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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
__________ SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 26, 1998
__________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_________ TO __________.
COMMISSION FILE NUMBER 1-12912
CENTENNIAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2978400
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7 LOPEZ ROAD, WILMINGTON, MASSACHUSETTS 01887
(Address of Principal Executive Offices) (Zip Code)
(978) 988-8848
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of January 29, 1999, there were 20,546,683 shares of Common Stock,
$.01 par value per share (the "Common Stock"), of the Registrant
outstanding.
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CENTENNIAL TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PAGE NUMBER
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PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements 3
Consolidated Balance Sheets at December 26, 1998 and March 31, 3
1998
Consolidated Statements of Operations for three and nine 4
months ended December 26, 1998 and December 27, 1997
Consolidated Statements of Cash Flows for nine months 5
ended December 26, 1998 and December 27, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
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<CAPTION>
DECEMBER 26, MARCH 31,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 8,686 $ 5,358
Trade accounts receivable............................................. 4,059 3,677
Less allowances.................................................. (856) (868)
---------- ---------
3,203 2,809
Recoverable income taxes.............................................. 337 337
Inventories........................................................... 2,204 2,309
Other current assets.................................................. 172 684
---------- ---------
Total current assets....................................................... 14,602 11,497
Equipment and leasehold improvements....................................... 3,630 3,973
Less accumulated depreciation and amortization........................ (1,298) (1,242)
----------- ----------
2,332 2,731
Other assets............................................................... 388 417
Investment in former affiliate............................................. 1,700 2,433
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Total assets............................................................... $ 19,022 $ 17,078
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital leases...................................... $ 54 $ 70
Accounts payable and accrued expenses................................. 8,199 8,070
---------- ---------
Total current liabilities.................................................. 8,253 8,140
Long-term obligations under capital leases................................. -- 36
Contingencies (Note 8)
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized, none issued............................................... -- --
Common Stock, $.01 par value; 50,000,000 shares authorized,
20,549,000 issued and outstanding at December 26, 1998 and
18,499,000 issued and outstanding at March 31, 1998................... 205 185
Additional paid-in capital............................................ 84,200 84,220
Foreign currency translation adjustment............................... (6) --
Accumulated deficit................................................... (73,630) (75,503)
----------- ----------
Total stockholders' equity................................................. 10,769 8,902
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Total liabilities and stockholders' equity................................. $ 19,022 $ 17,078
---------- ---------
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales ................................................. $ 7,568 $ 7,567 $ 19,954 $ 21,041
Cost of goods sold ........................................ 4,978 5,362 13,809 17,866
-------- -------- -------- --------
Gross profit ......................................... 2,590 2,205 6,145 3,175
Operating expenses:
Engineering, research and development costs ............ 205 249 574 683
Selling, general and administrative expenses ........... 1,808 1,725 4,706 6,185
-------- -------- -------- --------
Operating income/(loss) ............................. 577 231 865 (3,693)
Provision for loss on inventory subject to customer dispute -- -- -- 1,841
Proceeds from resolution of customer dispute .............. -- -- (1,600) --
Loss on investment activities ............................. -- 5,156 733 14,065
Other expenses, net ....................................... 83 -- 83 855
Net interest (income)/expense ............................ (79) (51) (224) 96
-------- -------- -------- --------
Income/(loss) before equity in earnings of affiliate ... 573 (4,874) 1,873 (20,550)
Equity in earnings of former affiliate .................... -- -- -- 423
-------- -------- -------- --------
Net income/(loss) ................................... $ 573 $ (4,874) $ 1,873 $(20,127)
-------- -------- -------- --------
-------- -------- -------- --------
Net income/(loss) per share - basic ....................... $ .03 $ (.26) $ .10 $ (1.09)
Net income/(loss) per share - diluted ..................... $ .03 $ (.26) $ .09 $ (1.09)
Weighted average shares outstanding - basic ............... 20,549 18,513 19,707 18,446
Weighted average shares outstanding - diluted ............. 20,607 18,513 19,837 18,446
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
-------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
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Cash flows from operating activities:
Net income/(loss).............................................................. $ 1,873 $ (20,127)
Adjustments to reconcile net income/(loss) to net cash from operating
activities:
Depreciation and amortization.................................................. 782 665
Loss on disposal of capital equipment.......................................... 85 --
Equity in earnings of former affiliate......................................... -- (423)
Provision for loss on accounts receivable...................................... 130 310
Provision for loss on investments.............................................. 733 12,161
Change in operating assets and liabilities:
Accounts receivable.......................................................... (524) 1,317
Inventories.................................................................. 105 4,935
Notes receivable from former affiliate....................................... -- 4,129
Recoverable income taxes..................................................... -- 7,019
Other assets................................................................. 541 (5)
Accounts payable and accrued expenses........................................ 129 (3,236)
-------- ---------
Net cash provided by operating activities.................................... 3,854 6,745
Cash flows from investing activities:
Capital expenditures........................................................... (500) (848)
Disposal of capital equipment.................................................. 32 607
Advances from affiliate (net).................................................. -- 1,017
-------- ---------
Net cash provided by/(used in) investing activities.......................... (468) 776
Cash flows from financing activities:
Net borrowings under line of credit............................................ -- (7,941)
Borrowings from term loans..................................................... -- 938
Payments on term loans......................................................... -- (167)
Payments on capital leases..................................................... (52) (549)
Proceeds from exercise of stock options........................................ -- 209
Foreign currency translation adjustment........................................ (6) 77
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Net cash used in financing activities........................................ (58) (7,433)
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Net increase in cash and cash equivalents........................................ 3,328 88
Cash and cash equivalents at beginning of period................................. 5,358 57
-------- ---------
Cash and cash equivalents at end of period....................................... $ 8,686 $ 145
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CENTENNIAL TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CHANGE IN FISCAL YEAR
BASIS OF PRESENTATION
The consolidated financial statements of Centennial Technologies, Inc. (the
"Company") include the accounts of the Company and all wholly owned
subsidiaries. Investments in companies in which ownership interests range from
20 to 50 percent and the Company exercises significant influence over operating
and financial policies are accounted for using the equity method. Other
investments are accounted for using the cost method. All significant
intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior reported financial statements to
conform to the fiscal 1999 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations for the interim periods
reported and of the financial condition of the Company as of the date of the
interim balance sheet. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal period ended March 31, 1998.
CHANGE IN FISCAL YEAR
On March 24, 1997, the Company's Board of Directors voted to change the
fiscal year end from June 30 to March 31. All references to fiscal 1999 and
fiscal 1998 in the accompanying financial statements relate to the twelve months
ended March 31, 1999 and 1998, respectively. All references to fiscal 1997 in
the accompanying financial statements relate to the nine months ended March 31,
1997. References to fiscal 1996, 1995 and 1994 relate to the respective years
ended June 30.
The Company's fiscal year begins on April 1. Each fiscal quarter ends on the
Saturday of the thirteenth week following the beginning of the quarter, except
for the fourth quarter, which ends on March 31.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has no requirements for compensating balances.
2. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade receivables. If any
of the Company's major customers fail to pay the Company on a timely basis, it
could have a material adverse effect on the Company's business, financial
condition and results of operations.
For the three and nine months ended December 26, 1998, two customers
accounted for approximately 28% and 27% of the Company's sales, respectively. At
December 26, 1998, these customers accounted for approximately $1.2 million, or
39% of the Company's net accounts receivable balance.
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For the three and nine months ended December 27, 1997, two customers
accounted for approximately 39% and 32% of the Company's sales, respectively. At
December 27, 1997, these customers accounted for approximately $1.7 million, or
42% of the Company's net accounts receivable balance.
Approximately 14% and 16% of the Company's sales for the three months ended
December 26, 1998 and December 27, 1997, respectively, and approximately 12% of
the Company's sales for each of the nine months ended December 26, 1998 and
December 27, 1997, respectively, were outside the United States, primarily in
several Western European countries. No one area comprised more than 10% of the
Company's sales.
3. INVENTORIES
Inventories consisted of (in thousands):
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DECEMBER 26, MARCH 31,
1998 1998
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Raw material, primarily electronic components....... $ 1,307 $ 1,239
Work in process..................................... 421 620
Finished goods...................................... 476 450
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$ 2,204 $ 2,309
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--------- ---------
</TABLE>
The Company maintains levels of inventories that it believes are necessary
based upon assumptions concerning its growth, mix of sales and availability of
raw materials. Changes in those underlying assumptions could affect management's
estimates of inventory valuation.
In fiscal 1998, the Company reserved fully $1.8 million of costs related to
inventory specifically purchased and manufactured pursuant to a customer
purchase order (the "Custom Inventory"). The customer later attempted to cancel
the purchase order. The Company disputed the customer's claim that the purchase
order cancellation was effective, and sought legal remedies related thereto.
During fiscal 1999, the Company agreed to settle its claims against the
customer, in return for a $1.6 million cash payment and the right to retain and
sell the Custom Inventory at issue. The Company sold portions of the Custom
Inventory during the three months and the nine months ended December 26, 1998
for approximately $0.5 million and $1.0 million, respectively, which has been
included in net sales. At December 26, 1998, the costs related to the Custom
Inventory still on hand remained fully reserved.
4. INVESTMENT IN CENTURY ELECTRONICS MANUFACTURING, INC.
During fiscal 1997, the Company completed three separate business
acquisitions of contract manufacturing activities. On July 10, 1996, the Company
acquired a majority equity position in Design Circuits, Inc. ("DCI") for
approximately $3.2 million in cash, 250,000 shares of the Company's Common Stock
and assumption of certain liabilities.
In October 1996, the Company and the minority shareholders in DCI exchanged
their DCI shares for shares of capital stock in a newly formed entity, Century
Electronics Manufacturing, Inc. ("Century").
Pursuant to a joint venture agreement executed in May 1996, the Company
invested $1.3 million during fiscal 1997 as its initial capital contribution
into its 51% owned contract manufacturing joint venture in Thailand. The
Company's joint venture partner's initial capital contribution was $3.7 million.
On November 5, 1996, Century purchased Triax Technology Group Limited
("Triax"), a provider of contract manufacturing services located in the United
Kingdom for approximately $4.2 million in cash and approximately 2.2 million
shares of common stock of Century. The Company also contributed 25,000 shares of
Centennial Common Stock as a finder's fee. At the conclusion of the Triax
transaction, Triax and DCI were wholly-owned subsidiaries of Century, and
Centennial owned approximately 67% of Century.
On March 14, 1997, Century entered into an agreement in principal with the
Company, whereby Century agreed to redeem a portion of its shares in exchange
for $1.3 million in cash and a $6.0 million subordinated debenture, reducing the
Company's equity ownership position to 45%. The debentures bore interest at a
rate of 6% and were to mature in ten years. Under certain conditions, the
debentures would have been convertible into the capital stock of an entity with
which Century might merge. In addition, the Company
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agreed to contribute to Century its interest in the Thailand joint venture.
Century also agreed to repay an 8.5% note payable to Centennial in the amount of
$4.1 million and to take the necessary steps to remove all outstanding
guarantees of third-party indebtedness.
On July 1, 1997, the aforementioned transaction was completed. In order to
remove certain guarantees of equipment subleased to DCI, Centennial executed
lease buyouts amounting to $2.4 million and sold the underlying equipment to
Century for cash and a $1.9 million 9% promissory note due December 1998.
On February 4, 1998, the Company entered into a transaction with Century
whereby Century redeemed the Company's remaining holdings of Century common
stock, repurchased its $1.9 million 9% promissory note due December 1998,
recovered a warrant for the purchase of 250,000 shares of Century common stock,
and satisfied its $6 million 6% Convertible Subordinated Debenture due June
2007, in exchange for $9.7 million in cash and $4.0 million of Century Series B
Convertible Preferred Stock and the forgiveness of interest due on the note and
debenture. The Series B Convertible Preferred Stock is equivalent upon
conversion to approximately 7%, non-diluted, of Century's outstanding shares, is
non-voting, has no dividend, and has a liquidation preference of $4 million
senior to the common shareholders and subordinate to the holders of Century
Series A Convertible Preferred Stock. The Company recorded a loss on investment
activities of $5.1 million during fiscal 1998 to reflect the difference between
the fair value of the consideration received from Century and the carrying value
of the Company's investment in Century.
During the second quarter of fiscal 1999, the Company reduced the carrying
value of its investment in Century by $733,000 to $1.7 million, reflecting
management's assessment of the deterioration in value of contract manufacturing
businesses in general and a permanent decline in the value of its investment.
During the third quarter of fiscal 1999, Century agreed to redeem the Company's
remaining interest in Century for $1.7 million. The Company expects to complete
this transaction in February 1999.
5. OTHER INVESTMENTS
During fiscal 1996, the Company began a strategy of making investments,
financed through a combination of cash and common stock, in technology companies
for the expressed purpose of market development for its PC card business as well
as investment gain. Management has decided to focus its financial resources on
its core business, and to suspend new investment activities. The Company fully
reserved the carrying value of its investments in these development stage
companies during fiscal 1997 and 1998.
On December 13, 1996, the Company completed merger agreements with
Intelligent Truck Project, Inc., Fleet.Net, Inc. and Smart Traveler Plazas, Inc.
(collectively, "ITP/Fleet.Net") agreeing to exchange 792,960 shares of Common
Stock of the Company for all of the outstanding common stock of the acquired
businesses. Subsequent to the Company's February announcement of financial
irregularities, the principal shareholder of ITP/Fleet.Net filed suit, alleging,
among other things, breach of representations and warranties as to the financial
statements of Centennial. On March 4, 1997, the Company and the principal
shareholder of ITP/Fleet.Net entered into a memorandum of understanding pursuant
to which the companies would unwind the merger agreements. The parties were
unable to reach mutually satisfactory terms to complete the unwinding and on May
15, 1997 agreed to complete the merger and exchange mutual releases of certain
claims. Based on the material uncertainties surrounding the value of
consideration on the original merger date, which uncertainties were not resolved
until the execution of a settlement and mutual release agreement, the Company
recorded the merger and corresponding issuance of Common Stock as of May 15,
1997. Advances to ITP/Fleet.Net made during fiscal 1996 and fiscal 1997, certain
of which were previously characterized as advance payments for technology
license arrangements, were included in loss on investment activities in the
periods the advances were made. The merger was recorded using purchase
accounting, and the excess (approximately $3.2 million) of the purchase price
over the fair value of assets acquired was written off as of the agreement date
(May 15, 1997) because of the uncertainties related to the future operations of
ITP/Fleet.Net.
6. DEBT
On August 14, 1997, the Company entered into a credit agreement, effective
through August 13, 2000 unless terminated sooner, with Congress Financial Corp.
("Congress Financial"), a commercial credit institution, for a revolving credit
facility and term loan facility of up to $4.1 million and $0.9 million,
respectively, and a $2.0 million capital equipment acquisition facility, based
on certain limitations and covenants. On August 15, 1997, the Company paid in
full its line of credit and lease financing obligations with the bank that was
previously providing the Company with its credit facilities.
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On November 24, 1998, the Company terminated its credit agreement with
Congress Financial and entered into a new credit agreement with Fleet National
Bank ("Fleet") for a revolving credit facility, equipment term loan facility and
foreign exchange facility of $3.5 million, $1.5 million and $2.0 million,
respectively. Allowable borrowings are based on accounts receivable and the cost
of equipment, are secured by substantially all of the Company's assets, and are
based on certain limitations and covenants.
At December 26, 1998 and March 31, 1998, the Company had no outstanding
borrowings under either of these credit agreements.
7. EARNINGS (LOSS) PER SHARE
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per
Share," which the Company adopted as of March 31, 1998. Basic earnings per share
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The computation of
diluted earnings per share is similar to the computation of basic earnings per
share except that the denominator is generally increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Common equivalent shares result from
the assumed exercise of outstanding stock options and warrants, the proceeds of
which are then assumed to have been used to repurchase outstanding common stock
using the treasury stock method. The following table reconciles the numerator
and denominator of the basic and diluted earnings per share computations shown
on the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
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BASIC EARNINGS PER SHARE
Numerator
Net income/(loss) $ 573 $ (4,874) $ 1,873 $(20,127)
Denominator
Weighted average common
shares outstanding 20,549 18,513 19,707 18,446
-------- -------- -------- --------
Basic earnings (loss) per share $ 0.03 $ (0.26) $ 0.10 $ (1.09)
-------- -------- -------- --------
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Numerator
Net income/(loss) $ 573 $ (4,874) $ 1,873 $(20,127)
Denominator
Weighted average common
shares outstanding 20,549 18,513 19,707 18,446
Effective of dilutive securities:
Employee stock options 58 -- 130 --
-------- -------- -------- --------
Denominator for diluted
earnings per share 20,607 18,513 19,837 18,446
-------- -------- -------- --------
Diluted earnings (loss) per share $ 0.03 $ (0.26) $ 0.09 $ (1.09)
-------- --------- -------- ---------
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</TABLE>
Options to purchase 2,885,000 shares of Common Stock on December 27, 1997
were excluded from the three and nine months ended calculations of diluted net
income/(loss) per share as the effect of their inclusion would have been
anti-dilutive. Earnings per share data have been restated for all periods
presented to reflect the adoption of SFAS 128.
8. CONTINGENCIES
CLASS ACTION LITIGATION. Since the Company's announcement on February 11,
1997 that it was undertaking an inquiry into the accuracy of its prior reported
financial results, and that preliminary information had raised questions as to
whether reported results contained material misstatements, approximately 35
purported class action lawsuits have been filed in or transferred to the United
States District Court for the District of Massachusetts. These complaints assert
claims against the Company under Section 10(b) of the Securities Exchange Act of
1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder, and related state
law claims of fraud,
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deceit and negligent misrepresentation. The complaints also assert claims
against some or all of the Company's Board of Directors, and some complaints
assert claims against certain of the Company's nondirector officers, under
Section 20(a) of the 1934 Act, as well as the same state law claims asserted
against the Company. The Company's independent accountants, Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), the Company's lead underwriter for its March 1996
subsequent public offering, Needham & Company, Inc., and a financial advisory
subscription company, Cabot Heritage Corporation, have also been named in some
of the suits. These class action lawsuits were purportedly brought by and on
behalf of purchasers of the Company's Common Stock between the Company's initial
public offering on April 12, 1994 and February 10, 1997 (the "Centennial
Securities Litigation").
On February 20, 1997, the Company received a subpoena from the United
States Department of Justice ("DOJ") to produce documents in connection with a
grand jury investigation regarding various irregularities in the Company's
previous press releases and financial statements. The DOJ also requested certain
information regarding some of the Company's former officers, certain stock
transactions by the Company's former Chief Executive Officer, and correspondence
with the Company's auditors. The DOJ has subsequently subpoenaed additional
Company records and files. The Company has not been notified by the DOJ that it
is a target or subject of this investigation.
On and after February 26, 1997, four complaints were filed in the United
States District Court for the District of Massachusetts by plaintiffs purporting
to represent classes of shareholders who purchased the Company's Common Stock on
February 25, 1997. The complaint also names the Company's former Interim Chief
Executive Officer, Lawrence J. Ramaekers, and alleges violations of Sections
10(b) and 20(a) of the 1934 Act (the "February 25 Securities Litigation").
In mid-February 1997, the Company was notified that the Boston District
Office of the Securities and Exchange Commission ("SEC") was conducting an
investigation of the Company. The SEC has requested that the Company provide the
SEC with certain documents concerning the Company's public reports and financial
statements. The SEC indicated that its inquiry should not be construed as an
indication by the SEC or its staff that any violations have occurred, or as a
reflection upon the merits of the securities involved or upon any person who
effected transactions in such securities. The Company is cooperating with the
SEC in connection with this investigation, the outcome of which cannot yet be
determined.
On and after March 26, 1997, several complaints were filed in the United
States District Court for the District of Massachusetts by plaintiffs purporting
to represent classes of shareholders who purchased stock of WebSecure, Inc.
("WebSecure") between December 5, 1996 and February 27, 1997 (the "WebSecure
Complaints"). The WebSecure Complaints assert claims against WebSecure, certain
officers, directors and underwriters of WebSecure, and the Company. Claims
against the Company include alleged violations of Sections 11 and 15 of the
Securities Act of 1933 (the "1933 Act") (the "WebSecure Securities Litigation").
In addition, several shareholder derivative lawsuits have been filed by
purported holders of the Company's Common Stock seeking recovery for certain
alleged breach of fiduciary duties, alleged gross negligence, alleged breach of
contract and alleged insider trading by members of the Company's Board of
Directors between August 21, 1996 and February 10, 1997 (the "Derivative
Litigation").
On January 13, 1998, a plaintiff purporting to represent classes of
shareholders who purchased the Company's Common Stock on February 27, 1997 filed
a complaint in the United States District Court for the District of
Massachusetts. The complaint also names the Company's former Interim Chief
Executive Officer, Lawrence J. Ramaekers, and Mr. Ramaekers' employer, Jay Alix
& Co., and alleges violations of Sections 10(b) and 20(a) of the 1934 Act (the
"February 27 Securities Litigation").
On February 9, 1998, a consolidated amended complaint combining the
Centennial Securities Litigation, the February 25 Securities Litigation, the
February 27 Securities Litigation and the Derivative Litigation was filed in the
United States District Court for the District of Massachusetts (the
"Consolidated Litigation"). Also on February 9, 1998, the Company and lead
counsel representing the plaintiffs in the Consolidated Litigation filed a
Stipulation of Settlement (the "Settlement Agreement"), whereby the Company and
certain of its officers and directors would be released from liability arising
from the allegations included in the Consolidated Litigation. In return, the
Company agreed to pay the plaintiffs in the Consolidated Litigation $1.475
million in cash and to issue to these plaintiffs 37% of the Company's Common
Stock. The Company also agreed to adopt certain corporate governance policies
and procedures.
The plaintiffs in the Consolidated Litigation have not yet reached an
agreement with the Company's former Interim Chief Executive Officer, Lawrence J.
Ramaekers, regarding their alleged claims against him. The plaintiffs have
agreed to release the
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Company from any direct liability related to those alleged claims. In the
agreement under which Mr. Ramaekers provided services to the Company, the
Company agreed to provide Mr. Ramaekers with the same indemnification as is
applicable to other officers of the Company pursuant to the Company's By-Laws.
The Company has agreed to indemnify, hold harmless, and defend Mr. Ramaekers
from and against certain claims arising out of his engagement with the Company.
The Court granted final approval of the Settlement Agreement of the
Consolidated Litigation on April 29, 1998, which became effective on July 20,
1998.
