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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACTS OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 25, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACTS OF 1934 FOR
THE TRANSITION PERIOD FROM ______ TO ________.
COMMISSION FILE NUMBER 1-12912
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CENTENNIAL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2978400
(State Or Other Jurisdiction (IRS 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 ISSUER (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 February 1, 2000, there were 3,179,479 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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PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements 3
Consolidated Balance Sheets at December 25, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Income for three and nine
months ended December 25, 1999 and December 26, 1998
(Unaudited) 4
Consolidated Statements of Cash Flows for nine months
ended December 25, 1999 and December 26, 1999
(Unaudited) 5
Notes to Unaudited 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 21
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
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DECEMBER 25, MARCH 31,
1999 1999
---- ----
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 5,193 $ 4,922
Short-term investments....................................................... 2,254 2,500
Trade accounts receivable, net............................................... 4,385 3,726
Recoverable income taxes..................................................... 106 125
Inventories.................................................................. 4,808 3,049
Other current assets......................................................... 269 231
--------- ---------
Total current assets.............................................................. 17,015 14,553
Equipment and leasehold improvements.............................................. 4,755 3,967
Less: accumulated depreciation and amortization.............................. (1,981) (1,508)
--------- ---------
2,774 2,459
Other assets...................................................................... 245 92
Investments in third parties...................................................... 1,948 1,700
--------- ---------
Total assets...................................................................... $ 21,982 $ 18,804
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 7,381 $ 7,072
Current portion of obligations under capital leases.......................... 228 36
--------- ---------
Total current liabilities......................................................... 7,609 7,108
Long-term obligations under capital leases........................................ 860 --
Contingencies (Note 8)
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized, none issued......................................................... -- --
Common Stock, $.01 par value; 6,250,000 shares authorized, 3,176,000
issued and outstanding at December 25, 1999 and 2,569,000 issued and
outstanding at March 31, 1999................................................... 32 26
Additional paid-in capital........................................................ 83,800 84,379
Accumulated deficit............................................................... (70,292) (72,697)
Accumulated other comprehensive loss.............................................. (27) (12)
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Total stockholders' equity........................................................ 13,513 11,696
--------- ---------
Total liabilities and stockholders' equity........................................ $ 21,982 $ 18,804
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
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Net sales.............................................. $ 8,567 $ 7,568 $ 22,881 $ 19,954
Cost of goods sold .................................... 5,209 4,978 14,902 13,809
----------- ----------- ----------- -----------
Gross profit................................... 3,358 2,590 7,979 6,145
Operating expenses:
Research and development.......................... 448 205 1,069 574
Selling, general and administrative expenses...... 1,631 1,808 5,326 4,706
----------- ----------- ----------- -----------
Operating income............................. 1,279 577 1,584 865
Proceeds from resolution of customer dispute........... -- -- -- 1,600
Revision of an estimate of a litigation settlement..... -- -- 940 --
Loss on investment activity............................ -- -- -- (733)
Loss on disposal of equipment.......................... -- (83) (345) (83)
Net interest income.................................... 80 79 230 224
Other Income........................................... -- -- 39 --
----------- ----------- ----------- -----------
Income before taxes.......................... 1,359 573 2,448 1,873
Income taxes........................................... 23 -- 43 --
----------- ----------- ----------- -----------
Net income............................................. $ 1,336 $ 573 $ 2,405 $ 1,873
=========== =========== =========== ===========
Net income per share - basic........................... $ .42 $ .18 $ .76 $ .67
Net income per share - diluted......................... $ .42 $ .18 $ .75 $ .66
Weighted average shares outstanding - basic............ 3,204 3,167 3,177 2,816
Weighted average shares outstanding - diluted.......... 3,217 3,174 3,229 2,832
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
--------------------------------
DECEMBER 25, DECEMBER 26,
1999 1998
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Cash flows from operating activities:
Net income.............................................. $ 2,405 $ 1,873
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization........................... 827 782
Loss on disposal of equipment........................... 345 85
Provision for loss on accounts receivable............... 75 130
Provision for loss on investments....................... -- 733
Recovery of loss on inventory........................... (145) --
Revision of an estimate of a litigation settlement...... (940) --
Change in operating assets and liabilities:
Accounts receivable................................ (734) (524)
Inventories........................................ (1,614) 105
Other assets....................................... (172) 541
Income taxes payable............................... (28) --
Accounts payable and accrued expenses.............. 737 129
----------- -----------
Net cash used in operating activities.............. 756 3,854
Cash flows from investing activities:
Capital expenditures.................................... (307) (500)
Disposal of capital equipment........................... -- 32
Proceeds from sale of securities held to maturity....... 3,144 --
Investments in third parties............................ (248) --
Purchase of short-term investments...................... (2,898) --
------------ -----------
Net cash used in investing activities.............. (309) (468)
Cash flows from financing activities:
Payments for fractional shares resulting from split..... (40) --
Proceeds from employee stock purchase plan.............. 7 --
Payments on equipment lease financing................... (128) (52)
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Net cash used in financing activities.............. (161) (52)
------------ -----------
Effect of exchange rate changes on cash...................... (15) (6)
------------ -----------
Net decrease in cash and cash equivalents.................... 271 3,328
Cash and cash equivalents at beginning of period............. 4,922 5,358
----------- -----------
Cash and cash equivalents at end of period................... $ 5,193 $ 8,686
=========== ===========
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of equipment through capital lease transactions $ 1,180 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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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 the company's ownership
interests range from 20 to 50 percent and in which 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 2000 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 year ended March 31, 1999 along with
any other filing with the Securities and Exchange Commission since March 31,
1999.
FISCAL YEAR
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 EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents include highly liquid temporary cash investments having
maturities of three months or less at date of acquisition. Short-term
investments include commercial paper having a maturity longer than three months
but less than one year at date of acquisition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents,
short-term investments and trade receivables. At December 25, 1999,
substantially all of the Company's cash, cash equivalents and short-term
investments were held by one financial institution. The Company primarily sells
and grants credit to domestic and foreign original equipment manufacturers and
distributors. The Company extends credit based on an evaluation of the
customer's financial condition and generally does not require collateral. The
Company monitors its exposure for credit losses and
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maintains allowances for anticipated losses. At December 25, 1999 and March 31,
1999, the allowance for doubtful accounts was $514,000 and $795,000,
respectively.
For the nine months ended December 25, 1999, one customer represented 10% of
the Company's sales. For the nine months ended December 25, 1999 and December
26, 1998, another customer represented 4% and 19%, respectively, of the
Company's sales. During fiscal 1999, this customer engaged several contract
manufacturers 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
these contract manufacturers for the nine months ended December 25, 1999 and
December 26, 1998 represented 16% and 13% of the Company's sales. One of these
contract manufacturers recently merged with one of the Company's competitors,
which could result in a decrease of sales to this contract manufacturer. If any
of 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.
For the nine months ended December 25, 1999 and December 26, 1998, sales
outside the United States were approximately 18% and 12%, respectively, of the
Company's sales. Sales outside the United States are primarily in several
Western European countries. No one country comprised more than 10% of the
Company's sales for the nine month periods ended December 25, 1999 or December
26, 1998.
3. NET INCOME PER SHARE
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings Per Share." Basic net
income per share excludes any dilutive effect of options, warrants and
convertible securities. Diluted net income per share includes all potentially
dilutive securities.
On July 20, 1999, the Company's shareholders approved a one-for-eight
reverse split of the common stock for shareholders of record as of the close of
business on July 22, 1999. In this report, all per share amounts and numbers of
shares have been restated to reflect a one-for-eight reverse stock split of the
Company's common stock, which was effective as of the opening of the
over-the-counter Bulletin Board on July 23, 1999.
The following table sets forth the computation of net income per share (in
thousands, except per share data). All shares issuable in connection with the
settlement of the Consolidated Litigation described in Note 7 are included in
the weighted average shares outstanding calculation as of July 20, 1998, the
date on which the Company's settlement of the Consolidated Litigation became
effective.
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THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
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BASIC NET INCOME PER SHARE
Numerator
Net income $ 1,336 $ 573 $ 2,405 $ 1,873
Denominator
Weighted average common shares outstanding 3,204 3,167 3,177 2,816
Basic net income per share $ .42 $ .18 $ .76 $ .67
======== ======== ======== ========
DILUTED NET INCOME PER SHARE
Numerator
Net income $ 1,336 $ 573 $ 2,405 $ 1,873
Denominator
Weighted average common shares outstanding 3,204 3,167 3,177 2,816
Stock options 13 7 52 16
-------- -------- -------- --------
Shares used in computing diluted earnings 3,217 3,174 3,229 2,832
per share
Diluted net income per share $ .42 $ .18 $ .75 $ .66
======== ======== ======== ========
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4. INVENTORIES
Inventories consisted of (in thousands):
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DECEMBER 25, MARCH 31,
1999 1999
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Raw material, primarily electronic components....... $ 3,376 $ 1,709
Work in process..................................... 900 399
Finished goods...................................... 532 941
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$ 4,808 $ 3,049
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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 and
pricing 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"), as to which 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, which
was included in other income in the second quarter of fiscal 1999, and the right
to retain and sell the Custom Inventory at issue. The Company sold portions of
the Custom Inventory during the nine months ended December 26, 1998 and December
25, 1999 for approximately $1.0 million, which have been included in net sales.
5. INVESTMENT IN CENTURY ELECTRONICS MANUFACTURING, INC.
Since October 1996, the Company has held an equity interest in Century
Electronics Manufacturing, Inc. ("Century"), a contract manufacturer.
On February 4, 1998, Century redeemed a portion of the Company's debt and
equity holdings in Century in exchange for $9.7 million in cash, $4.0 million of
Century Series B Convertible Preferred Stock and the forgiveness of certain
interest. The Series B Convertible Preferred Stock is equivalent upon conversion
to approximately 5%, non-diluted, of Century's outstanding shares, is
non-voting, has no dividend, and has a liquidation preference of $4.0 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 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. In August 1999, Century filed
a registration statement with the Securities and Exchange Commission in
preparation for a planned initial public offering of Century's common stock. The
preferred shares that Centennial owns are convertible into 667,667 shares of
Century's common stock. Centennial's shares of Century stock are subject to
certain restrictions on sales and are not readily saleable for a period of 180
days following the consummation of Century's initial public offering. There can
be no assurance that the initial public offering of Century common stock will
occur.
6. DEBT
On November 24, 1998, the Company entered into a credit agreement with Fleet
National Bank 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. This arrangement contains certain limitations and covenants,
including a covenant regarding the maintenance of the Company's liquidity, as
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defined. Allowable borrowings are based on accounts receivable and the cost of
equipment, and are secured by substantially all of the Company's assets. At
December 25, 1999 and March 31, 1999, the Company had no outstanding borrowings
under these credit facilities. This agreement expired in the third quarter of
fiscal 2000. The Company is negotiating a replacement contract under similar
terms, which it expects to be final in its fourth fiscal quarter.
LEASES
In April, 1999 and November, 1999, the Company entered into five year
capital leases for new manufacturing equipment. Monthly payments under these
leases are $6,318 and $16,217, respectively.
7. STOCK OPTION PLANS
On November 11, 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan (the "Plan") under which incentive and non-qualified stock
options may be granted to employees, officers, directors and consultants of the
Company. The Company reserved 1,000,000 shares of common stock for issuance
under the Plan. The vesting periods and the expiration date of options granted
under the Plan are established by the Compensation Committee of the Board of
Directors. In the quarter ended December 25, 1999, the Company granted options
to acquire 580,500 shares of the Company's common stock, exercisable at $3.50
per share under this plan. These options vest ratably on each of the first,
second and third anniversaries of the date of grant, although this vesting is
accelerated in three increments in the event certain stock price targets are
achieved.
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 40 purported
class action lawsuits were filed in or transferred to the United States District
Court for the District of Massachusetts. These complaints asserted claims
against the Company and the Company's Board of Directors, officers and former
independent accounts, among others, under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated
thereunder, and related state law claims of fraud, deceit and negligent
misrepresentation. These class action lawsuits were purportedly brought by and
on behalf of purchasers of the Company's Common Stock (i) between the Company's
initial public offering on April 12, 1994 and on February 10, 1997 or (ii) on
February 25, 1997.
On February 9, 1998, these class action lawsuits were consolidated (the
"Consolidated Litigation"), and 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 Settlement
Agreement became effective on July 20, 1998. The Company has issued 854,300
shares of common stock pursuant to the Settlement Agreement. All shares issued
in connection with the Consolidated Litigation are included in the weighted
average shares outstanding calculation from July 20, 1998 forward.
A significant number of class members elected not to participate in the
Settlement Agreement described above. In September 1999, the Company reached an
agreement with a number of these parties which calls for the Company to pay
$500,000 in cash to settle these claims (the "Additional Settlement Agreement").
For the remaining parties who did not participate in the Settlement Agreement or
the Additional Settlement Agreement, the Company believes that the applicable
Federal statue of limitations has likely expired and that it does not have
material exposure to these parties. In connection with the above, the Company
has revised its original estimate of the allocation between cash and common
stock of the $20 million provision for settlement of all such shareholder
litigation recorded during its fiscal year ended March 31, 1997 related to the
Class Action Litigation. Accordingly, the Company has reclassified $750,000 in
the second quarter of fiscal 2000 from the original settlement reserve to
accrued liabilities, representing the $500,000 Additional Settlement Agreement
described above and a remaining estimate of the probable costs to be incurred in
connection with the remaining parties not a party to the Settlement Agreement or
the Additional Settlement Agreement. In January 2000, the Company
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made a partial payment of $188,000 in settlement of certain of these claims. The
Company expects the remaining amount to be paid in the next quarter.
The plaintiffs in the Consolidated Litigation have reached an agreement with
the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and
his employer, Jay Alix & Associates ("Jay Alix"), regarding the plaintiffs'
alleged claims against them. In return for the Company's agreement to reimburse
Jay Alix and Mr. Ramaekers in the third quarter of fiscal 2000 $1.0 million for
legal fees incurred, Jay Alix and Mr. Ramaekers have released any and all claims
against the Company and its affiliates and directors, including any claims to
indemnification and defense costs incurred by Jay Alix and Mr. Ramaekers in
defending the claims brought by the plaintiffs against them. The Plaintiffs in
the Consolidated Litigation have retained their claims against the Company's
former Chief Executive Officer, Emanuel Pinez, and the Company's former Chief
Financial Officer, James M. Murphy.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
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.
The Company is currently considering withdrawing its application for
listing on the NASDAQ National Market because it has not yet fully resolved with
the SEC all of the issues arising from the conduct of former members of the
Company's senior management and the restatement of certain of the Company's
financial statements. The Company is cooperating fully with the SEC and
believes, based on discussions with the SEC, that it will be able to resolve
these issues in an acceptable manner. The Company is presently awaiting a formal
proposal from the SEC, however, until these issues are resolved with the SEC,
the Company believes that NASDAQ would not approve its current listing
application. The Company believes that it presently meets all of the
requirements for listing on the NASDAQ National Market. In the event the Company
withdraws its current application with the NASDAQ National Market, it intends to
promptly refile upon resolution of the matters with the SEC. The Company
believes that it may not be able to refile until after the filing of its Annual
Report on Form 10-K for the fiscal year ended March 31, 2000, in which case the
Company believes the review of the NASDAQ application should be completed by
June, 2000. There can be no assurance that the common stock will be approved for
listing on NASDAQ on a timely basis or at all.
WEBSECURE LITIGATION
On and after March 26, 1997, several complaints were filed against
WebSecure, certain officers, directors and underwriters of WebSecure, and the
Company 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 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 fiscal 1997, the Company established
a reserve of $1.2 million in connection with the expected settlement of the
WebSecure Securities Litigation.
On September 17, 1999, the Company's agreement to settle the WebSecure
Securities Litigation received final approval by the Court. The settlement
agreement contemplates that the Company and certain of its officers and
directors will 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 43,125 shares of the
Company's common stock, of which 14,375 shares have been issued as of December
25, 1999, and the payment to the class of up to $50,000 for notice and
administrative costs. In the second quarter ended September 25, 1999, the
Company revised its estimate of the expected cost to resolve this matter
resulting in income of $940,000. This revision of an estimate was based on the
final settlement amounts approved by the court.
9. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted FASB Statement No. 130, REPORTING
COMPREHENSIVE INCOME (FASB 130). FASB 130 establishes new 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 or
stockholders' equity. FASB 130 requires the Company's foreign currency
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translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Accumulated
other comprehensive loss is comprised of cumulative translation adjustments.
Comprehensive Income was $1,336,000 and $2,405,000 for the three and nine month
periods ended December 25, 1999, respectively, and was $573,000 and $1,873,000
for the three and nine month periods ended December 26, 1998, respectively.
10. SEGMENTS OF BUSINESS ENTERPRISE
Effective April 1, 1998, the Company adopted the FASB Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FASB 131).
FASB 131 superseded FASB 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. FASB 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. FASB 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company operates in a single industry segment, the
design and manufacture of high technology memory chip based products used in
industrial and commercial applications. As such, the adoption of FASB 131 did
not affect results of operations, financial position or the disclosure of
segment information.
