expiration Date").
3. RENT PAYMENT DATES; RENT. Lessee hereby agrees to pay Rent for the
Equipment throughout the Initial Term in eighty-four (84) consecutive monthly
installments payable in advance on the Rent Commencement Date and on the same
day each month thereafter (each, a "Rent Payment Date"). Each such installment
of Rent shall be in an amount equal to $11,217.54.
4. EQUIPMENT LOCATION; BILLING ADDRESS. The Equipment described on this
Schedule shall be located at, and except as otherwise provided in this Lease,
shall not be removed from, the following address: 904 E. 10Th Ave., Mcminnville,
OR 97128. The billing address of Lessee is as follows: R-B RUBBER PRODUCTS,
INC., 904 E. 10Th Ave., Mcminnville, OR 97128.
5. TAX INDEMNIFICATION. (a) Lessee acknowledges that Lessor has executed
this Lease, and that the Rent payable by Lessee under this Lease has been
computed, upon the assumptions that Lessor will (i) be entitled to depreciation
or cost recovery deductions ("MACRS Deductions") for Federal income tax purposes
under the Modified Accelerated Cost Recovery System provided for in Section 168
of the Internal Revenue Code of 1986, as amended (the "Code"), and depreciation
or cost recovery deductions ("State Depreciation Deductions") for state income
tax purposes for the State of New York ("New York"), in each case on the basis
that (1) each Item of Equipment constitutes "7-year property" within the meaning
of Section 168(e) of the Code, (2) the initial tax basis for each Item of
Equipment will be equal to the Total Cost, (3) deductions for each Item of
Equipment will be computed by using the method specified in Section 168(b)(1) of
the Code over the 7-year recovery period described in Section 168(c) of the
Code, and (4) the applicable convention
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for each Item of Equipment under Section 168(d) of the Code is the half-year
convention; (ii) be entitled to deductions for Federal income tax purposes
(available in the manner and as provided by Section 163 of the Code) for
interest payable with respect to any indebtedness incurred by Lessor in
connection with any financing by Lessor of any portion of the Total Cost of
each Item of Equipment ("Interest Deductions"); and (iii) be subject to tax
for each year at a composite Federal and New York corporate income tax rate
equal to the then highest marginal rate for corporations provided for under
the Code and the laws of New York (the "Highest Marginal Tax Rate"). The
MACRS Deductions, State Depreciation Deductions and Interest Deductions are
hereinafter collectively referred to as the "Tax Benefits".
(b) Lessee represents and warrants to Lessor that (i) each Item of
Equipment constitutes "7-year property" within the meaning of Section 168(e) of
the Code, (ii) Lessee shall not attempt to claim such Tax Benefits, (iii) at and
after the time of delivery of the Equipment to Lessee pursuant to this Lease,
the Equipment shall be owned by Lessor for Federal income tax purposes and
Lessee shall not claim any ownership or title in and to the Equipment, and (iv)
Lessee has not, and will not, at any time after such delivery throughout the
Term of this Lease, take any action or omit to take any action (whether or not
the same is permitted or required hereunder) which will result in the loss by
Lessor of all or any part of such Tax Benefits.
(c) If, as a result of any act, omission or misrepresentation of
Lessee, (x) the Tax Benefits are lost, disallowed, deferred, eliminated,
reduced, recaptured, compromised or otherwise unavailable to Lessor, (y) for
Federal, foreign, state or local income tax purposes, any item of income, loss
or deduction with respect to any Item of Equipment is treated as derived from,
or allocable to, sources outside the United States, or (z) there shall be
included in the gross income of Lessor for Federal, state or local income tax
purposes any amount on account of any addition, modification, substitution or
improvement to or in respect of any Item of Equipment made or paid for by Lessee
(any of the foregoing being hereinafter a "Tax Loss"), then, within thirty (30)
days of Lessee's receipt of written notice from Lessor that such a Tax Loss has
occurred, Lessee shall pay to Lessor an amount which, after deduction therefrom
of all taxes to be paid in respect of the receipt thereof, will enable Lessor to
receive the same Net Economic Return (as hereinafter defined) that Lessor would
have realized on this Lease had such Tax Loss (together with any interest,
penalties or additions to tax) not occurred. Any event which, by the terms of
this Lease, requires payment by Lessee to Lessor of the Stipulated Loss Value of
the Equipment shall not constitute the act of Lessee for purpose of the
foregoing sentence.