As of March 31, 1997, the Company recorded a provision for the settlement of
the Consolidated Litigation of $20.0 million, representing the cash portion of
the Settlement Agreement, together with an amount equal to 37% of the estimated
market capitalization of the Company. The Company satisfied its obligations
regarding the cash portion ($1,475,000) of the Settlement Agreement by remitting
that amount into a settlement fund during fiscal 1998. The Company distributed
2,050,321 shares of the common stock component of the Settlement Agreement
during the second quarter of fiscal 1999, and expects to satisfy its remaining
obligation to distribute 4,784,083 shares of Common Stock by the end of fiscal
1999.
A significant number of class members opted not to participate in the
Settlement Agreement. No assurance can be given that claims by class members who
declined to participate in the Settlement Agreement will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
On November 13, 1998, the Company reached an agreement to settle the
WebSecure Securities Litigation. The settlement agreement contemplates that the
Company and certain of its officers and directors would be released from any and
all liability arising from the allegations included in the WebSecure Securities
Litigation in return for the issuance to the WebSecure Securities Litigation
class of 345,000 shares of the Company's Common Stock and the payment to the
class of up to $50,000 for notice and administrative costs. The settlement
agreement must be submitted to the Court for review and approval and,
thereafter, presented to class members for consideration. If a sufficiently
large number of class members opt not to participate in the settlement
agreement, the agreement may by withdrawn. No assurance can be given that the
Court will approve the settlement agreement, or that, if such approval is
obtained, that a material number of class members will not decline to
participate in the settlement.
9. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income." Statement
130 establishes rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income (loss) or stockholders' equity. During the third quarter
and first nine months of fiscal 1999, total comprehensive income was not
materially different than net income.
10. SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore the company will adopt the new requirements retroactively in fiscal
1999. Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
Except for historical information contained herein, the discussions
contained in this document include forward-looking statements. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking
11
<PAGE>
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," and similar expressions are intended to identify
forward-looking statements. Such statements involve a number of risks and
uncertainties, including, but not limited to, those (i) discussed below, (ii)
discussed under the heading "Risk Factors", and (iii) identified from time to
time in the Company's filings with the Securities and Exchange Commission
including those set forth in the Company's Annual Report on Form 10-K for the
fiscal period ended March 31, 1998 under the heading "Risk Factors." These risks
and uncertainties could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements. The Company assumes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
hereof.
OVERVIEW
The Company designs, manufacturers and markets an extensive line of PC cards
used primarily by OEMs in industrial and commercial applications. The Company's
PC cards provide added functionality to devices containing microprocessors by
supplying increased storage capacity, communications capabilities and programmed
software for specialized applications.
The following discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated condensed statements of
income data of the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 65.8 70.9 69.2 84.9
----------- ----------- ----------- -----------
Gross profit................................... 34.2 29.1 30.8 15.1
Operating expenses:
Engineering, research and development costs..... 2.7 3.3 2.9 3.2
Selling, general and administrative expenses.... 23.9 22.8 23.6 29.4
----------- ----------- ----------- -----------
Operating income/(loss) ..................... 7.6 3.0 4.3 (17.5)
Provision for loss on inventory subject to
customer dispute.............................. -- -- -- 8.8
Proceeds from resolution of customer dispute...... -- -- (8.0) --
Loss on investment activities..................... -- 68.1 3.7 66.8
Other expenses, net............................... 1.0 -- 0.3 4.1
Net interest (income)/expense..................... (1.0) (0.7) (1.1) 0.5
------------ ------------ ------------ -----------
Income/(loss) before equity in earnings
of affiliate.................................. 7.6 (64.4) 9.4 (97.7)
Equity in earnings of former affiliate............ -- -- -- 2.0
----------- ----------- ----------- -----------
Net income (loss)............................... 7.6% (64.4)% 9.4% (95.7)%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
NET SALES
Net sales consist of sales of PC cards, embedded computer modules and
specialty and standard memory products, less returns and discounts. Net sales
for the third quarter of fiscal 1999 and fiscal 1998 were both $7.6 million. Net
sales for the nine months ended December 26, 1998 decreased 5.2% to $20.0
million from $21.0 million for the same period of fiscal 1998. A portion of the
decrease in net sales resulted from a decline in the cost of certain memory
devices used in the production of the Company's products. Decreasing component
costs led to a decrease in the average selling price of the Company's products
between the periods, which was partially offset by an increase in the volume of
PC cards sold to both new and existing customers. The Company expects that
further
12
<PAGE>
decreases in component costs and reductions in the average selling price of its
products will continue through fiscal 1999, and no assurances can be given that
the Company will be successful in its efforts to offset this trend with
increases in the volume of PC cards sold during the remainder of fiscal 1999.
A significant customer represented 8% and 19% of total sales in the three
and nine month periods ended December 26, 1998, respectively, and 29% of total
sales in each of the same periods last year. During the third quarter of fiscal
1999, this customer engaged a contract manufacturer to complete the final
assembly of a majority of its products for which the Company has historically
supplied PC cards. The Company's sales to this contract manufacturer represented
20% and 7% of total sales for the three and nine month periods ended December
26, 1998. The Company had no sales to this contract manufacturer during fiscal
1998. A third customer represented 6% and 4% of total sales for the three and
nine month periods ended December 26, 1998, respectively, and 10% and 4% of
total sales in each of the same periods last year. If these customers were to
reduce significantly the amount of business they conduct with the Company, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. No other customer or group of related
customers accounted for more than 10% of the Company's sales.
Sales outside of the United States represented 14% and 12% of sales for the
three and nine month periods ended December 26, 1998, compared to 16% and 12% of
sales for the same periods in the previous year. The Company expects that sales
outside the United States will continue to represent a percentage of the
Company's sales consistent with that of these periods.
COSTS OF GOODS SOLD
Cost of goods sold decreased 7% to $5.0 million for the third quarter
compared to $5.4 million for the same period in fiscal 1998, and decreased 23%
to $13.8 million for the nine months ended December 26, 1998 compared to $17.9
million for the same period last year, primarily due to a decline in the cost of
certain memory devices used in the Company's PC card products, which decline was
partially offset by an increase in the unit volume of sales between periods.
Gross margins were 34% and 31% for the three and nine month periods ended
December 26, 1998, respectively, compared to 29% and 15% for the same periods
last year. During both the second and third quarters of fiscal 1999, the Company
sold portions of some customized inventory for approximately $0.5 million each
quarter, the cost of which had been previously fully reserved due to a dispute
with the customer for whom the customized cards were originally produced and who
had attempted to cancel the order. Gross margins for the three and nine month
periods ended December 26, 1998, excluding this sale of fully reserved
inventory, were 30% and 27%, respectively. Costs of goods sold for the three and
nine months ended December 27, 1997 include provisions for inventory
obsolescence of $0.1 million and $0.9 million, respectively, representing 2% and
4% of sales in these periods, respectively. Cost of goods sold for the nine
months ended December 27, 1997 was also negatively impacted by inventory
revaluation adjustments of $0.9 million, or 4.3% of sales, primarily due to
declining electronic component prices and changes in overhead absorption rates.
During fiscal 1998, the Company instituted policies that have resulted in
significantly decreasing the amount of inventory purchased in advance of receipt
of customer orders. In addition, during fiscal 1998 the Company instituted new
procurement practices reflecting increased emphasis on reducing inventory
levels, and established on-site stores of raw materials consigned by several of
the Company's major vendors. The Company also instituted several policies that
have resulted in increased production efficiencies.
ENGINEERING, RESEARCH AND DEVELOPMENT COSTS
Engineering, research and development costs were $205,000 and $574,000 for
the three and nine month periods ended December 26, 1998, respectively, and
$249,000 and $683,000 for the same periods last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1.8 million and $4.7
million for the three and nine months periods ended December 26, 1998,
respectively, and $1.7 million and $6.2 million for the same periods last
year. Expenses related to professional consultants and audit fees have
decreased significantly between periods as the Company completed its special
investigation and hired new senior management. The Company also incurred
significantly lower bad debt expenses compared to last year as the Company
provided specific reserves in fiscal 1998 on the accounts of two of the
Company's customers, both of which are no longer customers of the Company,
and the Company continues to improve its credit extension policies. The
Company incurred expenses during fiscal 1999 related to its new UK sales
operations founded in January 1998 that were not experienced during the same
period last year.
13
<PAGE>
PROVISION FOR LOSS ON INVENTORY SUBJECT TO CUSTOMER DISPUTE/PROCEEDS FROM
RESOLUTION OF CUSTOMER DISPUTE
During fiscal 1998, the Company filed suit against a customer regarding
inventory specifically purchased and manufactured pursuant to a purchase order
from the customer (the "Custom Inventory"). The customer attempted to cancel a
portion of the purchase order. The Company disputed the customer's claim that
the purchase order cancellation was effective. During fiscal 1998, the Company
fully reserved the cost of the Custom Inventory of approximately $1.8 million
due to the legal costs and inherent uncertainties involved in litigation.
During the second quarter of fiscal 1999, the Company and the customer
agreed to settle the litigation. As a result of this settlement, the Company
received $1.6 million in cash and the customer agreed that the Company would
retain all rights with regard to the Custom Inventory. During the second quarter
of fiscal 1999, the Company recognized the cash payment of $1.6 million as
income.
During both the second and third quarters of fiscal 1999 and after the
settlement agreement was reached, the Company sold portions of the Custom
Inventory for approximately $0.5 million each quarter, which the Company has
included in net sales for these periods.
OTHER EXPENSES, NET
During the third quarter of fiscal 1999, the Company incurred a loss on the
disposal of certain equipment that had a net book value of approximately
$83,000, which equipment was replaced.
During the first quarter of fiscal 1998, the Company increased its accrual
for Special Investigation Costs by $597,000 due to incremental costs. During the
second quarter of fiscal 1998, the Company paid in full its line of credit and
lease financing obligations with the bank that was previously providing the
Company with its credit facilities. That bank required the Company to pay lease
cancellation charges of approximately $258,000 in order to release its lien on
the equipment being financed pursuant to those leases.
NET INTEREST INCOME/EXPENSE
Net interest income was $79,000 and $224,000 for the three and nine month
periods ended December 26, 1998 compared to net interest income/(expense) of
$51,000 and ($96,000) for the same periods last year, reflecting cash available
for investment in fiscal 1999 and outstanding borrowings during fiscal 1998.
LOSS ON INVESTMENT ACTIVITIES
Loss on investment activities consists of write-downs, valuation adjustments
and accruals for losses recorded associated with certain investments. During the
second quarter of fiscal 1999, the Company reduced the carrying value of its
investment in Century by $733,000, reflecting management's assessment of the
deterioration in value of contract manufacturing businesses in general and a
permanent decline in the value of its investment. During the third quarter of
fiscal 1999, Century agreed to redeem the Company's remaining interest in
Century for $1.7 million. The Company expects to complete this transaction in
February 1999.
The following table describes the elements and the amounts reflected in this
category during fiscal 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 27, DECEMBER 27,
1997 1997
--------------- -------------
<S> <C> <C>
Costs incurred in connection with ITP/Fleet.Net..... $ 50 $ 3,869
Loss on investment in former affiliate.............. 5,142 5,142
Loss on investment in ViA........................... -- 4,415
Loss on other investments........................... (36) 639
--------------- -------------
TOTAL............................................... $ 5,156 $ 14,065
--------------- -------------
--------------- -------------
</TABLE>
14
<PAGE>
EQUITY INTEREST IN EARNINGS OF AFFILIATE
The equity interest in earnings of affiliate of $423,000 for the nine month
periods ended December 27, 1997 reflects the Company's net interest in earnings
of its former affiliate, Century Electronics Manufacturing, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operating activities
primarily from public and private offerings of equity securities and loans from
financial institutions.
FISCAL 1999 LIQUIDITY OUTLOOK
The Company experienced significant losses from operations prior to fiscal
1999 and has taken measures to reduce those losses, including reducing various
expenses and implementing new cost controls. The Company believes that its
present cash balances, bank financing, and anticipated future cash flows will be
sufficient to fund operations for the foreseeable future.
OPERATING ACTIVITIES
At December 26, 1998, working capital increased to approximately $6.3
million, compared to working capital of $3.4 million at March 31, 1998. The
Company experienced cash flow provided by operations during the first nine
months of fiscal 1999 of approximately $3.9 million, compared to cash flow
provided by operations of approximately $6.7 million for the comparable period
last year. Days of sales outstanding in accounts receivable amounted to 39 days
at December 26, 1998 compared to 36 days at March 31, 1998. The Company's
inventories represent approximately 6 weeks of manufacturing output at December
26, 1998, compared to 5 weeks at March 31, 1998.
INVESTING TRANSACTIONS
Net capital expenditures amounted to $468,000 in the first nine months of
fiscal 1999 and $241,000 in the same period last year. As of December 26, 1998,
the Company had remaining obligations of $54,000 on equipment financing leases.
As of December 26, 1998, the Company had commitments for future capital
equipment expenditures in fiscal year 1999 of approximately $60,000.
FINANCING TRANSACTIONS
On August 14, 1997, the Company entered into a credit agreement, effective
through August 13, 2000 unless terminated sooner, with Congress Financial Corp.
("Congress Financial"), a commercial credit institution, for a revolving credit
facility and term loan facility of up to $4.1 million and $0.9 million,
respectively, and a $2.0 million capital equipment acquisition facility, based
on certain limitations and covenants. On August 15, 1997, the Company paid in
full its line of credit and lease financing obligations with the bank that was
previously providing the Company with its credit facilities. At March 31, 1998,
the Company had no outstanding borrowings under the Congress Financial credit
agreement.
On November 24, 1998, the Company terminated its credit agreement with
Congress Financial and entered into a new credit agreement with Fleet National
Bank ("Fleet") for a revolving credit facility, equipment term loan facility and
foreign exchange facility of $3.5 million, $1.5 million and $2.0 million,
respectively. Allowable borrowings are based on accounts receivable and the cost
of equipment, are secured by substantially all of the Company's assets, and are
based on certain limitations and covenants. At December 26, 1998, the Company
had no outstanding borrowings under the Fleet credit agreement.
INVESTMENT IN CENTURY ELECTRONICS MANUFACTURING, INC.
During fiscal 1997, the Company completed three separate business
acquisitions of contract manufacturing activities. On July 10, 1996, the Company
acquired a majority equity position in Design Circuits, Inc. ("DCI") for
approximately $3.2 million in cash, 250,000 shares of the Company's Common Stock
and assumption of certain liabilities.
15
<PAGE>
In October 1996, the Company and the minority shareholders in DCI exchanged
their DCI shares for shares of capital stock in a newly formed entity, Century
Electronics Manufacturing, Inc. ("Century").
Pursuant to a joint venture agreement executed in May 1996, the Company
invested $1.3 million during fiscal 1997 as its initial capital contribution
into its 51% owned contract manufacturing joint venture in Thailand. The
Company's joint venture partner's initial capital contribution was $3.7 million.
On November 5, 1996, Century purchased Triax Technology Group Limited
("Triax"), a provider of contract manufacturing services located in the United
Kingdom for approximately $4.2 million in cash, and approximately 2.2 million
shares of common stock of Century. The Company also contributed 25,000 shares of
Centennial Common Stock as a finder's fee. At the conclusion of the Triax
transaction, Triax and DCI were wholly-owned subsidiaries of Century, and
Centennial owned approximately 67% of Century.
On March 14, 1997, Century entered into an agreement in principal with the
Company, whereby Century agreed to redeem a portion of its shares in exchange
for $1.3 million in cash and a $6.0 million subordinated debenture, reducing the
Company's equity ownership position to 45%. The debentures bore interest at a
rate of 6% and were to mature in ten years. Under certain conditions, the
debentures would have been convertible into the capital stock of an entity with
which Century might merge. In addition, the Company agreed to contribute to
Century its interest in the Thailand joint venture. Century also agreed to repay
an 8.5% note payable to Centennial in the amount of $4.1 million and to take the
necessary steps to remove all outstanding guarantees of third-party
indebtedness.
On July 1, 1997, the aforementioned transaction was completed. In order to
remove certain guarantees of equipment subleased to DCI, Centennial executed
lease buyouts amounting to $2.4 million and sold the underlying equipment to
Century for cash and a $1.9 million 9% promissory note due December 1998.
On February 4, 1998, the Company entered into a transaction with Century
whereby Century redeemed the Company's remaining holdings of Century common
stock, repurchased its $1.9 million 9% promissory note due December 1998,
recovered a warrant for the purchase of 250,000 shares of Century common stock,
and satisfied its $6 million 6% Convertible Subordinated Debenture due June
2007, in exchange for $9.7 million in cash and $4.0 million of Century Series B
Convertible Preferred Stock and the forgiveness of interest due on the note and
debenture. The Series B Convertible Preferred Stock is equivalent upon
conversion to approximately 7%, non-diluted, of Century's outstanding shares, is
non-voting, has no dividend, and has a liquidation preference of $4 million
senior to the common shareholders and subordinate to the holders of Century
Series A Convertible Preferred Stock. The Company recorded a loss on investment
activities of $5.1 million in the third quarter of fiscal 1998 to reflect the
difference between the fair value of the consideration received from Century and
the carrying value of the Company's investment in Century.
During the second quarter of fiscal 1999 the Company reduced the carrying
value of its investment in Century by $733,000 to $1.7 million, reflecting
management's assessment of the deterioration in value of contract manufacturing
businesses in general. During the third quarter of fiscal 1999, Century agreed
to redeem the Company's remaining interest in Century for $1.7 million. The
Company expects to complete this transaction in February 1999.
CONTINGENCIES
The Company is a defendant in numerous lawsuits alleging violations of
securities and other laws in connection with the Company's prior reported
financial results and certain other related matters. See "Part II, Item 1 --
Legal Proceedings." The Company has been granted final approval of its proposed
settlement of the Consolidated Litigation, has entered an agreement to settle
the WebSecure Securities Litigation, and believes that such lawsuits will be
settled substantially in accordance with the description contained in "Part II,
Item 1 -- Legal Proceedings." The Company believes that such settlements will
not have a material adverse impact on its liquidity. As of March 31, 1997, the
Company recorded a provision for the settlement of the Consolidated Securities
Litigation of $20.0 million, representing the cash portion of the settlement,
together with an amount equal to 37% of the estimated market capitalization of
the Company. The Company satisfied its obligations regarding the cash portion
($1,475,000) of the Settlement Agreement by remitting that amount into a
settlement fund during fiscal 1998. The Company distributed 2,050,321 shares of
the common stock component of the Settlement Agreement during the second quarter
of fiscal 1999, and expects to satisfy its remaining obligation to distribute
4,784,083 shares of Common Stock by the end of fiscal 1999.
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<PAGE>
There can be no assurance that claims by shareholders who opted not to
participate in the class action settlement will not be material, or that the
claims against Lawrence J. Ramaekers, the Company's former interim Chief
Executive Officer, in connection with the February 25 Securities Litigation and
the February 27 Securities Litigation, as to which the Company may have
indemnification obligations will be settled, and such inability to settle
pending litigation could have a material adverse effect on the Company's
liquidity, business, financial condition and results of operations.
RISK FACTORS
From time to time, information provided by the Company or statements made by
its employees may contain forward-looking information. The Company's actual
future results may differ materially from those projections or suggestions made
in such forward-looking information as a result of various potential risks and
uncertainties including, but not limited to, the factors discussed below.
Losses in Prior Periods; Liquidity and Financing Risks.
The Company has experienced significant losses from operations from fiscal
1994 through fiscal 1998. The Company has taken measures since the firing of its
former Chief Executive Officer in February 1997 to reduce those losses,
including the following:
- appointing a turnaround specialist - hiring new senior management
- reducing various expenses - implementing new cost controls.
If cost savings are not achieved or revenues are not increased, the operating
plan for the Company could include further cost reductions. If cost savings are
not achieved, or revenues are not increased, it would significantly impair the
ability of the Company to continue as a going concern. The Company believes that
its cash balances, bank financing, and anticipated future cash flows will be
sufficient to fund operations for the foreseeable future. The Company can make
no assurances that measures taken to date or to be taken in the future will be
sufficient to stem losses or that future financing will be available to the
Company or, if available, on terms that will be satisfactory to the Company.
Dependence on Major Customers; Concentration of Credit Risk.
Bay Networks, Inc. ("Bay"), which merged with and became a subsidiary of
Northern Telecom during the second quarter of fiscal 1999, accounted for
approximately 19% of the Company's sales for the nine months ended December 26,
1998. Bay accounted for 29% of the Company's sales for the nine months ended
December 27, 1997. During the third quarter of fiscal 1999, Bay engaged a
contract manufacturer to complete the final assembly of a majority of the
network routers for which the Company has historically been supplying Bay with
PC cards. The Company's sales of PC cards to this contract manufacturer to be
used in Bay's network routers accounted for 7% of the Company's sales for the
nine months ended December 26, 1998. The loss of, or a significant curtailment
of purchases by these customers, or any other significant customer of the
Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. The industries served by the
Company are characterized by frequent mergers, consolidations, acquisitions,
corporate restructuring and changes in management, and the Company has from time
to time experienced reductions in purchase orders from customers as a result of
such events. There can be no assurance that such events involving customers of
the Company will not result in a significant reduction in the level of sales by
the Company to such customers or the termination of the Company's relationship
with such customers. In addition, the percentage of the Company's sales to
individual customers may fluctuate from period to period. Customer orders can be
canceled and volume levels can be changed or delayed. The timely replacement of
canceled, delayed, or reduced orders with new customers cannot be assured. These
risks are exacerbated because a majority of the Company's sales are to customers
in the electronics industry, which is subject to rapid technological change and
product obsolescence. The electronics industry is also subject to economic
cycles and has experienced, and is likely to experience, fluctuations in demand.
The Company anticipates that a significant portion of its sales will continue
for the foreseeable future to be concentrated in a small number of customers in
the electronics industry.
Declining Average Sales Prices.
The Company has experienced, and expects to continue to experience,
declining average sales prices for its products. The data storage markets in
which the Company competes are characterized by intense competition. Therefore,
the Company expects to incur increasing pricing pressures from its customers in
future periods, which will likely result in a further decline in average sales
prices for the Company's products. The Company believes that it must continue to
achieve manufacturing costs reductions, develop new
17
<PAGE>
products that incorporate customized features and increase its volume of PC card
sales in order to offset the effect of these declining average sales prices. If
the Company were not able to achieve such cost reductions, develop new
customized products or increase its unit sales volumes, each of these factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Fluctuations in Quarterly Results.
The Company's results of operations may be subject to quarterly fluctuations
due to a number of factors, including the following:
<TABLE>
<S> <C>
- timing of receipt and delivery of - competitive pricing pressures
significant orders for the Company's products - increases in raw material costs
- costs associated with the expansion of operations - changes in customer and product mix
- production difficulties. - quality of the Company's products
- write-downs or write-offs of investments - exchange rate fluctuations
in other companies - market acceptance of new or enhanced versions
of the Company's products
</TABLE>
Other factors, some of which are beyond the Company's control, may also cause
fluctuations in the Company's results of operations. Additionally, as is the
case with many high technology companies, a significant portion of the Company's
orders and shipments typically occurs in the last few weeks of a quarter. As a
result, revenues for a quarter are not predictable, and the Company's revenues
may shift from one quarter to the next, having a significant effect on reported
results.