11. SUBSEQUENT EVENT
On December 29, 1999, the Company acquired the flash memory card business
of Intel Corporation for a total purchase price of approximately $8.1 million.
The Company's acquisition includes the PCMCIA card families (Series 2, Value
series 100 and 200) and the miniature card families (Series 100 and 200) and
inventory valued at approximately $8.1 million. This acquisition will be
accounted for as a purchase combination in the fourth quarter of fiscal 2000. In
exchange, the Company made a cash payment of $2 million, issued a secured
promissory note for $4 million and issued 60,000 shares of preferred stock which
represents approximately 16 percent of the outstanding shares of Centennial, on
an as-converted basis. The note payable bears interest at the rate of 9% and the
note and interest are due and payable in one year. The Preferred Stock converts
at a ratio of 10 for 1 and has registration rights and a liquidation preference
of $4.8 million. The flash memory card business was concentrated with a few
customers. While there is a contingent payment of up to $4.5 million due in one
year based on units shipped related to the primary customer of the acquired
business, the Company has received notice by this primary customer of its intent
to discontinue purchasing from Centennial following the acquisition.
Accordingly, if this primary customer discontinues purchasing from Centennial,
no contingent payment will be due.
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. By way of
example, the discussions include statements regarding price competition and
erosion, expansion into new markets, future sales mix, future supply of raw
materials, gross margins, raw materials inventory procurement practices, the
Company's customer base, future developments involving certain investments,
assessments regarding systems required to address Year 2000 issues, and future
availability of financing. Such statements involve a number of risks and
uncertainties, including, but not limited to, those (i) discussed below, (ii)
discussed under the heading "Factors That May Affect Future Results", 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 year ended March 31, 1999 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.
11
<PAGE>
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 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 60.8 65.8 65.1 69.2
--------- --------- --------- ---------
Gross profit................................... 39.2 34.2 34.9 30.8
Operating expenses:
Research and development costs.................. 5.2 2.7 4.7 2.9
Selling, general and administrative expenses.... 19.0 23.9 23.3 23.6
--------- --------- --------- ---------
Operating income ............................ 15.0 7.6 6.9 4.3
Other income, net................................. -- (1.0) 2.8 4.0
Net interest income............................... 0.9 1.0 1.0 1.1
--------- --------- --------- ---------
Income before taxes.......................... 15.9 7.6 10.7 9.4
Income taxes...................................... 0.3 -- 0.2 --
--------- --------- --------- ---------
Net income................................... 15.6% 7.6% 10.5% 9.4%
========= ========= ========= =========
</TABLE>
QUARTER AND NINE MONTHS ENDED DECEMBER 25, 1999 AND DECEMBER 26, 1998
NET SALES.
Net sales increased 13% to $8.6 million for the three months ended December
25, 1999 compared to $7.6 million for the same period a year ago. Net sales
increased 15% to $22.9 million for the nine months ended December 25, 1999
compared to $20.0 million in the same period a year ago. During the three and
nine months ended December 25, 1999, units shipped increased 4% and 11%,
respectively, from the same periods in fiscal 1999. Average selling prices
increased 7% in the third quarter of fiscal 2000 and increased 2% for the nine
month period ended December 25, 1999 compared to the same periods of the prior
year. Increasing component costs in the third quarter of fiscal 2000 partially
offset by a decline due to a product mix change, contributed to the increase in
the average selling price of the Company's products. The Company expects
component costs to continue to increase for the remainder of fiscal 2000, which
the Company believes should continue to cause an increase in its average selling
price. There can be no assurance that if component costs rise the Company will
be able to continue to increase its average selling price or that competitive
pricing pressures will not adversely affect the average selling price. The
Company believes there will be significant shortages of certain of its
components, particularly with respect to flash memory. Any such shortages could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company continues to experience limited bookings visibility as customers
continue to expect short lead-times, particularly with the Company's major
customers. A majority of the Company's anticipated next quarter revenues are
expected to be orders that will be received and fulfilled in the same quarter.
Due to a number of factors described herein and in "Factors That May Affect
Future Results," the Company's ability to adjust its operating expenses is
limited in the short term. As a result, if product revenues are lower than
anticipated, the Company's results of operations will be adversely affected.
12
<PAGE>
For the nine months ended December 25, 1999, one customer represented 10% of
the Company's sales. For the nine months ended December 25, 1999 and December
26, 1998, another customer represented 4% and 19%, respectively, of the
Company's sales. During fiscal 1999, this customer engaged several contract
manufacturers 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
these contract manufacturers for the nine months ended December 25, 1999 and
December 26, 1998 represented 16% and 13% of the Company's sales. One of these
contract manufacturers recently merged with one of the Company's competitors,
which could result in a decrease of sales to this contract manufacturer. If any
of 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.
For the nine months ended December 25, 1999 and December 26, 1998, sales
outside the United States were approximately 18% and 12%, respectively, of the
Company's sales. Sales outside the United States are primarily in several
Western European countries. No one country comprised more than 10% of the
Company's sales for the nine month periods ended December 25, 1999 or December
26, 1998.
GROSS PROFIT.
Gross profit increased 31% to $3.4 million for the three months ended
December 25, 1999 compared to $2.6 million for the same period a year ago. Gross
margin increased to 39% for the three months ended December 25, 1999 from 34%
for the same period a year ago. Gross profit increased 31% to $8.0 million for
the nine months ended December 25, 1999 compared to $6.1 million for the same
period a year ago. The Company experienced a significant increase in its flash
memory costs in the quarter ended December 25, 1999. The Company increased its
average selling price during the quarter as a result of its increased component
costs. During the quarter the Company matched older inventory costs (FIFO
method) against the current higher selling price. This caused the gross margin
to be higher than might normally be expected by approximately 9%. The Company
does not believe the higher gross margin will be maintained. Gross margin
increased to 35% for the first nine months of fiscal 2000 from 31% for the
comparable period of fiscal 1999. The Company believes costs of certain of its
component memory devices will continue to increase during fiscal 2000. There can
be no assurance the Company will be able to continue to increase its average
selling price to offset such component cost increases which might adversely
affect the Company's gross profit amounts and percent.
RESEARCH AND DEVELOPMENT COSTS.
Research and development costs increased 118% to $448,000 for the three
months ended December 25, 1999 compared to $205,000 for the three months ended
December 26, 1998. For the nine months ended December 25, 1999, research and
development costs increased 86% to $1,069,000 from $574,000 in the same period
of fiscal 1999. The higher research and development costs for the three and nine
months ended December 25, 1999 are due generally to increased spending on
outside consultants combined with an increased percentage of employees focused
on development projects. The Company expects that it will continue to spend
significant amounts on research and development in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses decreased 11% to $1.6 million
for the third quarter of fiscal 2000 from $1.8 million in the same period of
fiscal 1999. Selling, general and administrative expenses increased 13% to $5.3
million for the first nine months of fiscal 2000 from $4.7 million in the same
period of fiscal 1999. The $0.6 million increase in expenses for the first nine
months of fiscal 2000 is mainly attributed to termination costs of an executive
in the second quarter of 2000. Net insurance costs are also higher for the nine
month period ending December 25, 1999 due to an offsetting refund in directors
and officers liability insurance premiums on policies that were rescinded in
February 1997, which refund was recorded in the first quarter of fiscal 1999.
Selling, general and administrative expenses are expected to be slightly higher
in absolute dollars for the remainder of fiscal 2000 as compared to the third
fiscal quarter of 2000.
OTHER INCOME.
On September 17, 1999, the Company's agreement to settle the WebSecure
Securities Litigation received final approval by the Court. The settlement
agreement stated that the Company and certain of its officers and directors will
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 43,125 shares of the Company's common stock and
the payment to the class of up to $50,000 for notice and administrative costs.
In the second quarter ended September 25, 1999, the Company revised its estimate
of the expected cost to
13
<PAGE>
resolve this matter resulting in income of $940,000. This revision of an
estimate was based on the final settlement amounts approved by the court.
During the second quarter of fiscal 2000, the Company incurred a loss on the
disposal of certain equipment that had a net book value of approximately
$345,000, which equipment was replaced.
Net interest income was $80,000 for the quarter ended December 25, 1999
compared to $79,000 for the quarter ended December 26, 1998.
NET INCOME PER SHARE.
On July 20, 1999, the Company's shareholders approved a one-for-eight
reverse stock split of its common stock, which was effective as of the opening
of the stock markets on July 23, 1999. In this report, all per share amounts and
numbers of shares have been restated to reflect the reverse stock split.
As a result of the Intel transaction described more fully below, the
Company's weighted average outstanding shares increased by 600,000 as of
December 29, 1999.
SUBSEQUENT EVENT.
On December 29, 1999, the Company acquired the flash memory card business
of Intel Corporation for a total purchase price of approximately $8.1 million.
The Company's acquisition includes the PCMCIA card families (Series 2, Value
series 100 and 200) and the miniature card families (Series 100 and 200) and
inventory valued at approximately $8.1 million. This acquisition will be
accounted for as a purchase combination in the fourth quarter of fiscal 2000. In
exchange, the Company made a cash payment of $2 million, issued a secured
promissory note for $4 million and issued 60,000 shares of preferred stock which
represents approximately 16 percent of the outstanding shares of Centennial, on
an as-converted basis. The note payable bears interest at the rate of 9% and the
note and interest are due and payable in one year. The Preferred Stock converts
at a ratio of 10 for 1 and has registration rights and a liquidation preference
of $4.8 million. The flash memory card business was concentrated with a few
customers. While there is a contingent payment of up to $4.5 million due in one
year based on units shipped related to the acquired business, the Company has
received notice by Intel's primary customer of its intent to discontinue
purchasing from Centennial following the acquisition.
In the purchase price allocation process, the acquired inventory of
approximately $8.1 million is expected to be recorded at fair value.
Accordingly, the gross margins on the sale of the acquired inventory will be
negligible in the fourth quarter of fiscal 2000. The Company believes most of
this inventory will be sold in the fourth quarter of fiscal 2000 and the first
quarter of fiscal 2001. The Company also believes the gross margins on sales
other than the sales of the acquired inventory will be significantly lower than
those achieved by the Company's existing products. The Company is able to
achieve higher margins on its products primarily due to a significant amount of
custom product sales through its direct sales force combined with a small amount
of software and service revenue. Both of these products tend to have higher
margins than standard products, which is what substantially all of the acquired
business consists of. Additionally, the Company primarily sells through its
direct sales force while a portion of the acquired business is sold through
distributors. Margins achieved through distributors are typically lower than
through a direct sales force. The Company is planning to add several people in
sales and marketing related to the acquired business.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operating activities primarily
from public and private offerings of equity securities, loans from financial
institutions and positive cash flows from operations. Management believes the
existing cash and cash equivalents, short-term investments and available
financing arrangements will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements for the
foreseeable future.
OPERATING ACTIVITIES
At December 25, 1999, and March 31, 1999 working capital was $9.4 and $7.4
million, respectively.
14
<PAGE>
On November 24, 1998, the Company entered into a credit agreement with Fleet
National Bank 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. This arrangement contains certain limitations and covenants,
including a covenant regarding the maintenance of the Company's liquidity, as
defined. Allowable borrowings are based on accounts receivable and the cost of
equipment, and are secured by substantially all of the Company's assets. At
December 25, 1999 and March 31, 1999, the Company had no outstanding borrowings
under these credit facilities. This agreement expired in the third quarter of
fiscal 2000. The Company is negotiating a replacement contract under similar
terms, which it expects to be final in its fourth fiscal quarter.
INVESTING TRANSACTIONS
Net capital expenditures amounted to $307,000 in the nine months ended
December 25, 1999 compared to $468,000 in the nine months ended December 26,
1998.
On November 11, 1999 the Company invested $248,000 for 990 Ordinary shares,
or approximately a 7% interest in Elan Digital Systems Limited ("Elan"). In
addition, the Company loaned $124,000 to Elan and in connection Centennial
received a note receivable bearing interest at the annual rate of prime plus
1.5%. The principal is due and payable in three years, while the interest is
payable quarterly. Elan was formed in the UK during 1976 to offer application
engineering and design services for microcontroller based solutions.
Diversification has moved the company into the design and manufacture of
proprietary device programming equipment, the distribution of hardware and
software products including compilers and support utilities, subcontract SMD
product assembly, and into providing totally integrated services for PC Card
applications.
FINANCING TRANSACTIONS
In April, 1999 and again in November 1999, the Company entered into five
year capital leases for new manufacturing equipment. Monthly payments under
these leases are $6,318 and $16,217, respectively.
INVESTMENT IN CENTURY ELECTRONICS MANUFACTURING, INC.
Since October 1996, the Company has held an equity interest in Century
Electronics Manufacturing, Inc. ("Century"), a contract manufacturer.
On February 4, 1998, Century redeemed a portion of the Company's debt and
equity holdings in Century in exchange for $9.7 million in cash, $4.0 million of
Century Series B Convertible Preferred Stock and the forgiveness of certain
interest. The Series B Convertible Preferred Stock is equivalent upon conversion
to approximately 5%, non-diluted, of Century's outstanding shares, is
non-voting, has no dividend, and has a liquidation preference of $4.0 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 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. In August 1999, Century filed
a registration statement with the Securities and Exchange Commission in
preparation for a planned initial public offering of Century's common stock. The
preferred shares that Centennial owns are convertible into 666,667 shares of
Century common stock. Centennial's shares of Century stock are subject to
certain restrictions on sales and are not readily saleable for a period of 180
days following the consummation of Century's initial public offering. There can
be no assurance that the public offering of Century common stock will occur.
CONTINGENCIES
The Company has been 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. These lawsuits are
described more fully in "Item 1 -- Legal Proceedings" which is incorporated
herein by this reference. The Company has been granted final approval of its
proposed
15
<PAGE>
settlement of these suits, has issued cash and stock in satisfaction of its
obligations to the class action plaintiffs in the Consolidated Litigation. As of
March 31, 1997, the Company recorded a provision for the settlement of the
Consolidated Litigation of $20.0 million, representing its estimate of 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 has issued
854,300 shares of common stock pursuant to the Settlement Agreement. The
Company's agreement with the opt outs calls for the Company to pay $500,000 to
settle these claims, and the Company has this amount reserved as of December 25,
1999. The Company's agreement to settle the Websecure litigation calls for the
Company to issue 43,125 shares of the Company's common stock and for a payment
of $50,000, which has already been made.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made by
its employees may contain forward-looking information. The Company's actual
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.
DEPENDENCE ON MAJOR CUSTOMERS.
A relatively small number of customers have accounted for a significant
percentage of the Company's net sales. 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.
For the nine months ended December 25, 1999, one customer represented 10% of
the Company's sales. For the nine months ended December 25, 1999 and December
26, 1998, another customer represented 4% and 19%, respectively, of the
Company's sales. During fiscal 1999, this customer engaged several contract
manufacturers 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
these contract manufacturers for the nine months ended December 25, 1999 and
December 26, 1998 represented 16% and 13% of the Company's sales. One of these
contract manufacturers recently merged with one of the Company's competitors,
which could result in a decrease of sales to this contract manufacturer. If any
of 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.
The Company generally enters into individual purchase orders with its
customers and has no firm long-term volume commitments from any of its major
customers. The Company has experienced fluctuations in order levels from period
to period and expects it will continue to experience such cancellations and
fluctuations in the future. The Company's business, financial condition and
results of operations will depend in significant part on its ability to obtain
orders from new customers, as well as on financial condition and success of its
customers. Therefore, any adverse factors affecting any of the Company's
customers or their customers 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.
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 is currently experiencing supply shortages, particularly with
respect to computer memory chips and other electronic components used in
products targeted at high-growth market segments. Currently, certain
16
<PAGE>
memory chips important to the Company's products are on industry-wide allocation
by suppliers. Such shortages could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes it will be able to mostly meet customers' orders for the Company's
fiscal fourth quarter. At this time the Company is unable to determine what the
impact will be thereafter.
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.
COMPETITION.
The market in which the Company competes is intensely competitive. The
Company competes with manufacturers of PC cards and related products, including
SanDisk Corporation, Viking Components and Smart Modular Technologies, Inc., as
well as with electronic component manufacturers who also manufacture PC cards,
including Advanced Micro Devices, Inc., Hitachi Semiconductor, Inc. and
Mitsubishi Electric Corporation. Certain of these competitors supply the Company
with raw materials, including electronic components, which are occasionally and
are at present, 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
- - ability to obtain raw materials
</TABLE>
In addition, market conditions are expected to lead to intensified price
competition for the Company's products and services, 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.
HISTORICAL SINGLE PRODUCT CONCENTRATION.
PC cards and related services constitute 100% of the Company's sales for
fiscal 1999 and the first nine months of fiscal 2000. 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.
DECLINING AVERAGE SALES PRICES.