(d) As used in this Section, the term "Net Economic Return" shall mean
Lessor's net after-tax yield, aggregate after-tax cash flow and return on
assets, based on (i) the assumptions used by Lessor in originally calculating
Rent and Stipulated Loss Value percentages, including the assumptions set forth
above (as such assumptions may have been revised pursuant to the last sentence
of this subsection) and (ii) the Highest Marginal Tax Rate actually in effect
during each year from the date of such original calculations to the date of such
Tax Loss, both dates inclusive. In the event Lessor shall suffer a Tax Loss
with respect to which Lessee is required to pay an indemnity hereunder, and the
full amount of such indemnity has been paid or provided for hereunder, the
aforesaid assumptions, without further act of the parties hereto, shall
thereupon be and be deemed to be amended, if and to the extent appropriate, to
reflect such Tax Loss.
(e) For purposes of this Section, the term "Lessor" shall include the
entity or entities, if any, with which Lessor consolidates any tax return.
Lessee acknowledges that it has neither sought nor received tax advice from
Lessor as to the availability to Lessee of any tax benefits with respect to the
Equipment. All of Lessor's rights and privileges arising from the indemnities
contained in this Lease will survive the expiration or other termination or
cancellation of this Lease. Such indemnities are expressly made for the benefit
of, and are enforceable by, Lessor and its successors and assigns.
14
<PAGE>
6. TRUE LEASE TRANSACTION. (a) It is the express intent of the parties
that this Lease constitute a true lease and not a sale of the Equipment. Title
to the Equipment shall at all times remain in Lessor, and Lessee shall acquire
no ownership, title, property, right, equity, or interest in the Equipment other
than its leasehold interest solely as Lessee subject to all the terms and
conditions hereof. To the extent that Article 2A ("Article 2A") of the Uniform
Commercial Code ("UCC") applies to the characterization of this Lease, the
parties hereby agree that this Lease is a "Finance Lease" as defined therein.
Lessee acknowledges: (i) that Lessee has selected the "Supplier" (as defined in
the UCC) and has directed Lessor to purchase the Equipment from the Supplier in
connection with this Lease, and (ii) that Lessee has been informed in writing in
this Lease, before Lessee's execution of this Lease, that Lessee is entitled
under Article 2A to the promises and warranties, including those of any third
party, provided to Lessor by the Supplier in connection with or as part of the
Purchase Agreement, and that Lessee may communicate with the Supplier and
receive an accurate and complete statement of those promises and warranties,
including any disclaimers and limitations of them or of remedies. The filing of
UCC financing statements pursuant to Section 34 of the Master Lease is
precautionary and shall not be deemed to have any effect on the characterization
of this Lease.
(b) Notwithstanding the express intent of Lessor and Lessee that
this agreement constitute a true lease and not a sale of the Equipment,
should a court of competent jurisdiction determine that this agreement is not
a true lease, but rather one intended as security, then solely in that event
and for the expressly limited purposes thereof, Lessee shall be deemed to
have hereby granted Lessor a security interest in the Equipment and all
accessions, substitutions and replacements thereto and therefor, and proceeds
(cash and non-cash), including, without limitation, insurance proceeds
thereof (but without power of sale), to secure the prompt payment and
performance as and when due of all obligations and indebtedness of Lessee,
now existing or hereafter created, to Lessee pursuant to this Lease or
otherwise. In furtherance of the foregoing, Lessee shall execute and deliver
to Lessor, to be recorded at Lessee's expense, Uniform Commercial Code
financing statements, statements of amendment and statements of continuation
as reasonably may be required by Lessor to perfect and maintain perfected
such security interest.