Fluctuations in Trading Price.
The trading price of the Company's Common Stock may fluctuate widely in
response to, among other things, the following:
<TABLE>
<S> <C>
- quarter-to-quarter operating results - industry conditions
- awards of orders to the Company - new product or product development
or its competitors announcements by the Company or its competitors
- changes in earnings estimates by analysts
</TABLE>
There can be no assurance that the Company's future performance will meet the
expectations of analysts or investors. In addition, the volatility of the stock
markets may cause wide fluctuations in trading prices of securities of high
technology companies.
Dependence on Key Personnel.
The Company's success depends to a significant degree upon the efforts and
abilities of members of its senior management and other key personnel, including
technical personnel. The loss of any of these individuals could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's business also depends upon its ability to continue to
attract and retain senior managers and skilled technical employees. Failure to
attract and retain such senior personnel could materially and adversely affect
the Company's business, financial condition and results of operations.
Need to Respond to Rapid Technological Change.
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and rapid product
obsolescence. Rapid technological development substantially shortens product
life cycles, and the Company's growth and future success will depend upon its
ability, on a timely basis, to develop and introduce new products, to enhance
existing products and to adapt products for various industrial applications and
equipment platforms, as well as upon customer acceptance of these products,
enhancements and adaptations. The Company, having more limited resources than
many of its competitors, focuses its development efforts at any given time to a
relatively narrow scope of development projects. There can be no assurance that
the Company will select the correct projects for development or that the
Company's development efforts will be successful. In addition, no assurance can
be given that the Company will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of new products,
that new products and product enhancements will meet the requirements of the
marketplace and achieve market acceptance, or that the Company's current or
future products will conform to applicable industry standards. Any inability of
18
<PAGE>
the Company to introduce on a timely basis new products or enhancements that
contribute to profitable sales would have a material adverse effect on the
Company's business, financial condition and results of operations.
Historical Single Product Concentration.
PC cards and related services constitute 100% of the Company's sales for
fiscal 1999 and 1998. The market for PC cards is still developing and there can
be no assurance that computing and electronic equipment that utilize PC cards
will not be modified to render the Company's PC cards obsolete or otherwise have
the effect of reducing demand for the Company's PC cards. In addition, the
Company faces intense competition from competitors that have greater financial,
marketing and technological resources than the Company, which competition may
reduce demand for the Company's PC cards. Decreased demand for the Company's PC
cards as a result of technological change, competition or other factors would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Competition.
Each of the markets in which the Company competes is intensely competitive.
The Company competes with manufacturers of PC cards and related products,
including SanDisk Corporation and Smart Modular Technologies, Inc., as well as
with electronic component manufacturers who also manufacture PC cards, including
Advanced Micro Devices, Inc., Epson America, Inc., Intel Corporation and
Mitsubishi Electric Corporation. Certain of these competitors supply the Company
with raw materials, including electronic components, which are occasionally
subject to industry wide allocation. These competitors may have the ability to
manufacture products at lower costs than the Company as a result of their higher
levels of integration. In addition, many of the Company's competitors or
potential competitors have greater name recognition, a larger installed base of
customers, more extensive engineering, manufacturing, marketing, distribution
and support capabilities and greater financial, technological and personnel
resources than the Company. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with similar or alternative products that
may be less costly or provide additional features. The Company believes that its
ability to compete successfully depends on a number of factors, including the
following:
<TABLE>
<S> <C>
- product quality and performance - order turnaround
- provision of competitive design capabilities - timely response to advances in technology
- adequate manufacturing capacity - production efficiency
- timing of new product introductions by the - number and nature of the Company's competitors
Company, its customers and its competitors in a given market
- price - general market and economic conditions
</TABLE>
In addition, market conditions are expected to lead to intensified price
competition for the Company's products and services, resulting in lower prices
and gross margins, which could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will compete successfully in the future.
Raw Material Shortages and Dependence on Single Source Suppliers.
The Company has from time to time experienced shortages in the supply of
computer memory chips and other electronic components used to manufacture PC
cards. The Company expects that such supply shortages may continue, particularly
with respect to computer memory chips and other electronic components used in
products targeted at high-growth market segments. Occasionally, certain memory
chips important to the Company's products are on industry-wide allocation by
suppliers. Any such shortages could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company purchases certain key components from single source vendors for
which alternative sources are not currently available. The Company does not
maintain long-term supply agreements with any of its vendors. The inability to
develop alternative sources for these single source components or to obtain
sufficient quantities of components could result in delays or reductions in
product shipments, or higher prices for these components, or both, any of which
could materially and adversely affect the Company's business, financial
condition and results of operations. No assurance can be given that one or more
of the Company's vendors will not reduce supplies to the Company.
19
<PAGE>
Year 2000 Compliance.
The Company is aware of problems associated with computer systems as the
year 2000 approaches. "Year 2000" problems are the result of common computer
programming techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The issue is complex and
wide-ranging. The problem may affect transaction processing computer
applications used by the Company for accounting, distribution, manufacturing,
planning and other applications. Problems may also affect embedded systems such
as building security systems, machine controllers and production test equipment.
Year 2000 problems with any or all of these systems may affect the effectiveness
or efficiency with which the Company can perform many significant functions,
including but not limited to:
- order processing - material planning
- product assembly - product test
- invoicing - payroll and financial reporting
In addition, the problem may affect the computer systems of vendors and
customers, disrupting their operations and possibly impairing the Company's
sources of supply and demand.
The Company has established a Year 2000 readiness team to assess the impact
of the Year 2000 issue on the Company, and to coordinate testing and remediation
activities. In general, the Company's products do not perform date related
processing and are not materially affected by Year 2000 issues. Product testing
has uncovered no Year 2000 problems, and investigation into product design,
specifically firmware and microcode, has uncovered no design assumptions or
application programming interfaces that would cause Year 2000 problems. The
Company has also sample tested 100% of its manufacturing, testing and labeling
equipment and uncovered no Year 2000 problems. The Company has not specifically
tested software obtained from its customers that is incorporated into its
products for such customers, which may in some cases involve date related
processing, but the Company has sought assurances from all of its customers that
provide the Company with software for incorporation into the Company's products
that the software is Year 2000 compliant, as well as a disclaimer of liability
and indemnification should any Year 2000 issues arise with regard to the
customer's software. The Company will analyze the responses to these requests as
they are received. There can be no assurance that the Company will be successful
in obtaining from these customers such assurance or indemnification.
The Company has completed its Year 2000 compliance assessment and
remediation of the Company's management information system. The Company upgraded
its core management information systems to address the Year 2000 issues with
respect to internal budgeting, financial planning, material planning, sales
order processing, accounting, inventory control, shop floor accounting and
purchasing. All of the modules of this new system are currently operational. The
Company has tested the upgrade to verify its Year 2000 compliance. The cost of
this management information system was approximately $450,000, of which
approximately $394,000 is attributable to the purchase of new software, which
has been capitalized; the balance has been expensed as incurred. The Company has
used operating cash flows as the source of funds for Year 2000 compliance
issues.
The assessment and remediation of Year 2000 problems in tertiary business
information systems is on-going. The Company believes that over 95% of its
desktop PC hardware units are Year 2000 compliant. The majority of the software
used on these systems and network servers is composed of recent versions of
vendor supported, commercially available products that the Company believes are
Year 2000 compliant. Upgrading these applications as respective vendors release
Year 2000 compliant patches has not been a significant burden on the Company.
The Company has also replaced and tested one operating system that was not and
could not be modified to become year 2000 compliant. The cost for this new
system was not material.
The Company has completed its assessment and remediation of Year 2000
problems with computer systems used for facilities control. The Company has
recently purchased a Year 2000 compliant telephone system. The cost to purchase
and install the new telephone systems was approximately $106,000, which has been
capitalized. The Company has also tested its building security system and
determined that it is Year 2000 compliant.
During the third quarter of fiscal 1999, the Company initiated formal
communications with its key suppliers and customers regarding their Year 2000
readiness status. The Company is in the process of analyzing the responses
received from suppliers and customers and is following up with those who have
not yet provided a formal response. The Company plans to complete this
assessment phase by the end of fiscal 1999. While suppliers and customers may
indicate that their products are or will be Year 2000 compliant prior to the
year 2000 and that they expect their operations and services will continue
uninterrupted, the Company can
20
<PAGE>
provide no assurances that the Company's key suppliers and customers have, or
will have technology systems, non-information technology systems and products
that are Year 2000 compliant. Any Year 2000 compliance problem facing the
Company's customers or suppliers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Any additional expenses related to the management of the Company's Year
2000 compliance program are not expected to be material to the Company's
quarterly operating results. The Company estimates that it has spent in
aggregate approximately $600,000 in addressing Year 2000 readiness issues.
The Company has not deferred or delayed any information technology projects
due to Year 2000 efforts.
The costs and time schedules for the Company's Year 2000 problem abatement
are based on management's best estimates for the implementation of its new
operating system and Year 2000 problems uncovered to date. These estimates were
derived from utilizing numerous assumptions, including that the most significant
Year 2000 risks have already been identified, that certain resources will
continue to be available, that third party plans will be fulfilled, and other
factors. However, there can be no assurance that these estimates will be
achieved or that the anticipated time schedule will be met.
Actual results could differ materially from those anticipated.
Because computer systems may involve different hardware, firmware and
software components from different manufacturers, it may be difficult to
determine which component in a computer system may cause a Year 2000 issue. As a
result, the Company may be subjected to Year 2000-related lawsuits independent
of whether its products and services are Year 2000 ready. Any Year 2000 related
lawsuits, if adversely determined, could have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company is in the process of preparing contingency plans for critical
areas to address Year 2000 failures if remedial efforts are not fully
successful. The Company expects to complete its initial contingency plans during
the fourth quarter of fiscal 1999, which plans may thereafter be revised from
time to time as deemed appropriate. Should previously undetected Year 2000
problems be found in systems that support the Company's on-going operations or
other systems, these systems will be upgraded, replaced, turned off, or operated
in place with manual procedures to compensate for their deficiencies. While the
Company believes that these alternative plans would be adequate to meet the
Company's need without materially impacting its operations, there can be no
assurance that such alternatives would be successful or that the Company's
results of operations would not be materially adversely affected by the delays
and inefficiencies inherent in conducting operations in this manner.
There may be additional Year 2000 problems that are as yet unknown to the
Company and for which remediation plans have not yet been made. Any such Year
2000 compliance problem of the Company, its suppliers or its customers could
materially adversely affect the Company's business, results of operations,
financial condition, and prospects. If, for example, third party suppliers were
unable to deliver necessary components, the Company may be unable to manufacture
products in a timely manner. Similarly, if shipping and freight forwarders were
unable to ship product, the Company would be unable to deliver product to its
customers. There can be no assurance that the Company's insurance will cover
losses from business interruptions arising from year 2000 problems of the
Company or its suppliers or customers.
The foregoing discussion of the Company's Year 2000 readiness includes
forward-looking statements, including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved, and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of the Company to identify and correct all relevant computer
code and the success of third parties with whom the Company does business in
addressing their Year 2000 issues.
Euro Currency.
The participating member countries of the European Union adopted the Euro
as the common legal currency on January 1, 1999. On that same date, they
established the fixed conversion rates between their existing sovereign
currencies and the Euro. The Company has begun to assess the potential impact on
the Company that may result from the Euro conversion. At this early stage of its
assessment, the Company cannot yet predict the impact of the Euro conversion.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is set forth in Note 8 of the Notes
to the Unaudited Consolidated Financial Statements on pages 9, 10 and 11 and
under "Management's Discussion and Analysis - Liquidity and Capital Resources -
Contingencies" on pages 16 and 17 of this Form 10-Q for the quarterly period
ended December 26, 1998 and is incorporated herein by reference.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On November 13, 1998, the Company's Board of Directors adopted a series of bylaw
provisions relating to the conduct of stockholder meetings. The following
summary of the material terms of the new bylaws is qualified in all respects by
reference to the full text of the bylaw provisions included in the copy of the
Company's bylaws incorporated by reference as an exhibit to this Quarterly
Report.
A new Section 1.11 ("Conduct of Meeting") was adopted, authorizing the
Board of Directors and the officer of the Company presiding at a
stockholder meeting to adopt rules, regulations and procedures for the
conduct of the meeting. The new bylaw also provides a procedure for
closing the polls at meetings.
A new Section 1.12 ("Nomination of Directors") was adopted, creating a
notice provision to be followed if a stockholder wishes to nominate
someone for election to the Board and setting out time periods during
which any such nominations must be made.
Under the new bylaw, to be timely, a stockholder's notice must be received by
the Secretary at the principal executive offices of the Company as follows: (a)
in the case of an election of directors at an annual meeting of stockholders,
not less than 70 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than 20 days, or delayed by
more than 70 days, from such anniversary date, to be timely, a stockholder's
notice must be so received not earlier than the ninetieth day prior to such
annual meeting and not later than the close of business on the later of the
seventieth day prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such annual meeting is first made;
or (b) in the case of an election of directors at a special meeting of
stockholders, not earlier than the ninetieth day prior to such special meeting
and not later than the close of business on the later of the seventieth day
prior to such special meeting or the tenth day following the day on which public
announcement of the date of such special meeting is first made.
The stockholder's notice to the Secretary is required to set forth: (a) as to
each proposed nominee (i) such person's name, age, business address and, if
known, residence address, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of stock of the Company which are
beneficially owned by such person, and (iv) any other information concerning
such person that must be disclosed as to nominees in proxy solicitations
pursuant to Regulation 14A under the 1934 Act (or any successor provision
thereto); (b) as to the stockholder giving the notice (i) the name and address,
as they appear on the Company's books, of such stockholder and (ii) the class
and number of shares of the Company which are beneficially owned by such
stockholder; and (c) as to the beneficial owner, if any, on whose behalf the
nomination is made (i) the name and address of such beneficial owner and (ii)
the class and number of shares of the Company which are beneficially owned by
such person. In addition, to be effective, the stockholder's notice must be
accompanied by the written consent of the proposed nominee to serve as a
director if elected. The Company may require any proposed nominee to furnish
such other information as may reasonably be required by the Company to determine
the eligibility of such proposed nominee to serve as a director.
A new Section 1.13 ("Notice of Business at Annual Meeting") was
adopted, creating a notice provision to be followed if a stockholder
wishes to present business (other than the election of directors) at an
annual meeting of stockholders and setting out time periods during which
any such notice must be given.
Under the new bylaw, to be timely, a stockholder's notice must be received by
the Secretary at the principal executive offices of the Company not less than 70
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 20 days, or delayed by more than 70
days, from such anniversary date, to be timely, a stockholder's notice must be
so received not earlier than the ninetieth day prior to such
22
<PAGE>
annual meeting and not later than the close of business on the later of the
seventieth day prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such meeting is first made.
The stockholder's notice to the Secretary is required to set forth as to each
matter the stockholder proposes to bring before the annual meeting: (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (c) the class and number of shares of the
corporation which are beneficially owned by the stockholder and beneficial
owner, if any, and (d) any material interest of the stockholder or such
beneficial owner, if any, in such business. Any stockholder proposal which
complies with Rule 14a-8 of the proxy rules (or any successor provision)
promulgated under the 1934 Act and is to be included in the Company's proxy
statement for an annual meeting of stockholders shall be deemed to comply with
the requirements of Section 1.13.
ITEMS 3 AND 4. NONE.
ITEM 5. OTHER INFORMATION
Shareholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8
under the Securities Exchange Act of 1934 for inclusion in the Company's proxy
material for its 1999 Annual Meeting of Stockholders must be received by the
Secretary of the Company at the principal offices of the Company no later than
February 10, 1999.
Repricing of Options
On December 10, 1998, the Compensation Committee of the Company's Board
of Directors approved the repricing of outstanding stock options with an
exercise price in excess of $.60 per share for those full-time employees who
elected to accept the Company's repricing offer, and to set as the new exercise
price the closing bid price for the Company's Common Stock at the close of the
market on December 11, 1998. Such action reduced to $.65 per share the exercise
price for the options involved. The options previously had exercise prices
ranging from $.68 to $13.875 per share. The Compensation Committee of the Board
of Directors also imposed a condition that no such repriced options may be
exercised until the date upon which they were originally scheduled to become
vested, or June 30, 1999, whichever is later. This action does not affect any of
the options to purchase shares of the Company's Common Stock that are held by
the six members of the Company's Board of Directors who are not employees of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed on the Exhibit Index filed as a part of this
Quarterly Report on Form 10-Q are incorporated herein by reference.
(b) Reports on Form 8-K. During the quarter ended December 26, 1998, the Company
filed no reports on Form 8-K.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTENNIAL TECHNOLOGIES, INC.
Dated: February 8, 1999 BY: /s/ L. MICHAEL HONE
------------------- --------------------------
L. Michael Hone
President and Chief Executive Officer
Dated: February 8, 1999 BY: /s/ DONALD R. PECK
------------------- --------------------------
Donald R. Peck
Secretary, Treasurer and General Counsel
-------------------------------
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
- ---
<S> <C>
3.1 -- Amended and Restated Bylaws of Centennial Technologies, Inc. (1)
10.1 -- Key Employee Agreement between Centennial Technologies, Inc. and Jacques Assour,
as of April 1, 1998
10.2 -- Employment Agreement between Centennial Technologies, Inc. and John C. Nugent,
as of January 12, 1998
10.3 -- $3,500,000 Revolving Note, dated November 20, 1998, made by Centennial Technologies, Inc.
and payable to the order of Fleet National Bank
10.4 -- $1,500,000 Term Note, dated November 20, 1998, made by Centennial Technologies, Inc. and
payable to the order of Fleet National Bank
10.5 -- Letter Agreement, dated November 20, 1998, by and between Centennial Technologies, Inc. and
Fleet National Bank
27 -- Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on November 19, 1998.
24
<PAGE>
EXHIBIT 10.1
----------------------
KEY EMPLOYEE AGREEMENT
----------------------
To: Jacques Assour, Ph.D. As of April 1, 1998
118 Northgate Circle
Melville, NY 11747
The undersigned, Centennial Technologies, Inc., a Delaware corporation
(the "Company"), hereby agrees with you as follows:
1. POSITION AND RESPONSIBILITIES.
1.1 You shall serve as the Senior Vice President of Operations
of the Company or in a position designated by the Company's Chief Executive
Officer, and shall perform such functions as are customarily associated with
such capacity from time to time at the Company's headquarters or such place or
places as are appropriate and necessary in connection with such employment.
These functions shall include, among other things, building positive and
productive relationships with the Company's customers, vendors and suppliers;
the training, development and mentoring of subordinate personnel; the hiring and
assimilation of personnel to assume director positions in the areas of
management information systems, procurement and engineering, and other functions
as delegated from time to time by the Company's Chief Executive Officer.
1.2 You will, to the best of your ability, devote your full
time and best efforts to the performance of your duties hereunder and the
business and affairs of the Company. You agree to perform such duties consistent
with your position as may be lawfully and reasonably assigned to you by the
Company's Chief Executive Officer from time to time. Such duties may include
similar responsibilities with companies in which the Company has a majority
ownership interest.
1.3 You will duly, punctually and faithfully perform and
observe any and all lawful rules and regulations that the Company may now or
shall hereafter establish governing the conduct of its business.
-1-
<PAGE>
2. TERM OF EMPLOYMENT.
2.1 The term of this Agreement shall be for two (2) years,
subject to earlier termination in accordance with Section 2.2 hereof.
Thereafter, this Agreement may be renewed upon the written agreement of you and
the Company. The term of this Agreement and any renewal thereof shall not to be
construed as an agreement, either expressed or implied, to employ you for a
stated term, and shall in no way alter the Company's policy of employment at
will, allowing either you or the Company to remain free to terminate the
employment relationship with or without cause at any time.
2.2 The Company shall have the right to terminate your
employment at any time either (a) for "cause" (as defined herein), or (b) upon
thirty (30) days' notice without cause. If the Company terminates your
employment for cause, the Company shall be obligated to pay you an amount equal
to your salary and vacation pay which is accrued and unpaid up to the date of
such termination. If the Company terminates your employment without cause, the
Company shall be obligated to pay you your Base Salary (as defined in EXHIBIT A
attached hereto) for a period of six (6) months (the "Severance Period"). The
Company shall also continue in full force and effect for the Severance Period
all health and insurance benefits that you enjoyed at the time of your
termination without cause, and all other benefits which applicable law requires
to be continued. These severance payments would be in lieu of all other
severance by the Company to which you might be entitled and is conditioned upon
your execution of a general release in a form satisfactory to the Company.
2.3 For purposes of Section 2.2 hereof, the term "cause" shall
mean the following: (i) your involvement in any felony crime, material
arrestable criminal offense (excluding road traffic offenses for which a fine or
non-custodial penalty is imposed), or any crime in connection with your
employment with the Company (including theft of Company assets); or (ii)
material insubordination or your unreasonable failure to take actions permitted
by law and necessary to implement strategies or policies of the Company and
which are consistent with your positions and duties, following written warning
of such material insubordination or unreasonable failure; or (iii) drunkenness
or use of any drug or narcotic which adversely affects your job performance; or
(iv) any knowing or intentional misrepresentation of significant information
important to the operating condition of the Company; or (v) acting in material
breach or contravention of any non-competition, non-disclosure or
non-solicitation covenants hereof, or (vi) after written warning from the
Company's Chief Executive Officer, continued willful failure to fulfill the job
functions outlined in paragraph 1.1 of this Agreement.
3. COMPENSATION. You shall receive the compensation and benefits set
forth on Exhibit A hereto ("Compensation") for all services to be rendered by
you hereunder and for your transfer of property rights, if any, pursuant to an
agreement relating to inventions and non-disclosure dated as of September 15,
1997 attached hereto and made a part hereof as EXHIBIT C
-2-
<PAGE>
between you and the Company (the "Invention and Non-Disclosure Agreement") and
pursuant to an agreement relating to non-competition and non-solicitation dated
as of September 15, 1997 attached hereto and made a part hereof as EXHIBIT D
between you and the Company (the "Non-Competition and Non-Solicitation
Agreement").
4. OTHER ACTIVITIES DURING EMPLOYMENT.
4.1 Except for any outside employments and directorships
currently held by you as listed on EXHIBIT B hereto, if any, and except with the
prior written consent of the Company's Board of Directors (which approval shall
not be unreasonably withheld), you will not during the term of this Agreement
undertake or engage in any other employment, occupation or business enterprise
other than one in which you are an inactive investor.