Although the Company is currently experiencing increases in average sales
prices, the Company has in the past experienced, and may in the future
experience, declining average sales prices for its products. The data storage
markets in which the Company competes
17
<PAGE>
are characterized by intense competition. Therefore, the Company expects to
incur increasing pricing pressures from its customers in future periods, which
may result in declines in average sales prices for the Company's products. The
Company believes that it must continue to achieve manufacturing costs
reductions, develop new 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 quarterly and annual operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. This fluctuation is a result of a variety 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
- - changes in customer and product mix - production difficulties
- - quality of the Company's products - write-downs or write-offs of investments in other companies
- - exchange rate fluctuations - market acceptance of new or enhanced versions
- - litigation settlements and revisions of the Company's products
estimates thereon in connection with - raw material shortages
the company's legal matters
</TABLE>
Other factors, some of which are beyond the Company's control, may also
cause fluctuations in the Company's results of operations. The Company has short
lead times from customers, and accordingly does not have a significant backlog.
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 - resolution of pending SEC investigation
</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. The Company's Common Stock is currently traded at the
over-the-counter Bulletin Board, which the Company believes has resulted in a
minimal amount of analyst coverage.
The Company is currently considering withdrawing its application for
listing on the NASDAQ National Market because it has not yet fully resolved with
the SEC all of the issues arising from the conduct of former members of the
Company's senior management and the restatement of certain of the Company's
financial statements. The Company is cooperating fully with the SEC and
believes, based on discussions with the SEC, that it will be able to resolve
these issues in an acceptable manner. The Company is presently awaiting a formal
proposal from the SEC, however, until these issues are resolved with the SEC,
the Company believes that NASDAQ would not approve its current listing
application. The Company believes that it presently meets all of the
requirements for listing on the NASDAQ National Market. In the event the Company
withdraws its current application with the NASDAQ National Market, it intends to
promptly refile upon resolution of the matters with the SEC. The Company
believes that it may not be able to refile until after the filing of its Annual
Report on Form 10-K for the fiscal year ended March 31, 2000, in which case the
Company believes the review of the NASDAQ application should be completed by
June, 2000. There can be no assurance that the common stock will be approved for
listing on NASDAQ on a timely basis or at all.
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<PAGE>
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
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.
ANTI-TAKEOVER PROVISIONS.
The Company has taken a number of actions that could have the effect of
discouraging a takeover attempt. For example, the Company has adopted a
Shareholder Rights Plan that would cause substantial dilution to a stockholder
who attempts to acquire the Company on terms not approved by the Company's Board
of Directors. In addition, the Company's Certificate of Incorporation grants the
Board of Directors the authority to fix the rights, preferences and privileges
of and issue up to 1,000,000 shares of Preferred Stock without stockholder
action. The Board of Directors has reserved 50,000 shares of Preferred Stock for
issuance pursuant to the Company's Shareholder Rights Plan. Issuing shares of
Preferred Stock, could have the effect of making it more difficult and less
attractive for a third party to acquire a majority of our outstanding voting
stock. Preferred Stock may also have other rights, including economic rights
senior to the Common Stock that could have a material adverse effect on the
market value of the Common Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
This section provides that a corporation shall not engage in any business
combination with any interested shareholder during the three-year period
following the time that such stockholder becomes an interested shareholder. This
provision could have the effect of delaying or preventing a change in control of
the Company.
YEAR 2000 COMPLIANCE.
Over the past two to three years the Company made significant investments in
new manufacturing, financial and operating hardware and software. These
investments were made to support the growth of its operations; however, the
by-product of this effort is that the Company had year 2000 compliant hardware
and software running as we entered into the year 2000. In fiscal 1999 the
Company established a task force to evaluate all tertiary systems and equipment.
The Company upgraded or replaced systems which were not year 2000 compliant. The
Company estimates that it has spent in aggregate approximately $600,000 in
addressing Year 2000 readiness issues, of which $502,000 was capitalized.
The Company's computer systems and equipment successfully transitioned to
the year 2000. However, there may be latent problems that surface at key dates
or events in the future. The Company has not experienced, and does not
anticipate, any significant problems related to the transition to the year 2000.
Furthermore, the Company does not anticipate any significant expenditure in the
future related to year 2000 compliance.
RISKS OF INTERNATIONAL OPERATIONS AND EURO CURRENCY.
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For the nine months ended December 25, 1999 and December 26, 1998, the
Company derived approximately 18% and 12%, respectively, of its sales from
outside the United States. The Company's international operations subject the
Company to the risks of doing business abroad, including currency fluctuations,
export duties, import controls and trade barriers, restrictions on the transfer
of funds, greater difficulty in accounts receivable collection, burdens of
complying with a wide variety of foreign laws and, in certain parts of the
world, political instability.
Beginning in 1999, 11 member countries of the European union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their common legal currency. During the three year transition, the
Euro will be available for non-cash transactions and legacy currencies will
remain legal tender. The Company is continuing to assess the Euro's impact on
its business. The Company is reviewing the ability of its accounting and
information systems to handle the conversion, the legal and contractual
implications of agreements, as well as pricing strategies. The Company expects
that any additional modifications to its operations and systems will be
completed on a timely basis and do not believe the conversion will have a
material adverse impact on its operations. However, there can be no assurance
that the Company will be able to modify successfully all systems and contracts
to comply with Euro requirements.
PROTECTION OF PROPRIETARY INFORMATION.
The Company's products require technical know-how to engineer and
manufacture. To the extent proprietary technology is involved, the Company
relies on trade secrets that it seeks to protect, in part, through
confidentiality agreements with certain employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to, or independently
developed by, existing or potential competitors of the Company. The Company
historically has not sought to protect its proprietary information through
patents or registered trademarks, although it instituted a patent program in
fiscal 1999. There can be no assurance that the Company's products will not
infringe on patents held by others. The Company may be involved from time to
time in litigation to determine the enforceability, scope and validity of its
rights. Litigation could result in substantial cost to the Company and could
divert the attention and time of the Company's management and technical
personnel from the operations of the Company.
The Company currently licenses certain proprietary and patented technology
from third parties. There can be no assurance that the Company will be able to
continue to license such technology, that such licenses will be or remain
exclusive or that any patented technology licensed by the Company will provide
meaningful protection from competitors. In the event that a competitor's
products were to infringe on patents licensed by the Company, it would be costly
for the Company to enforce its rights in an infringement action and such an
action would divert funds and management resources from the Company's
operations.
RISKS OF ACQUISITIONS AND INVESTMENTS IN OTHER COMPANIES.
On December 29, 1999, the Company acquired the flash memory card business
of Intel Corporation for a total purchase price of approximately $8.1 million.
The Company's acquisition includes the PCMCIA card families (Series 2, Value
series 100 and 200) and the miniature card families (Series 100 and 200) and
inventory valued at approximately $8.1 million. This acquisition will be
accounted for as a purchase combination in the fourth quarter of fiscal 2000. In
exchange, the Company made a cash payment of $2 million, issued a secured
promissory note for $4 million and issued 60,000 shares of preferred stock which
represents approximately 16 percent of the outstanding shares of Centennial, on
an as-converted basis. The note payable bears interest at the rate of 9% and the
note and interest are due and payable in one year. The Preferred Stock converts
at a ratio of 10 for 1 and has registration rights and a liquidation preference
of $4.8 million. The flash memory card business was concentrated with a few
customers. While there is a contingent payment of up to $4.5 million due in one
year based on units shipped related to the primary customer of the acquired
business, the Company has received notice by this primary customer of its intent
to discontinue purchasing from Centennial following the acquisition.
Accordingly, if this primary customer discontinues purchasing from Centennial,
no contingent payment will be due.
ENVIRONMENTAL COMPLIANCE.
The Company is subject to a variety of environmental regulations relating
to the use, storage and disposal of hazardous chemicals used during its
manufacturing processes. Any failure by the Company to comply with present and
future regulations could subject the Company to significant liabilities. In
addition, such regulations could restrict the Company's ability to expand its
facilities or could require the Company to acquire costly equipment or to incur
other significant expenses in order to comply with regulations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, accounts receivable, and accounts payable
and other accrued expenses. The Company believes all of the carrying amounts
approximate fair market value.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of longer than three months but
less than one year. As of December 25, 1999, the Company did not have any
borrowings outstanding under any credit agreement. The Company believes that the
effects, if any, of possible near-term changes in interest rates on the
Company's financial position, results of operations and cash flows should not be
material. The Company denominates substantially all sales in U.S. dollars and
has limited expenses denominated in foreign currencies. Consequently, the
Company has limited exposure to fluctuations in foreign currencies. The Company,
to date, has not attempted to hedge this limited foreign currency exposure. The
Company does not enter into financial instrument transactions for trading or
other speculative purposes.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 40 purported
class action lawsuits were filed in or transferred to the United States District
Court for the District of Massachusetts. These complaints asserted claims
against the Company and the Company's Board of Directors, officers and former
independent accounts, among others, under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated
thereunder, and related state law claims of fraud, deceit and negligent
misrepresentation. These class action lawsuits were purportedly brought by and
on behalf of purchasers of the Company's Common Stock (i) between the Company's
initial public offering on April 12, 1994 and on February 10, 1997 or (ii) on
February 25, 1997.
On February 9, 1998, these class action lawsuits were consolidated (the
"Consolidated Litigation"), and 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 Settlement
Agreement became effective on July 20, 1998. The Company has issued 854,300
shares of common stock pursuant to the Settlement Agreement. All shares issued
in connection with the Consolidated Litigation are included in the weighted
average shares outstanding calculation from July 20, 1998 forward.
A significant number of class members elected not to participate in the
Settlement Agreement described above. In September 1999, the Company reached an
agreement with a number of these parties which calls for the Company to pay
$500,000 in cash to settle these claims (the "Additional Settlement Agreement").
For the remaining parties who did not participate in the Settlement Agreement or
the Additional Settlement Agreement, the Company believes that the applicable
Federal statue of limitations has likely expired and that it does not have
material exposure to these parties. In connection with the above, the Company
has revised its original estimate of the allocation between cash and common
stock of the $20 million provision for settlement of all such shareholder
litigation recorded during its fiscal year ended March 31, 1997 related to the
Class Action Litigation. Accordingly, the Company has reclassified $750,000 in
the second quarter of fiscal 2000 from the original settlement reserve to
accrued liabilities, representing the $500,000 Additional Settlement Agreement
described above and a remaining estimate of the probable costs to be incurred in
connection with the remaining parties not a party to the Settlement Agreement or
the Additional Settlement Agreement. In January 2000, the Company made a partial
payment of $188,000 in settlement of certain of these claims. The Company
expects the remaining amount to be paid in the next quarter.
The plaintiffs in the Consolidated Litigation have reached an agreement with
the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and
his employer, Jay Alix & Associates ("Jay Alix"), regarding the plaintiffs'
alleged claims against
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them. In return for the Company's agreement to reimburse Jay Alix and Mr.
Ramaekers in the third quarter of fiscal 2000 $1.0 million for legal fees
incurred, Jay Alix and Mr. Ramaekers have released any and all claims against
the Company and its affiliates and directors, including any claims to
indemnification and defense costs incurred by Jay Alix and Mr. Ramaekers in
defending the claims brought by the plaintiffs against them. The Plaintiffs in
the Consolidated Litigation have retained their claims against the Company's
former Chief Executive Officer, Emanuel Pinez, and the Company's former Chief
Financial Officer, James M. Murphy.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
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.
The Company is currently considering withdrawing its application for
listing on the NASDAQ National Market because it has not yet fully resolved with
the SEC all of the issues arising from the conduct of former members of the
Company's senior management and the restatement of certain of the Company's
financial statements. The Company is cooperating fully with the SEC and
believes, based on discussions with the SEC, that it will be able to resolve
these issues in an acceptable manner. The Company is presently awaiting a formal
proposal from the SEC, however, until these issues are resolved with the SEC,
the Company believes that NASDAQ would not approve its current listing
application. The Company believes that it presently meets all of the
requirements for listing on the NASDAQ National Market. In the event the Company
withdraws its current application with the NASDAQ National Market, it intends to
promptly refile upon resolution of the matters with the SEC. The Company
believes that it may not be able to refile until after the filing of its Annual
Report on Form 10-K for the fiscal year ended March 31, 2000, in which case the
Company believes the review of the NASDAQ application should be completed by
June, 2000. There can be no assurance that the common stock will be approved for
listing on NASDAQ on a timely basis or at all.
WEBSECURE LITIGATION
On and after March 26, 1997, several complaints were filed against
WebSecure, certain officers, directors and underwriters of WebSecure, and the
Company 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 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 fiscal 1997, the Company established
a reserve of $1.2 million in connection with the expected settlement of the
WebSecure Securities Litigation.
On September 17, 1999, the Company's agreement to settle the WebSecure
Securities Litigation received final approval by the Court. The settlement
agreement states that the Company and certain of its officers and directors will
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 43,125 shares of the Company's common stock, of
which 14,375 shares have been issued as of December 25,1999, and the payment to
the class of up to $50,000 for notice and administrative costs. In the second
quarter ended September 25, 1999, the Company revised its estimate of the
expected cost to resolve this matter resulting in income of $940,000. This
revision of an estimate was based on the final settlement amounts approved by
the court.
ITEM 2. CHANGES IN SECURITIES
In consideration of our acquisition of the flash memory card business of
Intel Corporation, which we completed effective December 29, 1999, the Company
issued 60,000 shares of Series B preferred stock to Intel Corporation. The
Series B preferred stock, which is convertable into common stock, represents
approximately 16% of the outstanding shares of Centennial on an as converted
basis. The Series B preferred stock converts at a ratio of 10 for 1 and has
registration rights and a liquidation preference of $4.8 million. The Company's
acquisition includes the PCMCIA card families (Series 2, Value series 100 and
200) and the miniature card families (Series 100 and 200) and inventory valued
at approximately $8.0 million. See Note 11 to the financial statements appearing
elsewhere in this report for additional information regarding this transaction.
In connection with this issuance, the Company relied on the exemption
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from registration provided under Section 4(2) of the Securities Act of 1933. The
Company did not engage in any advertising or general solicitation in connection
with the offer and sale of the securities.
Sales of Unregistered Securities. In the quarter ended December 25, 1999,
the Company granted options to acquire a total of 580,500 shares of the
Company's common stock exercisable at $3.50 per share. The securities issued
were offered in reliance upon the exemption from registration under Rule 701 of
the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
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 25, 1999 the
Company filed the following reports on Form 8-K.
1. On January 13, 2000, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission announcing the
purchase of Intel's Flash card business.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTENNIAL TECHNOLOGIES, INC.
Dated: February 8, 2000 By: /s/ L. MICHAEL HONE
-------------------------------------
L. Michael Hone
President and Chief Executive Officer
Dated: February 8, 2000 By: /s/ RICHARD J. PULSIFER
-------------------------------------
Richard J. Pulsifer
Chief Financial Officer
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INDEX OF EXHIBITS
ITEM
NO. DESCRIPTION
3.1 Certificate of Amendment of Certificate of Incorporation of Centennial
Technologies, Inc. dated December 28, 1999
10.1 Key Employment Agreement between Centennial Technologies, Inc. and Mary
Gallahan dated December 16, 1999
10.2 Lease Agreement by and between Centennial Technologies, Inc. and Crocker
Capital
10.3 1999 Stock Option Plan
27 Financial Data Schedule
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Exhibit 3.1
CERTIFICATE OF DESIGNATION OF THE RIGHTS, PREFERENCES AND
TERMS
OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
OF
CENTENNIAL TECHNOLOGIES, INC.
----------------------------------------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------------------------------------------------------
We, the undersigned duly authorized officers of CENTENNIAL
TECHNOLOGIES, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "COMPANY"), in accordance with the
provisions of Section 103 thereof, and pursuant to Section 151 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Company, the Board of Directors of the
Company on December 16, 1999, adopted the following resolution creating a series
of sixty thousand (60,000) shares of Series B Convertible Preferred Stock, par
value $.01 per share:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company by provisions of the Certificate
of Incorporation of the Company, as amended (the "CERTIFICATE OF
INCORPORATION"), there hereby is created out of the shares of Preferred Stock,
par value $.01 per share, of the Company authorized in Article 4 of the
Certificate of Incorporation (the "PREFERRED STOCK"), a series of Preferred
Stock of the Company, to be named "SERIES B CONVERTIBLE PREFERRED STOCK,"
consisting of sixty thousand (60,000) shares, which series shall have the
following designations, powers, preferences and relative, optional and other
special rights and the following qualifications, limitations and restrictions:
1. DESIGNATION AND RANK. The designation of such series of the
Preferred Stock shall be the Series B Convertible Preferred Stock, par value
$0.01 per share (the "SERIES B CONVERTIBLE PREFERRED STOCK"). The maximum number
of shares of Series B Convertible Preferred Stock shall be sixty thousand
(60,000) shares. The Series B Convertible Preferred Stock shall rank senior to
the common stock, par value $.01 per share, of the Company (the "COMMON STOCK"),
and to all other classes and series of equity securities of the Company which by
their terms do not rank senior to the Series B Convertible Preferred Stock,
including but not limited to the Series A Junior Participating Preferred Stock.