(c) In the event that the Supplier erroneously invoices Lessee for the
Equipment, Lessee agrees to forward said invoice to Lessor immediately. Lessee
acknowledges that the Equipment is, and shall at all times remain, the property
of Lessor, and that Lessee has no right, title or interest therein or thereto
except as expressly set forth in the Lease.
7. LESSEE'S PURCHASE AND RENEWAL OPTIONS. Lessee shall have the purchase
and renewal options set forth on the End of Lease Options Addendum attached
hereto and made a part hereof.
8. MODIFICATIONS TO MASTER LEASE. With respect to the Equipment
described on this Schedule, the Master Lease shall be modified as follows:
(a) The following shall be inserted as the penultimate sentence of
Section 11 of the Master Lease ("Use; Alterations"):
Title to all such alterations, additions, modifications or improvements
shall immediately, and without further act, vest in Lessor and thereupon
shall be deemed to constitute Items of Equipment and be fully subject to
this Lease as if originally leased hereunder.
(b) The following shall be inserted as the penultimate sentence of
Section 12 of the Master Lease ("Repairs and Maintenance"):
15
<PAGE>
Title to such replacement part shall immediately (and without further act)
vest in Lessor upon installation, attachment or incorporation of the same
in, on or into such Item of Equipment and thereupon shall be deemed to
constitute an Item of Equipment and be fully subject to this Lease as if
originally leased hereunder.
(c) As used in Section 22(a) of the Master Lease ("Events of
Default"), the term "Event of Default" shall also mean any of the following
events: (1) a change in control occurs in Lessee or any Guarantor; or (2) the
death or dissolution of Lessee or any Guarantor.
(d) Section 22(b) of the Master Lease ("Events of Default") is hereby
amended as follows: (1) with respect to Section 22(b)(4), the word "terminate"
is hereby deleted and the words "cancel or terminate" are hereby substituted in
its place; (2) with respect to Section 22(b)(6), the word "termination" is
hereby deleted and the words "cancellation or termination" are hereby
substituted in its place; and (3) with respect to Section 22(b)(7), the word
"terminated" is hereby deleted and the words "canceled or terminated" are hereby
substituted in its place.
9. STIPULATED LOSS VALUE. The Stipulated Loss Values applicable to the
Equipment and this Lease are as set forth on a supplement (the "Stipulated Loss
Value Supplement") prepared by Lessor.
10. GOVERNING LAW. This Schedule is being delivered in the State of New
York and shall in all respects be governed by, and construed in accordance with,
the laws of the State of New York, including all matters of construction,
validity and performance.
11. COUNTERPARTS. This Schedule may be executed in any number of
counterparts, each executed counterpart constituting an original but all
together one and the same instrument.
12. PERSONAL PROPERTY TAX. To insure Lessee's compliance with the
provisions of the Lease with respect to the payment of personal property taxes
on the Equipment described on this Schedule, Lessee hereby covenants and agrees
that, unless otherwise directed in writing by Lessor or required by applicable
law, Lessee will not list itself as owner of any Item of Equipment for property
tax purposes. Upon receipt by Lessee of any property tax bill pertaining to
such Item of Equipment from the appropriate taxing authority, Lessee will
promptly forward such property tax bill to Lessor. Upon receipt by Lessor of
any such property tax bill, Lessor will pay such tax and will invoice Lessee for
the expense. Upon receipt of such invoice, Lessee will promptly reimburse
Lessor for such expense.
13. ADDITIONAL ADDENDA. In addition to the End of Lease Options Addendum,
please see the following addenda to this Schedule, attached hereto and made a
part hereof, for additional terms and conditions governing the leasing of the
Equipment described on this Schedule: Early Buyout Addendum, Interim Rent
Addendum, Return/Maintenance Addendum.
14. MORE THAN ONE LESSEE. If more than one person or entity executes this
Schedule, and all addenda or other documents executed in connection herewith, as
"Lessee," the obligations of "Lessee" contained herein and therein shall be
deemed joint and several and all references to "Lessee" shall apply both
individually and jointly.
