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 ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 26, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . ------ -------- COMMISSION FILE NUMBER 1-12912 ------------------------ CENTENNIAL TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 04-2978400 (State Or Other Jurisdiction (I.R.S. Employer Of Incorporation Or Organization) Identification Number) 7 LOPEZ ROAD, WILMINGTON, MASSACHUSETTS 01887 (Address of Principal Executive Offices) (Zip Code) (978) 988-8848 (Registrant's Telephone Number, Including Area Code) -------------------- INDICATE BY CHECK MARK WHETHER THE 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 August 4, 1999, there were 3,161,229 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the registrant outstanding. 1 CENTENNIAL TECHNOLOGIES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NUMBER ----------- Item 1. Financial Statements 3 Consolidated Balance Sheets at June 26, 1999 and March 31, 1999 3 Consolidated Statements of Income for three months ended 4 June 26, 1999 and June 27, 1998 Consolidated Statements of Cash Flows for three months ended 5 June 26, 1999 and June 27, 1998 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 23 2 PART I ITEM 1. FINANCIAL STATEMENTS CENTENNIAL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) June 26, March 31, 1999 1999 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................................................$ 1,220 $ 4,922 Short-term investments....................................................... 5,385 2,500 Trade accounts receivable, net............................................... 3,877 3,726 Recoverable income taxes..................................................... 125 125 Inventories.................................................................. 3,008 3,049 Other current assets......................................................... 273 231 ---------- --------- Total current assets.............................................................. 13,888 14,553 Equipment and leasehold improvements.............................................. 4,477 3,967 Less: accumulated depreciation and amortization.............................. (1,777) (1,508) ----------- ---------- 2,700 2,459 Other assets...................................................................... 90 92 Investment in former affiliate.................................................... 1,700 1,700 ---------- --------- Total assets......................................................................$ 18,378 $ 18,804 ---------- --------- ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........................................$ 6,106 $ 7,072 Current portion of obligations under capital................................. 82 36 ---------- --------- Total current liabilities......................................................... 6,188 7,108 Long-term obligations under capital leases........................................ 273 -- Contingencies (Note 7) Stockholders' equity: Preferred Stock, $.01 par value; 1,000,000 shares authorized, none issued...................................................... -- -- Common Stock, $.01 par value; 50,000,000 shares authorized, 3,167,000 issued and outstanding at June 26, 1999 and 2,569,000 issued and outstanding at March 31, 1999................................................... 205 205 Additional paid-in capital........................................................ 84,205 84,200 Accumulated deficit............................................................... (72,466) (72,697) Accumulated other comprehensive income............................................ (27) (12) ----------- ---------- Total stockholders' equity........................................................ 11,917 11,696 ---------- --------- Total liabilities and stockholders' equity........................................$ 18,378 $ 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 ------------------ June 26, June 27, 1999 1998 ---- ---- Net sales.............................................. $ 6,681 $ 6,235 Cost of goods sold .................................... 4,556 4,590 ----------- ----------- Gross profit................................... 2,125 1,645 Operating expenses: Engineering, research and development............. 145 202 Selling, general and administrative expenses...... 1,844 1,408 ----------- ----------- Operating income............................. 136 35 Other income, net...................................... 38 -- Net interest income.................................... 67 64 ----------- ----------- Income before taxes.......................... 241 99 Income taxes........................................... 10 -- ----------- ----------- Net income................................... $ 231 $ 99 ----------- ----------- ----------- ----------- Net income per share -- basic........................... $ .07 $ .04 Net income per share -- diluted......................... $ .07 $ .04 Weighted average shares outstanding -- basic............ 3,167 2,312 Weighted average shares outstanding -- diluted........... 3,426 2,446 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) Three Months Ended -------------------------------- June 26, June 27, 1999 1998 ---- ---- Cash flows from operating activities: Net income.............................................. $ 231 $ 99 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization........................... 269 264 Provision for loss on accounts receivable............... -- ( 22) Provision for loss on inventory......................... ( 145) ( 279) Change in operating assets and liabilities: Accounts receivable................................ ( 151) ( 169) Inventories........................................ 186 882 Other assets....................................... ( 40) 508 Income taxes payable............................... 10 -- Accounts payable and accrued expenses.............. ( 976) (1,488) ------------ ------------ Net cash used in operating activities.............. ( 616) ( 205) Cash flows from investing activities: Capital expenditures.................................... ( 150) ( 113) Purchase of short-term investments...................... (2,885) -- Investment in former affiliates......................... -- 6 ----------- ----------- Net cash used in investing activities.............. (3,035) ( 107) Cash flows from financing activities: Payments on equipment lease financing................... ( 41) ( 20) Foreign currency translation of equity investment....... ( 10) -- ------------ ----------- Net cash used in financing activities.............. ( 51) ( 20) ------------ ----------- Net decrease in cash and cash equivalents.................... (3,702) ( 332) Cash and cash equivalents at beginning of period............. 