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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
----------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended 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 0-27312
TOLLGRADE COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 25-1537134
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
493 NIXON RD.
CHESWICK, PA 15024
(Address of Principal Executive Offices, including zip code)
724-274-2156
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
As of July 30, 1999, there were 5,968,497 shares of the Registrant's
Common Stock, $0.20 par value per share, and no shares of the Registrant's
Preferred Stock, $1.00 par value per share, outstanding.
This report consists of a total of 53 pages. The exhibit index is at
page 20.
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TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 26, 1999
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE NO.
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ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 26, 1999 AND
DECEMBER 31,1998 ..........................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS
ENDED JUNE 26, 1999 AND JUNE 27, 1998......................................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS
ENDED JUNE 26, 1999 AND JUNE 27, 1998 .....................................................5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......................................6
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS...................................................8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION..................................................................................9
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1 LEGAL PROCEEDINGS.........................................................................17
ITEM 2 CHANGES IN SECURITIES.....................................................................17
ITEM 3 DEFAULTS UPON SENIOR SECURITIES...........................................................17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................17
ITEM 5 OTHER INFORMATION.........................................................................18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K..........................................................18
SIGNATURE...............................................................................................19
EXHIBIT INDEX...........................................................................................20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
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=========================================================================================================
(UNAUDITED) DECEMBER 31,
JUNE 26, 1999 1998
=========================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,666,494 $ 8,311,353
Short term investments 10,618,738 14,249,164
Accounts receivable:
Trade 12,028,872 7,888,060
Other 201,808 300,680
Inventories 14,875,931 13,201,771
Prepaid expenses and deposits 345,219 352,413
Deferred tax assets 354,891 354,891
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TOTAL CURRENT ASSETS 48,091,953 44,658,332
Long term investments 1,455,000 1,553,000
Property and equipment, net 3,524,478 3,314,522
Deferred tax assets 334,474 334,474
Patents and other assets 2,821 4,247
=========================================================================================================
TOTAL ASSETS $53,408,726 $49,864,575
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,183,004 $ 687,079
Accrued expenses 711,002 1,128,421
Accrued salaries and wages 845,672 801,908
Royalties payable 945,998 712,971
Income taxes payable 1,016,582 788,479
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TOTAL CURRENT LIABILITIES 4,702,258 4,118,858
Deferred income -- 40,000
Deferred tax liabilities 9,950 9,950
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TOTAL LIABILITIES 4,712,208 4,168,808
Shareholders' equity:
Common stock, $.20 par value; authorized shares,
25,000,000; issued shares 5,960,064 and 5,920,464,
respectively 1,192,013 1,184,093
Additional paid-in capital 28,013,052 27,503,772
Treasury stock, at cost, 193,400 and 109,100 shares,
respectively (3,164,975) (1,789,287)
Retained earnings 22,656,428 18,797,189
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TOTAL SHAREHOLDERS' EQUITY 48,696,518 45,695,767
=========================================================================================================
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $53,408,726 $49,864,575
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================================
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 26, 1999 JUNE 27, 1998 JUNE 26, 1999 JUNE 27, 1998
====================================================================================================================================
<S> <C> <C> <C> <C>
REVENUES $14,269,719 $14,025,024 $25,390,064 $24,788,864
COST OF PRODUCT SALES 5,902,774 5,919,637 10,654,718 10,274,949
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GROSS PROFIT 8,366,945 8,105,387 14,735,346 14,513,915
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OPERATING EXPENSES:
Selling and marketing 1,767,547 1,499,318 3,165,988 3,121,202
General and administrative 964,933 1,262,850 2,013,369 2,352,557
Research and development 2,157,980 1,542,450 4,033,658 3,170,452
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TOTAL OPERATING EXPENSES 4,890,460 4,304,618 9,213,015 8,644,211
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INCOME FROM OPERATIONS 3,476,485 3,800,769 5,522,331 5,869,704
Interest and other income, net 236,549 417,366 507,763 605,991
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,713,034 4,218,135 6,030,094 6,475,695
Provision for income taxes 1,339,855 1,575,000 2,170,855 2,388,000
====================================================================================================================================
NET INCOME $ 2,373,179 $ 2,643,135 $ 3,859,239 $ 4,087,695
====================================================================================================================================
EARNINGS PER SHARE INFORMATION:
Weighted average shares of common stock and equivalents:
Basic 5,768,925 5,855,207 5,778,233 5,816,867
Diluted 5,805,943 6,007,594 5,841,776 5,982,179
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Net income per common and common equivalent shares:
Basic $ .41 $ .45 $ .67 $ .70
Diluted $ .41 $ .44 $ .66 $ .68
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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============================================================================================================================
SIX MONTHS ENDED
JUNE 26, 1999 JUNE 27, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,859,239 $ 4,087,695
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 541,794 601,586
Compensation expense for restricted stock -- 26,950
Changes in assets and liabilities:
Increase in accounts receivable-trade (4,140,812) (4,695,784)
Decrease in accounts receivable-other 98,872 192,291
Increase in inventories (1,674,160) (199,376)
Decrease in prepaid expenses and deposits 7,194 142,284
Increase in accounts payable 495,925 33,384
Decrease in accrued expenses, deferred income, and royalties payable (224,392) (67,702)
Increase (decrease) in accrued salaries and wages 43,764 (405,395)
Increase in income taxes payable 228,103 25,318
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Net cash used in operating activities (764,473) (258,749)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of investments 5,689,303 12,931,757
Purchase of investments (1,960,877) (10,694,127)
Capital expenditures (750,324) (1,002,806)
Purchase of treasury stock (1,375,688) (287,623)
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Net cash provided by investing activities 1,602,414 947,201
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options including related tax benefits 517,200 1,748,702
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Net cash provided by financing activities 517,200 1,748,702
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Net increase in cash and cash equivalents 1,355,141 2,437,154
Cash and cash equivalents at beginning of period 8,311,353 3,183,944
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,666,494 $ 5,621,098
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Tollgrade Communications, Inc. (the "Company") in
accordance with generally accepted accounting principles for the interim
financial information and Article 10 of Regulation S-X. The condensed
consolidated financial statements as of and for the three and six-month periods
ended June 26, 1999 should be read in conjunction with the Company's
consolidated financial statements (and notes thereto) included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. Accordingly,
the accompanying condensed consolidated financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements, although the Company believes that
the disclosures are adequate to make the information presented not misleading.