4.2 You hereby agree that, except as disclosed on EXHIBIT B
hereto, during your employment hereunder, you will not, directly or indirectly,
engage (a) individually, (b) as an officer, (c) as a director, (d) as an
employee, (e) as a consultant, (f) as an advisor, (g) as an agent (whether a
salesperson or otherwise), (h) as a broker, or (i) as a partner, coventurer,
stockholder or other proprietor owning directly or indirectly more than one
percent (1%) interest, in any firm, corporation, partnership, trust,
association, or other organization which is engaged in any line of business
engaged in or under demonstrable development by the Company (such firm,
corporation, partnership, trust, association, or other organization being
hereinafter referred to as a "Prohibited Enterprise"). You hereby represent that
you are not presently engaged in any of the foregoing capacities described in
(a) through (i) in any Prohibited Enterprise.
5. FORMER EMPLOYERS.
5.1 You represent and warrant that your employment by the
Company will not conflict with and will not be constrained by any prior or
current employment, consulting agreement or relationship whether oral or
written. You represent and warrant that you do not possess confidential
information arising out of any such employment, consulting agreement or
relationship which, in your best judgment, would be utilized in connection with
your employment by the Company.
5.2 If, in spite of the second sentence of Section 5.1, you
should find that confidential information belonging to any other person or
entity might be usable in connection with the Company's business, you will not
intentionally disclose to the Company or use on behalf of the Company any
confidential information belonging to any of your former employers; but during
your employment by the Company you will use in the performance of your duties
all information which is generally known and used by persons with training and
experience comparable to your own, all information which is common knowledge in
the industry or otherwise legally in the public domain.
-3-
<PAGE>
6. PROPRIETARY INFORMATION AND INVENTIONS. You agree to execute,
deliver and be bound by the provisions of the Invention and Non-Disclosure
Agreement attached hereto as EXHIBIT C and incorporated herein.
7. POST-EMPLOYMENT ACTIVITIES. You agree to execute, deliver and be
bound by the provisions of the Non-Competition and Non-Solicitation Agreement
attached hereto as EXHIBIT D and incorporated herein.
8. REMEDIES. Your obligations under the Proprietary Information and
Inventions Agreement and the provisions of Sections 9, 10 and 11 of this
Agreement (as modified by Section 12, if applicable) shall survive the
expiration or termination of your employment (whether through your resignation
or otherwise) with the Company. You acknowledge that a remedy at law for any
breach or threatened breach by you of the provisions of this Agreement or the
Proprietary Information and Inventions Agreement would be inadequate and you
therefore agree that the Company shall be entitled to injunctive relief in case
of any such breach or threatened breach.
9. ASSIGNMENT. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of any successor or
successors of the Company by reorganization, merger or consolidation and any
assignee of all or substantially all of its business and properties, but, except
as to any such successor or assignee of the Company, neither this Agreement nor
any rights or benefits hereunder may be assigned by the Company or by you,
except by operation of law or by a further written agreement by the parties
hereto.
10. CONFIDENTIALITY. You agree to keep confidential, except as the
Company may otherwise consent in writing, and, except for the Company's benefit,
not to disclose or make any use of at any time either during or subsequent to
your employment, any trade secrets, confidential information, knowledge, data or
other information of the Company relating to products, processes, know-how,
techniques, methods, designs, formulas, test data, customer lists, business
plans, marketing plans and strategies, pricing strategies, or other subject
matter pertaining to any business of the Company or any of its affiliates, which
you may produce, obtain, or otherwise acquire during the course of your
employment, except as herein provided. You further agree not to deliver,
reproduce or in any way allow any such trade secrets, confidential information,
knowledge, data or other information, or any documentation relating thereto, to
be delivered to or used by any third parties without specific direction or
consent of a duly authorized representative of the Company.
11. ARBITRATION. Any dispute concerning this Agreement including, but
not limited to, its existence, validity, interpretation, performance or
non-performance, arising before or after termination or expiration of this
Agreement, shall be settled by a single arbitrator in Boston,
-4-
<PAGE>
Massachusetts, in accordance with the expedited procedures of the commercial
rules then in effect of the American Arbitration Association. Judgment upon any
award may be entered in the highest court, state or federal, having
jurisdiction.
12. INTERPRETATION. IT IS THE INTENT OF THE PARTIES THAT in case any
one or more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. MOREOVER, IT IS THE
INTENT OF THE PARTIES THAT if any one or more of the provisions contained in
this Agreement is or becomes or is deemed invalid, illegal or unenforceable or
in case any provision shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
13. NOTICES. Any notice which the Company is required to or may desire
to give you shall be given by personal delivery or registered or certified mail,
return receipt requested, addressed to you at your address of record with the
Company, or at such other place as you may from time to time designate in
writing. Any notice which you are required or may desire to give to the Company
hereunder shall be given by personal delivery or by registered or certified
mail, return receipt requested, addressed to the Company at its principal
office, or at such other office as the Company may from time to time designate
in writing with a copy to S. Donald Gonson, Esquire, Hale and Dorr, L.L.P.,
Sixty State Street, Boston, Massachusetts 02109. The date of personal delivery
or the date of mailing of any notice under this Section 13 shall be deemed to be
the date of delivery thereof.
14. WAIVERS. No waiver of any right under this Agreement shall be
deemed effective unless contained in a writing signed by the party charged with
such waiver, and no waiver of any right arising from any breach or failure to
perform shall be deemed to be a waiver of any future such right or of any other
right arising under this Agreement. If either party should waive any breach of
any provision of this Agreement, such party shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
15. COMPLETE AGREEMENT; AMENDMENTS. The foregoing, including Exhibits
A, B, C and D hereto, is the entire agreement of the parties with respect to the
subject matter hereof, superseding any previous oral or written communications,
representations, understandings, or agreements with the Company or any officer
or representative thereof. Any amendment to this
-5-
<PAGE>
Agreement shall be effective only if evidenced by a written instrument executed
by the parties hereto, upon authorization of the Company's Board of Directors.
16. HEADINGS. The headings of the Sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
17. COUNTERPARTS. This Agreement may be signed in two counterparts,
each of which shall be deemed an original and both of which shall together
constitute one agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed
under Massachusetts law, without regard to its conflict of laws principles.
If you are in agreement with the foregoing, please sign your name below
and also at the bottom of the Invention and Non-Disclosure Agreement and the
Non-Competition and Non-Solicitation Agreement, whereupon this Agreement shall
become binding in accordance with its terms. Please then return this Agreement
to the Company. (You may retain for your records the accompanying counterpart of
this Agreement enclosed herewith).
Very truly yours,
CENTENNIAL TECHNOLOGIES, INC.
BY:
---------------------------------
L. Michael Hone
Chief Executive Officer
Accepted and Agreed:
- ------------------------------------
Jacques Assour
-6-
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
JACQUES ASSOUR
1. TERM. The term of the Agreement to which this Exhibit A is annexed and
incorporated shall be until April 1, 2000.
2. COMPENSATION. Your Base Salary shall be $160,000 per annum, payable in
accordance with the payroll policies established by the Company. Your
Base Salary will be reviewed and evaluated as of April 1, 1999.
3. REIMBURSEMENT OF HOUSING AND TRAVEL EXPENSES. The Company will
reimburse you at a rate of one thousand dollars ($1,000) per month for
all reasonable expenses incurred by you for housing and travel required
in connection with the furnishing of services hereunder.
4. VACATION. You shall be entitled to four (4) weeks paid vacation per
year to be taken at such times as are consistent with the interests of
the Company.
5. OTHER BENEFITS. You shall be eligible for participation in any health,
group insurance plan, or pension insurance and benefits plan that may
be established by the Company or which the Company is required to
maintain by law.
6. MANAGEMENT INCENTIVE PLAN. You shall be eligible to participate in any
management incentive plan or bonus plan generally available to senior
managers of the Company, if and when such plans are developed, on a
basis to be determined by and within the absolute discretion of the
Company's Chief Executive Officer and Compensation Committee of the
Company's Board of Directors.
A-1
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF
JACQUES ASSOUR
None
B-1
<PAGE>
C-1
<PAGE>
EXHIBIT 10.2
12th January 1998
Mr John C. Nugent
Ness Acre
Ness Acre Lane
Willaston
South Wirral L63 2TJ
UNITED KINGDOM
Dear John:
Following our recent discussions, I have pleasure in offering you the position
of Managing Director for Centennial Technologies International Limited (the
"Company") under the following terms and conditions:
1. DATE OF COMMENCEMENT OF EMPLOYMENT
The date of commencement of employment will be Monday 12th January 1998.
Any employment with a previous employer does not count as part of your
continuous period of employment.
2. MAIN DUTIES
2.1 You will report directly to the President and Chief Executive Officer
of the Company's parent company, Centennial Technologies, Inc.
("Centennial"), Mr L. Michael Hone.
2.2 You will be a member of the Executive Management Team of Centennial in
your capacity as Vice President International Operations.
2.3 You will be based in the UK office and you will be responsible for all
Centennial business outside of North and South America.
3. REMUNERATION AND OTHER BENEFITS
<PAGE>
3.1. You will be paid at the rate of L90,000 per annum paid monthly in
arrears in 12 equal payments.
3.2. Your salary will be reviewed on the 1st January 1999 and thereafter
starting in the year 2000 on the 1st April each year. This Agreement
is not to be construed as an agreement, either expressed or implied,
to employ you for a stated term, and shall in no way alter the
Company's policy of employment at will, allowing either you or the
Company to remain free to terminate the employment relationship with
or without cause at any time.
3.3. During the period of your employment the Company will pay for
subscription to a suitable medical insurance scheme, subject to
acceptance therefor at standard rates of premium.
3.4. On 1st April 1999, you will be entitled to a bonus covering the period
from the start of your employment through 31st March 1999 of L30,000.
Thereafter, your bonus, if any, will be based upon criteria and sales
targets to be agreed upon between you and Centennial's President.
3.5. As a signing on incentive, the Company is pleased to offer you a
generous stock option to purchase 125,000 shares of Centennial's stock
at a price established at the end of your first day of employment at
the Company, to be vested over a period of three years in thirds,
beginning on the first anniversary of your employment. The terms and
conditions of Centennial's 1994 Stock Option Plan shall further govern
this stock option award, and are incorporated herein by reference.
This option is contingent upon the ratification by Centennial's
shareholders at Centennial's 1998 Annual Meeting of an increase in the
number of shares reserved for issuance under Centennial's 1994 Stock
Option Plan from 3,000,000 to 6,000,000 shares of Centennial's Common
Stock.
4. EXPENSES
The Company shall pay to you all reasonable travelling, entertainment and
other expenses incurred by you in the performance of your duties, upon
approval of expense reports submitted by you to Centennial's President and
Chief Executive Officer. You shall provide the Company with vouchers or
other evidence of actual payment of such expenses.
5. CAR
To assist you in performing your duties the Company shall procure that you
are provided with the use of a fully expensed motor vehicle suitable for the
satisfactory discharge of your duties. You agree:
Page 2 of 8
<PAGE>
5.1. To take good care of the car and procure that the provisions and
conditions of any policy of insurance relating thereto are observed.
5.2. Not to permit such car to be taken out of the United Kingdom without
the written consent of Centennial's President and Chief Executive
Officer.
5.3 That fuel expenses incurred during holiday periods are excluded from
the above.
5.4 To provide evidence of a full driving licence.
5.5 To return the car immediately to the Company upon the termination of
your employment, for whatever reason.
6. HOURS AND PLACE OF WORK
6.1. Your normal working hours are from 8.30 a.m. to 5.00 p.m. from Monday
to Friday (inclusive) of each week. However, the Company reserves the
right to vary your normal working hours according to demand. You may
be required to work in excess of your normal working hours.
6.2. You are entitled to a lunch break of one hour at a time convenient to
the Company.
6.3. Overtime payments are not usually paid by the Company.
6.4. Your duties hereunder shall be performed at the UK Headquarters or at
such place as the Company shall from time to time direct.
7. HOLIDAYS
7.1 Your annual holiday entitlement is 24 working days per calendar year
which should be approved in advance by Centennial's President and
Chief Executive Officer and scheduled to cause the minimum of
disruption to the Company. Holiday entitlement accrues at the rate of
two days per completed month of service.
7.2 Bank Holidays and other holidays are additional. Except with prior
approval, holidays may not be carried over from one calendar year to
another, but must be taken in the calendar year in which they are due
or else be forfeited.
7.3 On termination of employment, if you have taken holidays in excess of
those accrued due by the date of termination you may be required to
pay to the Company or the Company may deduct from any sums payable to
you an appropriate amount. However, if your annual holiday entitlement
is greater than the period of notice, or if you are paid in lieu of
working out your period of notice, the Company, at its
Page 3 of 8
<PAGE>
discretion, may pay you for such part of your holiday entitlement as
it shall deem appropriate. Holiday during the calendar year in which
employment ceases will be based on length of service and will be
proportionate to the whole year's entitlement (rounded up to the
nearest whole day).
8. SICKNESS OR INJURY
8.1. SICKNESS NOTIFICATION
8.1.1. Should you become ill or unable to work due to injury, you
should arrange for the Company's Commercial Manager to be
notified of your absence, and the reason for it, by no later
than 10 a.m. on the first day.
8.1.2. Medical certificates are not normally issued by doctors for
absences of 7 consecutive days or less, you will therefore be
required to complete a Self Certification of Sickness Absence
form to cover the period of your absence. The form must be
completed and submitted to the Company's Commercial Manager
immediately on your return to work.
8.1.3. If the absence continues until the 8th consecutive day, a
doctor's medical certificate must be produced in addition to
the Self Certification of Sickness Absence form. If the illness
should continue, further doctor's medical certificates should
be sent as the first and subsequent certificates expire. All
certificates should be sent directly to the Company's
Commercial Manager.
8.1.4 Where a history of self certified claims arises, the Company may
require a doctor's medical certificate for periods less than 8
consecutive days. The Company may also require you to undergo a
medical examination by the Company Doctor or your own GP.
8.1.5 If you are absent for very long periods of time, i.e. 2 or 3
months in any 12 month period, or accumulate several periods of
sickness in any one calendar year, the Company reserves the
right to terminate your employment. This will only take place
after careful consideration of all the relevant facts including
a report from the Company Doctor or your own GP if appropriate.
8.2 COMPANY SICK PAY
Page 4 of 8
<PAGE>
8.2.1 During the period of absence due to sickness, the Company may
at its discretion, pay all or part of your salary. However,
there is no absolute right to Company Sick Pay over and above
Statutory Sick Pay (SSP). Company Sick Pay will include any
entitlement to SSP, but the total of the Company Sick Pay and
SSP will not exceed your normal full pay.
8.2.2 The qualifying days for SSP purposes are Monday to Friday
inclusive each week and SSP will be paid for the first 28
weeks of sickness absence in any one period. When your
entitlement to SSP expires you may be eligible to receive
Invalidity Benefit direct from the Department of Social
Security (DSS). The amount of Invalidity Benefit (or any other
State benefit) received must be advised to the Company's
Commercial Manager in order that an appropriate deduction can
be made from any Company Sick Pay.
8.2.3 Failure to comply with any or all of the requirements for
notification of absence, evidence of ill-health or examination
by a doctor may result in disciplinary action.
8.3 ABSENCE FROM WORK
If for any reason, other than sickness or injury, you are absent from
work, you must inform the Company as soon as possible, but not later
than 10 a.m., on the first day. Your time away from work shall be
deducted from your holiday entitlement.
Whenever possible you should obtain prior permission for absence from
Centennial's President and Chief Executive Officer.
9. PENSIONS
The Company will contribute a sum equal to 10% of your basic salary (as
reviewed from time to time) monthly directly to a pension scheme of your
choice in keeping with the Governing Law.
10. NOTICE OF TERMINATION OF EMPLOYMENT
You are entitled to receive (except in cases where summary dismissal is
justified) three months' written notice of termination of your employment.
The Company reserves the right to make payment in lieu of notice of
termination at a rate equal to your normal remuneration at the time of your
termination of employment.
Page 5 of 8
<PAGE>
11. DISCIPLINARY PROCEDURE
11.1 The Company reserves the right to dismiss you summarily or to suspend
you, either on full pay or without pay, at any time for the purpose of
carrying out an investigation, if at any time you commit an act of
gross misconduct. The following examples of offences which the Company
regards as constituting gross misconduct should not be regarded as
exhaustive:-
11.1.1 A serious or persistent breach of the terms of your
employment; or
11.1.2 Any grave misconduct e.g. a breach of confidentiality, an
assault on another employee, wilful damage to the Company's
property, wilful neglect of your duties or falsification of
accounts; or
11.1.3 Repeated failure to attend for work without informing the
Company of the reason for your absence; or
11.1.4 Conviction of a criminal offence other than an offence which
in the reasonable opinion of the Company does not affect your
position as an employee.
11.2 In the case of minor offences you will normally receive a verbal
warning and two written warnings before being dismissed. However, in
cases of more serious misconduct the verbal and/or one of the written
warnings may be omitted. The Company will be entitled to dismiss you
without notice in the event of gross misconduct.
12. GRIEVANCES
If you wish to seek redress for any grievance relating to your employment
you must first submit such complaint in writing to Centennial's President
and Chief Executive Officer. This complaint may then be discussed with
Centennial's President and Chief Executive Officer who will inform you of
the decision. This decision shall be final and binding.
13. RESTRICTIVE COVENANTS
After the date of termination of your employment you shall not without the
prior written approval of the Company directly or indirectly through any
other person, firm or company for a period of 12 months solicit, entice or
induce any person, firm or company with which at any time during the 12
months immediately preceding the termination of
Page 6 of 8
<PAGE>
your employment you have had dealings or contact with in connection with
the business of the Company to become a client or customer of any other
person, firm or company and you shall not approach any such person, firm
or company for such purpose or authorise or knowingly approve the taking
of such actions by any other person, firm or company.
You expressly confirm and agree with the Company that you consider the
restrictions in this clause to be reasonable, fair and properly required to
protect the goodwill and trade connections of the Company's and
Centennial's business.
14. CONFIDENTIALITY
14.1 You must not during the period of your employment, or at any time
thereafter, whether on your own behalf, or as the employee, partner or
agent of any other person or firm, disclose or allow to be disclosed
or use any confidential information. The Company regards as
confidential any technical or commercial information concerning the
business dealings, affairs or conduct of the Company or of any of its
customers or any other similar matters which may come to your
knowledge in the course of your employment.
14.2 You must not use materials, equipment or information which is the
property of the Company or is entrusted to you by or on behalf of the
Company in the course of your employment otherwise than for the
purposes authorised by the Company.
15. OUTSIDE ACTIVITIES
As an employee of Centennial Technologies International Limited, it is
important that you agree not, without prior written consent, during the
continuance of your employment to be employed or engaged by or in, or
directly or indirectly concerned or otherwise interested in or provide
services to any person, firm or company or undertake any other activity.
15.1 Engaged in or involving the provision of goods or services in
competition with the Company.
15.2 Whether or not engaged in or involving the provision of goods or
services in competition with the Company, in any manner or capacity or
to any extent which either detracts from the proper performance of or
otherwise gives rise to a conflict with your obligations to the
company.
Page 7 of 8
<PAGE>
16. RETIREMENT
Your Normal Retiring Date is your 65th birthday.
17. OTHER TERMS & CONDITIONS
These terms and conditions are subject to any other terms or conditions
expressly agreed between you and the Company. Any changes in these or such
other terms and conditions will be specified in writing. It is expressly
agreed that there are no collective agreements with trade unions relevant
to your employment.
18. NOTICES
Any notice to be given by you or the Company shall be in writing and be
sufficiently served, in the case of a notice served on you, by being
delivered either personally to you or sent by first class post addressed to
you at your usual or last known place of abode or, in the case of the
Company, by being delivered at or sent by first class post addressed to its
Registered Office and any such notice (unless delivered by hand) shall be
deemed served at the time at which the letter would be delivered in the
ordinary course of post.
19. RELEVANT LAW
These terms shall be governed by and interpreted in accordance with the
laws of England and you and the Company submit to the non-exclusive
jurisdiction of the English Courts as regards to any claim or matter
arising under these terms.
I trust that the above terms and conditions will be acceptable to you. If so,
will you please sign, date and return the enclosed copy of this letter to me.
Yours sincerely,
L. Michael Hone
President and Chief Executive Officer
I hereby agree to the above terms and conditions of my employment.
Page 8 of 8
<PAGE>
Exhibit 10.3
PROMISSORY NOTE
$3,500,000.00 Boston, Massachusetts
November 20, 1998
FOR VALUE RECEIVED, the undersigned Centennial Technologies, Inc., a
Delaware corporation (the "Borrower") hereby promises to pay to the order of
FLEET NATIONAL BANK (the "Bank") the principal amount of Three Million Five
Hundred Thousand and 00/100 ($3,500,000.00) Dollars or (if less) such portion
thereof as may be advanced by the Bank pursuant to Section 1.2 of that
certain letter agreement of even date herewith between the Bank and the
Borrower (the "Letter Agreement") and remains outstanding from time to time
hereunder ("Principal"), with interest, at the rate hereinafter set forth, on
the daily balance of all unpaid Principal, from the date hereof until payment
in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times (except as
described in the next sentence) be equal to the sum of (i) one-half of one
percent (0.5%) per annum PLUS (ii) the Prime Rate, as in effect from time to
time (but in no event in excess of the maximum rate permitted by then applicable
law), with a change in the aforesaid rate of interest to become effective on the
same day on which any change in the Prime Rate is effective. Overdue Principal
and, to the extent permitted by law, overdue interest shall bear interest at a
fluctuating rate per annum which at all times shall be equal to the sum of (i)
four (4%) percent per annum PLUS (ii) the per annum rate otherwise payable under
this note (but in no event in excess of the maximum rate permitted by then
applicable law), compounded monthly and payable on demand. As used herein,
"Prime Rate" means that variable rate of interest per annum designated by the
Bank from time to time as its prime rate, it being understood that such rate is
merely a reference rate and does not necessarily represent the lowest or best
rate being charged to any customer. If the entire amount of any required
Principal and/or interest is not paid within ten (10) days after the same is
due, the Borrower shall pay to the Bank a late fee equal to five percent (5%) of
the required payment.
All outstanding Principal and all interest accrued thereon shall be
due and payable in full on the first to occur of: (i) an acceleration under
Section 5.2 of the Letter Agreement or (ii) October 1, 1999. The Borrower may
at any time and from time to time prepay all or any portion of said
Principal, without premium or penalty. Under certain circumstances set forth
in the Letter Agreement, prepayments of Principal may be required.
Payments of both Principal and interest shall be made, in lawful money
of the United States in immediately available funds, at the office of the Bank
located at One Federal Street,
<PAGE>
Boston, Massachusetts 02110, or at such other address as the Bank may from
time to time designate.