4,922 5,358 ----------- ----------- Cash and cash equivalents at end of period................... $ 1,220 $ 5,026 ------------ ----------- ------------ ----------- Supplemental disclosure of cash flow information: Acquisition of equipment through capital lease $ 360 $ -- transaction............................................... ------------ ----------- ------------ ----------- 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 ownership interests range from 20 to 50 percent and 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 period 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 June 26, 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 maintains allowances for anticipated losses. At June 26, 1999 and March 31, 1999, the allowance for doubtful accounts was $700,000 and $795,000, respectively. 6 For the three months ended June 26, 1999, two customers represented 23% of the Company's sales. For the first quarter of the prior year another customer represented 32% of the Company's sales. For the quarter ended June 26, 1999 sales to this customer represented 5% 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 first quarter of fiscal 2000 and fiscal 1999 represented 15% and 3%, respectively, of the Company's 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. Approximately 17% and 9% of the Company's sales for the three months ended June 26, 1999 and June 27, 1998, respectively, were outside the United States, primarily in several Western European countries. No one country comprised more than 10% of the Company's sales. 3. EARNINGS PER SHARE The Company computes basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share," which the Company adopted as of March 31, 1998. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. Diluted earnings per share is similar to fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to FASB 128 requirements and the accounting rules set forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange Commission on February 3, 1998. On July 20, 1999, the Company's shareholders approved a one-for-eight reverse stock split 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 stock market on July 23, 1999. The following table sets forth the computation of earnings 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 THREE MONTHS ENDED JUNE 26, ENDED JUNE 27, 1999 1998 ---- ---- (UNAUDITED) (UNAUDITED) BASIC EARNINGS PER SHARE Numerator Net earnings $ 231 $ 99 Denominator Common shares outstanding 3,167 2,312 ------ ------ Basic earnings per share $ .07 $ .04 ------ ------ ------ ------ DILUTED EARNINGS PER SHARE Numerator Net earnings $ 231 $ 99 Denominator Common shares outstanding 3,167 2,312 Stock options 259 134 ------ ------ Shares used in computing diluted earnings per share 3,426 2,446 ------ ------ Diluted earnings per share $ .07 $ .04 ------ ------ ------ ------ 7 4. INVENTORIES Inventories consisted of (in thousands): JUNE 26, MARCH 31, 1999 1999 --------- -------- Raw material, primarily electronic components....... $ 1,745 $ 1,709 Work in process..................................... 320 399 Finished goods...................................... 943 941 --------- -------- $ 3,008 $ 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 a portion of the Custom Inventory during fiscal 1999, and sold the remaining portions of the Custom Inventory during the three months ended June 26, 1999 for approximately $.8 million, which has 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 7%, non-diluted, of Century's outstanding shares, is non-voting, has no dividend, and has a liquidation preference of $4 million senior to the common shareholders and subordinate to the holders of Century Series A Convertible Preferred Stock. The Company recorded a loss on investment activities of $5.1 million in the third quarter of fiscal 1998 to reflect the difference between the fair value of the consideration received from Century and the carrying value of the Company's investment in Century. During 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. 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, the most restrictive of which is 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 June 26, 1999 and March 31, 1999 the Company had no outstanding borrowings under these credit facilities. LEASES In April, 1999, the Company entered into a five year lease for a new piece of manufacturing equipment. Monthly payments under this lease of $6,318 commenced in April 1999. 8 7. CONTINGENCIES CLASS ACTION LITIGATION. Since the Company's announcement on February 11, 1997 that it was undertaking an inquiry into the accuracy of its prior reported financial results, and that preliminary information had raised questions as to whether reported results contained material misstatements, approximately 35 purported class action lawsuits were filed in or transferred to the United States District Court for the District of Massachusetts. These complaints asserted claims against the Company under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder, and related state law claims of fraud, deceit and negligent misrepresentation. The complaints also asserted claims against some or all of the Company's Board of Directors, and some complaints asserted claims against certain of the Company's nondirector officers, under Section 20(a) of the 1934 Act, as well as the same state law claims asserted against the Company. The Company's former independent accountants, Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), the Company's lead underwriter for its March 1996 subsequent public offering, Needham & Company, Inc., and a financial advisory subscription company, Cabot Heritage Corporation, were also named in some of the suits. These class action lawsuits were purportedly brought by and on behalf of purchasers of the Company's Common Stock between the Company's initial public offering on April 12, 1994 and February 10, 1997 (the "Centennial Securities Litigation"). On and after February 26, 1997, four complaints were filed in the United States District Court for the District of Massachusetts by plaintiffs purporting to represent classes of shareholders who purchased the Company's Common Stock on February 25, 1997. The complaint also named the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and alleged violations of Sections 10(b) and 20(a) of the 1934 Act (the "February 25 Securities Litigation"). On January 13, 1998, a plaintiff purporting to represent classes of shareholders who purchased the Company's Common Stock on February 27, 1997 filed a complaint in the United States District Court for the District of Massachusetts. The Complaint also named the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and Mr. Ramaekers' employer, Jay Alix & Co., and alleged violations of Sections 10(b) and 20(a) of the 1934 Act (the "February 27 Securities Litigation"). On February 9, 1998, a consolidated amended complaint combining the Centennial Securities Litigation, the February 25 Securities Litigation, the February 27 Securities Litigation and the Derivative Litigation was filed in the United States District Court for the District of Massachusetts (the "Consolidated Litigation"). Also on February 9, 1998, the Company and lead counsel representing the plaintiffs in the Consolidated Litigation filed a Stipulation of Settlement (the "Settlement Agreement"), whereby