15. RELATIONSHIP TO MASTER LEASE; FURTHER ASSURANCES. This Schedule shall
be construed in connection with and as part of the Lease, and all terms and
conditions contained in the Master Lease are hereby incorporated herein by
reference with the same force and effect as if such terms and conditions were
fully stated herein. By execution of this Schedule, Lessee and Lessor reaffirm
16
<PAGE>
all terms and conditions of the Master Lease except as they may be modified
hereby. To the extent that any of the terms and conditions of this Schedule are
contrary to or inconsistent with any terms and conditions of the Master Lease,
the terms and conditions of this Schedule shall govern. LESSEE HEREBY CERTIFIES
TO LESSOR THAT THE REPRESENTATIONS AND WARRANTIES MADE BY LESSEE IN THE MASTER
LEASE (INCLUDING, WITHOUT LIMITATION, SECTION 31 THEREOF) ARE TRUE AND CORRECT
IN ALL MATERIAL RESPECTS AS OF THE DATE OF THIS SCHEDULE WITH THE SAME EFFECT AS
THOUGH MADE ON AND AS OF SUCH DATE. Lessee shall take such additional actions
and execute and deliver such additional documents as Lessor shall deem necessary
from time to time to effectuate the terms of the Lease.
16. OREGON BUSINESS ENERGY TAX CREDIT INDEMNITY. In addition to the
assumptions set forth in Section 5(a)(i-iii) of this Equipment Schedule, Lessor
has assumed that Lessor will be entitled to the BETC (as defined below). The
BETC shall be included in the definition of "Tax Benefits" set forth in Section
5(a) of this Equipment Schedule. With respect to the BETC, Lessee hereby
represents, warrants and covenants to Lessor as follows:
(a) This Lease will be a lease for purposes of Oregon Revised Statutes
("ORS") 469.185 - 225. Lessor will be treated as the purchaser, owner, lessor,
and original user of the Property and Lessee will be treated as the lessee of
the Equipment for such purposes. Lessee shall deliver its final certification
of eligibility of the BETC (defined below) for Application No. 6606 on or before
January 31, 1998, and in the event Lessee fails to do so, the Rent due under
this Equipment Schedule shall be adjusted in the same manner as if an Oregon Tax
Loss (as defined below) had occurred.
(b) Lessor shall be entitled to the Business Energy Tax Credit ("BETC")
with respect to each item of Equipment as provided by ORS 469.185 - 225. The
applicable BETC available to Lessor in connection with this Schedule is
$1,035,818.00.
(c) In the event that, pursuant to ORS 469.185 - 225, Lessee is deemed to
be the party eligible to receive the BETC, then Lessee hereby irrevocably
transfers to Lessor all right, title and interest which Lessee has or may have
to such BETC and agrees to cooperate with Lessor in any manner necessary to
ensure (at Lessee's expense) that Lessor continues to receive the benefit of
such BETC.
If for any reason whatsoever any of the representations, warranties, or
covenants of Lessee contained in this Section or in any other agreement relating
to this Section and to the Equipment shall prove to be incorrect and (i) Lessor
shall determine that it is not entitled to claim all or any portion of the BETC
in the amount specified (b) above, or (ii) such BETC is disallowed, adjusted,
recomputed, reduced, or recaptured, in whole or in part, by the Director of the
Oregon Department of Energy or his designee (such determination, disallowance,
adjustment, recomputation, reduction, or recapture being deemed herein an
additional "Tax Loss" pursuant to Section 5(c) of this Equipment Schedule), then
Lessee shall pay to Lessor as an indemnity and as additional Rent the amounts
set forth in Section 5(c) of this Equipment Schedule.