The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making any Revolving Loan (as defined in the
Letter Agreement) and of receiving any payment of Principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid balance of
Principal. Failure of the Bank to make any such notation shall not, however,
affect any obligation of the Borrower hereunder or under the Letter Agreement.
The unpaid Principal amount of this note, as recorded by the Bank from time to
time on such schedule or on such books, shall constitute PRIMA FACIE evidence of
the aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to pay
all reasonable costs and expenses, including, without limitation, reasonable
attorneys' fees, incurred or paid by the Bank in enforcing this note and any
collateral or security therefor, all whether or not litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement.
This note is secured by, and is entitled to the benefits of, the Security
Agreement (as defined in the Letter Agreement). This note is subject to
prepayment as set forth in the Letter Agreement. The maturity of this note may
be accelerated upon the occurrence of an Event of Default, as provided in the
Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE LOANS AS CONTEMPLATED IN THE LETTER
AGREEMENT.
-2-
<PAGE>
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL CENTENNIAL TECHNOLOGIES, INC.
ATTEST:
By:
- ---------------------------- --------------------------
Secretary Name:
Title:
-3-
<PAGE>
Exhibit 10.4
PROMISSORY NOTE
$1,500,000.00 Boston, Massachusetts
November 20, 1998
FOR VALUE RECEIVED, the undersigned Centennial Technologies, Inc., a
Delaware corporation (the "Borrower") hereby promises to pay to the order of
FLEET NATIONAL BANK (the "Bank") the principal amount of One Million Five
Hundred Thousand and 00/100 ($1,500,000.00) Dollars or such portion thereof
as may be advanced by the Bank pursuant to Section 1.4 of that certain letter
agreement of even date herewith between the Bank and the Borrower (the
"Letter Agreement") and remains outstanding from time to time hereunder
("Principal"), with interest, at the rate hereinafter set forth, on the daily
balance of all unpaid Principal, from the date hereof until payment in full
of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date
after the advance of any Principal and continuing on the first day of each
month thereafter and on the date of payment of this note in full, at a
fluctuating rate per annum (computed on the basis of a year of three hundred
sixty (360) days for the actual number of days elapsed) which shall at all
times (except as described in the next sentence) be equal to the sum of (i)
three-quarters of one percent (0.75%) per annum PLUS (ii) the Prime Rate as
in effect from time to time (but in no event in excess of the maximum rate
permitted by then applicable law), with a change in the aforesaid rate of
interest to become effective on the same day on which any change in the Prime
Rate is effective; provided, however, that if a COF Interest Rate (as defined
in the Letter Agreement) shall have become applicable to all or a portion of
the outstanding Principal, then interest on such Principal or portion thereof
shall thereafter accrue at said COF Interest Rate and shall be paid on the
first day of each month. Overdue Principal and, to the extent permitted by
law, overdue interest shall bear interest at a fluctuating rate per annum
which at all times shall be equal to the sum (i) four (4%) percent per annum
PLUS (ii) the Prime Rate (but in no event in excess of the maximum rate
permitted by then applicable law), compounded monthly and payable on demand.
As used herein, "Prime Rate" means that variable rate of interest per annum
designated by the Bank from time to time as its prime rate, it being understood
that such rate is merely a reference rate and does not necessarily represent
the lowest or best rate being charged to any customer. If the entire amount of
any required Principal and/or interest is not paid within ten (10) days after
the same is due, the Borrower shall pay to the Bank a late fee equal to five
percent (5%) of the required payment.
Principal of this note shall be repaid by the Borrower to the Bank in 35
equal consecutive monthly installments (each in an amount equal to 1/36th of
the aggregate principal amount of this note outstanding at the close of
business on October 31, 1999), such installments to commence November 1, 1999
and to continue thereafter on the first day of each succeeding month through
and including September 1, 2002, PLUS a 36th and final payment due and
payable on October 1, 2002 in an amount equal to all then remaining Principal
and all interest accrued but unpaid thereon.
<PAGE>
The Borrower may at any time and from time to time prepay all or any
portion of the principal of this note, but as to any COF Loan (as defined in
the Letter Agreement), only at the times and in the manner, and (under
certain circumstances) with the additional payments, provided for in the
Letter Agreement. Any prepayment of Principal, in whole or in part, will be
without premium or penalty (but, in the case of any COF Loan, may require
payment of additional amounts, as provided for in the Letter Agreement). Each
principal prepayment shall be accompanied by payment of all interest on the
prepaid amount accrued but unpaid to the date of payment. Any partial
prepayment of Principal will be applied against Principal installments in
inverse order of normal maturity.
Payments of both Principal and interest shall be made, in lawful money
of the United States in immediately available funds, at the office of the
Bank located at One Federal Street, Boston, Massachusetts 02110, or at such
other address as the Bank may from time to time designate.
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank,
at or following the time of making any Principal advance and of receiving any
payment of principal, an appropriate notation reflecting such transaction
(including date, amount and maturity) and the then aggregate unpaid balance
of Principal. Failure of the Bank to make any such notation shall not,
however, affect any obligation of the Borrower hereunder or under the Letter
Agreement. The unpaid Principal amount of this note, as recorded by the Bank
from time to time on such schedule or on such books, shall constitute PRIMA
FACIC evidence of the aggregate unpaid principal amount of the Term Loans (as
defined in the Letter Agreement).
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and
all receipts, substitutions, additions, exchanges and releases of
collateral, and any and all additions, sbustitutions and releases of any
person primarily or secondarily liable, (b) waives presentment, demand,
notice, protest and all other demands and notices generally in connection
with the delivery, acceptance, performance, default or enforcement of or
under this note, and (c) agrees to pay all reasonable costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid
by the Bank in enforcing this note and any collateral or security therefor,
all whether or not litigation is commenced.
This note is the Term Note referred to in the Letter Agreement. This
note is secured by, and is entitled to the benefits of, the Security
Agreement (as defined in the Letter Agreement). This note is subject to
prepayment as set forth in the Letter Agreement (which may require the making
of certain additional payments, as provided for in the Letter Agreement). The
maturity of this note may be accelerated upon the occurrence of an Event of
Default, as provided in the Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY
2
<PAGE>
CLAIM BASED ON THIS NOTE OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
NOTE OR ANY RELATED DOCUMENTS OR OUT OF ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PERSON. THIS
WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS NOTE AND
TO MAKE LOANS AS CONTEMPLATED IN THE LETTER AGREEMENT.
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL CENTENNIAL TECHNOLOGIES, INC.
ATTEST:
- ---------------------------------- By: ------------------------------
Secretary Name:
Title:
3
<PAGE>
Exhibit 10.5
CENTENNIAL TECHNOLOGIES, INC.
7 Lopez Road
Wilmington, MA 01887
November 20, 1998
Fleet National Bank
One Federal Street
Boston, MA 02110
Gentlemen:
This letter agreement will set forth certain understandings between
Centennial Technologies, Inc., a Delaware corporation (the "Borrower") and Fleet
National Bank (the "Bank") with respect to Revolving Loans and Term Loans (each
as hereinafter defined) which may be made by the Bank to the Borrower and with
respect to letters of credit which may hereafter be issued by the Bank for the
account of the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
1.1. REFERENCE TO DOCUMENTS. Reference is made to (i) that certain
$3,500,000 face principal amount revolving promissory note (the "Revolving
Note") of even date herewith made by the Borrower and payable to the order of
the Bank, (ii) that certain $1,500,000 face principal amount term promissory
note (the "Term Note") of even date herewith made by the Borrower and payable to
the order of the Bank, (iii) that certain Inventory, Accounts Receivable and
Intangibles Security Agreement and that certain Supplementary Security Agreement
- - Security Interest in Goods and Chattels, each of even date herewith, from the
Borrower to the Bank (collectively, the "Security Agreement"), and (iv)
collateral assignments and notices of collateral assignment (collectively, the
"Intellectual Property Security Agreements") from the Borrower to the Bank
relating to the Borrower's registered trademarks, patents and copyrights, if
any.
1.2. REVOLVING LOANS; REVOLVING NOTE. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
Section 5.2 or Section 6.6; provided, however, that (1) the aggregate principal
amount of Revolving Loans outstanding shall at no time exceed the Maximum
Revolving
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Amount (hereinafter defined) and (2) the Aggregate Revolving Bank Liabilities
(hereinafter defined) shall at no time exceed the Borrowing Base (hereinafter
defined). Within such limits, and subject to the terms and conditions hereof,
the Borrower may obtain Revolving Loans, repay Revolving Loans and obtain
Revolving Loans again on one or more occasions. The Revolving Loans shall be
evidenced by the Revolving Note and interest thereon shall be payable at the
times and at the rate provided for in the Revolving Note. Overdue principal of
the Revolving Loans and, to the extent permitted by law, overdue interest shall
bear interest at a fluctuating rate per annum which at all times shall be equal
to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate
otherwise payable under the Revolving Note (but in no event in excess of the
maximum rate from time to time permitted by then applicable law), compounded
monthly and payable on demand. The Borrower hereby irrevocably authorizes the
Bank to make or cause to be made, on a schedule attached to the Revolving Note
or on the books of the Bank, at or following the time of making each Revolving
Loan and of receiving any payment of principal, an appropriate notation
reflecting such transaction and the then aggregate unpaid principal balance of
the Revolving Loans. The amount so noted shall constitute PRIMA FACIE evidence
as to the amount owed by the Borrower with respect to principal of the Revolving
Loans. Failure of the Bank to make any such notation shall not, however, affect
any obligation of the Borrower or any right of the Bank hereunder or under the
Revolving Note.
1.3. REPAYMENT; RENEWAL OF REVOLVING LOAN FACILITY. The Borrower shall
repay in full all Revolving Loans and all interest thereon upon the first to
occur of: (i) the Expiration Date, or (ii) an acceleration under Section 5.2(a)
following an Event of Default. The Borrower may repay at any time, without
penalty or premium, the whole or any portion of any Revolving Loan. In addition,
if at any time the Borrowing Base is in an amount which is less than the then
outstanding Aggregate Revolving Bank Liabilities, the Borrower will forthwith
prepay so much of the Revolving Loans as may be required (or arrange for
termination of such letters of credit as may be required) so that the Aggregate
Revolving Bank Liabilities will not exceed the Borrowing Base. The Bank may, at
its sole discretion, renew the revolving financing arrangements described in
this letter agreement by extending the Expiration Date in a writing signed by
the Bank and accepted by the Borrower. Neither the inclusion in this letter
agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.
1.4. TERM LOANS; TERM NOTE. In addition to the foregoing, subject to the
terms and conditions hereinafter in this letter agreement set forth, the Bank
will make one or more loans (the "Term Loans") to the Borrower in an aggregate
principal amount not to exceed $1,500,000. A Term Loan shall be made, no more
than once per month (except that more than one Term Loan may be made in any
month provided that each additional Term Loan in any one month is in an amount
of at least $100,000), in order to finance costs of Qualifying Equipment
acquired by the Borrower within the 30 days preceding the request for such Term
Loan (except that the first Term Loan may include the costs of Qualifying
Equipment acquired by the Borrower more than 30 days prior thereto but not more
than 45 days prior to the date of this letter agreement), each such Term Loan to
be in such amount as may be requested by the Borrower; provided that (i) no
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Term Loan will be made after the earlier of (A) October 31, 1999, or (B) the
earlier termination of the within-described term loan facility pursuant to
Section 5.2 or Section 6.6; (ii) the aggregate original principal amounts of
all Term Loans will not exceed $1,500,000; and (iii) no Term Loan will be in
an amount more than 80% of the invoiced actual costs of the tangible property
constituting the items of Qualifying Equipment with respect to which such
Term Loan is made (excluding taxes, shipping, software, installation charges,
training fees and other "soft costs"). Prior to the making of each Term Loan,
and as a precondition thereto, the Borrower will provide the Bank with: (i)
invoices supporting the costs of the relevant Qualifying Equipment; (ii) such
evidence as the Bank may reasonably require showing that the Qualifying
Equipment has been delivered to and installed at the Borrower's Wilmington,
MA premises, has become fully operational, has been paid for by the Borrower
(or will be promptly so paid for from the proceeds of such Term Loan) and is
owned by the Borrower free of all liens and interests of any other Person
(other than the security interest of the Bank pursuant to the Security
Agreement); (iii) Uniform Commercial Code financing statements, if needed,
reflecting the relevant Qualifying Equipment with respect to which such Term
Loan is being made; and (iv) evidence satisfactory to the Bank that the
Qualifying Equipment is fully insured against casualty loss, with insurance
naming the Bank as secured party and first loss payee. The Term Loans will be
evidenced by the Term Note. The Borrower hereby irrevocably authorizes the
Bank to make or cause to be made, on a schedule attached to the Term Note or
on the books of the Bank, at or following the time of making each Term Loan
and of receiving any payment of principal, an appropriate notation reflecting
such transaction and the then aggregate unpaid principal balance of the Term
Loans. The amount so noted shall constitute PRIMA FACIE evidence as to the
amount owed by the Borrower with respect to principal of the Term Loans.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower or any right of the Bank hereunder or under the
Term Note.
1.5. PRINCIPAL REPAYMENT OF TERM LOANS. The Borrower shall repay
principal of the Term Loans in 36 equal consecutive monthly installments,
commencing on November 1, 1999 and continuing on the first day of each month
thereafter. Each such monthly installment of principal shall be in an amount
equal to 1/36th of the aggregate principal amounts of the Term Loans
outstanding at the close of business on October 31, 1999. In any event, the
then outstanding principal balance of all Term Loans and all interest then
accrued but unpaid thereon shall be due and payable in full on October 1,
2002. The Borrower may prepay, at any time or from time to time, without
premium or penalty, the whole or any portion of any Term Loan which
constitutes a Floating Rate Term Loan; provided that on the date of such
prepayment the Borrower pays all interest under the Term Note accrued on such
Floating Rate Term Loan (or the portion thereof so prepaid) but unpaid to the
date of payment. Subject to Section 1.8, the Borrower may prepay all or any
portion of any Term Loan which is a COF Loan; provided that (i) the Borrower
gives the Bank not less than two (2) Business Days' prior written notice of
its intent so to prepay, (ii) the Borrower pays all interest on each Term
Loan (or portion thereof) so prepaid accrued to the date of prepayment, (iii)
any voluntary prepayment with respect to any such COF Loan (if less than the
then outstanding principal balance of such COF Loan) shall be in a principal
amount of at least $100,000 and (iv) the Borrower shall forthwith pay all
amounts owing to the Bank pursuant to the provisions of Section 1.8. Any
partial prepayment of principal of the Term Loans will be applied to
installments of principal of the Term Loans thereafter coming due in inverse
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order of normal maturity. Amounts repaid or prepaid with respect to the Term
Loans are not available for reborrowing.
1.6. INTEREST RATE FOR TERM LOANS. Except as otherwise provided below in
this Section 1.6 or in the last sentence of Section 1.7, interest on the Term
Loans will be payable at a rate per annum (the "Floating Rate") which shall
at all times be equal to the sum of (i) three-quarters of one percent (0.75%)
per annum PLUS (ii) the Prime Rate as in effect from time to time, with a
change in such rate of interest to become effective on each day when a change
in the Prime Rate becomes effective.
Subject to the provisions of this Section 1.6, the Borrower may borrow
any Term Loan as a COF Loan or may convert to a COF Loan all or any portion
of any COF Loan then outstanding as a Floating Rate Term Loan; provided that
in no event will the amount so borrowed as a COF Loan on any one date be less
than $250,000 nor will the amount so converted to a COF Loan on any one date
be less than $250,000. If the Borrower desires such a borrowing of a COF Loan
or such a conversion of all or any portion of a Floating Rate Term Loan to a
COF Loan, the Borrower will notify the Bank of same not less than two
Business Days prior to the proposed borrowing or conversion and will request
that the Bank offer with respect to the relevant Term Loan (or portion
thereof) a rate of interest which shall be fixed (subject to adjustment as
provided in this letter agreement) for the period (a "Fixed Rate Period")
commencing on the date of such borrowing or conversion and ending on the
final maturity date of the relevant Term Loan (or such portion proposed to be
so converted, as the case may be). Following such request for a fixed rate,
the Bank will endeavor to offer a proposed COF Interest Rate for the relevant
Term Loan to be borrowed or converted (or such portion proposed to be so
converted, as the case may be) at a rate determined as provided below and
under conditions determined by the Bank, in its sole discretion. The Borrower
may elect to accept such offer in the manner and within the time period
specified in such offer. Any such election shall be irrevocable on the part
of the Borrower and any failure by the Borrower to borrow a Term Loan after
electing a fixed rate will be deemed a prepayment in full of such Term Loan
for the purposes of Section 1.8. Upon such election, the interest rate payable
with respect to the relevant Term Loan (or such portion proposed to be so
converted as the case may be) shall be fixed (subject to adjustment as
provided in this letter agreement) for the relevant Fixed Rate Period and at
the rate communicated by the Bank for this purpose as its proposed COF
Interest Rate. Any proposed COF Interest Rate offered under this paragraph
with respect to any Term Loan (or any such portion thereof) will be a rate
per annum equal to the sum of (i) 3.5% per annum PLUS (ii) the COF Rate for
the applicable Fixed Rate Period (expressed as a per annum rate); provided,
however that the COF Interest Rate shall in no event exceed the maximum rate
permitted by applicable law.
The Borrower shall not have any claim against the Bank with respect to
computation of any proposed COF Interest Rate. If the Borrower is dissatisfied
with any proposed COF Interest Rate, the Borrower's sole remedy with respect
thereto shall be not to accept such proposed COF Interest Rate within the
applicable time period, and thus to cause interest on the relevant Term Loan to
continue to be payable at the Floating Rate. Notwithstanding the foregoing
provisions hereof, the Bank need not offer a proposed COF Interest Rate for any
period of time with respect to which the Bank, in its reasonable discretion,
determines that there are no recognized sources of
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funding available to it for such time period or principal amount or that the
cost of funds with respect thereto would be unreasonably high or if there then
exists any Default or Event of Default.
1.7. INTEREST PAYMENTS ON TERM LOANS. The Borrower will pay interest on the
principal amount of the Term Loans outstanding from time to time, from the date
hereof until payment of the Term Loans and the Term Note in full and the
termination of this letter agreement. Interest on all Term Loans will be payable
monthly in arrears on the first day of each month. In any event, interest on the
Term Loans shall also be paid on the date of payment of the Term Loans in full.
Interest on Floating Rate Term Loans shall be payable at the Floating Rate. The
rate of interest payable on any COF Loan will be the COF Interest Rate
applicable thereto. In any event, overdue principal of any Term Loan and, to the
extent permitted by law, overdue interest on any Term Loan shall bear interest
at a rate per annum which at all times shall be equal to the sum of (i) four
(4%) percent per annum PLUS (ii) the Prime Rate, compounded monthly and payable
on demand.
1.8. PREPAYMENT OF COF LOANS. The following provisions of this Section 1.8
shall be effective only with respect to COF Loans: As to any COF Loan, at
any time when the Bank in its reasonable discretion determines that current
market conditions can accommodate a prepayment request, the Borrower shall
have the right (subject to the payment of the yield maintenance fee described
below) to prepay such COF Loan. If, due to acceleration of the Term Note or
due to voluntary or mandatory repayment or prepayment or due to any other
reason, the Bank receives payment of all or any portion of any installment of
a COF Loan prior to the regularly scheduled due date for such installment,
the Borrower shall, upon demand and receipt of a Bank Certificate from the
Bank with respect thereto, pay forthwith to the Bank a yield maintenance fee
in an amount computed as follows: The current rate for United States Treasury
securities (bills on a discounted basis shall be converted to a bond
equivalent) with a maturity date closest to the regularly scheduled due date
of the COF Loan installment (or portion thereof) so prepaid shall be
subtracted from the "cost of funds" component of the fixed rate for the
relevant COF Loan. If the result is zero or a negative number, there shall be
no yield maintenance fee. If the result is a positive number, then the
resulting percentage shall be multiplied by the amount of the principal
balance being prepaid. The resulting amount shall be divided by 360 and
multiplied by the number of days remaining until the regularly scheduled due
date of the COF Loan installment (or portion thereof) so prepaid. Said amount
shall be reduced to present value calculated by using the number of days
remaining until the regularly scheduled due date of the COF Loan installment
(or portion thereof) so prepaid and by using the above-referenced United
States Treasury security rate as the discount rate. The resulting amount
shall be the yield maintenance fee due to the Bank upon prepayment of the
applicable COF Loan. Any acceleration of a COF Loan due to an Event of
Default will give rise to a yield maintenance fee calculated with the respect
to such COF Loan on the date of such acceleration in the same manner as
though the Borrower had exercised a right of prepayment at that date, such
yield maintenance fee being due and payable at that date.
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1.9. INCREASED COSTS; CAPITAL ADEQUACY.
(i) If the adoption, effectiveness or phase-in, after the date hereof,
of any applicable law, rule or regulation, or any change therein, or
any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the
Bank with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency:
(A) shall subject the Bank to any Imposition or other charge with
respect to any COF Loan or the Bank's agreement to make COF
Loans, or shall change the basis of taxation of payments to the
Bank of the principal of or interest on any COF Loan or any other
amounts due under this letter agreement in respect of COF Loans
or the Bank's agreement to make or maintain COF Loans (except for
changes in the rate of tax on the over-all net income of the
Bank); or
(B) shall impose, modify or deem applicable any reserve, special
deposit, deposit insurance or similar requirement (including,
without limitation, any such requirement imposed by the Board of
Governors of the Federal Reserve System), against assets of,
deposits with or for the account of, or credit extended by, the
Bank or shall impose on the Bank any other condition affecting
any COF Loans or the Bank's agreement to make COF Loans
and the result of any of the foregoing is to increase the cost to the
Bank of making or maintaining any COF Loan or to reduce the amount of
any sum received or receivable by the Bank under this letter agreement
and/or the Term Note and/or with respect to any COF Loan by an amount
deemed by the Bank to be material, then, upon demand by the Bank and
receipt of a Bank Certificate from the Bank with respect thereto, the
Borrower shall pay to the Bank such additional amount or amounts as
the Bank certifies to be necessary to compensate the Bank reasonably
for such increased cost or reduction in amount received or receivable.