the Company and certain of its officers and directors would be released from liability arising from the allegations included in the Consolidated Litigation. In return, the Company agreed to pay the plaintiffs in the Consolidated Litigation $1.475 million in cash and to issue to these plaintiffs 37% of the Company's Common Stock. The Company also agreed to adopt certain corporate governance policies and procedures. The Court granted final approval of the Settlement Agreement of the Consolidated Litigation on April 29, 1998 and 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 issuable 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 opted not to participate in the Settlement Agreement. No assurance can be given that claims by class members who declined to participate in the Settlement Agreement will not have a material adverse effect on the Company's business, financial condition and results of operations. The plaintiffs in the Consolidated Litigation have not yet reached an agreement with the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, regarding their alleged claims against him. The plaintiffs have agreed to release the Company from any direct liability related to those alleged claims. In the agreement under which Mr. Ramaekers provided services to the Company, the Company agreed to provide Mr. Ramaekers with the same indemnification as is applicable to other officers of the Company pursuant to the Company's By-Laws. The Company has agreed to indemnify, hold harmless, and defend Mr. Ramaekers from and against certain claims arising out of his engagement with the Company. The plaintiffs also retained their claims against the Company's former President and Chief Executive Officer, Emanuel Pinez; the Company's former Chief Financial Officer, James M. Murphy; the Company's former independent accountants, Coopers & Lybrand; and others. On February 20, 1997, the Company received a subpoena from the United States Department of Justice ("DOJ") to produce documents in connection with a grand jury investigation regarding various irregularities in the Company's previous press releases and financial statements. The DOJ also requested certain information regarding some of the Company's former officers, certain stock 9 transactions by Mr. Pinez, and correspondence with the Company's auditors. The DOJ has subsequently subpoenaed additional Company records and files. The Company has not been notified by the DOJ that it is a target or subject of this investigation. In mid-February 1997, the Company was notified that the Boston District Office of the Securities and Exchange Commission ("SEC") was conducting an investigation of the Company. The SEC has requested that the Company provide the SEC with certain documents concerning the Company's public reports and financial statements. The SEC indicated that its inquiry should not be construed as an indication by the SEC or its staff that any violations have occurred, or as a reflection upon the merits of the securities involved or upon any person who effected transactions in such securities. The Company is cooperating with the SEC in connection with this investigation, the outcome of which cannot yet be determined. On and after March 26, 1997, several complaints were filed in the United States District Court for the District of Massachusetts by plaintiffs purporting to represent classes of shareholders who purchased stock of WebSecure, Inc. ("WebSecure") between December 5, 1996 and February 27, 1997 (the "WebSecure Complaints"). The WebSecure Complaints assert claims against WebSecure, certain officers, directors and underwriters of WebSecure, and the Company. Claims against the Company include alleged violations of Sections 11 and 15 of the Securities Act of 1933 (the "1933 Act") (the "WebSecure Securities Litigation"). In fiscal 1997 the Company recorded a reserve of $1.2 million in connection with the expected settlement of the WebSecure Securities Litigation. On November 13, 1998, the Company reached an agreement to settle the WebSecure Securities Litigation. The settlement agreement contemplates that the Company and certain of its officers and directors would be released from any and all liability arising from the allegations included in the WebSecure Securities Litigation in return for the issuance to the WebSecure Securities Litigation class of 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. The form of the settlement agreement has been approved preliminarily by the Court, and notice to class members of the proposed settlement will be provided. Thereafter, the Court will rule on any objections to the settlement agreement and determine whether it should be finally approved. If a sufficiently large number of class members opt not to participate in the settlement agreement, the agreement may by withdrawn. No assurance can be given that the Court will approve the settlement agreement, or that, if such approval is obtained, that a material number of class members will not decline to participate in the settlement. 8. 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 translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Comprehensive loss is comprised of cumulative translation adjustments and was $15,000 and $0 for the three months ended June 26, 1999 and June 27, 1998, respectively. 9. SEGEMENTS 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. 10 CENTENNIAL TECHNOLOGIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 "Risk Factors", and (iii) identified from time to time in the Company's filings with the Securities and Exchange Commission including those set forth in the Company's Annual Report on Form 10-K for the fiscal 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. 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 ------------------ JUNE 26, JUNE 27, 1999 1998 ---- ---- Net sales......................................... 100.0% 100.0% Cost of goods sold................................ 68.2 73.6 ----------- ----------- Gross profit................................... 31.8 26.4 Operating expenses: Engineering, research and development costs..... 2.2 3.2 Selling, general and administrative expenses.... 27.6 22.6 ----------- ----------- Operating income ............................ 2.0 .6 Other income, net................................. .6 -- Net interest income............................... 1.0 1.0 ----------- ----------- Income before taxes.......................... 3.6 1.6 Income taxes...................................... .1 -- ----------- ----------- Net income................................... 