Subject to Section 3 hereof, the Board of Directors may by resolution issue and
designate additional series or classes of preferred stock which may rank senior
to, junior to, or on parity with the Series B Convertible Preferred Stock as to
dividends or the distribution of assets upon liquidation, dissolution or winding
up, redemption rights and the other rights preferences and privileges of such
preferred stock. Shares ranking senior to, on a parity with, and junior to the
Series B Convertible Preferred Stock as to dividends
<PAGE>
or the distribution of assets upon liquidation, dissolution or winding up, as
the case may be, are hereinafter referred to as "SENIOR STOCK," "PARITY STOCK"
and "JUNIOR STOCK," respectively.
2. DIVIDENDS. In the event any dividend or other distribution payable
in cash or other property is declared on the Common Stock (excluding any
dividend or other distribution for which adjustment to the Conversion Ratio is
provided by Section 5(e) hereof), each holder of shares of Series B Preferred
Stock on the record date for such dividend or distribution shall be entitled to
receive on the date of payment or distribution of such dividend or other
distribution the same cash or other property which such holder would have
received, if on such record date such holder was the holder of record of the
number of shares of Common Stock into which the shares of Series B Preferred
Stock then held by such holder are then convertible.
3. VOTING RIGHTS.
(a) CLASS VOTING RIGHTS. The Series B Convertible Preferred
Stock shall have the following class voting rights (in addition to the voting
rights set forth in Section 3(b) hereof). So long as at least ten percent (10%)
of the original issuance of the Series B Convertible Preferred Stock remain
outstanding, the affirmative vote or consent of the holders of at least
two-thirds (2/3) of the shares of the Series B Convertible Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, shall be necessary for effecting or validating:
(i) the increase in the authorized or issued amount
of Series B Convertible Preferred Stock, or the authorization, creation
or issuance of shares of any class or series of stock, or any security
convertible into shares of any class or series of stock, ranking senior
to or on parity with the rights, preferences, privileges and powers of,
or restrictions provided for the benefit of, the Series B Convertible
Preferred Stock;
(ii) any amendment, alteration or repeal of any of
the provisions of the Certificate of Incorporation or By-Laws of the
Company, or this Certificate of Designation, so as to adversely affect
any right, preference, privilege or power, or restriction provided for
the benefit of, the holders of the Series B Convertible Preferred
Stock; and
(iii) any corporate or shareholder action which
reclassifies any outstanding shares of the Company into shares having a
preference or priority right to receive dividends or assets senior to
or on a parity with the preference of the Series B Convertible
Preferred Stock.
(b) GENERAL VOTING RIGHTS. Except with respect to transactions
upon which the Series B Convertible Preferred Stock shall be entitled to vote
separately as a class pursuant to Section 3(a) above and except as otherwise
required by Delaware law, the Series B Convertible Preferred Stock shall vote
together with the Common Stock on any matter submitted to a vote of the
stockholders (whether at a meeting or by written consent). For the purposes of
any matter in which the Series B Convertible Preferred Stock votes together with
the Common Stock, each share of Series B Convertible Preferred Stock shall have
the number of votes equal to the number
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of shares of Common Stock then issuable upon its conversion into Common Stock
pursuant to Section 5 hereof.
4. LIQUIDATION RIGHTS.
(a) LIQUIDATION PREFERENCE. In the event of the liquidation,
dissolution or winding up of the affairs of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of shares of the Series B Convertible
Preferred Stock then outstanding shall be entitled to receive, out of the assets
of the Company whether such assets are capital or surplus of any nature, an
amount equal to eighty dollars ($80) per share (the "LIQUIDATION PREFERENCE
AMOUNT") of the Series B Convertible Preferred Stock plus any declared but
unpaid dividends before any payment shall be made or any assets distributed to
the holders of the Common Stock or any other Junior Stock. If, following payment
in full of Senior Stock, the assets of the Company are not sufficient to pay in
full the Liquidation Preference Amount plus any declared but unpaid dividends
payable to the holders of outstanding shares of the Series B Convertible
Preferred Stock and any series of preferred stock or any other class of stock on
a parity, as to rights on liquidation, dissolution or winding up, with the
Series B Convertible Preferred Stock, then all of said assets will be
distributed among the holders of the Series B Convertible Preferred Stock and
the other classes of stock on a parity with the Series B Convertible Preferred
Stock, if any, ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. All
payments for which this Section 4(a) provides shall be in cash, property (valued
at its fair market value as determined by the Company's independent, outside
accountant) or a combination thereof; PROVIDED, HOWEVER, that no cash shall be
paid to holders of Junior Stock unless each holder of the outstanding shares of
Series B Convertible Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any declared but unpaid dividends to which such holder is
entitled as provided herein. After payment of the full Liquidation Preference
Amount plus any declared but unpaid dividends to which each holder is entitled,
such holders of shares of Series B Convertible Preferred Stock will not be
entitled to any further participation as such in any distribution of the assets
of the Company.
(b) LIQUIDATION, DISSOLUTION AND WINDING UP. For purposes of
this Section 4, each of the following shall be deemed a liquidation, dissolution
or winding up of the Company: (i) a consolidation or merger of the Company with
or into any other corporation or corporations, or a transaction or series of
transactions in which fifty percent (50%) or more of the voting shares of the
Company is disposed of or conveyed to a single person or a Group (as defined
under the Securities Exchange Act of 1934, as amended); and (ii) a sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Company. In the event of the merger or consolidation of the Company with or into
another corporation which does not constitute a liquidation, dissolution or
winding up of the Company, the Series B Convertible Preferred Stock shall
maintain its relative powers, designations and preferences provided for herein
and no merger shall result inconsistent therewith.
(c) NOTICES. Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall be payable. The
written notice required by this Section 4(c) shall be deemed given if delivered
personally or by facsimile or three (3) business days
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<PAGE>
following being mailed by certified or registered mail, postage prepaid,
return-receipt requested, addressed to the holder of record at its address
appearing on the books of the Company, no less than forty-five (45) days prior
to the payment date stated therein.
5. CONVERSION. The holder of Series B Convertible Preferred Stock shall
have the following conversion rights (the "CONVERSION RIGHTS"):
(a) RIGHT TO CONVERT. Each share of Series B Convertible
Preferred Stock shall be convertible, at the holder's option, at any time or
from time to time, into a number of fully paid and nonassessable shares of
Common Stock at a ratio of ten (10) shares of Common Stock for each share of
Series B Convertible Preferred Stock (the "CONVERSION RATIO"). The Conversion
Ratio is subject to adjustment as hereinafter provided.
(b) MECHANICS OF CONVERSION. To exercise the conversion
privilege set forth in Section 5(a) hereof, the holder of shares of Series B
Convertible Preferred Stock shall surrender the shares to be converted,
accompanied by instruments of transfer satisfactory to the Company and
sufficient to transfer the Series B Preferred Stock being converted to the
Company free of any adverse interest, at the principal offices of the Company or
any of the offices or agencies maintained for such purpose by the Company
("CONVERSION AGENT") and shall give written notice (by registered or certified
mail, overnight courier or hand delivery) to the Company or such Conversion
Agent that the holder elects to convert such shares. Such notice shall also
state the name or names, together with address or addresses, in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued. As promptly as practicable after the
surrender of such shares of Series B Preferred Stock as aforesaid, the Company
or its Conversion Agent shall issue and deliver to such holder a certificate or
certificates for the number of full shares of Common Stock issuable upon the
conversion of such shares in accordance with the provisions hereof. New
certificates shall be issued representing the balance of any shares of Series B
Preferred Stock covered by certificates surrendered for conversion in any case
in which fewer than all of the shares of Series B Preferred Stock represented by
a certificate are converted. Each conversion pursuant to Section 5(a) hereof
shall be deemed to have been effected immediately prior to the close of business
on the date on which the shares of Series B Preferred Stock shall have been so
surrendered and such notice shall have been received by the Company as
aforesaid.
(c) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of the Series B Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to such fraction multiplied by the then fair market value
of one share of Common Stock, as determined in good faith by the Board of
Directors of the Company.
(d) HOLDER OF RECORD. The person or persons in whose name or
names any certificate or certificates for Common Stock shall be issuable upon a
conversion of the Series B Convertible Preferred Stock shall be deemed to have
become the holder or holders of record of the Common Stock represented thereby
at the effective date of such conversion, unless the stock transfer books of the
Company shall be closed on such date, in which event such conversion shall be
deemed to have been effected immediately prior to the open of business on the
next succeeding day on which such stock transfer books are open, and such person
or persons shall be
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<PAGE>
deemed to have become such holder or holders of record of the Common Stock
represented thereby at the open of business on such later day.
(e) ADJUSTMENTS OF CONVERSION PRICE.
(i) ADJUSTMENTS FOR STOCK SPLITS AND COMBINATIONS. If
the Company shall, at any time or from time to time after the date of
filing of this Certificate of Designation, effect a stock split of the
outstanding Common Stock, the Conversion Ratio shall be proportionately
increased. If the Company shall at any time or from time to time after
the date of filing of this Certificate of Designation, combine the
outstanding shares of Common Stock, the Conversion Ratio shall be
proportionately decreased. Any adjustments under this Section 5(e)(i)
shall be effective at the close of business on the date the stock split
or combination occurs.
(ii) ADJUSTMENTS FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS. If the Company shall at any time or from time to time
after the date of filing of this Certificate of Designation, make or
issue, or set a record date for the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in
shares of Common Stock, then, and in each event, the Conversion Ratio
shall be increased proportionately as of the time of such issuance or,
in the event such record date shall have been fixed, as of the close of
business on such record date, by increasing the Conversion Ratio such
that each share of Series B Convertible Preferred Stock shall be
converted into ten (10) shares of Common Stock plus the number of
additional shares of Common Stock per share of Series B Convertible
Preferred Stock that each holder of a share of Common Stock is entitled
to receive in payment of such dividend or distribution.
(iii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE OR
SUBSTITUTION. If the Common Stock issuable upon conversion of the
Series B Convertible Preferred Stock at any time or from time to time
after the date of original issuance of the Series B Convertible
Preferred Stock shall be changed to the same or different number of
shares of any class or classes of stock, whether by reclassification,
exchange, substitution or otherwise (other than by way of a stock split
or combination of shares or stock dividends or distributions provided
for in Sections 5(e)(i) and (ii)), then, and in each event, an
appropriate revision to the Conversion Ratio shall be made and
provisions shall be made (by adjustments of the Conversion Ratio or
otherwise) so that the holders of the Series B Convertible Preferred
Stock shall have the right thereafter to convert the Series B
Convertible Preferred Stock into the kind and amount of shares of stock
and other securities receivable upon reclassification, exchange,
substitution or other change, which such holders would have received
had such holders' Series B Convertible Preferred Stock been converted
immediately prior to such reclassification, exchange, substitution or
other change, all subject to further adjustment as provided herein.
(iv) NO IMPAIRMENT. The Company shall not, by
amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times
in good faith,
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assist in the carrying out of all the provisions of this Section 5 and
in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the Series B
Convertible Preferred Stock against impairment. The Company may in its
sole discretion make such adjustments in the Conversion Ratio, in
addition to those required by paragraphs 5(e)(i), (ii) and (iii) above,
as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights
shall not be taxable to the recipient.
(v) CERTIFICATES AS TO ADJUSTMENTS. Upon occurrence
of each adjustment or readjustment of the number of shares of Common
Stock issuable upon conversion of the Series B Convertible Preferred
Stock pursuant to this Section 5, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of such Series B Convertible
Preferred Stock a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request of the
holder of such affected Series B Convertible Preferred Stock, at any
time, furnish or cause to be furnished to such holder a like
certificate setting forth such adjustments and readjustments, the
applicable Conversion Ratio in effect at the time, and the number of
shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon the conversion of a
share of such Series B Convertible Preferred Stock.
(vi) ADJUSTMENTS FOR CONVERSION SHARES OTHER THAN
COMMON STOCK. In the event that at any time as a result of an
adjustment made, the holder of any share of Series B Convertible
Preferred Stock thereafter converted shall become entitled to receive
any shares of the Company other than Common Stock, thereafter the
Conversion Ratio of such other shares so receivable upon conversion of
any share of Series B Preferred Stock shall be subject to readjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained
herein.
(vii) ISSUE TAXES. The Company will pay any and all
documentary, stamp or similar issue or transfer taxes payable in
respect of the issue or delivery of shares of Common Stock on
conversion of shares of the Series B Convertible Preferred Stock
pursuant hereto; PROVIDED, HOWEVER, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of shares of Common Stock in a name
other than that of the holder of the shares of the Series B Preferred
Stock to be converted and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid
to the Company the amount of any such tax or has established, to the
satisfaction of the Company, that such tax has been paid.
(f) NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
facsimile or three business days following being mailed by certified or
registered mail, postage prepaid, return-receipt requested, addressed to the
holder of record at its address appearing on the books of the Company. In the
event that, at any time after the date of original issuance of the Series B
Convertible Preferred
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Stock: (i) the Company shall declare a dividend or other distribution on its
Common Stock, (ii) the Company shall authorize a distribution of assets or
property to all holders of its Common Stock, (iii) the Company shall authorize
the issuance to all holders of its Common Stock of rights or warrants entitling
them to subscribe for or purchase any shares of Common Stock or any other
subscription rights or warrants, (iv) the Company shall reclassify its capital
stock (other than a subdivision or combination of its outstanding shares of
Common Stocks), (v) the Company shall effect any consolidation or merger for
which approval of any stockholders of the Company is required (other than a
consolidation or merger which is deemed a liquidation, dissolution or winding up
of the Company pursuant to Section 4 hereof), then the Company shall cause to be
mailed to each transfer agent for the Series B Convertible Preferred Stock and
to the holders of record of the outstanding shares of Series B Convertible
Preferred Stock, at least twenty (20) days prior to the applicable record or
effective date hereinafter specified, a notice stating (A) the date as of which
the holders of record of Common Stock to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (B) the date on which
such reclassification, consolidation or merger is expected to become effective,
and the date as of which it is expected that holders of record of Common Stock
shall be entitled to exchange their shares for securities or other property, if
any, deliverable upon such reclassification, consolidation or merger.
(g) RESERVATION OF COMMON STOCK. The Company shall, so long as
any shares of Series B Convertible Preferred Stock are outstanding, reserve and
keep available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Series B Convertible Preferred Stock,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all of the Series B Convertible Preferred Stock then
outstanding The Company shall, from time to time in accordance with the General
Corporation Law of the State of Delaware, as amended, increase the authorized
number of shares of Common Stock if at any time the unissued number of
authorized shares shall not be sufficient to satisfy the Company's obligations
under this Section 5(g).
(h) REGULATORY COMPLIANCE. If any shares of Common Stock to be
reserved for the purpose of conversion of Series B Convertible Preferred Stock
require registration or listing with or approval of any governmental authority,
stock exchange or other regulatory body under any federal or state law or
regulation or otherwise before such shares may be validly issued or delivered
upon conversion, the Company shall, at its sole cost and expense, in good faith
and as expeditiously as possible, endeavor to secure such registration, listing
or approval, as the case may be.
6. TRANSFERABILITY. Shares of Series B Convertible Preferred Stock can
only be transferred to Affiliates of the original holders of such shares or to
an aggregate of not more than five (5) third parties. Such third party
transferees can only transfer the shares of Series B Convertible Preferred Stock
to their Affiliates. For the purposes of this Section 6, "Affiliates" means any
individual, corporation, partnership, association, limited liability company,
trust, estate or other similar business entity or organization directly or
indirectly controlling, controlled by or under direct or indirect common control
with such holder. Nothing in this Section 6 is intended in any way to limit or
restrict the Conversion Rights under Section 5 or the transferability of the
shares of Common Stock issued upon the exercise of such Conversion Rights.
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<PAGE>
7. REDEMPTION. The Company shall have neither the right nor the
obligation to redeem any of the outstanding Series B Convertible Preferred
Stock, and holders of the Series B Convertible Preferred Stock shall not have
the right to demand the redemption of any of the outstanding Series B
Convertible Preferred Stock.
8. NO REISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK. No share or
shares of Series B Convertible Preferred Stock acquired by the Company by reason
of purchase, conversion, or otherwise shall be reissued, and all such shares
shall be canceled, retired, and shall have the status of authorized and unissued
shares of preferred stock, undesignated as to series, subject to later issuance.
9. LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock certificates representing the shares of Series B Convertible
Preferred Stock, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case of
mutilation, upon surrender and cancellation of the Series B Convertible
Preferred Stock certificate(s), the Company shall execute and deliver new
preferred stock certificate(s) of like tenor and date; PROVIDED, HOWEVER, the
Company shall not be obligated to re-issue preferred stock certificates if the
holder contemporaneously requests the Company to convert such shares of Series B
Convertible Preferred Stock into Common Stock.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be executed by a duly authorized officer on the 29th day of
December, 1999.
CENTENNIAL TECHNOLOGIES, INC.