(ii) If the Bank shall have determined that the adoption,
effectiveness or phase-in after the date hereof of any applicable law,
rule or regulation regarding capital requirements for banks or bank
holding companies, or any change therein after the date hereof, or any
change after the date hereof in the interpretation or administration
thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity
regarding capital adequacy (whether or not having the force of law)
has or would have the effect of reducing the return on the Bank's
capital with respect to any Loan, any letter of credit and/or any
Foreign Exchange Contract or with respect to any of its agreements
hereunder to make Loans (all such Loans, whether or not subject to any
COF
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Interest Rate), issue letters of credit and issue Foreign Exchange
Contracts to a level below that which the Bank could have achieved
(taking into consideration the Bank's policies with respect to capital
adequacy immediately before such adoption, effectiveness, phase-in,
change or compliance and assuming that the Bank's capital was then
fully utilized) by any amount deemed by the Bank to be material: (A)
the Bank shall promptly after its determination of such occurrence
deliver a Bank Certificate with respect thereto to the Borrower; and
(B) the Borrower shall pay to the Bank as an additional fee from time
to time on demand such amount as the Bank certifies to be the amount
that will reasonably compensate for such reduction.
(iii) A Bank Certificate of the Bank claiming compensation under this
Section 1.9 shall be deemed PRIMA FACIE correct. Such certificate
shall set forth the nature of the occurrence giving rise to such
claim for compensation, the additional amount or amounts to be paid
to the Bank hereunder and the method by which such amounts are
determined. In determining any such amount, the Bank may use any
reasonable averaging and attribution methods.
(iv) No failure on the part of the Bank to demand compensation on any
one occasion shall constitute a waiver of its right to demand such
compensation on any other occasion and no failure on the part of the
Bank to deliver any Bank Certificate in a timely manner shall in any
way reduce any obligation of the Borrower to the Bank under this
Section 1.9.
1.10. ADVANCES AND PAYMENTS. The proceeds of all Loans shall be credited
by the Bank to a general deposit account maintained by the Borrower with the
Bank. The proceeds of each Revolving Loan will be used by the Borrower solely
for (i) working capital purposes and (ii) to fund investments in, or to form
partnerships with, suppliers or other businesses complementary with the
Borrower's business; provided that (1) all such investments and partnerships
shall be subject to the restrictions contained in Sections 4.6 and 4.7 below,
and (2) the aggregate amount advanced pursuant to this clause (ii) shall not
exceed $500,000 without the prior written consent of the Bank, which consent
shall not be unreasonably withheld. The proceeds of each Term Loan will be
used by the Borrower solely to pay or reimburse acquisition costs of
Qualifying Equipment.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums when same
are due, from time to time, under this letter agreement and/or any Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so charged. The failure of the Bank so to charge any account or to
give any such notice shall not affect the obligation of the Borrower to pay
interest, principal or other sums as provided herein or in any Note or with
respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under any Note or
with respect to any letter of credit shall be stated to be due on a day which is
not a Business Day, such
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payment may be made on the next succeeding Business Day, and interest payable on
each such date shall include the amount thereof which shall accrue during the
period of such extension of time. All payments by the Borrower hereunder and/or
in respect of any Note and/or with respect to any letter of credit shall be made
net of any impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank. All payments of interest, principal and any other sum
payable hereunder and/or under any Note and/or with respect to any letter of
credit shall be made to the Bank, in lawful money of the United States in
immediately available funds, at its office at One Federal Street, Boston, MA
02110 or at such other address as the Bank may from time to time direct. All
payments received by the Bank after 2:00 p.m. on any day shall be deemed
received as of the next succeeding Business Day. All monies received by the Bank
shall be applied first to fees, charges, costs and expenses payable to the Bank
under this letter agreement, any Note and/or any of the other Loan Documents
and/or with respect to any letter of credit, next to interest then accrued on
account of any Loans or letter of credit reimbursement obligations and only
thereafter to principal of the Loans and letter of credit reimbursement
obligations, being applied against the Loans and/or such obligations in such
order as the Borrower may designate (and, failing such designation, being
applied first against the letter of credit reimbursement obligations, next
against the Revolving Loans and thereafter against installments of the Term
Loans in inverse order of normal maturity). All interest and fees payable
hereunder and/or under any Note shall be calculated on the basis of a 360-day
year for the actual number of days elapsed.
1.11. LETTERS OF CREDIT. At the Borrower's request, the Bank may, from time
to time, in its reasonable discretion issue one or more letters of credit for
the account of the Borrower; provided that at the time of such issuance and
after giving effect thereto the Aggregate Revolving Bank Liabilities will in no
event exceed the lesser of (i) $3,500,000 or (ii) the then effective Borrowing
Base. Any such letter of credit will be issued for such fee and upon such terms
and conditions as may be agreed to by the Bank and the Borrower at the time of
issuance. The Borrower hereby authorizes the Bank, without further request from
the Borrower, to cause the Borrower's liability to the Bank for reimbursement of
funds drawn under any such letter of credit to be repaid from the proceeds of a
Revolving Loan to be made hereunder. The Borrower hereby irrevocably requests
that such Revolving Loans be made.
1.12. FOREIGN EXCHANGE CONTRACTS. Subject to the terms and conditions
hereof, the Bank will from time to time, at the Borrower's request, provide to
the Borrower one or more forward contracts ("Foreign Exchange Contracts") for
the purchase by the Borrower of foreign currency from the Bank; provided that
(i) each such Foreign Exchange Contract will be at such pricing as the Bank and
the Borrower may agree at the time of execution of such Foreign Exchange
Contract, (ii) the documentation for each such Foreign Exchange Contract will be
in such form as is then customarily used by the Bank for transactions of this
type, (iii) the Foreign Exchange Contracts will be used by the Borrower to
minimize its exposure to the fluctuation of the value of those foreign
currencies in which payments are expected to be made to the Borrower by
customers or in which the Borrower is required to make payments to suppliers,
(iv) the United States Dollar equivalent of all amounts subject to the Foreign
Exchange Contracts will not exceed $2,000,000 in the aggregate, with a maximum
two-day settlement requirement of $300,000, and (v) no such Foreign Exchange
Contract will provide
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for delivery of currency after that date which is the earlier of (a) November
1, 1999 or (b) 90 days after the date of issuance of such Foreign Exchange
Contract. The Bank agrees that the Borrower may make payment for any Foreign
Exchange Contract by means of an advance under this letter agreement, all of
which advances will be deemed Revolving Loans for all purposes of this letter
agreement, will be subject to the terms of this letter agreement (including,
without limitation, the limitations set forth in the first sentence of
Section 1.2 and the conditions to advance set forth in Section 1.13 below) and
will be evidenced by the Revolving Note; provided, however, that any
Revolving Loan made pursuant to this sentence will be repaid by the Borrower
promptly following the settlement date or earlier termination of the Foreign
Exchange Contract to which same relates.
1.13. CONDITIONS TO ADVANCE. Prior to the making of the initial Loan
hereunder or the issuance of any letter of credit hereunder or the issuance
of any Foreign Exchange Contract, the Borrower shall deliver to the Bank duly
executed copies of this letter agreement, the Security Agreement, the
Intellectual Property Security Agreements, the Revolving Note, the Term Note
and the documents and other items listed on the Closing Agenda delivered
herewith by the Bank to the Borrower, all of which, as well as all legal
matters incident to the transactions contemplated hereby, shall be reasonably
satisfactory in form and substance to the Bank and its counsel.
Without limiting the foregoing, any Loan or letter of credit issuance or
the issuance of any Foreign Exchange Contract (including the initial Loan or
letter of credit issuance or Foreign Exchange Contract issuance) is subject
to the further conditions precedent that on the date on which such Loan is
made or such letter of credit or Foreign Exchange Contract is issued (and
after giving effect thereto):
(a) All statements, representations and warranties of the Borrower made
in this letter agreement and/or the Security Agreement shall continue to be
correct in all material respects as of the date of such Loan or issuance of
such letter of credit or Foreign Exchange Contract, as the case may be.
(b) All covenants and agreements of the Borrower contained herein and/or
in any of the other Loan Documents shall have been complied with in all
material respects on and as of the date of such Loan or issuance of such
letter of credit or Foreign Exchange Contract, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements
then most recently furnished to the Bank.
Each request by the Borrower for any Loan or for the issuance of a
letter of credit or a Foreign Exchange Contract, and each acceptance by the
Borrower of the proceeds of any Loan or
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delivery of a letter of credit or a Foreign Exchange Contract, will be deemed
a representation and warranty by the Borrower that at the date of such Loan
or letter of credit issuance or Foreign Exchange Contract issuance, as the
case may be, and after giving effect thereto all of the conditions set forth
in the foregoing clauses (a)-(d) of this Section 1.13 will be satisfied. Each
request for a Revolving Loan or letter of credit issuance will be accompanied
by a borrowing base certificate on a form reasonably satisfactory to the
Bank, executed by the chief financial officer of the Borrower, unless such a
certificate shall have been previously furnished setting forth the Borrowing
Base as at a date not more than 30 days prior to the date of the requested
borrowing or the requested letter of credit issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this letter agreement and to make Loans hereunder and/or issue letters of
credit hereunder and/or issue Foreign Exchange Contracts, the Borrower warrants
and represents to the Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. The Borrower has full corporate power
to own its property and conduct its business as now conducted and as
contemplated to be conducted, to grant the security interests contemplated by
the Security Agreement and the Intellectual Property Security Agreement and to
enter into and perform this letter agreement and the other Loan Documents. The
Borrower is duly qualified to do business and in good standing in Massachusetts
and in each other jurisdiction in which the Borrower maintains any facility,
sales office or warehouse and in each other jurisdiction where the failure so to
qualify could (singly or in the aggregate with all other such failures) have a
material adverse effect on the financial condition, business or prospects of the
Borrower, all such jurisdictions, as at the date of this letter agreement, being
listed on item 2.1(a) of the attached Disclosure Schedule. At the date hereof,
the Borrower has no Subsidiaries, except as shown on said item 2.1(a) of the
attached Disclosure Schedule. The Borrower is not a member of any partnership or
joint venture.
(b) At the date of this letter agreement, no Person was known to own, of
record or beneficially, 5% or more of any class of outstanding capital stock of
the Borrower, except as set forth on item 2.1(b) of the attached Disclosure
Schedule. The Borrower owns 100% of the outstanding capital stock of each
Subsidiary.
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than
filings under the Uniform Commercial Code), registration, consent or
approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
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(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any waiver or
consent under any indenture or loan or credit agreement or any other
material agreement, lease or instrument to which the Borrower is a party or
by which the Borrower or any of its properties may be bound or affected or
require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank),
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any Material
Subsidiary of the Borrower before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could materially hinder or prevent the consummation of the transactions
contemplated hereby or call into question the validity of this letter agreement
or any of the other Loan Documents or any other instrument provided for or
contemplated by this letter agreement or any of the other Loan Documents or any
action taken or to be taken in connection with the transactions contemplated
hereby or thereby or which in any single case or in the aggregate might result
in any material adverse change in the business, prospects, condition, affairs or
operations of the Borrower or any such Material Subsidiary.
(f) Neither the Borrower nor any of its Material Subsidiaries is in
violation of any term of its charter or by-laws as now in effect. Neither the
Borrower nor any Material Subsidiary of the Borrower is in material violation of
any term of any mortgage, indenture or judgment, decree or order, or any other
instrument, contract or agreement to which it is a party or by which any of its
property is bound.
(g) Except as disclosed on item 2.1(g) of the attached Disclosure Schedule,
the Borrower has filed (and has caused each Material Subsidiary of the Borrower
to file) all federal, foreign, state and local tax returns, reports and
estimates required to be filed by the Borrower or by any such Material
Subsidiary. Except as disclosed on said item 2.1(g), all such filed returns,
reports and estimates are proper and accurate and the Borrower (or the Material
Subsidiary concerned, as the case may be) has paid all taxes, assessments,
impositions, fees and other governmental charges required to be paid in respect
of the periods covered by such returns, reports or estimates. Except as
disclosed on said item 2.1(g), no deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
(h) The Borrower is in compliance with (and each Material Subsidiary of the
Borrower is in compliance with) all requirements of law, federal, state and
local, and all
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requirements of all governmental bodies or agencies having jurisdiction over it,
the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with which could (singly or in the
aggregate with all other such failures) have a material adverse effect upon the
assets, business, financial condition or prospects of the Borrower or any such
Material Subsidiary. Without limiting the foregoing, the Borrower and each such
Material Subsidiary has all the franchises, licenses, leases, permits,
certificates and authorizations needed for the conduct of its business and the
use of its properties and all premises occupied by it, as now conducted, owned
and used and as planned to be conducted, owned and used.
(i) The audited financial statements of the Borrower as at March 31, 1998
and the management-generated financial statements of the Borrower as at
September 30, 1998, each heretofore delivered to the Bank, fairly present the
financial condition of the Borrower as at the date thereof and for the period
covered thereby, except that the management-generated statements do not have
footnotes and thus do not present the information which would normally be
contained in footnotes to financial statements. Neither the Borrower nor any of
the Borrower's Subsidiaries has any liability, contingent or otherwise, not
disclosed in the aforesaid March 31, 1998 financial statements or in the notes
thereto that could materially affect the financial condition of the Borrower.
Since March 31, 1998, except as set forth on item 2.1(i) of the attached
Disclosure Schedule, there has been no material adverse development in the
business or condition of the Borrower, and the Borrower has not entered into any
transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 7 Lopez Road, Wilmington, MA 01887. All of the books and
records of the Borrower are located at said address. Except as described on item
2.1(j) of the attached Disclosure Schedule, no assets of the Borrower are
located at any other address. Said item 2.1(j) of the attached Disclosure
Schedule sets forth the names and addresses of all record owners of each of the
premises where any material amount of Collateral is located.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises ("Intellectual
Property") now being used or necessary to conduct its business, all of which are
described on item 2.1(k) of the attached Disclosure Schedule. None of the
Intellectual Property owned by the Borrower is represented by a registered
copyright, trademark, patent or other federal or state registration, except as
shown on said item 2.1(k). To the best knowledge of the Borrower, the conduct of
the Borrower's business as now operated does not conflict with valid patents,
licenses, copyrights, trademarks, trade names or franchises of others in any
manner that could materially adversely affect the business or assets or
condition, financial or otherwise, of the Borrower.
(l) None of the executive officers or key employees of the Borrower or any
of its Material Subsidiaries is subject to any agreement in favor of anyone
other than the Borrower (or such Material Subsidiary, as the case may be) which
limits or restricts that person's right to engage in the type of business
activity conducted or proposed to be conducted by the Borrower (or such Material
Subsidiary, as the case may be) or which grants to anyone other than the
Borrower (or such Material Subsidiary, as the case may be) any rights in any
inventions or other
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ideas susceptible to legal protection developed or conceived by any such officer
or key employee.
(m) Neither the Borrower nor any of its Material Subsidiaries is a party to
any contract or agreement which now has or, as far as can be foreseen by the
Borrower at the date hereof, may have a material adverse effect on the financial
condition, business, prospects or properties of the Borrower or any such
Material Subsidiary.
(n) The Borrower has reviewed the financial reporting, manufacturing,
testing and labeling equipment and management information system software which
it uses in its business for "Year 2000" compliance and has determined that such
software will continue to function in the manner intended without interruption
of service or other difficulty resulting from the "Year 2000 problem". The
Borrower will, at the request of the Bank, provide such reports and such other
information as the Bank may reasonably request in order to evidence such Year
2000 compliance.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any Term Loan or any of the other Obligations shall be outstanding or any
letter of credit issued hereunder or any Foreign Exchange Contract issued
hereunder shall be outstanding:
3.1. LEGAL EXISTENCE; QUALIFICATION; COMPLIANCE. The Borrower will
maintain (and will cause each Material Subsidiary of the Borrower to
maintain) its corporate existence and good standing in the jurisdiction of
its incorporation. The Borrower will remain qualified to do business and in
good standing in Massachusetts. The Borrower will qualify to do business and
remain qualified and in good standing (and will cause each Material
Subsidiary of the Borrower to qualify and remain qualified and in good
standing) in each other jurisdiction where the Borrower or such Material
Subsidiary, as the case may be, maintains any plant, sales office, warehouse
or other facility and in each other jurisdiction in which the failure so to
qualify could (singly or in the aggregate with all other such failures) have
a material adverse effect on the financial condition, business or prospects
of the Borrower or any such Material Subsidiary. The Borrower will comply
(and will cause each Material Subsidiary of the Borrower to comply) with its
charter documents and by-laws. The Borrower will comply with (and will cause
each Material Subsidiary of the Borrower to comply with) all applicable laws,
rules and regulations (including, without limitation, ERISA) other than (i)
laws, rules or regulations the validity or applicability of which the
Borrower or such Material Subsidiary shall be contesting in good faith by
proceedings which serve as a matter of law to stay the enforcement thereof
and (ii) those laws, rules and regulations the failure to comply with any of
which could not (singly or in the aggregate) have a material adverse effect
on the financial condition, business or prospects of the Borrower or any such
Material Subsidiary. In addition, and without limitation of the foregoing,
the Borrower will comply (and will cause each Subsidiary of the Borrower,
whether or not a
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Material Subsidiary, to comply) with all applicable laws, rules and regulations
relating to environmental protection.
3.2. MAINTENANCE OF PROPERTY; INSURANCE. The Borrower will maintain and
preserve (and will cause each Material Subsidiary of the Borrower to maintain
and preserve) all of its properties in good working order and condition,
making all necessary repairs thereto and replacements thereof. The Borrower
will maintain all such insurance as may be required under the Security
Agreement and will also maintain (and will cause each Material Subsidiary of
the Borrower to maintain), with financially sound and reputable insurers,
insurance with respect to its property and business against such liabilities,
casualties and contingencies and of such types and in such amounts as shall
be reasonably satisfactory to the Bank from time to time and in any event all
such insurance as may from time to time be customary for companies conducting
a business similar to that of the Borrower (or such Material Subsidiary, as
the case may be) in similar locales.
3.3. PAYMENT OF TAXES AND CHARGES. The Borrower will pay and discharge
(and will cause each Material Subsidiary of the Borrower to pay and
discharge) all taxes, assessments and governmental charges or levies imposed
upon it or upon its income or property, including, without limitation, taxes,
assessments, charges or levies relating to real and personal property,
franchises, income, unemployment, old age benefits, withholding, or sales or
use, prior to the date on which penalties would attach thereto, and all
lawful claims (whether for any of the foregoing or otherwise) which, if
unpaid, might give rise to a lien upon any property of the Borrower or any
such Material Subsidiary, except any of the foregoing which is being
contested in good faith and by appropriate proceedings which serve as a
matter of law to stay the enforcement thereof and for which the Borrower has
established and is maintaining adequate reserves. The Borrower will pay, and
will cause each of its Material Subsidiaries to pay, in a timely manner, all
lease obligations, all material trade debt, material purchase money
obligations, equipment lease obligations and all of its other material
Indebtedness. The Borrower will perform and fulfill (and will cause each of
its Material Subsidiaries to perform and fulfill) all material covenants and
agreements under any leases of real estate, agreements relating to material
purchase money debt, equipment leases and other material contracts. The
Borrower will (and will cause each of its Material Subsidiaries to) maintain
in full force and effect, and comply with the terms and conditions of, all
permits, permissions and licenses necessary or desirable for its business.
3.4. ACCOUNTS. The Borrower will maintain (and will cause each of its
Material Subsidiaries to maintain) its principal depository and operating
accounts with the Bank. Notwithstanding the immediately preceding sentence, the
Borrower and its Subsidiaries may maintain accounts with other banks; provided
that the total amount on deposit with such other banks will at no time exceed
25% of the aggregate amount then held by the Borrower and its Subsidiaries in
all bank accounts.
3.5. CONDUCT OF BUSINESS. The Borrower will conduct (and will cause each of
its Material Subsidiaries to conduct), in the ordinary course, the business in
which it is presently engaged or lines of business reasonably related thereto.
The Borrower will not, without the prior
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written consent of the Bank (which consent shall not be unreasonably withheld),
directly or indirectly (itself or through any Subsidiary), enter into any other
lines of business, businesses or ventures not reasonably related to the business
conducted at the date hereof.
3.6. REPORTING REQUIREMENTS. The Borrower will furnish to the Bank:
(i) Within 90 days after the end of each fiscal year of the Borrower,
a copy of the annual audit report for such fiscal year for the Borrower,
including therein consolidated and consolidating balance sheets of the
Borrower and Subsidiaries as at the end of such fiscal year and related
consolidated and consolidating statements of income, stockholders' equity
and cash flow for the fiscal year then ended. The annual consolidated
financial statements shall be certified by independent public accountants
selected by the Borrower and reasonably acceptable to the Bank, such
certification to be in such form as is generally recognized as
"unqualified".
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries and related consolidated and consolidating statements of
income and cash flow, unaudited but prepared in accordance with generally
accepted accounting principles fairly presenting the financial condition of
the Borrower as at the dates thereof and for the periods covered thereby
(except that such quarterly statements need not contain footnotes) and
certified as such (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer or Vice President of
Finance of the Borrower, such balance sheets to be as at the end of each
such fiscal quarter and such statements of income and cash flow to be for
such fiscal quarter and for the fiscal year to date.
(iii) Within 30 days after the end of each month, consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries (domestic
operations only) and related consolidated and consolidating statements of
income, unaudited but prepared in accordance with generally accepted
accounting principles fairly presenting the financial condition of the
Borrower as at the dates thereof and for the periods covered thereby
(except that such monthly statements need not contain footnotes) and
certified as such (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer or Vice President of
Finance of the Borrower, such balance sheets to be as at the end of each
such month and such statements of income to be for such month and for the
fiscal year to date.
(iv) At the time of delivery of each annual, quarterly or monthly
statement of the Borrower, a certificate executed by the chief financial
officer or Vice President of Finance of the Borrower stating that he or she
has reviewed this letter agreement and the other Loan Documents and has no
knowledge of any default by the Borrower in the performance or observance
of any of the provisions of this letter agreement or of any of the other
Loan Documents or, if he or she has such knowledge, specifying each such
default and the nature thereof. Each such certificate given as at the end
of any fiscal
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quarter shall also set forth the calculations necessary to evidence
compliance with Sections 3.7-3.10 (to the extent then applicable).
(v) Monthly, within 15 days after the end of each month, (A) an aging
report in form satisfactory to the Bank covering all Receivables of the
Borrower outstanding as at the end of such month and (B) a certificate of
the chief financial officer or Vice President of Finance of the Borrower
setting forth the Borrowing Base as at the end of such month, all in form
reasonably satisfactory to the Bank. Notwithstanding the provisions of the
immediately preceding sentence, the Borrower may omit the delivery of the
aforesaid aging report and Borrowing Base certificate as at the end of any
month if there are no Revolving Loans outstanding or letters of credit
issued for the account of the Borrower outstanding at the end of such
month; provided that if the Borrower omits such delivery as at the end of
any month the Borrower will provide to the Bank a current Receivables aging
and Borrowing Base certificate prior to requesting any Revolving Loan or
letter of credit issuance.
(vi) Promptly after receipt, a copy of all audits or reports submitted
to the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
"management letter" prepared by such accountants.