In the opinion of the Company's management, all adjustments considered necessary
for a fair presentation of the accompanying condensed consolidated financial
statements have been included, and all adjustments are of a normal and recurring
nature. Operating results for the three and six-month periods ended June 26,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. INVENTORY
At June 26, 1999 and December 31, 1998, inventory consisted of the following:
(Unaudited)
June 26, December 31,
1999 1998
----------- -----------
Raw materials .................... $ 7,206,497 $ 6,135,743
Work in progress ................. 5,509,142 4,725,776
Finished goods ................... 2,160,292 2,340,252
----------- -----------
$14,875,931 $13,201,771
=========== ===========
3. INVESTMENTS
Short-term investments at June 26,1999 consisted of individual municipal bonds
stated at cost, which approximated market value. These securities have a
maturity of one year or less at date of purchase and/or contain a callable
provision in which the bonds can be called within one year from date of
purchase. Long-term investments are individual municipal bonds with a maturity
of more than one year but less than eighteen months. The primary investment
purposes are to provide a reserve for future business purposes, including
possible acquisitions, capital expenditures and to meet working capital
requirements.
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4. INCOME PER COMMON SHARE
Net income per share is calculated by dividing net income by the weighted
average number of common shares plus incremental common stock equivalent shares
(shares issuable upon exercise of stock options). Incremental common stock
equivalent shares are calculated for each measurement period based on the
treasury stock method, which uses the monthly average market price per share.
The calculation of net income per common and common equivalent shares follows:
<TABLE>
<CAPTION>
======================================================================================================================
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 26, 1999 JUNE 27, 1998 JUNE 26, 1999 JUNE 27, 1998
======================================================================================================================
<S> <C> <C> <C> <C>
Net income ...................................... $2,373,179 $2,643,135 $3,859,239 $4,087,695
========== ========== ========== ==========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period ......................... 5,768,925 5,855,207 5,778,233 5,816,867
Common shares issuable upon exercise
of outstanding stock options
Diluted .......................... 37,018 152,387 63,543 165,312
---------- ---------- ---------- ----------
Common and common equivalent shares
outstanding during the period
Diluted .......................... 5,805,943 6,007,594 5,841,776 5,982,179
========== ========== ========== ==========
Earnings per share data
Net income per common and common
equivalent shares
Basic ............................ $ 0.41 $ 0.45 $ 0.67 $ 0.70
Diluted .......................... $ 0.41 $ 0.44 $ 0.66 $ 0.68
</TABLE>
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REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Tollgrade Communications, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Tollgrade Communications, Inc. and subsidiaries as of June 26, 1999, and the
related condensed consolidated statements of operations for the three months and
six-months ended June 26, 1999 and June 27, 1998 and the condensed consolidated
statements of cash flows for the six-months ended June 26, 1999 and June 27,
1998. These financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet of Tollgrade Communications, Inc. and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 25, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
July 13, 1999
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
- ------------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto appearing elsewhere in this
report.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in the following Management's Discussion and Analysis
of Results of Operations and Financial Condition which are not historical are
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements as to management's beliefs, strategies, plans,
expectations or opinions in connection with Company performance, which are based
on a number of assumptions concerning future conditions that may ultimately
prove to be inaccurate. Such statements must be qualified by important factors
that could cause actual earnings and other results to differ materially from
those achieved in the past or those expected by the Company. These include:
rapid technological change along with the need to continually develop new
products; the Company's dependence on a single product line; competition; the
Company's dependence on key employees; difficulties in managing the Company's
growth; the Company's dependence upon a small number of large customers and
certain suppliers; the Company's dependence upon proprietary rights; risks of
third party claims of infringement; and government regulation.
