-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OUWufr+RrUwnd/QmlxK8nKPTXEMEMOVA1PTpcEdQIodcSoN7Rc1EF1TNTMBdTUl0 7Yxd5t+/3ObYDC+QbdApBQ== 0000912057-00-004507.txt : 20000209 0000912057-00-004507.hdr.sgml : 20000209 ACCESSION NUMBER: 0000912057-00-004507 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991225 FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000919006 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042978400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12912 FILM NUMBER: 527316 BUSINESS ADDRESS: STREET 1: 7 LOPEZ ROAD CITY: WILMINGTON STATE: MA ZIP: 01887 BUSINESS PHONE: 9789888848 MAIL ADDRESS: STREET 1: 7 LOPEZ ROAD CITY: WILMINGTON STATE: MA ZIP: 01887 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q ---------------------- [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 ------------------------ 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. CENTENNIAL TECHNOLOGIES, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NUMBER 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
2 PART I ITEM 1. FINANCIAL STATEMENTS CENTENNIAL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
DECEMBER 25, MARCH 31, 1999 1999 ---- ---- (UNAUDITED) 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) --------- --------- Total stockholders' equity........................................................ 13,513 11,696 --------- --------- Total liabilities and stockholders' equity........................................ $ 21,982 $ 18,804 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 CENTENNIAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26, 1999 1998 1999 1998 ---- ---- ---- ---- 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
The accompanying notes are an integral part of the consolidated financial statements. 4 CENTENNIAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED -------------------------------- DECEMBER 25, DECEMBER 26, 1999 1998 ---- ---- 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) ------------ ----------- 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 $ -- =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 5 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 6 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.
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------- ------------------------------- DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26, 1999 1998 1999 1998 ---- ---- ---- ---- 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 ======== ======== ======== ========
7 4. INVENTORIES Inventories consisted of (in thousands):
DECEMBER 25, MARCH 31, 1999 1999 ---- ---- Raw material, primarily electronic components....... $ 3,376 $ 1,709 Work in process..................................... 900 399 Finished goods...................................... 532 941 ------- ------- $ 4,808 $ 3,049 ======= =======
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 8 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 9 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 10 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 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:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26, 1999 1998 1999 1998 ---- ---- ---- ---- 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% ========= ========= ========= =========
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 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 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 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 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 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: - - 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
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 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: - - 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
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: - - 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
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. 18 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. 19 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. 20 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 21 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 22 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. 23 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 24 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 25 EX-3.1 2 EXHIBIT 3.1 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 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 2 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 3 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 4 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, 5 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 6 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. 7 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. [Remainder of this page intentionally left blank.] 8 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 9 EX-10.1 3 EXHIBIT 10.1 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. 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. 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 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 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. 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. EX-10.2 4 EXHIBIT 10.2 Exhibit 10.2 CENTENNIAL TECHNOLOGIES, INC. EXECUTIVE RETENTION AGREEMENT MARY A. GALLAHAN 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 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 (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 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 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 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. 7 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 8 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: 9 (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 10 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. 11 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. 12 (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. 13 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. 14 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 15 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 16 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] 17 EX-10.3 5 EXHIBIT 10.3 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. 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 2 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. 3 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. 4 (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. 5 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 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 EX-27 6 EXHIBIT 27
5 1,000 9-MOS MAR-31-2000 APR-01-1999 DEC-25-1999 5,193 2,254 4,385 0 4,808 17,015 4,755 1,981 21,982 7,609 0 0 0 32 13,481 21,982 22,881 22,881 14,902 14,902 6,395 0 0 2,448 43 2,405 0 0 0 2,405 .76 .75
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