3.5% 1.6% ----------- ----------- ----------- ----------- 11 QUARTER ENDED JUNE 26, 1999 AND JUNE 27, 1998 NET SALES. Net sales increased 7% to $6.7 million in the quarter ended June 26, 1999 compared to $6.2 million in the same period a year ago. The increase in sales was primarily due to a 25% increase in the volume of PC cards sold in fiscal 2000 as compared to fiscal 1999 partially offset by a 14% decline in the average selling price of the Company's products during the same period. Decreasing component costs between periods and competitive pricing pressures contributed to the decrease in the average selling price of the Company's products. The Company expects component costs to increase for the remainder of fiscal 2000, which the Company believes should reverse the downward trend in its average selling price. There can be no assurance that if component costs rise the Company will be able to increase its average selling price or that competitive pricing pressures will not adversely affect the average selling price. The Company believes there may be 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. For the three months ended June 26, 1999, two customers represented 23% of the Company's sales. For the same period of the prior year another customer represented 32% of sales. For the quarter ended June 26, 1999 sales to this customer represented 5% 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 first quarter of fiscal 2000 and fiscal 1999 represented 15% and 3%, respectively, of the Company's 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. Sales outside of the United States represented 17% and 9% of sales for the quarters ended June 26, 1999 and June 27, 1998, respectively. COSTS OF GOODS SOLD. Cost of goods sold remained unchanged at $4.6 million for the three months ended June 26, 1999 compared to the same period a year ago. Gross margins were 32% for the quarter ended June 26, 1999 compared to 26% for the quarter ended June 27, 1998. During the quarter ended June 26, 1999, the Company sold the remaining portions of some customized inventory for approximately $0.8 million, of which $145,000 had been previously fully reserved due to a dispute with the customer for whom the customized cards were originally produced and who had attempted to cancel the order. The gross margins, excluding this sale of fully reserved inventory, was 30%. The Company believes costs of certain of its component memory devices will increase during fiscal 2000. There can be no assurance the Company will be able to increase its average selling price to offset such component cost increases which might adversely affect the Company's gross margin. ENGINEERING, RESEARCH AND DEVELOPMENT COSTS. Engineering, research and development costs were $145,000 for the three months ended June 26, 1999 compared to $202,000 for the quarter ended June 27, 1998. The lower engineering costs for the quarter ended June 26, 1999 are due generally to lower engineering material costs. The Company expects engineering, research and development costs to be higher in future quarters. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $1.8 million for the quarter ended June 26, 1999 compared to $1.4 million in the same period a year ago. The $.4 million increase in expenses is attributed to $.5 million 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 and higher operating costs due to an increase in personnel for the quarter ended June 26, 1999. Selling, general and administrative expenses are expected to continue to be higher during fiscal 2000. OTHER INCOME. Net interest income was $67,000 for the quarter ended June 26, 1999 compared to $64,000 for the quarter ended June 27, 1998. 12 EARNINGS 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. The increase in the weighted average shares outstanding from the first quarter of fiscal 1999 compared to the first quarter of fiscal 2000 reflects the pending distribution of 854,300 shares in settlement of class action litigation which became effective during the second quarter of fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Since the Company's inception, it has financed its operating activities primarily from public and private offerings of equity securities, loans from financial institutions and positive cash flows from operations. The Company experienced significant losses from operations prior to fiscal 1999. The Company has taken measures since the firing of its former Chief Executive Officer in February 1997 to reduce those losses, including the following: hiring new senior management, reducing various expenses and implementing new cost controls. The Company can make no assurances that measures taken to date or to be taken in the future will be sufficient to assure profitability or that future financing will be available to the Company or, if available, on terms that will be satisfactory to the Company. 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 June 26, 1999, working capital increased to approximately $7.7 million, compared to working capital of $7.4 million at March 31, 1999, due principally to positive operating income of $231,000, depreciation and amortization of $269,000 offset by net capital expenditures of $150,000. 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, the most restrictive of which is a covenant regarding the maintenance of the Company's liquidity, as defined. Allowable borrowings are based on accounts receivable and the cost of equipment, are secured by substantially all of the Company's assets. At June 26, 1999 and March 31, 1999, the Company had no outstanding borrowings under these credit facilities. INVESTING TRANSACTIONS Net capital expenditures amounted to $510,000 in the quarter ended June 26, 1999 compared to $113,000 in the quarter ended June 27, 1998. As of June 26, 1999, the Company had remaining obligations of $355,000 on equipment financing leases. The Company had no commitments as of June 26, 1999 for future capital equipment expenditures in fiscal year 2000. FINANCING TRANSACTIONS In April 1999, the Company entered into a five-year lease for a new piece of manufacturing equipment. Monthly payments under this lease of $6,318 commenced in April 1999. 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 7%, non-diluted, of Century's outstanding shares, is non- 13 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. CONTINGENCIES The Company is a defendant in numerous lawsuits alleging violations of securities and other laws in connection with the Company's prior reported financial results and certain other related matters. See "Item 1 --Legal Proceedings." The Company has been granted final approval of its proposed settlement of these suits, has issued cash and stock in satisfaction of its obligations to the class action plaintiffs in the Consolidated Litigation, and believes that such lawsuits will be settled substantially in accordance with the description contained in "Item 1 -- Legal Proceedings." The Company believes that such settlements will not have a material adverse impact on its liquidity. As of March 31, 1997, the Company recorded a provision for the settlement of the Consolidated Securities Litigation of $20.0 million, representing the cash portion of the settlement, together with an amount equal to 37% of the estimated market capitalization of the Company. The Company satisfied its obligations regarding the cash portion ($1,475,000) of the Settlement Agreement by remitting that amount into a settlement fund during fiscal 1998. The Company has issued 854,300 shares of common stock pursuant to the Settlement Agreement. There