EFII » Topics » Our synthetic lease arrangements may adversely affect our cash flow.

These excerpts taken from the EFII 10-K filed Mar 2, 2009.

Our synthetic lease arrangements may adversely affect our cash flow.

As of December 31, 2008, we were a party to two synthetic leases (the “301 Lease” and the “303 Lease”, together “Leases”) covering our Foster City facilities located at 301 and 303 Velocity Way, Foster City, California. These leases provided a cost effective means of providing adequate office space for our corporate

 

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offices. Both Leases were scheduled to expire in July 2014. The leases included an option to purchase the facilities during or at the end of the term of the leases for the amount expended by the lessor to purchase the facilities. We have exercised our purchase option in January 2009 with respect to the 301 Lease. On January 29, 2009, we completed the sale of land and building to Gilead for a total price of $137.5 million, subject to an escrow holdback of $15.5 million. The escrow period expires January 2010. The property sold included approximately thirty acres of land and the office building located on the land at 301 Velocity Way, Foster City, California, consisting of approximately 163,000 square feet and certain other assets related to the property.

We have guaranteed to the lessor a residual value associated with the buildings equal to 82% of their funding of the respective Leases. Under the financial covenants, we must maintain a minimum net worth and a minimum tangible net worth as of the end of each quarter. There is an additional covenant regarding mergers. We were in compliance with all such financial and merger related covenants as of December 31, 2008. We are liable to the lessor for the financed amount of the buildings if we default on our covenants. Since we exercised our purchase option with respect to the 301 Lease, our exposure under our remaining synthetic lease arrangements is $56.9 million as of January 29, 2009.

Our remaining synthetic lease arrangement with respect to the 303 Lease could have significant negative consequences. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions, as we are required to maintain compliance with financial covenants regardless of external conditions;

 

   

limit our ability to obtain additional financing due to covenants and the existing leverage;

 

   

require the dedication of funds to comply with the financial covenants, thereby reducing the availability of cash flow and/or ability to obtain financing to fund our growth strategy, working capital, capital expenditures, and other general corporate purposes; and

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our industry by restricting the funds available for use in addressing such changes; and place us at a competitive disadvantage relative to our competitors.

Our synthetic lease arrangements may adversely affect our cash flow.

As of December 31, 2008, we were a party to two synthetic leases (the “301 Lease” and the “303 Lease”, together “Leases”) covering our Foster City facilities located at 301 and 303 Velocity Way, Foster City, California. These leases provided a cost effective means of providing adequate office space for our corporate

 

25


Table of Contents

offices. Both Leases were scheduled to expire in July 2014. The leases included an option to purchase the facilities during or at the end of the term of the leases for the amount expended by the lessor to purchase the facilities. We have exercised our purchase option in January 2009 with respect to the 301 Lease. On January 29, 2009, we completed the sale of land and building to Gilead for a total price of $137.5 million, subject to an escrow holdback of $15.5 million. The escrow period expires January 2010. The property sold included approximately thirty acres of land and the office building located on the land at 301 Velocity Way, Foster City, California, consisting of approximately 163,000 square feet and certain other assets related to the property.

We have guaranteed to the lessor a residual value associated with the buildings equal to 82% of their funding of the respective Leases. Under the financial covenants, we must maintain a minimum net worth and a minimum tangible net worth as of the end of each quarter. There is an additional covenant regarding mergers. We were in compliance with all such financial and merger related covenants as of December 31, 2008. We are liable to the lessor for the financed amount of the buildings if we default on our covenants. Since we exercised our purchase option with respect to the 301 Lease, our exposure under our remaining synthetic lease arrangements is $56.9 million as of January 29, 2009.

Our remaining synthetic lease arrangement with respect to the 303 Lease could have significant negative consequences. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions, as we are required to maintain compliance with financial covenants regardless of external conditions;

 

   

limit our ability to obtain additional financing due to covenants and the existing leverage;

 

   

require the dedication of funds to comply with the financial covenants, thereby reducing the availability of cash flow and/or ability to obtain financing to fund our growth strategy, working capital, capital expenditures, and other general corporate purposes; and

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our industry by restricting the funds available for use in addressing such changes; and place us at a competitive disadvantage relative to our competitors.

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 2, 2009
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