By: /s/ RICHARD J. PULSIFER
----------------------------------
Name: Richard J. Pulsifer
Title: Chief Financial Officer, Secretary
and Treasurer
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Exhibit 10.1
Master Lease Agreement
No. M02433
CROCKER CAPITAL, INC.
Date: 10/07/99
Lessor: Crocker Capital, Inc. Lessee: Centennial Technologies, Inc.
Address: 1201 Dove Street, Suite #600 Address: 7 Lopez Road
Newport Beach, CA 92660 Wilmington, MA 01887
1. LEASE OF EQUIPMENT
On the terms and conditions of this Master Lease Agreement (the "Master
Agreement") Lessor leases to Lessee and Lessee leases from Lessor, the items of
personal property, together with a11 replacement parts, repairs, additions and
accessions thereto (collectively, the "Equipment" and individually, an "Item")
described in each Lease Schedule(s) (a "Lease Schedule") which incorporates this
Master Agreement. Notwithstanding anything to the contrary, the terms and
conditions of this Master Agreement shall be construed and interpreted as to
each Lease Schedule as if a separate lease shall have been executed between the
parties with regard to the Equipment on such Lease Schedule. The term "Lease"
when used herein shall refer to an individual Lease Schedule which incorporates
this Master Agreement. In the event of any conflict between the provisions of
any Lease Schedule and those of this Master Agreement, the provisions of the
Lease Schedule shall be controlling, but only with respect to such Lease
Schedule. Until a Lease is duly executed by Lessor, a Lease signed by Lessee
constitutes an irrevocable offer by Lessee to lease from Lessor. The Equipment
is to be delivered and installed at Lessee's expense at the location specified
on the applicable Lease Schedule. The Equipment shall be deemed to have been
accepted by Lessee for all purposes under the Lease upon Lessor's receipt of a
Delivery and Acceptance Certificate, or other evidence of acceptance
satisfactory to Lessor, executed by Lessee with respect to such Equipment (the
"Acceptance Certificate"). Lessee shall inspect each Item upon delivery and
promptly execute and deliver to Lessor an Acceptance Certificate with respect
thereto if such Item is acceptable to Lessee. Lessor shall not be liable or
responsible for any failure or delay in the delivery of the Equipment to Lessee
for whatever reason.
2. TERM AND RENT
(a) Rate floats, fixed at time of funding. The monthly rental payment stated in
the attached "Lease Schedule", is subject to increase, if like Treasury rates on
the date of the Lessee's signed acceptance of the Equipment are 25 basis points
or more greater than the rates for like Treasury's on the date Lessee signs this
Lease. The increase shall be based upon the entire increase in basis points. (b)
The term of each Lease shall be comprised of the Installation Term and the
Initial Term. The "Installation Term" shall commence on the date Lessee has
accepted the Equipment as evidenced by the date indicated on the applicable
Acceptance Certificate (the "Acceptance Date") and terminate on the Commencement
Date. The "Commencement Date" shall mean, where the Acceptance Date for the
Equipment falls on the first day of the month (if scheduled rental payments are
due monthly) or quarter (if scheduled rental payments are due quarterly), that
date, or in any other case, the first day of the month or quarter following the
month or quarter, as applicable, in which such Acceptance Date falls. The
"Initial Term" of the Lease shall commence on the Commencement Date and shall
continue for the number of months or quarters, as applicable, specified in the
Lease. Rental payments shall be in the amounts and shall be due and payable as
set forth in the Lease, whether or not Lessee has received any notice that such
payments are due. Lessee shall, in addition, pay interim rent to Lessor on a
pro-rata basis from the Acceptance Date to the Commencement Date on such
Commencement Date. If any rent or other amount payable under a Lease is not paid
when due, Lessee shall pay as an administrative and late charge an amount equal
to 10% of the amount of any such overdue payment, beginning with the second such
late payment. In addition, Lessee shall pay interest on such delinquent payment
from 30 days after its due date until paid at the rate of 1 1/2% per month or
the maximum amount permitted by law, whichever is lower. All payments to be made
to Lessor shall be made to Lessor at the address shown above, or at such other
place as Lessor shall specify in writing. (c) A Lease shall be automatically
extended at the expiration of the Initial Term for a term of four (4) months
(such four month period and any subsequent monthly extension thereof referred to
herein as the "Extended Term") unless Lessee gives written notice to Lessor not
less than three (3) months prior to such expiration date of Lessee's election to
(i) return the Equipment pursuant to Section 19 of the Master Agreement or (ii)
exercise its options, if any, to purchase the Equipment described in such Lease
or to renew such Lease. Thereafter, the term of such Lease will be extended for
subsequent full month periods, on a month to month basis, until Lessee has given
Lessor at least 120 days written notice of termination of such Lease. The rental
set forth in the Lease shall continue to be due and payable by Lessee on the
same periodic basis during such Extended Term (the phrases Installation Term,
Initial Term and Extension Term are sometimes collectively referred to herein as
"Term") Failure by Lessee to return the Equipment in accordance with Section 19
when notice of termination had been provided by Lessee to Lessor shall render
such notice null and void. At any time after the expiration of the Initial Term,
if the Lease has been automatically extended as set forth herein, Lessor
reserves the right to terminate the Lease upon 30 days written notice to Lessee.
3. POSSESSION; INSPECTION; PERSONAL PROPERTY
No right, title or interest in the Equipment shall pass to Lessee other than the
right to maintain possession and use of the Equipment for the term of the Lease
(provided no Event of Default, as defined below, exists) free from interference
by any person claiming by, through or under Lessor. At its option, Lessor may
require Lessee, at Lessee's expense, to affix labels, plates or markings in a
prominent location on the Equipment indicating Lessor is the owner. Each Item
shall be kept at the location set forth in the applicable Lease Schedule. Lessor
may enter the premises where the Equipment is located during business hours for
the purpose of inspecting the Equipment and, during the last four months of the
Initial Term or during the Extended Term, for the purposes of showing the
Equipment to prospective purchasers or lessees of the Equipment. The Equipment
shall always remain personal property even though the Equipment may hereafter
become attached or affixed to real property. LESSEE SHALL KEEP EACH ITEM FREE
AND CLEAR OF ALL LIENS AND OTHER ENCUMBRANCES, OTHER THAN THOSE ARISING BY,
THROUGH OR UNDER LESSOR.
4. ASSIGNMENT OF PURCHASE DOCUMENTS
Lessee hereby assigns to Lessor all of Lessee's rights and interest in and to:
(a) the Equipment described in any Lease Schedule and (b) any purchase order,
contract or other documents (collectively, "Purchase Documents") relating
thereto that Lessee has entered into with the seller of the Equipment as
specified in such Lease Schedule (the "Seller"). The foregoing assignment is an
assignment of rights only, and Lessee shall remain liable for all obligations
under the Purchase Documents except for the obligation to pay for the Equipment
as described in Section 5 hereof. At Lessor's request, Lessee shall deliver to
Lessor a writing acceptable to Lessor whereby Seller acknowledges, and provides
any required consent to, such assignment. If Lessee has not entered into any
Purchase Document for the Equipment with Seller, Lessee authorizes Lessor to act
as Lessee's agent to issue a purchase order to Seller for the Equipment and for
associated matters and such purchase order shall be considered a Purchase
Document for the purposes of this Section 4.
<PAGE>
5. PURCHASE OF EQUIPMENT
Provided that no Event of Default (as defined in Section 10) exists, and no
event has occurred and is continuing that with notice or lapse of time or both
constitutes an Event of Default, Lessor shall be obligated to purchase the
Equipment and to lease the same to Lessee if, and only if, Lessor receives on or
before the "Commitment Expiration Date" set forth in the applicable Lease
Schedule, the related Acceptance Certificate and said Lease Schedule (both
executed by Lessee), and such other documents and assurances as Lessor may
reasonably request. If for any reason a Lease does not commence by such
Commitment Expiration Date, Lessor shall have no obligation to purchase the
Equipment and Lessor may reassign to Lessee all rights under the Purchase
Documents and Lessee shall be liable to (a) Seller for any payment due under the
Purchase Documents or (b) Lessor for any payment made by it to Seller thereunder
and any unpaid interim rent owing Lessor related to such payment.
6. DISCLAIMER OF WARRANTIES
LESSOR IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT, OR THE AGENT
THEREOF, AND MAKES NO EXPRESS OR IMPLIED WARRANTIES AS TO ANY MATTER WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT, ITS FITNESS
FOR A PARTICULAR PURPOSE, ITS DESIGN OR CONDITION, ITS CAPACITY OR DURABILITY,
THE QUALITY OF THE MATERIAL OR WORKMANSHIP, CONFORMITY OF THE EQUIPMENT TO THE
PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR PATENT
INFRINGEMENTS, AND HEREBY DISCLAIMS ANY SUCH WARRANTY. LESSOR IS NOT RESPONSIBLE
FOR ANY REPAIRS OR SERVICE TO THE EQUIPMENT, DEFECTS THEREIN OR FAILURES IN THE
OPERATION THEREOF. Lessee has made the selection of each Item and the
manufacturer and/or supplier thereof based on its own judgment and expressly
disclaims any reliance upon any statements or representations made by Lessor.
For so long as no Event of Default exists, Lessee shall be the beneficiary of,
and shall be entitled to, all rights under any applicable manufacturer's or
vendor's warranties with respect to the Equipment, to the extent permitted by
law, and shall apply any recoveries first to repair or restore the Equipment. If
the Equipment is not delivered, is not properly installed, does not operate as
warranted, becomes obsolete or is unsatisfactory for any reason whatsoever,
Lessee shall make all claims on account thereof solely against the manufacturer
or supplier and not against Lessor, and Lessee shall nevertheless pay all
rentals and other sums payable under the Lease. Lessee acknowledges that neither
the manufacturer or supplier of the Equipment, nor any sales representative or
agent thereof, is an agent of Lessor, and no agreement or representation as to
the Equipment or any other matter by such sales representative or agent of the
manufacturer or supplier shall in any way affect Lessee's obligations hereunder.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS
As of the execution date of each Lease, Lessee represents and warrants to and
covenants with Lessor as follows: (a) Lessee is duly organized and existing in
good standing under the laws of the state of its organization and is duly
qualified to do business wherever necessary to carry on its present business and
operations and to own its property; (b) the execution, delivery and performance
by Lessee of its obligations under this Master Agreement and each Lease have
been duly authorized by all necessary action on the part of Lessee consistent
with its form of organization, do not require any further shareholder or partner
approval, do not require the approval of, or the giving notice to, any federal,
state, local or foreign governmental authority and do not contravene any law
binding on Lessee or contravene Lessee's certificate or articles of
incorporation, or its by-laws or partnership certificate, or any agreement,
indenture, or other instrument to which Lessee is a party or by which it may be
bound; (c) this Master Agreement and each Lease have been duly executed and
delivered by Lessee and constitute legal, valid and binding obligations of
Lessee enforceable in accordance with their terms; (d) there are no material
adverse changes in the financial condition or operation of Lessee since the date
of its financial statements most recently provided to Lessor nor any pending or
threatened actions or proceedings before any court or administrative agency
which may materially adversely affect Lessee's financial condition or
operations, and all information so provided is, and all information hereafter
furnished will be, true and correct in all material respects; (e) Lessor has not
selected, manufactured or supplied the Equipment and has acquired any Equipment
subject to the Lease solely in connection with the Lease and Lessee has either
(i) received, reviewed and approved the terms of the associated Purchase
Documents or (ii) has been informed by Lessor (x) of the identity of the Seller,
(y) that Lessee may have rights under the Purchase Documents and (z) that Lessee
may contact Seller for a description of such rights; (f) the Lessee has (i)
initiated a review and assessment of all areas within its and each of its
Subsidiaries' business and operations (including those affected by suppliers,
vendors and customers) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by the Lessee or any
of its Subsidiaries (or suppliers, vendors and customers) may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date after December 31, 1999), (ii) developed a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to
date, implemented that plan in accordance with that timetable. Based on the
foregoing, the Lessee believes that all computer applications that are material
to its or any of its Subsidiaries' business and operations are reasonably
expected on a timely basis to be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000 (that is, be "Year 2000
compliant"), except to the extent that a failure to do so could not reasonably
be expected to have Material Adverse Effect.
8. INDEMNITY
Lessee assumes the risk of liability for, and hereby agrees to indemnify and
hold safe and harmless, and covenants to defend, Lessor, its employees, servants
and agents from and against: (a) any and all harm, liabilities, losses, damages,
claims and expenses (including legal expenses of every kind and nature), other
than those directly caused by Lessor's gross negligence or willful misconduct,
arising out of or in connection with the manufacture, purchase, shipment and
delivery to Lessee, acceptance or rejection, ownership, titling, registration,
leasing, possession, operation, use, return or other disposition of the
Equipment, including, without limitation, any of such as may arise from patent
or latent defects in the Equipment (whether or not discoverable by Lessee), any
claims based on absolute tort liability or warranty and any claims based on
patent, trademark or copyright infringement; (b) any and all loss or damage of
or to the Equipment, normal wear and tear excepted; and (c) any obligation or
liability to the manufacturer and any supplier of the Equipment arising under
the Purchase Documents other than the obligation to purchase the Equipment in
accordance with terms of the Lease. The covenants and indemnities contained in
this Section 8 and in Section 9 shall survive the expiration or other
termination of the Lease.
9. TAXES AND OTHER CHARGES
Lessee shall reimburse Lessor (or pay directly to the appropriate taxing
authority if, and only if, so instructed by Lessor) all license fees,
assessments, and sales, use, gross receipts, property, ad valorem, excise,
privilege and other taxes (including any related interest and penalties) or
other charges or fees now or hereafter imposed by any governmental body or
agency upon Lessor, Lessee, any Lease or any Equipment, or with respect to the
manufacturing, ordering, shipment, purchase, ownership, delivery, installation,
leasing, operation, possession, use, return, or other disposition thereof or the
rentals hereunder (other than taxes on or measured solely by the net income of
Lessor). The foregoing indemnity shall continue in full force and effect
notwithstanding the expiration or other termination of the Lease.
<PAGE>
10. DEFAULT
The occurrence of any one or more of the following events shall be deemed an
"Event of Default" under each and every Lease: (a) Lessee shall fail to make any
payment, of rent or otherwise, under any Lease when such payment is due and does
not cure such default within 5 days of written notice by Lessor; or (b) Lessee
shall fail to perform or observe any covenant, condition or agreement under any
Lease, and such failure continues for 10 days after Lessee's first knowledge of
such failure; or, if more than 10 days are reasonably required to cure such
failure, Lessee fails to commence and to diligently pursue the performance of
such obligations within such 10 day period; or (c) Lessee shall default in the
payment of any indebtedness to Lessor or any parent, subsidiary or affiliated
company of Lessor, or if Lessee shall default in the performance of or
compliance with any term contained in any agreement or instrument with respect
to such indebtedness, if the effect of such default is to cause or permit such
indebtedness to become due prior to its stated maturity; or (d) any
representation or warranty made by Lessee herein or in any certificate,
agreement, statement or document heretofore or hereafter furnished to Lessor in
connection herewith, including, without limitation, any financial information
disclosed to Lessor, shall prove to be false or incorrect in any material
respect; or (e) the death or judicial declaration of incompetence of Lessee, if
an individual; the commencement of any bankruptcy, insolvency arrangement,
reorganization, receivership, liquidation or other similar proceeding by or
against Lessee or any of its properties or business, or the appointment of a
trustee, receiver, liquidator or custodian for Lessee or any of its properties
or business, or Lessee suffers the entry of an order for relief under Title 11
of the United States Code; or the making by Lessee of a general assignment or
deed of trust for the benefit of creditors; or (f) Lessee shall default in
meeting any of its trade, tax, borrowing or other obligations as they mature,
except to the extent Lessee is contesting any such obligations in good faith and
has established adequate reserves therefor; or (g) Lessee ceases doing business
as a going concern or there is a change in the legal structure of ownership of
Lessee, or a consolidation or merger or Lessee into or with another entity,
which results, in the opinion of Lessor, in a material adverse change in the
ability of Lessee to perform its obligations under the Lease; or (h) any event
or condition set forth in subsections (b), (c), (d), (e), (f) or (g) of this
Section 10 shall occur with respect to any guarantor or other person
responsible, in whole or in part, for payment or performance of the Lease.
Lessee shall promptly notify Lessor of the occurrence of any Event of Default or
the occurrence or existence of any event or condition which, upon the giving of
notice or lapse of time, or both, may become an Event of Default.