can be no assurance that claims by shareholders who opted not to participate in the class action settlement will not be material, or that the claims against Lawrence J. Ramaekers, the Company's former interim Chief Executive Officer, in connection with the February 25 Securities Litigation and the February 27 Securities Litigation, as to which the Company may have indemnification obligations will be settled. An unfavorable outcome to the Company in these matters could have a material adverse affect on the Company's liquidity, business, financial condition and results of operations. RISK FACTORS From time to time, information provided by the Company or statements made by its employees may contain forward-looking information. The Company's actual results may differ materially from those projections or suggestions made in such forward-looking information as a result of various potential risks and uncertainties including, but not limited to, the factors discussed below. LOSSES IN PRIOR PERIODS; LIQUIDITY AND FINANCING RISKS. The Company has experienced significant losses from operations from fiscal 1994 through fiscal 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" for discussion of these losses in prior periods. DEPENDENCE ON MAJOR CUSTOMERS. For the three months ended June 26, 1999, two customers represented 23% of the Company's sales. For the first quarter of the prior year another customer represented 32% of sales. For the first quarter of fiscal 2000 sales to this customer represented 5% of the Company's sales. During fiscal 1999, this customer engaged 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 first quarter of fiscal 2000 and fiscal 1999 represented 15% and 3%, respectively, of the Company's 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. 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 14 timely replacement of canceled, delayed, or reduced orders with new customers cannot be assured. These risks are exacerbated because a majority of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The electronics industry is also subject to economic cycles and has experienced, and is likely to experience, fluctuations in demand. The Company anticipates that a significant portion of its sales will continue for the foreseeable future to be concentrated in a small number of customers in the electronics industry. DECLINING AVERAGE SALES PRICES. The Company has experienced, and may in the future experience, declining average sales prices for its products. The data storage markets in which the Company competes are characterized by intense competition. Therefore, the Company expects to incur increasing pricing pressures from its customers in future periods, which may result in a further decline in average sales prices for the Company's products. The Company believes that it must continue to achieve manufacturing costs reductions, develop new products that incorporate customized features and increase its volume of PC card sales in order to offset the effect of these declining average sales prices. If the Company were not able to achieve such cost reductions, develop new customized products or increase its unit sales volumes, each of these factors could have a material adverse effect on the Company's business, financial condition and results of operations. FLUCTUATIONS IN QUARTERLY RESULTS. The Company's results of operations may be subject to quarterly fluctuations due to a number of factors, including the following: - timing of receipt and delivery of - competitive pricing pressures significant orders for the Company's products - increases in raw material costs - costs associated with the expansion of operations - changes in customer and product mix - production difficulties. - quality of the Company's products - write-downs or write-offs of investments - exchange rate fluctuations in other companies - market acceptance of new or enhanced versions of the Company's products Other factors, some of which are beyond the Company's control, may also cause fluctuations in the Company's results of operations. Additionally, as is the case with many high technology companies, a significant portion of the Company's orders and shipments typically occurs in the last few weeks of a quarter. As a result, revenues for a quarter are not predictable, and the Company's revenues may shift from one quarter to the next, having a significant effect on reported results. FLUCTUATIONS IN TRADING PRICE. The trading price of the Company's Common Stock may fluctuate widely in response to, among other things, the following: - 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 There can be no assurance that the Company's future performance will meet the expectations of analysts or investors. In addition, the volatility of the stock markets may cause wide fluctuations in trading prices of securities of high technology companies. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant degree upon the efforts and abilities of members of its senior management and other key personnel, including technical personnel. The loss of any of these individuals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled technical employees. Failure to attract and retain such senior personnel could materially and adversely affect the Company's business, financial condition and results of operations. 15 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. HISTORICAL SINGLE PRODUCT CONCENTRATION. PC cards and related services constitute 100% of the Company's sales for fiscal 1999 and the first quarter 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. COMPETITION. Each of the markets in which the Company competes is intensely competitive. The Company competes with manufacturers of PC cards and related products, including SanDisk Corporation and Smart Modular Technologies, Inc., as well as with electronic component manufacturers who also manufacture PC cards, including Advanced Micro Devices, Inc., Hitachi Semiconductor, Inc., Intel Corporation and Mitsubishi Electric Corporation. Certain of these competitors supply the Company with raw materials, including electronic components, which are occasionally subject to industry wide allocation. These competitors may have the ability to manufacture products at lower costs than the Company as a result of their higher levels of integration. In addition, many of the Company's competitors or potential competitors have greater name recognition, a larger installed base of customers, more extensive engineering, manufacturing, marketing, distribution and support capabilities and greater financial, technological and personnel resources than the Company. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative products that may be less costly or provide additional features. The Company believes that its ability to compete successfully depends on a number of factors, including the following: - 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 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. 