(vii) Should any securities of the Borrower be publicly traded or if
registration of such securities is being sought, the Borrower will furnish
to the Bank, promptly upon same becoming available, one copy of each
financial statement, report, notice or proxy statement sent by the Borrower
to stockholders or the holders of debt securities generally, and of each
regular or periodic report and any registration statement, prospectus or
listing application filed by the Borrower with the National Association of
Securities Dealers, any securities exchange or the Securities and Exchange
Commission or any successor agency.
(viii) As soon as possible and in any event within five days after the
Borrower has knowledge or notice of the occurrence of any Event of Default
or any event which, with the giving of notice or passage of time or both,
would constitute an Event of Default, the statement of the Borrower setting
forth details of such Event of Default or event and the action which the
Borrower proposes to take with respect thereto.
(ix) Promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party. The
Borrower will also give written notice to the Bank promptly upon the
occurrence of any material adverse development in any then-existing
litigation involving the Borrower or any such Subsidiary.
(x) Promptly upon applying for (or upon any Guarantor applying for),
or being granted (or any Guarantor being granted), a federal or state
registration for any copyright, trademark or
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patent or purchasing any registered copyright, trademark or patent, written
notice to the Bank describing same, together with all such documents as may
be required in order to give the Bank a fully perfected first priority
security interest in each such copyright, trademark or patent.
(xi) Promptly after the Borrower has knowledge thereof, written notice
of any development or circumstance which may reasonably be expected to have
a material adverse effect on the Borrower or its business, properties,
assets, Material Subsidiaries or condition, financial or otherwise.
(xii) Promptly upon request, such other information respecting the
financial condition, operations, Receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
3.7. DEBT TO WORTH. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing with September 30, 1998) on a consolidated
basis a Leverage Ratio of not more than 1.0 to 1. As used herein, the "Leverage
Ratio", as determined at any date, means the ratio of (x) the total Indebtedness
of the Borrower and/or any of its Subsidiaries, taken on a consolidated basis,
outstanding at such date to (y) the then consolidated Tangible Net Worth of the
Borrower and Subsidiaries.
3.8. LIQUIDITY. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing September 30, 1998) a ratio of (x) Net Quick
Assets to (y) Adjusted Current Liabilities, which ratio shall be not less than
1.25 to 1.
3.9. PROFITABILITY. The Borrower will achieve annual consolidated Net
Income of at least $1.00 for its fiscal year ending March 31, 1999. Moreover,
the Borrower will achieve consolidated Net Income of not less than $1.00 for
each 12-month period ending as at the end of any fiscal quarter of the Borrower
(commencing with June 30, 1999).
3.10. DEBT SERVICE COVERAGE RATIO. The Borrower will maintain as at the end
of each fiscal quarter of the Borrower (commencing with its results as at March
31, 1999) on a consolidated basis a Debt Service Coverage Ratio of not less than
1.2 to 1. As used herein, "Debt Service Coverage Ratio", as determined as at any
date, means the ratio of (x) Adjusted EBITDA of the Borrower and Subsidiaries
for the 12-month period ending at such date to (y) the sum of (i) all principal
of Indebtedness (including, without limitation, the principal component of any
capitalized leases) paid or required to be paid by the Borrower and/or any of
its Subsidiaries during such 12-month period to the extent that, on the date
when paid or required to be paid, such principal constituted current maturities
of long-term debt PLUS (ii) all interest on Indebtedness (including, without
limitation, the interest component of any capitalized leases) paid or required
to pay or accrued by the Borrower and/or any of its Subsidiaries during such
12-month period. As used herein, "interest" includes all fees and other charges
payable with respect to any letters of credit now or hereafter issued by any
Person for the account of the Borrower and/or any of its Subsidiaries. As used
herein, "Adjusted EBITDA" for any fiscal period means the result of (x) the
consolidated EBITDA of the Borrower and Subsidiaries for such fiscal period
MINUS (y) all state and federal taxes actually paid by the Borrower and/or any
of its Subsidiaries during such
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fiscal period. Notwithstanding the foregoing, the Borrower need not comply
with this Section 3.10 at any time when no Term Loan is outstanding and the
within-described facility for Term Loans is no longer in effect.
3.11. BOOKS AND RECORDS. The Borrower will maintain (and cause each of
its Material Subsidiaries to maintain) complete and accurate books, records
and accounts which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied. The Borrower will, at any reasonable time and from time
to time upon reasonable notice and during normal business hours (and at any
time and without any necessity for notice following the occurrence and during
the continuance of an Event of Default), permit the Bank, and any agents or
representatives thereof, to examine and make copies of and take abstracts
from the records and books of account of, and visit the properties of the
Borrower and any of its Material Subsidiaries, and to discuss its affairs,
finances and accounts with its managers, officers or directors and
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this Section 3.11. The
Bank agrees that it will not exercise its rights of examination and
visitation under the immediately preceding sentence more than twice in any
given fiscal year unless a Default or Event of Default shall have occurred
and be then continuing. Each financial statement of the Borrower hereafter
delivered pursuant to this letter agreement will be complete and accurate and
will fairly present the financial condition of the Borrower as at the date
thereof and for the periods covered thereby.
3.12. LANDLORD'S WAIVER. Prior to the making of the first Loan the Borrower
will obtain, and will thereafter maintain in effect at all times, waivers from
the owners of all premises in which any material amount of Collateral is
located, such waivers to be in form and substance satisfactory to the Bank.
3.13. MATERIAL SUBSIDIARIES. If the Borrower acquires a Material Subsidiary
or if any Subsidiary of the Borrower becomes a Material Subsidiary, the Borrower
will promptly notify the Bank of same. Promptly following the Material
Subsidiary Date for any such Subsidiary, the Borrower will obtain from the
relevant Material Subsidiary (if it is a Domestic Material Subsidiary) and
deliver to the Bank (i) a guaranty by such Domestic Material Subsidiary of the
obligations of the Borrower under this letter agreement, the Notes and the other
Loan Documents, (ii) security agreements granting to the Bank a security
interest in all assets of such Domestic Material Subsidiary, together with all
filings needed to perfect such security interest and appropriate landlord's
waivers, (iii) certificates of appropriate governmental authorities as to the
legal existence, qualification and good standing of such Domestic Material
Subsidiary, (iv) a Secretary's Certificate as to such Domestic Material
Subsidiary's charter documents and by-laws, the incumbency and signatures of
such Domestic Material Subsidiary's officers, and the resolutions of such
Domestic Material Subsidiary's Board of Directors (and, if necessary,
stockholders) approving the aforesaid guaranty and security agreements, and (v)
an opinion of such Domestic Material Subsidiary's counsel as to the Domestic
Material Subsidiary's legal existence, qualification and good standing, such
Domestic Material Subsidiary's legal capacity, due corporate approval of the
guaranty and the security agreements, enforceability of the guaranty and the
security agreements in accordance with their respective terms, no need for third
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party consents, no breach of other agreements, orders or decrees or of
applicable laws, no litigation, perfection of security interest and other
matters, all of the documents described in clauses (i)-(v) of this sentence to
be satisfactory in form and substance to the Bank. As used herein, a "Domestic
Material Subsidiary" is any Material Subsidiary which (i) is incorporated under
the laws of any state or other political subdivision of the United States, (ii)
has its chief executive offices within the United States, (iii) has a principal
place of business within the United States, and/or (iv) has any material amount
of assets within the United States.
IV. NEGATIVE COVENANTS
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any Term Loan or any of the other Obligations shall be outstanding or any
letter of credit issued hereunder shall be outstanding or any Foreign Exchange
Contract shall be outstanding:
4.1. INDEBTEDNESS. The Borrower will not create, incur, assume or suffer to
exist any Indebtedness (nor allow any of its Material Subsidiaries to create,
incur, assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Notes and any Indebtedness in respect of
letters of credit issued by the Bank;
(ii) Indebtedness of the Borrower or any Material Subsidiary for
taxes, assessments and governmental charges or levies not yet due and
payable;
(iii) unsecured current liabilities of the Borrower or any Material
Subsidiary (other than for money borrowed or for purchase money
Indebtedness with respect to fixed assets) incurred upon customary terms in
the ordinary course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
for use in the Borrower's business, provided that the total of Indebtedness
permitted under this clause (iv) plus presently-existing equipment
financing permitted under clause (v) of this Section 4.1 will not exceed
$500,000 in the aggregate outstanding at any one time, unless the Bank
consents in writing to a higher amount, such consent not to be unreasonably
withheld;
(v) other Indebtedness existing at the date hereof, but only to the
extent set forth on Item 4.1 of the attached Disclosure Schedule; and
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant to Section 4.3.
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4.2. LIENS. The Borrower will not create, incur, assume or suffer to exist
(nor allow any of its Material Subsidiaries to create, incur, assume or suffer
to exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens") upon or with respect
to any of its property or assets, now owned or hereafter acquired, except:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Material Subsidiaries if the same
shall not at the time be delinquent or thereafter can be paid without
interest or penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
Section 4.1; provided that no such Lien will extend to any property of the
Borrower or any Material Subsidiary other than the specific items of
equipment financed; or
(vi) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on Item 4.2 of the attached
Disclosure Schedule.
4.3. GUARANTIES. The Borrower will not, without the prior written consent
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Material Subsidiaries so to
assume, guaranty or become directly or contingently liable) in connection with
any indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business, and (ii) currently
existing guaranties described on Item 4.3 of the attached Disclosure Schedule.
4.4. DIVIDENDS. The Borrower will not, without the prior written consent
of the Bank (which consent shall not be unreasonably withheld), make any
distributions to its shareholders, pay any dividends (other than dividends
payable solely in capital stock of the Borrower) or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
provided, however, that the Borrower may, without being deemed to be in
violation of this Section 4.4, issue and repurchase its securities,
including, without limitation, the adoption of shareholder rights plans,
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stock splits and reverse stock splits and stock repurchases so long as at the
time of any such action and after giving effect thereto (1) no Default or Event
of Default then exists or would result therefrom and (2) the total cash
expenditures for purposes referred to in this PROVISO will not, without the
prior written consent of the Bank (which consent shall not be unreasonably
withheld), exceed (i) $2,000,000 in the aggregate during the term of this letter
agreement for stock repurchases (such stock repurchases to be permitted if and
only if at the time of each such stock repurchase and after giving effect
thereto the Borrower has a Net Cash Balance (defined below) of at least
$5,000,000) nor (ii) $500,000 for all other purposes during the term of this
letter agreement. As determined at any time, the Borrower's "Net Cash Balance"
is the result of (i) the Borrower's total cash and cash-equivalents at such
time, MINUS (ii) the aggregate principal amount of Revolving Loans then
outstanding.
4.5. LOANS AND ADVANCES. The Borrower will not make any loans or
advances (and will not permit any of its Subsidiaries to make any loans or
advances) to any Person, including, without limitation, the Borrower's
directors, officers and employees without the prior written consent of the
Bank (such consent not to be unreasonably withheld), except (i) advances to
directors, officers or employees with respect to expenses incurred by them in
the ordinary course of their duties and advances against salary, all of which
will not exceed, in the aggregate, $200,000 outstanding at any one time; and
(ii) loans to Subsidiaries; provided that the total of (1) all loans made to
Subsidiaries after the date hereof, PLUS (2) all amounts expended for
acquisitions as described in Section 4.7 below, PLUS (3) all other amounts
invested in Subsidiaries after the date hereof will not exceed $250,000.
4.6. INVESTMENTS. The Borrower will not, without the Bank's prior
written consent (which consent will not be unreasonably withheld), invest in,
hold or purchase any stock or securities of any Person (nor will the Borrower
permit any of its Subsidiaries to invest in, purchase or hold any such stock
or securities) except (i) readily marketable direct obligations of, or
obligations guarantied by, the United States of America or any agency
thereof, (ii) other investment grade debt securities, (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this Section 4.6, (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the
Bank or the Bank's parent, (v) deposits with or certificates of deposit
issued by any United States commercial bank having more than $100,000,000 in
capital, (vi) investments in any Subsidiaries now existing or hereafter
created by the Borrower pursuant to Section 4.7 below; provided that in any
event the Tangible Net Worth of the Borrower alone (exclusive of its
investment in Subsidiaries and any debt owed by any Subsidiary to the
Borrower) will not be less than 90% of the consolidated Tangible Net Worth of
the Borrower and Subsidiaries, (vii) stock repurchases expressly permitted
under Section 4.4 above and investments expressly permitted by the second
sentence of Section 1.10 above, and (viii) other existing investments
described in Item 4.6(viii) of the attached Disclosure Schedule.
4.7. SUBSIDIARIES; ACQUISITIONS. The Borrower will not, without the prior
written consent of the Bank (which consent will not be unreasonably withheld),
form or acquire any Subsidiary or make (directly or indirectly) any other
acquisition of the stock of any Person or of all or substantially all of the
assets of any other Person, except as otherwise expressly permitted
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by Section 1.10, Section 4.4 and Section 4.6. The Borrower will not become a
partner in any partnership (and will not permit any Subsidiary to do so) if
the result of such partnership is that any Person other than the Borrower (or
such Subsidiary, as the case may be) has the power to incur any Indebtedness
on behalf of the Borrower (or such Subsidiary, as the case may be) or to
encumber or dispose of any assets of the Borrower (or such Subsidiary, as the
case may be).
4.8. MERGER. The Borrower will not (and will not permit any of its Material
Subsidiaries to) merge or consolidate with any Person or sell, lease, transfer
or otherwise dispose of any material portion of its assets (whether in one or
more transactions), other than sale of inventory in the ordinary course and the
disposal of obsolete or surplus equipment in the ordinary course.
4.9. AFFILIATE TRANSACTIONS. The Borrower will not (and will not permit
any of its Material Subsidiaries to) enter into any transaction, including,
without limitation, the purchase, sale or exchange of any property or the
rendering of any service, with any affiliate of the Borrower, except in the
ordinary course of and pursuant to the reasonable requirements of the
Borrower's business (or such Material Subsidiary's business, as the case may
be) and upon fair and reasonable terms no less favorable to the Borrower (or
such Material Subsidiary, as the case may be) than would be obtained in a
comparable arms'-length transaction with any Person not an affiliate;
provided that nothing in this Section 4.9 shall be deemed to prohibit the
payment of salary or other similar payments to any officer or director of the
Borrower or any Material Subsidiary at a level consistent with the salary and
other payments being paid at the date of this letter agreement and heretofore
disclosed in writing to the Bank, nor to prevent the hiring of additional
officers at a salary level consistent with industry practice, nor to prevent
reasonable periodic increases in salary, nor to prevent payments to any
officer or director in accordance with a duly authorized employee
compensation plan or any severance rights plans which would lead to the
payments upon a change in control of the Borrower, nor to prevent reasonable
increases in amounts payable under any such employee compensation plans
and/or severance rights plans. For the purposes of this letter agreement,
"affiliate" means any Person which, directly or indirectly, controls or is
controlled by or is under common control with the Borrower; any officer or
director or former officer or director of the Borrower; any Person owning of
record or beneficially, directly or indirectly, 5% or more of any class of
capital stock of the Borrower or 5% or more of any class of capital stock or
other equity interest having voting power (under ordinary circumstances) of
any of the other Persons described above; and any member of the immediate
family of any of the foregoing. "Control" means possession, directly or
indirectly, of the power to direct or cause the direction of the management
or policies of any Person, whether through ownership of voting equity, by
contract or otherwise.
4.10. CHANGE OF ADDRESS, ETC. The Borrower will not change its name or
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence
of Section 2.1(j) above, nor will the Borrower remove any books or records
from such address, nor will the Borrower keep any of its Collateral at any
location other than as described in said Section 2.1(j) without, in each
instance, giving the Bank at least 30 days' prior written notice and
providing all such financing statements, certificates and other documentation
as the Bank may request in order to maintain the perfection and priority of
the
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security interests granted or intended to be granted pursuant to the Security
Agreement. The Borrower will not change its fiscal year or methods of
financial reporting unless, in each instance, prior written notice of such
change is given to the Bank and prior to such change the Borrower enters into
amendments to this letter agreement in form and substance satisfactory to the
Bank in order to preserve unimpaired the rights of the Bank and the
obligations of the Borrower hereunder. Without limitation of the foregoing,
the Borrower will not make any change in its current capital structure except
as expressly permitted by Section 4.4 without the prior written consent of
the Bank, such consent not to be unreasonably withheld.
4.11. HAZARDOUS WASTE. Except as provided below, the Borrower will not
dispose of (or permit any Subsidiary to dispose of) or suffer or permit to exist
any hazardous material or oil on any site or vessel owned, occupied or operated
by the Borrower or any Subsidiary of the Borrower, nor shall the Borrower store
(or permit any Subsidiary to store) on any site or vessel owned, occupied or
operated by the Borrower or any such Subsidiary, or transport or arrange the
transport of, any hazardous material or oil (the terms "hazardous material",
"oil", "site" and "vessel", respectively, being used herein with the meanings
given those terms in Mass. Gen. Laws, Ch. 21E or any comparable terms in any
comparable statute in effect in any other relevant jurisdiction). The Borrower
shall provide the Bank with written notice of (i) the intended storage or
transport of any hazardous material or oil by the Borrower or any Subsidiary of
the Borrower, (ii) any potential or known release or threat of release of any
hazardous material or oil at or from any site or vessel owned, occupied or
operated by the Borrower or any Subsidiary of the Borrower, and (iii) any
incurrence of any expense or loss by any government or governmental authority in
connection with the assessment, containment or removal of any hazardous material
or oil for which expense or loss the Borrower or any Subsidiary of the Borrower
may be liable. Notwithstanding the foregoing, the Borrower and its Subsidiaries
may use, store and transport, and need not notify the Bank of the use, storage
or transportation of, (x) oil in reasonable quantities, as fuel for heating of
their respective facilities or for vehicles or machinery used in the ordinary
course of their respective businesses and (y) hazardous materials that are
solvents, cleaning agents or other materials used in the ordinary course of the
respective business operations of the Borrower and its Subsidiaries, in
reasonable quantities, as long as in any case the Borrower or the Subsidiary
concerned (as the case may be) has obtained and maintains in effect any
necessary governmental permits, licenses and approvals, complies with all
requirements of applicable federal, state and local law relating to such use,
storage or transportation, follows the protective and safety procedures that a
prudent businessperson conducting a business the same as or similar to that of
the Borrower or such Subsidiary (as the case may be) would follow, and disposes
of such materials (not consumed in the ordinary course) only through licensed
providers of hazardous waste removal services.
4.12. NO MARGIN STOCK. No proceeds of any Loan shall be used directly or
indirectly to purchase or carry any margin security.
V. DEFAULT AND REMEDIES
5.1. EVENTS OF DEFAULT. The occurrence of any one of the following events
shall constitute an Event of Default hereunder:
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(a) The Borrower shall fail to make any payment of principal of or interest
on the Revolving Note or the Term Note on or before the date when due and such
failure shall continue uncured for two Business Days after such due date; or the
Borrower shall fail to pay when due any amount owed to the Bank with respect to
any letter of credit or any Foreign Exchange Contract now or hereafter issued by
the Bank and such failure shall continue uncured for two Business Days after
such due date; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with any Loan
or any letter of credit or any Foreign Exchange Contract shall at any time prove
to have been incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of Sections 3.1, 3.3, 3.7, 3.8, 3.9 or 3.10
or Article IV; or
(d) The Borrower shall fail to perform or observe any agreement or
obligation under Section 3.6 and such failure shall continue uncured for 10
days; or
(e) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(g) Any default shall exist and remain unwaived or uncured with respect to
any Indebtedness of the Borrower or any Material Subsidiary of the Borrower in
excess of $1,000,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $1,000,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which then currently permits
the acceleration of the maturity of any such Indebtedness by the holder or
holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Material
Subsidiary of the Borrower shall become insolvent or bankrupt or shall cease
paying its debts as they mature or shall make an assignment for the benefit of
creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or any Material Subsidiary of the Borrower or for a substantial part of
the property of the Borrower or any such Material Subsidiary, or bankruptcy,
reorganization, arrangement, insolvency or similar proceedings shall be
instituted by or against the Borrower or any such Material Subsidiary under the
laws of any jurisdiction (except for an involuntary
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proceeding filed against the Borrower or any Material Subsidiary of the Borrower
which is dismissed within 60 days following the institution thereof); or
(i) Any attachment, execution or similar process relating to a sum in
excess of $50,000 shall be issued or levied against any of the property of the
Borrower or any Material Subsidiary and such attachment, execution or similar
process shall not be paid, stayed, released, vacated or fully bonded within 30
days after its issue or levy; or
(j) Any final uninsured judgment (other than a final judgment in the
litigation disclosed on Item 2.1(e) of the attached Disclosure Schedule) in
excess of $250,000 shall be entered against the Borrower or any Material
Subsidiary of the Borrower by any court of competent jurisdiction and shall
remain unpaid or unstayed for 30 days; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) The Security Agreement, any Guaranty or any other Loan Document shall
for any reason (other than due to payment in full of all amounts secured or
evidenced thereby or due to discharge in writing by the Bank) not remain in full
force and effect or any event of default shall exist under any Guaranty; or
(m) The security interests and liens of the Bank in and on any of the
Collateral covered or intended to be covered by the Security Agreement and/or
any of the Guarantors' Security Agreements shall for any reason (other than
written release by the Bank or due to any failure by the Bank to file
appropriate continuation statements or other failure by the Bank to perfect or
maintain perfection not resulting from the Borrower's or any Guarantor's failure
to deliver any documents or take any action requested by the Bank for this
purpose) not be fully perfected liens and security interests; or
(n) If, at any time, more than 50% of any class of voting stock of the
Borrower shall be held, of record and/or beneficially, by any Person or by any
"group" (as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder) other than by one or more of the Persons listed on item
5.1(n) of the attached Disclosure Schedule; or
(o) Either or both of Michael Hone and/or Donald Peck shall for any reason
not be an executive officer of the Borrower actively involved in the management
of the Borrower, unless promptly replaced as such executive officer by another
individual of similar expertise and experience and reasonably acceptable to the
Bank (and this clause will then become applicable to each such other
individual); provided that the Bank will waive so much (and only so much) of
this clause as requires the replacement executive officer to be reasonably
acceptable to the Bank
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as long as one of Michael Hone or Donald Peck remains an executive officer of
the Borrower actively involved in the management of the Borrower.
5.2. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amounts of the Revolving Note and
the Term Note then outstanding, all interest accrued and unpaid thereon and all
other amounts payable under this letter agreement and all other Indebtedness of
the Borrower to the Bank to be forthwith due and payable, whereupon the same
shall become forthwith due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements, the Term Loan facility,
the letter of credit facility and the facility for Foreign Exchange Contracts
provided for by this letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving Note,
under the Term Note, under the Security Agreement, under the Intellectual
Property Security Agreements, under the Guaranties (if any), under the
Guarantors' Security Agreements (if any) and under each and any other agreement
with the Bank; and exercise all other rights and remedies which the Bank may
have under applicable law.