Further, in the event (i) there shall be any change, amendment, addition,
or modification of any provision of Oregon law or regulations thereunder or
interpretation thereof with respect to the matters set forth in this Section
effective prior to the Rent Commencement Date of the Initial Term of this Lease
with respect to any Equipment, or (ii) if at any time there shall be any change,
amendment, addition, or modification of any provision of Oregon law or
regulations thereunder or interpretation thereof with respect to the maximum
applicable BETC, either of which results in a decrease in Lessor's Net Economic
Return, then Lessor shall recalculate and submit to Lessee the modified Rent or
rental rate required to provide Lessor with the same Net Economic Return as it
would have realized absent
17
<PAGE>
such change and the Lease shall thereupon automatically be deemed to be
amended to adopt such Rent or rental rate and related Stipulated Loss Value.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Schedule to be duly
executed and delivered on the day and year first above written.
LESSOR: LESSEE:
KEYCORP LEASING, R-B RUBBER PRODUCTS, INC.
A DIVISION OF KEY CORPORATE
CAPITAL INC.
By: ____________________________ By: ___________________________
Name: Ronald L. Bogh
Name: Title: Chief Execitive Officer
Title:
COUNTERPART NO. 1 OF 1 SERIALLY NUMBERED MANUALLY EXECUTED COUNTERPARTS. TO THE
EXTENT THAT THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL
CODE, NO SECURITY INTEREST MAY BE CREATED THROUGH THE TRANSFER AND POSSESSION OF
ANY COUNTERPART OTHER THAN COUNTERPART NO. 1.
18
<PAGE>
EXHIBIT A
(EQUIPMENT DESCRIPTION)
LEASE: Equipment Schedule No. 01 dated as of December 22, 1997 to Master
Equipment Lease Agreement Dated as of May 12, 1997
LESSOR: KEYCORP LEASING ,
A DIVISION OF KEY CORPORATE CAPITAL INC.
LESSEE: R-B RUBBER PRODUCTS, INC.
Large Cracker Mil (Primary Mill), Fine Grind Mill, Conveyors and Connection
Equipment, Press/Spreader Upgrade as described on the list of Exhibit A
attached. More particularly described on invoices located at KCL's
headquarters.
19
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
None.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation of our report dated March 18, 1998, included
in this Form 10-KSB into the Company's previously filed Registration
Statement No. 33-90376 on Form S-8.
Morrison & Liebswager, P.C.
March 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 291,990
<SECURITIES> 0
<RECEIVABLES> 916,696
<ALLOWANCES> 6,216
<INVENTORY> 692,073
<CURRENT-ASSETS> 1,932,281
<PP&E> 5,793,701
<DEPRECIATION> 1,727,139
<TOTAL-ASSETS> 6,275,536
<CURRENT-LIABILITIES> 631,007
<BONDS> 907,373
0
0
<COMMON> 3,797,442
<OTHER-SE> 836,187
<TOTAL-LIABILITY-AND-EQUITY> 6,275,536
<SALES> 7,445,403
<TOTAL-REVENUES> 7,445,403
<CGS> 4,625,670
<TOTAL-COSTS> 4,625,670
<OTHER-EXPENSES> 1,847,839
<LOSS-PROVISION> 61
<INTEREST-EXPENSE> 125,113
<INCOME-PRETAX> 856,174
<INCOME-TAX> 328,031
<INCOME-CONTINUING> 528,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528,143
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 97,524
<SECURITIES> 0
<RECEIVABLES> 618,188
<ALLOWANCES> 4,804
<INVENTORY> 511,706
<CURRENT-ASSETS> 1,356,074
<PP&E> 5,734,221
<DEPRECIATION> 1,355,178
<TOTAL-ASSETS> 5,963,165
<CURRENT-LIABILITIES> 668,872
<BONDS> 962,043
0
0
<COMMON> 3,797,442
<OTHER-SE> 428,296
<TOTAL-LIABILITY-AND-EQUITY> 5,963,165
<SALES> 1,626,895
<TOTAL-REVENUES> 1,626,895
<CGS> 973,521
<TOTAL-COSTS> 973,521
<OTHER-EXPENSES> 449,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,961
<INCOME-PRETAX> 180,791
<INCOME-TAX> 60,540
<INCOME-CONTINUING> 120,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,251
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.05
</TABLE>