16 RAW MATERIAL SHORTAGES AND DEPENDENCE ON SINGLE SOURCE SUPPLIERS. The Company has from time to time experienced shortages in the supply of computer memory chips and other electronic components used to manufacture PC cards. The Company expects that such supply shortages may continue, particularly with respect to computer memory chips and other electronic components used in products targeted at high-growth market segments. Occasionally, certain memory chips important to the Company's products are on industry-wide allocation by suppliers. Any such shortages could have a material adverse effect on the Company's business, financial condition and results of operations. The Company purchases certain key components from single source vendors for which alternative sources are not currently available. The Company does not maintain long-term supply agreements with any of its vendors. The inability to develop alternative sources for these single source components or to obtain sufficient quantities of components could result in delays or reductions in product shipments, or higher prices for these components, or both, any of which could materially and adversely affect the Company's business, financial condition and results of operations. No assurance can be given that one or more of the Company's vendors will not reduce supplies to the Company. 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. Although the Company has no present intention of issuing shares of Preferred Stock, such an issuance 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. The Company is aware of problems associated with computer systems as the year 2000 approaches. "Year 2000" problems are the result of common computer programming techniques that result in systems that do not function properly when manipulating dates later than December 31, 1999. The issue is complex and wide-ranging. The problem may affect transaction processing computer applications used by the Company for accounting, distribution, manufacturing, planning and other applications. Problems may also affect embedded systems such as building security systems, machine controllers and production test equipment. Year 2000 problems with any or all of these systems may affect the effectiveness or efficiency with which the Company can perform many significant functions, including but not limited to: - order processing - material planning - product assembly - product test - invoicing - payroll and financial reporting In addition, the problem may affect the computer systems of vendors and customers, disrupting their operations and possibly impairing the Company's sources of supply and demand. The Company has established a Year 2000 readiness team to assess the impact of the Year 2000 issue on the Company, and to coordinate testing and remediation activities. In general, the Company's products do not perform date related processing and are not materially affected by Year 2000 issues. Product testing has uncovered no Year 2000 problems, and investigation into product design, specifically firmware and microcode, has uncovered no design assumptions or application programming interfaces that would cause Year 2000 problems. The Company has also sample tested 100% of its manufacturing, testing and labeling equipment and uncovered no Year 2000 problems. The Company has not specifically tested software obtained from its customers that is incorporated into its products for such customers, which may in some cases involve date related processing, but the Company has sought assurances from 17 all of its customers that provide the Company with software for incorporation into the Company's products that the software is Year 2000 compliant, as well as a disclaimer of liability and indemnification should any Year 2000 issues arise with regard to the customer's software. The Company has only received a few responses to date and has not found any issues with these responses. There can be no assurance that the Company will be successful in obtaining from these customers such assurance or indemnification. The Company has completed its Year 2000 compliance assessment and remediation of the Company's management information system. The Company upgraded its core management information systems to address the Year 2000 issues with respect to internal budgeting, financial planning, material planning, sales order processing, accounting, inventory control, shop floor accounting and purchasing. All of the modules of this new system are currently operational. The Company has tested the upgrade to verify its Year 2000 compliance. The cost of this management information system was approximately $450,000, of which approximately $394,000 is attributable to the purchase of new software, which has been capitalized; the balance has been expensed as incurred. The Company has used operating cash flows as the source of funds for Year 2000 compliance issues. The Company believes its tertiary business information system is Year 2000 compliant. The Company believes that over 95% of its desktop PC hardware units are Year 2000 compliant. The majority of the software used on these systems and network servers is composed of recent versions of vendor supported, commercially available products that the Company believes are Year 2000 compliant. Upgrading these applications as respective vendors release Year 2000 compliant patches has not been a significant burden on the Company. The Company has also replaced and tested one operating system that was not and could not be modified to become year 2000 compliant. The cost for this new system was not material. The Company has completed its assessment and remediation of Year 2000 problems with computer systems used for facilities control. The Company has recently purchased a Year 2000 compliant telephone system. The cost to purchase and install the new telephone systems was approximately $108,000, which has been capitalized. The Company has also tested its building security system and determined that it is Year 2000 compliant. During fiscal 1999, the Company initiated formal communications with its key suppliers and customers regarding their Year 2000 readiness status. The Company has analyzed the responses received from its key suppliers and customers and is following up with those who have not yet provided a formal response. The Company received substantially all off its responses from its key suppliers and has found these responses to indicate suppliers to be Year 2000 compliant. The Company has only received a few responses from its Customers. There can be no assurance that the Company will be successful in obtaining from these vendors or customers such responses. While suppliers and customers may indicate that their products are or will be Year 2000 compliant prior to the year 2000 and that they expect their operations and services will continue uninterrupted, the Company can provide no assurances that the Company's key suppliers and customers have, or will have technology systems, non-information technology systems and products that are Year 2000 compliant. Any Year 2000 compliance problem facing the Company's customers or suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. Any