11. REMEDIES
Upon the occurrence of any Event of Default, Lessor may, at its sole option and
discretion, to the extent permitted by applicable law, exercise one or more of
the following remedies with respect to any or all of the Equipment: (a) cause
Lessee to, upon written demand of Lessor and at Lessee's expense, promptly
return any or all Equipment to such location as Lessor may designate in
accordance with the terms of Section 19, or Lessor, at its option, may enter
upon the premises where the Equipment is located and take immediate possession
of and remove the same by summary proceedings or otherwise, all without
liability to Lessee for or by reason of damage to property on such entry or
taking possession; (b) sell any or all the Equipment at public or private sale
or otherwise dispose of, hold, use, operate, lease to others or keep idle the
Equipment, all as Lessor in its sole discretion may determine and all free and
clear of any rights of Lessee; (c) remedy such default, including making repairs
or modifications to the Equipment, for the account of and the expense of Lessee,
and Lessee agrees to reimburse Lessor for all of Lessor's costs and expenses
incurred in connection therewith; (d) by written notice to Lessee, terminate any
or all Leases, as such notice shall specify, and, with respect to such
terminated Leases, declare immediately due and payable and recover from Lessee,
as liquidated damages for loss of a bargain and not as a penalty, an amount
equal to the sum of (i) all rental payments accrued and unpaid, plus interest
and late charges thereon, calculated as of the date payment is actually made,
plus (ii) the net present value of all rental payments to become due during the
remaining Term of each such Lease, discounted at the rate of 5% per annum, plus
the amount of any purchase or renewal option or obligation with respect to such
Equipment, or, if there is no such option or obligation, then the fair market
value of the Equipment at the end of such Term, as estimated by Lessor in its
sole, reasonable discretion, calculated as of the date payment is actually made,
plus (iii) all other amounts then payable to Lessor under the Lease; provided,
however, that any acceleration or prepayment of the unpaid rentals under the
Lease shall be subject to all applicable laws, including rebates of unearned
charges. If in any event whatsoever, Lessor shall receive anything of value
deemed interest under applicable law which would exceed the maximum amount of
interest permissible under applicable law, the excess amount shall be applied to
reduction of the unpaid principal balance owing under the Lease, if any, or
shall be refunded to Lessee; (e) apply any deposit or other cash collateral or
sale or remarketing proceeds of the Equipment at any time as it sees fit to
reduce any amounts due to Lessor; and (f) exercise any other right or remedy
which may be available to it under applicable law, or proceed by appropriate
court action to enforce the terms of the Lease or to recover damages for the
breach thereof, including reasonable attorneys' fees and court costs. No remedy
referred to in this Section 11 is intended to be exclusive, but each shall be
cumulative and in addition to any other remedy referred to above or otherwise
available to Lessor at law or in equity. The exercise or beginning of exercise
by Lessor of any one or more of such remedies shall not preclude the
simultaneous or later exercise by Lessor of any or all such other remedies, and
all remedies hereunder shall survive termination of the Lease. At any sale of
the Equipment pursuant to this Section 11, Lessor may bid for and purchase the
Equipment. Notice required, if any, of any sale or other disposition hereunder
by Lessor shall be satisfied by the mailing of such notice to Lessee at least
ten (10) days prior to the sale or other disposition. In the event Lessor takes
possession and disposes of the Equipment, Lessor shall give Lessee credit for
any sums actually received by Lessor from the disposition of the Equipment after
deduction of expenses of disposition and the amounts due to Lessor under
subsection (d) above. Termination shall occur only upon written notice by Lessor
and only with respect to such Equipment as Lessor shall specify in such notice.
Termination under this Section 11 shall not affect Lessee's duty to perform
Lessee's obligations hereunder to Lessor in full. Lessee agrees to reimburse
Lessor on demand for any and all costs and expenses incurred by Lessor in
enforcing its rights and remedies hereunder following the occurrence of an Event
of Default, including, without limitation, reasonable attorneys' fees and the
costs of repossessing, storing, insuring, reletting, selling and disposing of
any and all Equipment. To the extent permitted by applicable law, Lessee hereby
waives any rights now or hereafter conferred by statute or otherwise which may
require Lessor to sell, lease or otherwise use any of the Equipment in
mitigation of Lessor's damages or which may otherwise limit or modify any of
Lessor's rights or remedies under the Lease.
12. NOTICES
All notices and demands required or permitted to be given under a Lease shall be
given in writing and shall be delivered in person or sent by certified mail,
return receipt requested, or by overnight courier service to the attention of,
in the case of Lessor, Customer Administration, and to Lessee at the addresses
hereinabove set forth, or to such other address as the party to receive notice
hereafter designates by such written notice. All notices shall be deemed given
when received, when delivery is refused or when such notices are returned for
failure to be called for.
13. USE; REPAIRS; LOSS AND DAMAGE
Lessee will cause the Equipment to be operated in accordance with any applicable
manufacturer's manuals, instructions or requirements by competent and duly
qualified personnel only, in accordance with applicable requirements of law, if
any, and for business purposes only. Lessee, at its own cost and expense, shall
keep the Equipment in good repair, condition and working order, in accordance
with any applicable manufacturer's manuals, instructions or requirements and
shall furnish all
<PAGE>
parts, mechanisms, devices and servicing required therefor. All such parts,
mechanisms and devices shall immediately become the property of Lessor and part
of the Equipment for all purposes hereof. If the Equipment is such that Lessee
is not normally capable of maintaining it. Lessee at its expense, shall enter
into and maintain in full force and effect throughout the term of the Lease, a
maintenance contract for the Equipment with its manufacturer or vendor, or a
maintenance contractor previously approved in writing by Lessor (each, a
"Maintenance Organization"). Lessee hereby assumes all risk of loss, damage or
destruction for whatever reason to the Equipment from and after the earlier of
the date on which (a) the Equipment is ordered, or (b) Lessor pays the purchase
price of the Equipment, and continuing until its return as set forth in Section
19 hereof. If any Item shall become lost, stolen, destroyed, damaged beyond
repair or rendered permanently unfit for use for any reason, or in the event of
any condemnation, confiscation, seizure or requisition of title to or use of any
Item, then, at Lessor's option, Lessee shall promptly (i) pay to Lessor an
amount equal to the greater of (x) the full replacement value of such Item or
(y) the net present value of all rental payments then remaining unpaid for the
Term of the applicable Lease, discounted at the rate of 5% per annum, plus the
amount of any purchase or renewal option or obligation with respect to such
items or, if there is no such option or obligation, then the fair market value
of the Equipment at the end of such Term, as estimated by Lessor in its sole
reasonable discretion, or (ii) replace the affected Equipment. If Lessor
requires Lessee to replace the affected Item(s), Lessee shall purchase, in
Lessor's name, equipment either identical to the affected Equipment or if
identical equipment is not readily available, then equipment from the same
manufacturer or such other manufacturer acceptable to Lessor that performs
substantially the same function at substantially the same or greater speed and
capacity as the Equipment and the Lease shall continue as if no such loss,
theft, destruction, damage or condemnation had occurred without abatement of any
payments due under the Lease. Lessee shall take all action necessary to vest
unencumbered and unrestricted title in Lessor to any equipment purchased by it
pursuant to this Section 13.
14. INSURANCE
Lessee shall procure and maintain, upon such terms, with such deductibles and
with such companies as Lessor may approve, during the entire term of the Lease,
as Lessee's expense (a) Comprehensive General Liability Insurance including
product/completed operations and contractual liability coverage, with minimum
limits of $1,000,000 each occurrence, and Combined Single Limit Body Injury and
Property Damage, $1,000,000 aggregate, where applicable; and (b) All Risk
Physical Damage Insurance, including earthquake and flood, on each Item in an
amount not less than the greater of (i) the full replacement value of such Item,
or (ii) the net present value of all rental payments then remaining unpaid for
the Term of the Lease, discounted at the rate of 5% per annum, plus the amount
of any purchase or renewal option or obligation with respect to such Items or,
if there is no such option or obligation, then the fair market value of the
Equipment at the end of such Term, as estimated by Lessor in its sole,
reasonable discretion, Lessor will be included as an additional insured and loss
payee as its interest may appear. Such policies shall be endorsed to provide
that the coverage afforded to Lessor shall not be rescinded, impaired or
invalidated by any act or neglect of Lessee. Lessee agrees to waive Lessee's
right and its insurance carrier's right of subrogation against Lessor for any
and all loss or damage. In addition to the foregoing minimum insurance coverage.
Lessee shall procure and maintain such other insurance coverages as Lessor may
reasonably require from time to time during the term of the Lease. All policies
shall contain a clause requiring the insurer to furnish Lessor with at least 30
days' prior written notice of any material change, cancellation or non-renewal
of coverage. Upon execution of the Lease, Lessee shall furnish Lessor with a
certificate of insurance or other evidence satisfactory to Lessor that such
insurance coverages are in effect; provided, however, that Lessor shall be under
no duty either to ascertain the existence of or to examine such insurance
coverage or to advise Lessee in the event such insurance coverage should not
comply with the requirements hereof. In case of the failure of Lessee to procure
or maintain insurance, Lessor may as its option obtain such Insurance, the cost
of which will be paid by Lessee as additional rentals, Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to file, settle or adjust, and
receive payment of claims under the All Risk Physical Damage Insurance and to
endorse Lessee's name on any checks, drafts or other instruments in payment of
such claims. Lessee further agrees to give Lessor prompt notice of any damage
to, or loss of, the Equipment or any part thereof.
15. LIMITATION OF LIABILITY
Lessor shall have no liability in connection with or arising out of the
ownership, leasing, furnishing, performance or use of the Equipment or any
special, indirect, incidental or consequential damages of any character,
including, without limitation, loss of use of production facilities or
equipment, loss of profits, property damage or lost production, whether suffered
by Lessee or any third party.
16. FURTHER ASSURANCES
Lessee shall promptly execute and deliver to Lessor such further documents and
take such further action as Lessor may require in order to more effectively
carry out the intent and purpose of the Lease. Lessee shall provide to Lessor
within 120 days after the close of each of Lessee's fiscal years, and, upon
Lessor's request, within 45 days of the end of each quarter of Lessee's fiscal
year, a copy of its financial statements prepared in accordance with generally
accepted accounting principles, Annual financial statements shall be audited.
Lessee shall execute and deliver to Lessor upon Lessor's request such
instruments and assurances as Lessor deems necessary for the confirmation,
preservation or perfection of the Lease and Lessor's rights thereunder,
including, without limitation, such corporate resolutions, incumbency
certificates and opinions of counsel as Lessor may request from time to time,
and all schedules, forms and other reports as may be required to satisfy
obligations imposed by taxing authorities. In furtherance thereof, Lessor may
file or record the Lease or a memorandum or a photocopy thereof (which for the
purposes hereof shall be effective as a financing statement) so as to give
notice to third parties, and Lessee hereby appoints Lessor as its
attorney-in-fact to execute, on behalf of Lessee, file and record UCC financing
statements and other lien recordation documents with respect to the Equipment.
Lessee agrees to pay or reimburse Lessor for any filing, recording or stamp fees
or taxes arising from any such filings. The filing of UCC financing statements
is precautionary and shall not be evidence that the Lease is intended as
security. If the Lease is determined for any reason not to constitute a lease,
Lessee grants Lessor a security interest in the Equipment and the proceeds
thereof, including the re-lease, sale or other disposition of the Equipment.
17. ASSIGNMENT
The Lease and all rights of Lessor thereunder shall be assignable by Lessor
absolutely or as security, without notice to Lessee, subject to the rights of
Lessee hereunder. Any such assignment shall not relieve Lessor of its
obligations thereunder unless specifically assumed by the assignee, and Lessee
agrees it shall not assert any defense, right of set-off or counterclaim against
any assignee to which Lessor shall have assigned its rights and interests
hereunder, nor hold or attempt to hold such assignee liable for any of Lessor's
obligations hereunder. LESSEE SHALL NOT ASSIGN OR DISPOSE OF ANY OF ITS RIGHTS
OR OBLIGATIONS UNDER THE LEASE OR ENTER INTO ANY SUBLEASE WITH RESPECT TO ANY OF
THE EQUIPMENT WITHOUT THE EXPRESS PRIOR WRITTEN CONSENT OF LESSOR.
18. LESSEE'S OBLIGATIONS UNCONDITIONAL
The Lease is a net lease and Lessee hereby agrees that it shall not be entitled
to any abatement of rents or of any other amounts payable by Lessee and that its
obligation so pay all rent and any other amounts owing under the Lease shall be
absolute and unconditional under all
<PAGE>
circumstances, including, without limitation, the following circumstances; (i)
set-off counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, any seller or manufacturer of any Equipment or anyone else for
any reason whatsoever; or (ii) the existence of any liens, encumbrances or
rights of others whatsoever with respect to any Equipment, whether or not
resulting from claims against Lessor not related to the ownership of such
Equipment. Each rent or other payment made by Lessee hereunder shall be final,
and Lessee will not seek to recover all or any part of such payment from Lessor
for any reason whatsoever.
19. RETURN OF EQUIPMENT
Upon expiration of the term of the Lease or upon demand of Lessor as provided
in Section 11, Lessee, at its own expense, shall immediately return the
Equipment in the same condition as when delivered to Lessee, ordinary wear
and tear excepted, to such location as Lessor shall designate. The Equipment
shall be returned free and clear of all liens, encumbrances and rights of
others. Upon the return of the Equipment to Lessor, Lessee shall arrange and
pay for such repairs, if any, as are necessary for the manufacturer of the
Equipment or Maintenance Organization so accept the Equipment under a
maintenance contract at its then standard rates. The risk, of loss of the
Equipment shall remain with Lessee until the returned Equipment is accepted
by Lessor or such other entity to whom the Equipment is returned, and Lessee
shall maintain insurance on the Equipment in accordance with Section 14 until
such acceptance occurs. Unless and until the Equipment is returned and
accepted as herein provided, or otherwise disposed of by written agreement of
Lessor and Lessee, the term of the Lease with respect to such Equipment shall
continue on a month-to-month basis terminable by Lessor upon 30 days advance
written notice at a rent per month equal to the highest monthly rent for the
Equipment payable during the Initial Term.
20. ENFORCEABILITY; COUNTERPARTS; GOVERNING LAW
Any provision of this Master Agreement or any Lease Schedule which is
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such unenforceability without invalidating the remaining
provisions of the Master Agreement and such Lease Schedule, and any such
unenforceability in any jurisdiction shall not render unenforceable such
provision in any other jurisdiction. To the extent permitted by applicable law,
Lessee hereby waives any provisions of law which render any provision hereof
unenforceable in any respect. Any waiver of the terms hereof shall be effective
only in the specific instance and for the specific purpose given. Time is of the
essence in the Lease. Lessor reserves the right to change Lessee for its
provision of administrative services related to this Master Agreement or any
Lease Schedule issued pursuant hereto. The captions in this Master Agreement are
for convenience only and shall not define or limit any of the terms hereof. Each
Lease may be executed in one or more counterparts, each of which shall be deemed
an original as between the parties thereto, but there shall be a single executed
original of each Lease which shall be marked "Counterpart No. 1"; all other
counterparts shall be marked with other counterpart numbers. To the extent, if
any, that a Lease constitutes chattel paper (as such term is defined in the
Uniform Commercial Code), no security interest in the Lease may be created
through the transfer or possession of any counterpart other than Counterpart No.
1. The Master Agreement is incorporated by reference in each Lease and shall not
be chattel paper by itself.
THIS MASTER AGREEMENT AND ANY LEASE SCHEDULE ISSUED PURSUANT HERETO SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF CALIFORNIA. LESSEE HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL DISTRICT COURT IN ORANGE
COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING
ARISING OUT OF ITS OBLIGATIONS HEREUNDER, AND EXPRESSLY WAIVES ANY OBJECTIONS
THAT IT MAY HAVE TO THE VENUE OF SUCH COURTS. LESSEE AND LESSOR EACH HEREBY
EXPRESSLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS
MASTER AGREEMENT AND ANY LEASE SCHEDULE ISSUED PURSUANT HERETO. Any action by
Lessee against Lessor for any cause of action under a Lease shall be brought
within one year after any such cause of action first accrues. THIS MASTER
AGREEMENT, CONSISTING OF TWENTY SECTIONS, THE LEASE AND ANY ADDENDA OR
SUPPLEMENTS HERETO OR THERETO, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS BETWEEN THE PARTIES, LESSEE ACKNOWLEDGES AND CERTIFIES THAT NO
SUCH ORAL AGREEMENTS EXIST. The Lease may not be amended, nor may any rights
thereunder be waived, except by an instrument in writing signed by the party
charged with such amendment or waiver. The term "Lessee" as used herein shall
mean and include any and all Lessees who sign Lease, each of whom shall be
jointly and severally bound thereby.
By execution hereof, the signer certifies that he or she has read, accepted and
duly executed this Master Lease Agreement on behalf of Lessee.
Lessor: Crocker Capital, Inc.
By: /s/ Mona [ILLEGIBLE]
---------------------------------
Title: Documentation Manager
------------------------------
Lessee: Centennial Technologies, Inc.
By: /s/ Richard Pulsifer
---------------------------------
Title: CFO
------------------------------
This Master Agreement is incorporated by reference in the Lease and is not
chattel paper by itself.
<PAGE>
LEASE SCHEDULE
EQUIPMENT
MASTER LEASE AGREEMENT NO. M02433
LEASE SCHEDULE NO. 1099-01
BETWEEN Crocker Capital, Inc. (LESSOR)
and Centennial Technologies, Inc. (LESSEE).
1. DESCRIPTION OF EQUIPMENT
Quantity Item Model/Serial No.