5.3. SET-OFF. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code. ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
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<PAGE>
5.4. LETTERS OF CREDIT. Without limitation of any other right or remedy of
the Bank, (i) if an Event of Default shall have occurred and the Bank shall have
accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
5.5. SHAREHOLDER LITIGATION. Notwithstanding anything in the Loans
Documents to the contrary, any order, judgment, lien, settlement or other action
arising out of the securities litigation listed on item 2.1(e) of the attached
Disclosure Schedule shall not constitute an Event of Default, so long as (i)
same was fully reserved for on the books of the Borrower at the date of this
letter agreement and (ii) no violation of any of the financial covenants
(Sections 3.7-3.10) results therefrom.
VI. MISCELLANEOUS
6.1. COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and
expenses (including, without limitation, reasonable legal fees) of the Bank in
connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note, the Term Note and all
other instruments and documents to be delivered in connection with any Loan or
letter of credit issued hereunder or any Foreign Exchange Contract and any
amendments or modifications of any of the foregoing, as well as the costs and
expenses (including, without limitation, the reasonable fees and expenses of
legal counsel) incurred by the Bank in connection with preserving, enforcing or
exercising, upon default, any rights or remedies under this letter agreement,
the Security Agreement, the Revolving Note, the Term Note and all other
instruments and documents delivered or to be delivered hereunder or in
connection herewith, all whether or not legal action is instituted. In addition,
the Borrower shall be obligated to pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this letter agreement, the Security Agreement, the Revolving Note, the Term Note
and all other instruments and documents to be delivered in connection with any
Obligation. Unless disputed in good faith, any fees, expenses or other charges
which the Bank is entitled to receive from the Borrower under this Section shall
bear interest from that date which is 30 days after the date of any demand
therefor until the date when paid at a rate per annum equal to the sum of (i)
four (4%) percent PLUS (ii) the per annum rate otherwise payable under the
Revolving Note (but in no event in excess of the maximum rate permitted by then
applicable law).
6.2. COMMITMENT FEES. The Borrower agrees to pay to the Bank with respect
to the within arrangements for Revolving Loans, on the last day of each calendar
quarter (commencing on December 31, 1998) as long as the within-described
revolving loan arrangements are in effect and on the Expiration Date or date of
earlier termination of such Revolving Loan arrangements, a non-refundable
commitment fee computed quarterly in arrears on the daily average unused portion
of the Bank's total revolving commitment during the calendar quarter (or partial
calendar quarter) then ended. Such commitment fee will be payable at a rate of
0.5% per annum based on
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such unused portion of the Bank's total revolving commitment and will be
appropriately prorated for any partial calendar quarter. As used herein, the
Bank's "total revolving commitment" will be deemed to be $3,500,000 and the
"unused portion" on any day means that amount by which (x) said $3,500,000
exceeds (y) the total of (1) the aggregate principal amounts of the Revolving
Loans outstanding at that day and (2) the then total undrawn amounts of all
letters of credit issued hereunder and then outstanding, whether such excess
results from the Bank not making Revolving Loans or issuing letters of credit up
to said $3,500,000 amount, from the repayment of Revolving Loans or the
termination of letters of credit or from any other circumstance. In addition, if
the within-described revolving financing arrangements are cancelled or
terminated prior to the end of any calendar quarter by the Borrower for any
reason or by the Bank due to the Borrower's default, the Borrower shall
forthwith upon such cancellation or termination pay to the Bank a sum equal to
all of the commitment fees which would have become due, absent such cancellation
or termination, pursuant to the immediately preceding three sentences with
respect to the period beginning on the date of such cancellation or termination
and continuing through the end of such calendar quarter, assuming, for the
purposes of this calculation, that no Revolving Loans or letters of credit would
be outstanding during such period. Fees described in this Section are in
addition to any balances and fees required by the Bank or any of its affiliates
in connection with any other services now or hereafter made available to the
Borrower.
6.3. OTHER AGREEMENTS. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or in any such other agreement.
6.4. GOVERNING LAW. This letter agreement and the Notes shall be governed
by, and construed and enforced in accordance with, the laws of The Commonwealth
of Massachusetts.
6.5. ADDRESSES FOR NOTICES, ETC. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
Centennial Technologies, Inc.
7 Lopez Road
Wilmington, MA 01887
Attention: Donald R. Peck, Secretary, Treasurer and General Counsel
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If to the Bank:
Fleet National Bank
High Technology Division
Mail Code: MA OF D07A
One Federal Street
Boston, MA 02110
Attention: Scott D. Wheelock, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be effective two (2) days after deposit in the United
States mails, if sent postage prepaid, certified or registered mail, return
receipt requested, addressed as aforesaid. If any such notice, request, demand
or other communication is hand delivered, same shall be effective upon receipted
delivery.
6.6. BINDING EFFECT; ASSIGNMENT; TERMINATION. This letter agreement shall
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this letter agreement, the Loans, the Notes and/or any letters of credit
issued hereunder; provided that the Bank will not make such an assignment to any
Person whom the Bank knows to be a direct competitor of the Borrower. Without
limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its rights
under the Loan Documents (including any portion of any Note) to any of the
12 Federal Reserve Banks organized under Section 4 of the Federal Reserve
Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall
release the Bank from its obligations under any of the Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and from
time to time, and without the consent of or notice to the Borrower, to
grant to one or more banks or other financial institutions (each, a
"Participant") participating interests in the Bank's obligation to lend
hereunder and/or any or all of the Loans held by the Bank hereunder. In the
event of any such grant by the Bank of a participating interest to a
Participant, whether or not upon notice to the Borrower, the Bank shall
remain responsible for the performance of its obligations hereunder and the
Borrower shall continue to deal solely and directly with the Bank in
connection with the Bank's rights and obligations hereunder. The Bank may
furnish any information concerning the Borrower in its possession from time
to time to prospective assignees and Participants; provided that the Bank
shall
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require any such prospective assignee or Participant to agree in writing to
maintain the confidentiality of such information to the same extent as the
Bank would be required to maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank, together with the payment described in the penultimate sentence of
Section 6.2; provided that no such termination will release or waive any of
the Bank's rights or remedies or any of the Borrower's obligations under this
letter agreement or any of the other Loan Documents unless and until the
Borrower has paid in full all Loans and all interest thereon and all fees and
charges payable in connection therewith and all letters of credit issued
hereunder have been terminated.
6.7. CONSENT TO JURISDICTION. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or any
Note. The Borrower irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in such a court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of proper
jurisdiction by a suit upon such judgment, provided that service of process
in such action, suit or proceeding shall have been effected upon the Borrower
in one of the manners specified in the following paragraph of this Section 6.7
or as otherwise permitted by law.
The Borrower hereby consents to process being served in any suit, action
or proceeding of the nature referred to in the preceding paragraph of this
Section 6.7 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set
forth in Section 6.5 or (ii) by serving a copy thereof upon it at its address
set forth in Section 6.5.
6.8. SEVERABILITY. In the event that any provision of this letter agreement
or the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this letter
agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this letter
agreement shall be valid and enforced to the fullest extent permitted by law.
6.9. REPLACEMENT NOTE. Upon receipt of an affidavit of an officer of the
Bank as to the loss, theft, destruction or mutilation of any Note or of any
other Loan Document which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of such Note or other Loan Document,
the Borrower will issue, in lieu thereof, a replacement Note or other Loan
Document in the same principal amount (as to any Note) and in any event of like
tenor.
6.10. USURY. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of
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<PAGE>
maturity of the Notes or otherwise, shall the amount paid or agreed to be
paid to the Bank for the use or the forbearance of the Indebtedness
represented by any Note exceed the maximum permissible under applicable law.
In this regard, it is expressly agreed that it is the intent of the Borrower
and the Bank, in the execution, delivery and acceptance of the Notes, to
contract in strict compliance with the laws of The Commonwealth of
Massachusetts. If, under any circumstances whatsoever, performance or
fulfillment of any provision of any of the Notes or any of the other Loan
Documents at the time such provision is to be performed or fulfilled shall
involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically
to the limits of such validity, and if under any circumstances whatsoever the
Bank should ever receive as interest an amount which would exceed the highest
lawful rate, such amount which would be excessive interest shall be applied
to the reduction of the principal balance evidenced by the Notes and not to
the payment of interest. The provisions of this Section 6.10 shall control
every other provision of this letter agreement and of each Note.
6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, ANY NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY COURSE
OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS
OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO
ENTER INTO THIS LETTER AGREEMENT AND TO MAKE LOANS AS CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. DEFINITIONS. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Adjusted Current Liabilities" - All Current Liabilities of the Borrower
and/or any of its Subsidiaries, taken on a consolidated basis, other than those
Current Liabilities (not in excess of $1,200,000 in the aggregate) which
represent accrued liabilities of the Borrower in connection with certain claims
made by plaintiffs in a class action securities litigation filed as IN RE
WEBSECURE, INC.
"Aggregate Revolving Bank Liabilities" - At any time, the sum of (i) the
principal amount of all Revolving Loans then outstanding, PLUS (ii) all then
undrawn amounts of letters of credit issued by the Bank for the account of the
Borrower, PLUS (iii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Bank Certificate" - A certificate signed by an officer of the Bank
setting forth any additional amount required to be paid by the Borrower to
the Bank pursuant to Section 1.8 or Section 1.9 of this letter agreement,
which certificate shall be submitted by the Bank to the Borrower in
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<PAGE>
connection with each demand made at any time by the Bank upon the Borrower with
respect to any such additional amount, and each such certificate shall, save for
manifest error, constitute PRIMA FACIE evidence of the additional amount
required to be paid by the Borrower to the Bank upon each demand. A claim by the
Bank for all or any part of any additional amount required to be paid by the
Borrower may be made before and/or after the end of the period of time to which
such claim relates or during which such claim has arisen and before and/or after
any payment hereunder to which such claim relates. Each Bank Certificate shall
set forth in reasonable detail the basis for and the calculation of the claim to
which it relates.
"Borrowing Base" - At any time, 80% of the aggregate principal amount of
the Qualified Receivables of the Borrower then outstanding.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.
"Capital Expenditures" - All acquisitions of machinery, equipment, land,
leaseholds, buildings, leasehold improvements and all other expenditures for
purposes which are considered to be fixed assets under generally accepted
accounting principles consistently applied. When a fixed asset is acquired by a
lease which is required to be capitalized pursuant to generally accepted
accounting principles, the amount required to be capitalized pursuant thereto
shall be considered to be a Capital Expenditure in the year such asset is first
leased.
"COF Interest Rate" - As to any COF Loan for any period of time, that per
annum rate of interest which is determined by the Bank to represent the sum of
(i) the COF Rate applicable to the relevant period of time for the relevant
principal amount as amortized over such period of time PLUS (ii) 3.5% per annum.
"COF Loan" - All or any portion of a Term Loan which bears interest at a
COF Interest Rate.
"COF Rate" - As to any principal amount and for any period of time, that
per annum rate of interest which the Bank is required to pay, or is offering to
pay, for wholesale liabilities of a similar principal amount and for a similar
period of time, adjusted for reserve requirements and for such other
requirements as may from time to time be imposed by federal, state or local
governmental and/or regulatory agencies, all as determined from time to time in
its sole discretion by the Bank's treasury group.
"Collateral" - All of the following: (i) property now or hereafter owned by
the Borrower or in which the Borrower now or hereafter has any interest which is
described as "Collateral" in the Security Agreement or in Subsection 7.2(b)
below, and (ii) all property now or hereafter owned by any Guarantor or in which
such Guarantor now or hereafter has any interest which is described as
"Collateral" in any of the Guarantors' Security Agreements.
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<PAGE>
"Current Liabilities" - All liabilities of the Borrower and/or any of its
Subsidiaries which are properly shown as current liabilities on a consolidated
balance sheet of the Borrower prepared in accordance with generally accepted
accounting principles consistently applied, including, without limitation, all
capitalized lease payments and fixed prepayments of, and sinking fund payments
with respect to, Indebtedness required to be made within one year from the date
of determination. "Current Liabilities" shall also and in any event be deemed to
include the Revolving Loans.
"Default" - Any event or circumstance which, with the passage of time or
the giving of notice or both, could become an Event of Default.
"Domestic Material Subsidiary" - As defined in Section 3.13.
"EBITDA" - For any fiscal period, the consolidated Net Income (or
consolidated Net Loss, expressed as a negative number) of the Borrower and its
Subsidiaries for such period, PLUS, without duplication of any item, (i) all
federal and state income taxes (but not taxes in the nature of an AD VALOREM
property tax or a sales or excise tax) paid or accrued with respect to such
period and actually deducted on the consolidated books of the Borrower for the
purposes of computation of such consolidated Net Income (or such consolidated
Net Loss, as the case may be) for the fiscal period involved, (ii) the
consolidated Interest Expense paid or accrued by the Borrower and/or any of its
Subsidiaries for such fiscal period and actually deducted on the consolidated
books of the Borrower for the purposes of computation of such consolidated Net
Income (or such consolidated Net Loss, as the case may be) for the fiscal period
involved, and (iii) the amount of the provision for depreciation and/or
amortization expense actually deducted on the consolidated books of the Borrower
for the purposes of computation of such consolidated Net Income (or such
consolidated Net Loss, as the case may be) for the period involved.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Event of Default" - As defined in Section 5.1 of this letter agreement.
"Expiration Date" - October 1, 1999, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Floating Rate" - As defined in Section 1.6 of this letter agreement.
"Floating Rate Term Loan" - All or any portion of a Term Loan which bears
interest calculated by reference to the Prime Rate.
"Foreign Exchange Contract" - As defined in Section 1.12 of this letter
agreement.
"Guaranties" - Collectively, each of the guaranties (if any) from time to
time given by any Domestic Material Subsidiary pursuant to Section 3.13.
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<PAGE>
"Guarantors" - Collectively, each of the Domestic Material Subsidiaries
which gives, or is required to give, a Guaranty pursuant to Section 3.13.
"Guarantors' Security Agreements" - Collectively, each of the security
agreements (if any) from time to time given by any Domestic Material Subsidiary
pursuant to Section 3.13.
"Impositions" - All present and future taxes, levies, duties, impositions,
deductions, charges and withholdings applicable to the Bank with respect to any
COF Loan, excluding, however, any taxes imposed directly on the Bank's income
and any franchise taxes imposed on it by the jurisdiction under the laws of
which the Bank is organized or any political subdivision thereof.
"Indebtedness" - The total of all obligations of a Person, whether current
or long-term, senior or subordinated, which in accordance with generally
accepted accounting principles would be included as liabilities upon such
Person's balance sheet at the date as of which Indebtedness is to be determined,
and shall also include guaranties, endorsements (other than for collection in
the ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Interest Expense" - With respect to any period of computation thereof, the
gross interest expense of the Borrower and its Subsidiaries, including, without
limitation, (i) the amortization of debt discounts, (ii) the amortization of all
fees (including, without limitation, fees payable in respect of any swap
agreement or other hedging agreement and any letters of credit) payable in
connection with the incurrence of Indebtedness to the extent included in
interest expense, and (iii) the portion of any liabilities incurred in
connection with capital leases allocable to interest expense, all determined on
a consolidated basis in accordance with generally accepted accounting principles
applied on a consistent basis.
"Loan" - Any Revolving Loan or any Term Loan.
"Loan Documents" - Each of this letter agreement, the Revolving Note, the
Term Note, the Security Agreement, the Intellectual Property Security
Agreements, any Guaranties, any Guarantors' Security Agreements and each other
instrument, document or agreement evidencing, securing, guaranteeing or relating
in any way to any of the Loans or to any of the letters of credit issued
hereunder or to any Foreign Exchange Contract issued hereunder, all whether now
existing or hereafter arising or entered into.
"Material Subsidiary" - Collectively, (i) Centennial Technologies
International Limited and (ii) any Subsidiary of the Borrower, now existing or
hereafter created or arising, as to which a Material Subsidiary Date occurs at
any time after the date of this letter agreement, without regard to any
subsequent change in the assets or revenues of such Subsidiary.
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<PAGE>
"Material Subsidiary Date" - As to each Subsidiary of the Borrower, now
existing or hereafter created or arising, that date on which either or both of
the following shall occur: (i) the total assets of such Subsidiary (valued in
accordance with generally accepted accounting principles consistently applied)
are equal to or greater than 5% of the total consolidated assets (valued in
accordance with generally accepted accounting principles consistently applied)
of the Borrower and Subsidiaries and/or (ii) the net revenues (exclusive of any
extraordinary items) of such Subsidiary for any fiscal quarter are equal to or
greater than 5% of the total consolidated net revenues (exclusive of any
extraordinary items) of the Borrower and Subsidiaries for such fiscal quarter.
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $3,500,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents and Receivables (less an allowance for bad debt
consistent with the Borrower's prior experience).
"Notes" - Collectively, the Revolving Note and the Term Note.
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, limited liability company,
partnership, joint venture, trust, or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of BONA FIDE sales made to customers of the Borrower (which customers
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and which remain unpaid no more than
90 days past the respective invoice dates of such Receivables, the payment of
which is not in dispute. (Notwithstanding the provisions of the immediately
preceding sentence, the Borrower may include within Qualified Receivables any
Receivable which meets all of the criteria set forth in this definition to be a
Qualified Receivable except that the relevant customer is located outside the
United States; provided that such Receivable is
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<PAGE>
covered by credit insurance in form and substance satisfactory to the Bank and
issued by a credit insurer satisfactory to the Bank.) Subject to the immediately
preceding sentence, any Receivable which would otherwise be a Qualified
Receivable shall be deemed not to be a Qualified Receivable (i) if the Bank does
not have a fully perfected first priority security interest in such Receivable;
(ii) if such Receivable is not free and clear of all adverse interests in favor
of any other Person; (iii) if such Receivable is subject to any deduction,
off-set, contra account, counterclaim or condition; (iv) if a field examination
made by the Bank fails to confirm that such Receivable exists and satisfies all
of the criteria set forth herein to be a Qualified Receivable; (v) if such
Receivable is not properly invoiced at the date of sale; (vi) if the customer or
account debtor has disputed liability or made any claim with respect to the
Receivable or the merchandise covered thereby or with respect to any other
Receivable due from said customer to the Borrower; (vii) if the customer or
account debtor has filed a petition for bankruptcy or any other application for
relief under the Bankruptcy Code or has effected an assignment for the benefit
of creditors, or if any petition or any other application for relief under the
Bankruptcy Code has been filed against said customer or account debtor, or if
the customer or account debtor has suspended business, become insolvent, ceased
to pay its debts as they become due, or had or suffered a receiver or trustee to
be appointed for any of its assets or affairs; (viii) if the customer or account
debtor has failed to pay other Receivables so that an aggregate of 25% of the
total Receivables owing to the Borrower by such customer or account debtor has
been outstanding for more than 90 days; (ix) if such Receivable is owed by the
United States government or any agency or department thereof (unless assigned to
the Bank under the Federal Assignment of Claims Act); or (x) if the Bank
reasonably believes that collection of such Receivable is insecure or that it
may not be paid by reason of financial inability to pay or otherwise, or that
such Receivable is not for any reason suitable for use as a basis for borrowing
hereunder.
"Qualifying Equipment" - Equipment purchased by the Borrower within 30 days
prior to the date of the Term Loan borrowing relating thereto (or 45 days prior
to the date of this letter agreement in the case of the first Term Loan) for use
in the Borrower's business which meets all of the following criteria: (i) such
equipment consists of one of the items shown on the Equipment List heretofore
delivered by the Borrower to the Bank or has otherwise been approved by the Bank
for use in supporting a Term Loan, (ii) each item of such equipment has been
delivered to and installed at the Borrower's Wilmington, MA premises and has
become fully operational, (iii) the Borrower has paid in full for each item of
such equipment (or will promptly pay for same from the proceeds of the relevant
Term Loan) and holds title to same, free of all interests and claims of any
other Person (other than the security interest of the Bank), and (iv) the Bank
has a fully perfected first security interest in such equipment.
"Receivables" - All of the Borrower's present and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
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<PAGE>
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
representing amounts due from any officer, employee or other affiliate of such
Person) minus the total liabilities of such Person. Total intangible assets
shall be deemed to include, but shall not be limited to, the excess of cost over
book value of acquired businesses accounted for by the purchase method,
formulae, trademarks, trade names, patents, patent rights and deferred expenses
(including, but not limited to, unamortized debt discount and expense,
organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
7.2. SECURITY AGREEMENT. (a) The Borrower acknowledges and agrees that the
"Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note, the Term Note and/or this letter agreement, as well as all obligations of
the Borrower in respect of any letters of credit now or hereafter issued by the
Bank for the account of the Borrower and/or in respect of any Foreign Exchange
Contract.
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without limitation
and in addition to the Collateral described therein, all of the Borrower's
files, books and records (including, without limitation, all electronically
recorded data) all whether now owned or existing or hereafter acquired, created
or arising. The Borrower hereby grants to the Bank a security interest in all
such Collateral in order to secure the full and prompt payment and performance
of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default, the Bank may,
at any time, without further notice to the Borrower, notify account debtors that
the Collateral has been assigned to the Bank and that payments by such account
debtors shall be made directly to the Bank. At any time after the occurrence of
an Event of Default, the Bank may collect the Borrower's Receivables, or any of
same, directly from account debtors and may charge the collection costs and
expenses to the Borrower.
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<PAGE>
This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
CENTENNIAL TECHNOLOGIES, INC.
By
-----------------------------------------
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By
-----------------------------
Its
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<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(b) 5% Stock ownership
Item 2.1(e) Litigation
Item 2.1(g) Tax Filings
Item 2.1(i) Transactions not in ordinary course
Item 2.1(j) Record owners of premises in which Collateral is located
Item 2.1(k) Intellectual Property
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 4.6(viii) Existing Investments
Item 5.1(n) Permitted 50% Stockholders
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000919006
<NAME> CENTENNIAL TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-26-1998
<EXCHANGE-RATE> 1
<CASH> 8,686
<SECURITIES> 0
<RECEIVABLES> 4,059
<ALLOWANCES> 856
<INVENTORY> 2,204
<CURRENT-ASSETS> 14,602
<PP&E> 3,630
<DEPRECIATION> 1,298
<TOTAL-ASSETS> 19,022
<CURRENT-LIABILITIES> 8,253
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 10,564
<TOTAL-LIABILITY-AND-EQUITY> 19,022
<SALES> 19,954
<TOTAL-REVENUES> 19,954
<CGS> 13,809
<TOTAL-COSTS> 13,809
<OTHER-EXPENSES> 6,096
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,873
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,873
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
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