additional expenses related to the management of the Company's Year 2000 compliance program are not expected to be material to the Company's quarterly operating results. The Company estimates that it has spent in aggregate approximately $600,000 in addressing Year 2000 readiness issues. These expenditures have been funded through operations. The Company has not deferred or delayed any information technology projects due to Year 2000 efforts. The costs and time schedules for the Company's Year 2000 problem abatement are based on management's best estimates for the implementation of its new operating system and Year 2000 problems uncovered to date. These estimates were derived from utilizing numerous assumptions, including that the most significant Year 2000 risks have already been identified, that certain resources will continue to be available, that third party plans will be fulfilled, and other factors. However, there can be no assurance that these estimates will be achieved or that the anticipated time schedule will be met. Actual results could differ materially from those anticipated. Because computer systems may involve different hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a Year 2000 issue. As a result, the Company may be subjected to Year 2000-related lawsuits independent of whether its products and services are Year 2000 ready. Any Year 2000 related lawsuits, if adversely determined, could have a material adverse effect on the Company's business, financial condition, and results of operations. 18 The Company is in the process of preparing contingency plans for critical areas to address Year 2000 failures if remedial efforts are not fully successful. The Company expects to complete its contingency plans during the second quarter of fiscal 2000, which plans may thereafter be revised from time to time as deemed appropriate. Should previously undetected Year 2000 problems be found in systems that support the Company's on-going operations or other systems, these systems will be upgraded, replaced, turned off, or operated in place with manual procedures to compensate for their deficiencies. While the Company believes that these alternative plans would be adequate to meet the Company's need without materially impacting its operations, there can be no assurance that such alternatives would be successful or that the Company's results of operations would not be materially adversely affected by the delays and inefficiencies inherent in conducting operations in this manner. There may be additional Year 2000 problems that are as yet unknown to the Company and for which remediation plans have not yet been made. Any such Year 2000 compliance problem of the Company, its suppliers or its customers could materially adversely affect the Company's business, results of operations, financial condition, and prospects. If, for example, third party suppliers were unable to deliver necessary components, the Company may be unable to manufacture products in a timely manner. Similarly, if shipping and freight forwarders were unable to ship product, the Company would be unable to deliver product to its customers. There can be no assurance that the Company's insurance will cover losses from business interruptions arising from year 2000 problems of the Company or its suppliers or customers. The foregoing discussion of the Company's Year 2000 readiness includes forward-looking statements, including estimates of the timeframes and costs for addressing the known Year 2000 issues confronting the Company, and is based on management's current estimates, which were derived using numerous assumptions. There can be no assurance that these estimates will be achieved, and actual events and results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability of the Company to identify and correct all relevant computer code and the success of third parties with whom the Company does business in addressing their Year 2000 issues. RISKS OF INTERNATIONAL OPERATIONS AND EURO CURRENCY. For the three months ended June 26, 1999 and June 27, 1998, the Company derived approximately 17% and 9%, 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 19 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. The Company has terminated its earlier program of acquiring interests in companies and related technologies, and has written-off or provided valuation reserves for many such investments. However, the Company may determine that it is in the best interests to acquire or invest in other companies in the future. There can be no assurance that the companies in which the Company has invested (or may invest) will develop successful products or technologies beneficial to the Company or that such investments will be economically justified. 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 environmental regulations. 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, accounts payable and other accrued expenses. The Company believes all of the carrying amounts approximate fair value. 20 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 35 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 under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder, and related state law claims of fraud, deceit and negligent misrepresentation. The complaints also asserted claims against some or all of the Company's Board of Directors, and some complaints asserted claims against certain of the Company's nondirector officers, under Section 20(a) of the 1934 Act, as well as the same state law claims asserted against the Company. The Company's former independent accountants, Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), the Company's lead underwriter for its March 1996 subsequent public offering, Needham & Company, Inc., and a financial advisory subscription company, Cabot Heritage Corporation, were also named in some of the suits. These class action lawsuits were purportedly brought by and on behalf of purchasers of the Company's Common Stock between the Company's initial public offering on April 12, 1994 and February 10, 1997 (the "Centennial Securities Litigation"). On and after February 26, 1997, four complaints were filed in the United States District Court for the District of Massachusetts by plaintiffs purporting to represent classes of shareholders who purchased the Company's Common Stock on February 25, 1997. The complaint also named the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and alleged violations of Sections 10(b) and 20(a) of the 1934 Act (the "February 25 Securities Litigation"). On January 13, 1998, a plaintiff purporting to represent classes of shareholders who purchased the Company's Common Stock on February 27, 1997 filed a complaint in the United States District Court for the District of Massachusetts. The Complaint also named the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, and Mr. Ramaekers' employer, Jay Alix & Co., and alleged violations of Sections 10(b) and 20(a) of the 1934 Act (the "February 27 Securities Litigation"). On February 9, 1998, a consolidated amended complaint combining