-------- ---- ----------------
See Attached Schedule "A"
2. EQUIPMENT LOCATION
The above Equipment is to be located and delivered to Lessee's premises at
7 Lopez Road, Wilmington, MA 01887
3. RENTAL TERM: 60 months.
4. RENTAL
The first payment in the amount of $ 16,217.47 is due November 1,l999.
Subsequent rental payments will be in the same amount and due on the same
day Monthly thereafter.
5. NUMBER AND AMOUNT OF ADVANCE RENTAL PAYMENTS:
NUMBER: (1) First Months Payment $16,567.47
6. Fair Market Value: Return, Renew, Upgrade or Purchase FMV.
7. THIS SCHEDULE AND ITS TERMS AND CONDITIONS ARE HEREBY INCORPORATED BY
REFERENCE IN THE ABOVE EQUIPMENT LEASE AGREEMENT. LESSEE PERMITS LESSOR TO
INSERT MODEL AND SERIAL NUMBERS OF EQUIPMENT WHEN DETERMINED BY LESSOR.
- --------------------------------------------------------------------------------
LESSEE: LESSOR:
Centennial Technologies, Inc. Crocker Capital, Inc.
- --------------------------------------- --------------------------------------
(Must be signed by Authorized Corporate
Officer, Partner, or Proprietor)
/s/ Richard Pulsifer /s/ Mona [ILLEGIBLE]
- --------------------------------------- --------------------------------------
Richard Pulsifer, CFO Documentation Manager
Accepted this 28th day of October 1999
at Newport Beach, CA.
<PAGE>
Exhibit 10.2
CENTENNIAL TECHNOLOGIES, INC.
EXECUTIVE RETENTION AGREEMENT
MARY A. GALLAHAN
<PAGE>
CENTENNIAL TECHNOLOGIES, INC.
EXECUTIVE RETENTION AGREEMENT
THIS EXECUTIVE RETENTION AGREEMENT by and between Centennial
Technologies, Inc., a Delaware corporation (the "Company"), and Mary A. Gallahan
(the "Executive") is made as of December 16, 1999 (the "Effective Date").
WHEREAS, the Company recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders, and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that appropriate steps should be taken to reinforce and encourage the
continued employment and dedication of the Company's key personnel without
distraction from the possibility of a change in control of the Company and
related events and circumstances.
NOW, THEREFORE, as an inducement for and in consideration of the
Executive remaining in its employ, the Company agrees that the Executive shall
receive the severance benefits set forth in this Agreement in the event the
Executive's employment with the Company is terminated under the circumstances
described below subsequent to a Change in Control (as defined in Section 1.1).
1. KEY DEFINITIONS.
As used herein, the following terms shall have the following respective
meanings:
2
<PAGE>
1.1 "CHANGE IN CONTROL" means an event or occurrence set forth
in any one or more of subsections (a) through (d) below (including an event or
occurrence that constitutes a Change in Control under one of such subsections
but is specifically exempted from another such subsection):
(a) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership of any capital stock of the Company if, after such acquisition, such
Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) 30% or more of either (i) the then-outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then-outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); PROVIDED, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition directly from the Company (excluding an acquisition pursuant to the
exercise, conversion or exchange of any security exercisable for, convertible
into or exchangeable for common stock or voting securities of the Company,
unless the Person exercising, converting or exchanging such security acquired
such security directly from the Company or an underwriter or agent of the
Company), (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i) and (ii)
of subsection (c) of this Section 1.1; or
(b) such time as the Continuing Directors (as defined
below) do not constitute a majority of the Board (or, if applicable, the Board
of Directors of a successor corporation to the Company), where the term
"Continuing Director" means at any date a member of the Board (i) who was a
member of the Board on the date of the execution of this Agreement or (ii) who
was nominated or elected subsequent to such date by at least a majority of the
directors who were Continuing Directors at the time of such nomination or
election or whose election to the Board was recommended or endorsed by at least
a majority of the directors who were Continuing Directors at the time of such
nomination or election; PROVIDED, HOWEVER, that there shall be excluded from
this clause (ii) any individual whose initial assumption of office occurred as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents, by or on behalf of a person other than the Board; or
3
<PAGE>
(c) the consummation of a merger, consolidation,
reorganization, recapitalization or statutory share exchange involving the
Company or a sale or other disposition of all or substantially all of the assets
of the Company (a "Business Combination"), unless, immediately following such
Business Combination, each of the following two conditions is satisfied: (i) all
or substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding securities entitled
to vote generally in the election of directors, respectively, of the resulting
or acquiring corporation in such Business Combination (which shall include,
without limitation, a corporation which as a result of such transaction owns the
Company or substantially all of the Company's assets either directly or through
one or more subsidiaries) (such resulting or acquiring corporation is referred
to herein as the "Acquiring Corporation") in substantially the same proportions
as their ownership, immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
respectively; and (ii) no Person (excluding the Acquiring Corporation or any
employee benefit plan (or related trust) maintained or sponsored by the Company
or by the Acquiring Corporation) beneficially owns, directly or indirectly, 20%
or more of the then outstanding shares of common stock of the Acquiring
Corporation, or of the combined voting power of the then-outstanding securities
of such corporation entitled to vote generally in the election of directors
(except to the extent that such ownership existed prior to the Business
Combination); or
(d) approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
1.2 "CHANGE IN CONTROL DATE" means the first date during the
Term (as defined in Section 2) on which a Change in Control occurs. Anything in
this Agreement to the contrary notwithstanding, if (a) a Change in Control
occurs, (b) the Executive's employment with the Company is terminated prior to
the date on which the Change in Control occurs, and (c) it is reasonably
demonstrated by the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to effect a
Change in Control or (ii) otherwise arose in connection with or in anticipation
of a Change in Control, then for all purposes of this Agreement
4
<PAGE>
the "Change in Control Date" shall mean the date immediately prior to the date
of such termination of employment.
1.3 "CAUSE" means:
(a) the Executive's willful and continued failure
substantially to perform his reasonable assigned duties as an officer of the
Company (other than any such failure resulting from incapacity due to physical
or mental illness or any failure after the Executive gives notice of termination
for Good Reason), which failure is not cured within 30 days after a written
demand for substantial performance is received by the Executive from the Board
of Directors of the Company which specifically identifies the manner in which
the Board of Directors believes the Executive has not substantially performed
the Executive's duties; or
(b) the Executive's willful engagement in illegal
conduct or gross misconduct which is materially and demonstrably injurious to
the Company.
For purposes of this Section 1.3, no act or failure to act by the
Executive shall be considered "willful" unless it is done, or omitted to be
done, in bad faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
1.4 "GOOD REASON" means the occurrence, without the
Executive's written consent, of any of the events or circumstances set forth in
clauses (a) through (g) below. Notwithstanding the occurrence of any such event
or circumstance, such occurrence shall not be deemed to constitute Good Reason
if, prior to the Date of Termination specified in the Notice of Termination
(each as defined in Section 3.2(a)) given by the Executive in respect thereof,
such event or circumstance has been fully corrected and the Executive has been
reasonably compensated for any losses or damages resulting therefrom (provided
that such right of correction by the Company shall only apply to the first
Notice of Termination for Good Reason given by the Executive).
(a) the assignment to the Executive of duties
inconsistent in any material respect with the Executive's position (including
status, offices, titles and reporting requirements), authority or
responsibilities in effect immediately prior to the earliest to occur of (i) the
Change in Control Date, (ii) the date of the execution by the Company of the
initial written agreement or instrument providing for the Change in
5
<PAGE>
Control or (iii) the date of the adoption by the Board of Directors of a
resolution providing for the Change in Control (with the earliest to occur of
such dates referred to herein as the "Measurement Date"), or any other action or
omission by the Company which results in a diminution in such position,
authority or responsibilities;
(b) a reduction in the Executive's annual base salary
as in effect on the Measurement Date or as the same was or may be increased from
time to time;
(c) the failure by the Company to (i) continue in
effect any material compensation or benefit plan or program (including without
limitation any life insurance, medical, health and accident or disability plan
and any vacation program or policy) (a "Benefit Plan") in which the Executive
participates or which is applicable to the Executive immediately prior to the
Measurement Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan or
program, (ii) continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount of benefits provided and the level of the Executive's
participation relative to other participants, than the basis existing
immediately prior to the Measurement Date or (iii) award cash bonuses to the
Executive in amounts and in a manner substantially consistent with past practice
in light of the Company's financial performance;
(d) a change by the Company in the location at which
the Executive performs his principal duties for the Company to a new location
that is both (i) outside a radius of 35 miles from the Executive's principal
residence immediately prior to the Measurement Date and (ii) more than 20 miles
from the location at which the Executive performed his principal duties for the
Company immediately prior to the Measurement Date; or a requirement by the
Company that the Executive travel on Company business to a substantially greater
extent than required immediately prior to the Measurement Date;
(e) the failure of the Company to obtain the
agreement, in a form reasonably satisfactory to the Executive, from any
successor to the Company to assume and agree to perform this Agreement, as
required by Section 6.1;
(f) a purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of
6
<PAGE>
Section 3.2(a), which purported termination shall not be effective for purposes
of this Agreement; or
(g) any failure of the Company to pay or provide to
the Executive any portion of the Executive's compensation or benefits due under
any Benefit Plan within seven days of the date such compensation or benefits are
due, or any material breach by the Company of any employment agreement with the
Executive.
In addition, the termination of employment by the Executive for any
reason or no reason during the 30-day period beginning on the first anniversary
of the Change in Control Date shall be deemed to be termination for Good Reason
for all purposes under this Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Executive shall be conclusive, binding and final. The
Executive's right to terminate his employment for Good Reason shall not be
affected by his incapacity due to physical or mental illness.
1.5 "DISABILITY" means the Executive's absence from the
full-time performance of the Executive's duties with the Company for 180
consecutive calendar days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Executive or the Executive's
legal representative.
2. TERM OF AGREEMENT. This Agreement, and all rights and obligations of
the parties hereunder, shall take effect upon the Effective Date and shall
expire upon the first to occur of (a) the expiration of the Term (as defined
below) if a Change in Control has not occurred during the Term, (b) the date 24
months after the Change in Control Date, if the Executive is still employed by
the Company as of such later date, or (c) the fulfillment by the Company of all
of its obligations under Sections 4 and 5.2 and 5.3 if the Executive's
employment with the Company terminates within 24 months following the Change in
Control Date. "Term" shall mean the period commencing as of the Effective Date
and continuing in effect through March 31, 2001; PROVIDED, however, that
commencing on April 1, 2001 and each April 1 thereafter, the Term shall be
automatically extended for one additional year unless, not later than 90 days
prior to the scheduled expiration of the Term (or any extension thereof), the
Company shall have given the Executive written notice that the Term will not be
extended.
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3. EMPLOYMENT STATUS; TERMINATION FOLLOWING CHANGE IN CONTROL.
3.1 NOT AN EMPLOYMENT CONTRACT. The Executive acknowledges
that this Agreement does not constitute a contract of employment or impose on
the Company any obligation to retain the Executive as an employee and that this
Agreement does not prevent the Executive from terminating employment at any
time. If the Executive's employment with the Company terminates for any reason
and subsequently a Change in Control shall occur, the Executive shall not be
entitled to any benefits hereunder except as otherwise provided pursuant to
Section 1.2.
3.2 TERMINATION OF EMPLOYMENT.
(a) If the Change in Control Date occurs during
the Term, any termination of the Executive's employment by the Company or by the
Executive within 24 months following the Change in Control Date (other than due
to the death of the Executive) shall be communicated by a written notice to the
other party hereto (the "Notice of Termination"), given in accordance with
Section 7. Any Notice of Termination shall: (i) indicate the specific
termination provision (if any) of this Agreement relied upon by the party giving
such notice, (ii) to the extent applicable, set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) specify the
Date of Termination (as defined below). The effective date of an employment
termination (the "Date of Termination") shall be the close of business on the
date specified in the Notice of Termination (which date may not be less than 15
days or more than 120 days after the date of delivery of such Notice of
Termination), in the case of a termination other than one due to the Executive's
death, or the date of the Executive's death, as the case may be.
(b) The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive
or the Company, respectively, hereunder or preclude the Executive or the
Company, respectively, from asserting any such fact or circumstance in
enforcing the Executive's or the Company's right hereunder.
(c) Any Notice of Termination for Cause given
by the Company must be given within 90 days of the occurrence of the event(s) or
circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination
for Cause being given (and
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prior to any termination for Cause being effective), the Executive shall be
entitled to a hearing before the Board of Directors of the Company at which he
may, at his election, be represented by counsel and at which he shall have a
reasonable opportunity to be heard. Such hearing shall be held on not less than
15 days prior written notice to the Executive stating the Board of Directors'
intention to terminate the Executive for Cause and stating in detail the
particular event(s) or circumstance(s) which the Board of Directors believes
constitutes Cause for termination. Any such Notice of Termination for Cause must
be approved by an affirmative vote of two-thirds of the members of the Board of
Directors.
(d) Any Notice of Termination for Good Reason
given by the Executive must be given within 90 days of the occurrence of the
event(s) or circumstance(s) which constitute(s) Good Reason.
4. BENEFITS TO EXECUTIVE.
4.1 STOCK ACCELERATION. If the Change in Control Date occurs
during the Term, then, effective upon the Change in Control Date, (a) each
outstanding option to purchase shares of Common Stock of the Company held by the
Executive, not otherwise fully exercisable or automatically exercisable in full
upon a Change in Control, shall become immediately exercisable in full, (b) each
outstanding restricted stock award shall be deemed to be fully vested and no
longer subject to a right of repurchase by the Company and (c) notwithstanding
any provision in any applicable option agreement to the contrary, each such
option shall continue to be exercisable by the Executive (to the extent such
option was exercisable on the Date of Termination) for a period of six months
following the Date of Termination.
4.2 COMPENSATION. If the Change in Control Date occurs during
the Term and the Executive's employment with the Company terminates within 24
months following the Change in Control Date, the Executive shall be entitled to
the following benefits:
(a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON.
If the Executive's employment with the Company is terminated by the Company
(other than for Cause, Disability or Death) or by the Executive for Good Reason
within 24 months following the Change in Control Date, then the Executive shall
be entitled to the following benefits:
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(i) the Company shall pay to the
Executive in a lump sum in cash within 30 days after the Date of Termination the
aggregate of the following amounts:
(1) the sum of (A) the Executive's base
salary through the Date of Termination, (B) the product of (x) the annual
bonus paid or payable (including any bonus or portion thereof which has
been earned but deferred) for the most recently completed fiscal year and
(y) a fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of which is 365
and (C) the amount of any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation or compensatory time off pay, in each case to the extent not previously
paid (the sum of the amounts described in clauses (A), (B), and (C) shall be
hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to (A) two
and one-half multiplied by (B) the sum of (x) the Executive's highest annual
base salary from the Company during the five-year period prior to the Change in
Control Date and (y) the Executive's highest annual bonus from the Company
during the five-year period prior to the Change in Control Date.
(ii) for 30 months after the Date of
Termination, or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Company shall continue to
provide benefits to the Executive and the Executive's family at least equal to
those which would have been provided to them if the Executive's employment had
not been terminated, in accordance with the applicable Benefit Plans in effect
on the Measurement Date or, if more favorable to the Executive and his family,
in effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies; PROVIDED, however, that if the
Executive becomes reemployed with another employer and is eligible to receive a
particular type of benefits (e.g., health insurance benefits) from such employer
on terms at least as favorable to the Executive and his family as those being
provided by the Company, then the Company shall no longer be required to provide
those particular benefits to the Executive and his family;
(iii) to the extent not previously paid or
provided, the Company shall timely pay or provide to the Executive outplacement
assistance commensurate with the Executive's position as well as any other
amounts or benefits
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required to be paid or provided or which the Executive is eligible to receive
following the Executive's termination of employment under any plan, program,
policy, practice, contract or agreement of the Company and its affiliated
companies (such other amounts and benefits shall be hereinafter referred to as
the "Other Benefits"); and
(iv) for purposes of determining eligibility
(but not the time of commencement of benefits) of the Executive for retiree
benefits to which the Executive is entitled, the Executive shall be considered
to have remained employed by the Company until 30 months after the Date of
Termination.
(b) RESIGNATION WITHOUT GOOD REASON; TERMINATION
FOR DEATH OR DISABILITY. If the Executive voluntarily terminates his employment
with the Company within 24 months following the Change in Control Date,
excluding a termination for Good Reason, or if the Executive's employment with
the Company is terminated by reason of the Executive's death or Disability
within 24 months following the Change in Control Date, then the Company shall
(i) pay the Executive (or his estate, if applicable), in a lump sum in cash
within 30 days after the Date of Termination, the Accrued Obligations and (ii)
timely pay or provide to the Executive the Other Benefits.
(c) TERMINATION FOR CAUSE. If the Company terminates
the Executive's employment with the Company for Cause within 24 months following
the Change in Control Date, then the Company shall (i) pay the Executive, in a
lump sum in cash within 30 days after the Date of Termination, the sum of (A)
the Executive's annual base salary through the Date of Termination and (B) the
amount of any compensation previously deferred by the Executive, in each case to
the extent not previously paid, and (ii) timely pay or provide to the Executive
the Other Benefits.
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4.3 TAXES.
(a) In the event that the Company undergoes a
"Change in Ownership or Control" (as defined below), the Company shall, within
30 days after each date on which the Executive becomes entitled to receive
(whether or not then due) a Contingent Compensation Payment (as defined below)
relating to such Change in Ownership or Control, determine and notify the
Executive (with reasonable detail regarding the basis for its determinations)
(i) which of the payments or benefits due to the Executive (under this Agreement
or otherwise) following such Change in Ownership or Control constitute
Contingent Compensation Payments, (ii) the amount, if any, of the excise tax
(the "Excise Tax") payable pursuant to Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), by the Executive with respect to such
Contingent Compensation Payment and (iii) the amount of the Gross-Up Payment (as
defined below) due to the Executive with respect to such Contingent Compensation
Payment. Within 30 days after delivery of such notice to the Executive, the
Executive shall deliver a response to the Company (the "Executive Response")
stating either (A) that he agrees with the Company's determination pursuant to
the preceding sentence or (B) that he disagrees with such determination, in
which case he shall indicate which payment and/or benefits should be
characterized as a Contingent Compensation Payment, the amount of the Excise Tax
with respect to such Contingent Compensation Payment and the amount of the
Gross-Up Payment due to the Executive with respect to such Contingent
Compensation Payment. The amount and characterization of any item in the
Executive Response shall be final; provided, however, that in the event that the
Executive fails to deliver an Executive Response on or before the required date,
the Company's initial determination shall be final. Within 90 days after the due
date of each Contingent Compensation Payment to the Executive, the Company shall
pay to the Executive, in cash, the Gross-Up Payment with respect to such
Contingent Compensation Payment, in the amount determined pursuant to this
Section 4.3(a).
(b) For purposes of this Section 4.3, the following
terms shall have the following respective meanings:
(i) "Change in Ownership or Control" shall mean
a change in the ownership or effective control of the Company or in
the ownership of a substantial portion of the assets of the Company determined
in accordance with Section 280G(b)(2) of the Code.
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(ii) "Contingent Compensation Payment" shall
mean any payment (or benefit) in the nature of compensation that is made or
supplied (under this Agreement or otherwise) to a "disqualified individual" (as
defined in Section 280G(c) of the Code) and that is contingent (within the
meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or
Control of the Company.
(iii) "Gross-Up Payment" shall mean an amount
equal to the sum of (i) the amount of the Excise Tax payable with respect
to a Contingent Compensation Payment and (ii) the amount necessary to pay all
additional taxes imposed on (or economically borne by) the Executive (including
the Excise Taxes, state and federal income taxes and all applicable withholding
taxes) attributable to the receipt of such Gross-Up Payment. For purposes of the
preceding sentence, all taxes attributable to the receipt of the Gross-Up
Payment shall be computed assuming the application of the maximum tax rates
provided by law.
4.4 MITIGATION. The Executive shall not be required to
mitigate the amount of any payment or benefits provided for in this Section 4 by
seeking other employment or otherwise. Further, except as provided in Section
4.2(a)(ii), the amount of any payment or benefits provided for in this Section 4
shall not be reduced by any compensation earned by the Executive as a result of
employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
5. DISPUTES.
5.1 SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the
Executive for benefits under this Agreement shall be directed to and determined
by the Board of Directors of the Company and shall be in writing. Any denial by
the Board of Directors of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board of Directors shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim. Any further dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively
by arbitration in Boston, Massachusetts, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
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5.2 EXPENSES. The Company agrees to pay as incurred, to the
full extent permitted by law, all legal, accounting and other fees and expenses
which the Executive may reasonably incur as a result of any claim or contest
(regardless of the outcome thereof) by the Company, the Executive or others
regarding the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive regarding the amount of any payment or benefits
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Code.
5.3 COMPENSATION DURING A DISPUTE. If the Change in Control
Date occurs during the Term and the Executive's employment with the Company
terminates within 24 months following the Change in Control Date, and the right
of the Executive to receive benefits under Section 4 (or the amount or nature of
the benefits to which [he is entitled to receive) are the subject of a dispute
between the Company and the Executive, the Company shall continue (a) to pay to
the Executive his base salary in effect as of the Measurement Date and (b) to
provide benefits to the Executive and the Executive's family at least equal to
those which would have been provided to them, if the Executive's employment had
not been terminated, in accordance with the applicable Benefit Plans in effect
on the Measurement Date, until such dispute is resolved either by mutual written
agreement of the parties or by an arbitrator's award pursuant to Section 5.1.
Following the resolution of such dispute, the sum of the payments made to the
Executive under clause (a) of this Section 5.3 shall be deducted from any cash
payment which the Executive is entitled to receive pursuant to Section 4; and if
such sum exceeds the amount of the cash payment which the Executive is entitled
to receive pursuant to Section 4, the excess of such sum over the amount of such
payment shall be repaid (without interest) by the Executive to the Company
within 60 days of the resolution of such dispute.
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6. SUCCESSORS.
6.1 SUCCESSOR TO COMPANY. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company
expressly to assume and agree to perform this Agreement to the same extent that
the Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain an assumption of this Agreement at or
prior to the effectiveness of any succession shall be a breach of this Agreement
and shall constitute Good Reason if the Executive elects to terminate
employment, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
defined above and any successor to its business or assets as aforesaid which
assumes and agrees to perform this Agreement, by operation of law or otherwise.
6.2 SUCCESSOR TO EXECUTIVE. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amount would still
be payable to the Executive or his family hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Executive's estate.
7. NOTICE. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable
nationwide overnight courier service, in each case addressed to the Company, at
7 Lopez Road, Wilmington, Massachusetts 01887, and to the Executive at 104
Granville Ave., Malden, MA 02148 (or to such other address as either the Company
or the Executive may have furnished to the other in writing in accordance
herewith). Any such notice, instruction or communication shall be deemed to have
been delivered five business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service. Either party may give
any notice, instruction or other communication hereunder using any other means,
but no such notice, instruction or other communication shall be deemed to
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have been duly delivered unless and until it actually is received by the party
for whom it is intended.
8. MISCELLANEOUS.
8.1 EMPLOYMENT BY SUBSIDIARY. For purposes of this Agreement, the
Executive's employment with the Company shall not be deemed to have
terminated solely as a result of the Executive continuing to be employed by a
wholly-owned subsidiary of the Company.
8.2 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
8.3 INJUNCTIVE RELIEF. The Company and the Executive agree that
any breach of this Agreement by the Company is likely to cause the Executive
substantial and irrevocable damage and therefore, in the event of any such
breach, in addition to such other remedies which may be available, the
Executive shall have the right to specific performance and injunctive relief.
8.4 GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal laws of the
Commonwealth of Massachusetts, without regard to conflicts of law principles.
8.5 WAIVERS. No waiver by the Executive at any time of any breach
of, or compliance with, any provision of this Agreement to be performed by
the Company shall be deemed a waiver of that or any other provision at any
subsequent time.
8.6 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but both of which
together shall constitute one and the same instrument.
8.7 TAX WITHHOLDING. Any payments provided for hereunder shall be
paid net of any applicable tax withholding required under federal, state or
local law.
8.8 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations
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or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and cancelled.
8.9 AMENDMENTS. This Agreement may be amended or modified only
by a written instrument executed by both the Company and the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
CENTENNIAL TECHNOLOGIES, INC.
By:
--------------------------------
Title:
-----------------------------
-----------------------------------
[Mary A. Gallahan]
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Exhibit 10.3
INCENTIVE STOCK OPTION AGREEMENT
GRANTED UNDER 1994 STOCK OPTION PLAN
Date
Name & Address
Dear __________:
I am pleased to advise you that the Compensation Committee of the Board
of Directors of Centennial Technologies, Inc. (the "Company"), pursuant to the
terms and conditions of the Company's 1994 Stock Option Plan (the "Plan"), which
are incorporated herein by reference, has awarded you the following stock
option:
Number of Option Shares: _____
Exercise Price per Share: $ _____
Date of Grant: Date
Vesting: In increments of
one-third annually commencing on
1 year from date of Grant
Final Exercise Date: 10 years from date of Grant
The Company has awarded you this stock option to encourage your efforts
at helping the Company to grow and succeed. Regardless of your decision whether
or not to buy, you are requested to keep the number of shares that you are
eligible to purchase strictly confidential.
The following terms and conditions are applicable with respect to this
option agreement, and your signature below shall constitute your acknowledgment
and acceptance of same.
<PAGE>
1. GRANT OF OPTION.
This agreement evidences the grant by the Company, on ______________
(the "Grant Date") to you (the "Participant"), of an option to purchase, in
whole or in part, on the terms provided herein and in the Company's 1994 Stock
Option Plan, as amended (the "Plan"), a total number of shares (the "Shares") of
common stock, $.01 par value per share, of the Company ("Common Stock") at
$_____ per Share (the option grant(s) set forth above shall be referred to
herein as a "Option"). Unless earlier terminated, this option shall expire on
the date set forth above (the "Final Exercise Date").
It is intended that the option evidenced by this agreement shall be an
incentive stock option as defined in Section 422 of the Internal Revenue Code of
1986, as amended and any regulations promulgated thereunder (the "Code"). Except
as otherwise indicated by the context, the term "Participant," as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. VESTING SCHEDULE.
This Option will become exercisable ("vest") as to 33 1/3% of the
original number of Shares on the first anniversary of the Grant Date applicable
to such option and as to an additional 33 1/3% of the original number of Shares
upon each of the following two anniversaries of such Grant Date, respectively.
The right of exercise shall be cumulative so that to the extent an
Option is not exercised in any period to the maximum extent permissible it shall
continue to be exercisable, in whole or in part, with respect to all shares for
which it is vested until the earlier of the Final Exercise Date applicable to
such option or the termination of such option under Section 3 hereof or the
Plan.
3. EXERCISE OF OPTION.
(a) FORM OF EXERCISE. Each election to exercise this option shall be in
writing, signed by the Participant, and received by the Company at its principal
office, accompanied by this agreement, and payment in full in the manner
provided in the Plan. The Participant may purchase less than the number of
shares covered hereby, provided that no partial exercise of this option may be
for any fractional share or for fewer than one hundred (100) whole shares.
(b) CONTINUOUS RELATIONSHIP WITH THE COMPANY REQUIRED. Except as
otherwise provided in this Section 3, this option may not be exercised unless
the Participant, at the time he or she exercises this option, is, and has been
at all times since
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the Grant Date, an employee, officer or employee director of, the Company or any
parent or subsidiary of the Company as defined in Section 424(e) or (f) of the
Code (an "Eligible Participant").
(c) TERMINATION OF RELATIONSHIP WITH THE COMPANY. If the Participant
ceases to be an Eligible Participant for any reason, then, except as provided in
paragraphs (d) and (e) below, the right to exercise this option shall terminate
three months after such cessation (but in no event after the Final Exercise
Date), PROVIDED THAT this option shall be exercisable only to the extent that
the Participant was entitled to exercise this option on the date of such
cessation. Notwithstanding the foregoing, if the Participant, prior to the Final
Exercise Date, violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or other
agreement between the Participant and the Company, the right to exercise this
option shall terminate immediately upon written notice to the Participant from
the Company describing such violation.
(d) EXERCISE PERIOD UPON DEATH OR DISABILITY. If the Participant dies
or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior
to the Final Exercise Date while he or she is an Eligible Participant and the
Company has not terminated such relationship for "cause" as specified in
paragraph (e) below, this option shall be exercisable, within the period of one
year following the date of death or disability of the Participant by the
Participant, PROVIDED THAT this option shall be exercisable only to the extent
that this option was exercisable by the Participant on the date of his or her
death or disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) DISCHARGE FOR CAUSE. If the Participant, prior to the Final
Exercise Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the effective
date of such discharge. "Cause" shall mean willful misconduct by the Participant
or willful failure by the Participant to perform his or her responsibilities to
the Company (including, without limitation, breach by the Participant of any
provision of any employment, consulting, advisory, nondisclosure,
non-competition or other similar agreement between the Participant and the
Company), as determined by the Company, which determination shall be conclusive.
The Participant shall be considered to have been discharged for "Cause" if the
Company determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
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4. WITHHOLDING.
No Shares will be issued pursuant to the exercise of this option unless
and until the Participant pays to the Company, or makes provision satisfactory
to the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option.
5. NONTRANSFERABILITY OF OPTION.
This option may not be transferred otherwise than by will or the laws
of descent and distribution, and, during the lifetime of the Participant, this
option shall be exercisable only by the Participant.
6. DISQUALIFYING DISPOSITION.
If the Participant disposes of Shares acquired upon exercise of this
option within two years from the Grant Date or one year after such Shares were
acquired pursuant to exercise of this option, the Participant shall immediately
notify the Company in writing of such disposition. If the Participant has died
before Shares are sold, the above holding restrictions and notice requirement do
not apply.
7. STOCK SPLITS.
The shares of Common Stock underlying this option or these options and
the exercise price therefor shall be appropriately adjusted from time to time
for stock splits, reverse splits and stock dividends.
8. ACQUISITION AND CHANGE IN CONTROL EVENTS
(a) DEFINITIONS
(i) An "Acquisition Event" shall mean:
(A) any merger or consolidation of the Company
with or into another entity as a result of
which the Common Stock is converted into or
exchanged for the right to receive cash,
securities or other property; or
(B) any exchange of shares of the Company for
cash, securities or other property pursuant
to a statutory share exchange transaction.
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(ii) A "Change in Control Event" shall mean:
the consummation of a merger, consolidation,
reorganization, recapitalization or statutory share
exchange involving the Company or a sale or other
disposition of all or substantially all of the assets
of the Company (a "Business Combination"), unless,
immediately following such Business Combination, all
or substantially all of the individuals and entities
who were the beneficial owners of the
then-outstanding shares of Common Stock, (the
"Outstanding Company Common Stock") and the
then-outstanding Securities of the Company entitled
to vote generally on the election of directors (the
"Outstanding Company Voting Securities") immediately
prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of the
then-outstanding shares of common stock and the
combined voting power of the then-outstanding
securities entitled to vote generally in the election
of directors, respectively, of the resulting or
acquiring corporation in such Business Combination
(which shall include, without limitation, a
corporation which as a result of such transaction
owns the Company or substantially all of the
Company's assets either directly or through one or
more subsidiaries) (such resulting or acquiring
corporation is referred to herein as the "Acquiring
Corporation") in substantially the same proportions
as their ownership of the Outstanding Company Common
Stock and Outstanding Company Voting Securities,
respectively, immediately prior to such Business
Combination.
(b) EFFECT ON OPTIONS
(i) ACQUISITION EVENT. Upon the occurrence of an
Acquisition Event (regardless of whether such event
also constitutes a Change in Control Event), or the
execution by the Company of any agreement with
respect to an Acquisition Event (regardless of
whether such event will result in a Change in Control
Event), the Board shall provide that all outstanding
Options shall be assumed, or equivalent options shall
be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof); PROVIDED THAT
if such Acquisition Event also constitutes a Change
in Control Event, such assumed or substituted options
shall be immediately exercisable in full upon the
occurrence of such Acquisition Event.
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Notwithstanding the foregoing, if the acquiring or
succeeding corporation (or an affiliate thereof) does
not agree to assume, or substitute for, such Options,
then the Board shall, upon written notice to the
Participants, provide that all then unexercised
Options will become exercisable in full as of a
specified time prior to the Acquisition Event and
will terminate immediately prior to the consummation
of such Acquisition Event, except to the extent
exercised by the Participants before the consummation
of such Acquisition Event.
(ii) CHANGE IN CONTROL EVENT THAT IS NOT AN ACQUISITION
EVENT. Upon the occurrence of a Change in Control
Event that does not also constitute an Acquisition
Event, all Options then-outstanding shall
automatically become immediately exercisable in full.
9. PROVISIONS OF THE PLAN.
This Option is subject to the provisions of the Plan, a copy of which
is furnished to the Participant with this option.
This opportunity to purchase stock in the Company is being offered
because of the Company's desire to reward continuing service. However, it is not
and should not be construed as a guarantee of continuing employment.
Furthermore, exercising options may not be a prudent business decision for some
employees. Therefore, we urge you to review this opportunity carefully, consult
a tax advisor, and make a decision to exercise options only if your personal
financial situation makes this a wise decision.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this option to be executed
under its corporate seal by its duly authorized officer. This option shall take
effect as a sealed instrument on the date first set forth above.
CENTENNIAL TECHNOLOGIES, INC.
By:
-----------------------
Name: Richard J. Pulsifer
Title: Chief Financial Officer
I hereby accept the foregoing option(s)
and agree to the terms and conditions
thereof.
- ---------------------------------------
Name
Address:
------------------------------
- ---------------------------------------
7
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<PAGE>
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<S> <C>
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<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-25-1999
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0
0
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<EPS-BASIC> .76
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</TABLE>