the Centennial Securities Litigation, the February 25 Securities Litigation, the February 27 Securities Litigation and the Derivative Litigation was filed in the United States District Court for the District of Massachusetts (the "Consolidated Litigation"). Also on February 9, 1998, the Company and lead counsel representing the plaintiffs in the Consolidated Litigation filed a Stipulation of Settlement (the "Settlement Agreement"), whereby the Company and certain of its officers and directors would be released from liability arising from the allegations included in the Consolidated Litigation. In return, the Company agreed to pay the plaintiffs in the Consolidated Litigation $1.475 million in cash and to issue to these plaintiffs 37% of the Company's Common Stock. The Company also agreed to adopt certain corporate governance policies and procedures. The Court granted final approval of the Settlement Agreement of the Consolidated Litigation on April 29, 1998 and 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 issuable 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 opted not to participate in the Settlement Agreement. No assurance can be given that claims by class members who declined to participate in the Settlement Agreement will not have a material adverse effect on the Company's business, financial condition and results of operations. The plaintiffs in the Consolidated Litigation have not yet reached an agreement with the Company's former Interim Chief Executive Officer, Lawrence J. Ramaekers, regarding their alleged claims against him. The plaintiffs have agreed to release the Company from any direct liability related to those alleged claims. In the agreement under which Mr. Ramaekers provided services to the Company, the Company agreed to provide Mr. Ramaekers with the same indemnification as is applicable to other officers of the Company pursuant to the Company's By-Laws. The Company has agreed to indemnify, hold harmless, and defend Mr. Ramaekers from and against certain claims arising out of his engagement with the Company. The plaintiffs also retained their claims against the Company's former President and Chief Executive Officer, Emanuel Pinez; the Company's former Chief Financial Officer, James M. Murphy; the Company's former independent accountants, Coopers & Lybrand; and others. 21 On February 20, 1997, the Company received a subpoena from the United States Department of Justice ("DOJ") to produce documents in connection with a grand jury investigation regarding various irregularities in the Company's previous press releases and financial statements. The DOJ also requested certain information regarding some of the Company's former officers, certain stock transactions by Mr. Pinez, and correspondence with the Company's auditors. The DOJ has subsequently subpoenaed additional Company records and files. The Company has not been notified by the DOJ that it is a target or subject of this investigation. In mid-February 1997, the Company was notified that the Boston District Office of the Securities and Exchange Commission ("SEC") was conducting an investigation of the Company. The SEC has requested that the Company provide the SEC with certain documents concerning the Company's public reports and financial statements. The SEC indicated that its inquiry should not be construed as an indication by the SEC or its staff that any violations have occurred, or as a reflection upon the merits of the securities involved or upon any person who effected transactions in such securities. The Company is cooperating with the SEC in connection with this investigation, the outcome of which cannot yet be determined. On and after March 26, 1997, several complaints were filed in the United States District Court for the District of Massachusetts by plaintiffs purporting to represent classes of shareholders who purchased stock of WebSecure, Inc. ("WebSecure") between December 5, 1996 and February 27, 1997 (the "WebSecure Complaints"). The WebSecure Complaints assert claims against WebSecure, certain officers, directors and underwriters of WebSecure, and the Company. Claims against the Company include alleged violations of Sections 11 and 15 of the Securities Act of 1933 (the "1933 Act") (the "WebSecure Securities Litigation"). In fiscal 1997 the Company recorded a reserve of $1.2 million in connection with the expected settlement of the WebSecure Securities Litigation. On November 13, 1998, the Company reached an agreement to settle the WebSecure Securities Litigation. The settlement agreement contemplates that the Company and certain of its officers and directors would be released from any and all liability arising from the allegations included in the WebSecure Securities Litigation in return for the issuance to the WebSecure Securities Litigation class of 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. The form of the settlement agreement has been approved preliminarily by the Court, and notice to class members of the proposed settlement will be provided. Thereafter, the Court will rule on any objections to the settlement agreement and determine whether it should be finally approved. If a sufficiently large number of class members opt not to participate in the settlement agreement, the agreement may by withdrawn. No assurance can be given that the Court will approve the settlement agreement, or that, if such approval is obtained, that a material number of class members will not decline to participate in the settlement. ITEM 2. CHANGES IN SECURITIES On April 30, 1999, the Company's Board of Directors adopted the following two provisions to Article II of the Company's Amended and Restated Bylaws relating to the conduct of stockholders meetings: "Section 4. Special Meetings. Special meetings of the stockholders may be called for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, as amended, by the Chairman of the Board, if any, or the President, and shall be called by the President or Secretary at the request, in writing, of a majority of the Board of Directors. Such request shall state the purpose of the proposed meeting. " "Section 14. Limitations on Calling of Meetings. Meetings of the stockholders may be called only as expressly provided for in the Certificate of Incorporation of the Corporation, in these Bylaws or as otherwise required by statute." 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. 22 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 June 26, 1999 the Company filed no reports on Form 8-K. ITEM NO. DESCRIPTION - --- ----------- 3.1 Amended and Restated Bylaws of Centennial Technologies, Inc. 10.1 Lease Agreement by and between Centennial Technologies, Inc. and Crocker Capital 27 Financial Data Schedule 23 SIGNATURES IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CENTENNIAL TECHNOLOGIES, INC. Dated: August 10, 1999 BY: /s/ L. MICHAEL HONE --------------------------------- L. Michael Hone President and Chief Executive Officer Dated: August 10, 1999 BY: /s/ RICHARD J. PULSIFER ----------------------------------- Richard J. Pulsifer Chief Financial Officer 24