OVERVIEW
The Company was organized in 1986 and began operations in 1988. The Company
designs, engineers, markets and supports test access and test extension products
for the telecommunications and cable television industries. The Company's
telecommunication proprietary products enable telephone companies to use their
existing line test systems to remotely diagnose problems in Plain Old Telephone
Service ("POTS") lines containing both copper and fiber optics. The Company's
MCU(R) product line, which includes POTS line testing as well as alarm-related
products, represented approximately 88% of the Company's revenue for the second
quarter ended June 26, 1999 and will continue to account for a majority of the
Company's revenues for the foreseeable future. In addition, the Company has
begun modest shipments of the Digitest (TM) centralized network test platform.
The Digitest system is a test head designed to measure electrical and audio
characteristics of telephone lines providing POTS service, including the
capability to perform certain line prequalification tests in anticipation of the
deployment of wide bandwidth services. The Company is planning to further
develop the Digitest system to ultimately address in-service testing of digital
subscriber lines including Integrated Service Digital Network (ISDN) and
Asymmetric Digital Subscriber Line (ADSL). The Company's cable products consist
of a complete cable status monitoring system that provides a broad testing
solution for the Broadband Hybrid Fiber Coax distribution system. The status
monitoring system includes a host for user interface, control and configuration;
a headend controller for managing network communications; and transponders that
are strategically located within the cable network to gather status reports from
power supplies, line amplifiers and fiber-optic nodes.
The Company's telecommunication product sales are primarily to the five Regional
Bell Operating Companies ("RBOCs") as well as major independent telephone
companies such as Sprint and to certain digital loop carrier ("DLC") equipment
manufacturers. For the quarter ended June 26, 1999, approximately 79% of the
Company's total revenue was generated from sales to these five RBOCs, the two
largest of which comprised approximately 44% of revenues. The Company markets
and sells its cable products directly, as well as through various Original
9
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Equipment Manufacturer ("OEM") arrangements with cable network equipment
manufacturers. The Company presently has one such OEM arrangement under contract
and works under less formal arrangements with several other OEM partners. Sales
for the Company's cable products for the second quarter of 1999 were modest.
The Company's operating results have fluctuated and may continue to fluctuate
as a result of various factors, including the timing of orders from and
shipments to the RBOCs. This timing is particularly sensitive to various
business factors within each of the RBOCs including the RBOCs relationships with
their various organized labor groups.
The Company believes that recent changes within the telecommunication
marketplace, including industry consolidation, as well as the Company's ability
to successfully penetrate certain new markets, have resulted in some discounting
and more favorable terms granted to certain customers of the Company. In
addition, the Company experienced certain customer demands to consolidate
product purchases which have translated into large bulk orders. Although the
Company will continue to strive to meet the demands of its customers, which
include delivery of quality products at an acceptable price and on acceptable
terms, there are no assurances that the Company will be successful in
negotiating acceptable terms and conditions pertaining to these large orders.
Additionally, recent consolidations among the RBOCs, and their ability to
consolidate their inventory and product procurement systems could cause
fluctuations or delays in the Company's order patterns. The Company cannot
predict such future events or business conditions and the Company's results may
be adversely affected by these industry trends in the primary markets its
serves.
Although international sales to date have not been significant, the Company
believes that certain international markets may offer opportunities. However,
the international telephony markets differ from those found domestically due to
the different types and configurations of equipment used by those international
communication companies to provide services. In addition, certain competitive
elements also are found internationally which do not exist in the Company's
domestic markets. These factors, when combined, have made entrance into these
international markets extremely difficult. From time to time, the Company has
utilized the professional services of various marketing consultants to assist in
defining the Company's international market opportunities. With the assistance
of these consultants and through direct marketing efforts by the Company, it has
been determined that its present MCU technology offers limited opportunities in
certain international markets for competitive and other technological reasons.
These markets include China other than through an existing OEM relationship,
Europe and the Pac Rim countries. There can be no assurance that any continued
efforts by the Company will be successful or that the Company will achieve
significant international sales.
The Company believes that continued growth will depend on its ability to design
and engineer new products and, therefore, spends a significant amount on
research and development. Research and development expenses as a percent of
revenues were approximately 15.1% for the second quarter ended June 26, 1999.
The Company expects its research and development expenses to continue at
significant levels.
10
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RESULTS OF OPERATIONS - SECOND QUARTER
REVENUES
Revenues for the second quarter of 1999 of $14,269,719 were $244,695, or 1.7%,
higher than the revenues of $14,025,024 reported for the second quarter of 1998.
The increase in revenues for the second quarter of 1999 was primarily
attributable to an increase in unit volume sales of core MCU(R) line testing
products to US West as well as increases in sales to BellSouth and SBC
Communications. Additionally, sales to Competitive Local Exchange Carriers
improved from second quarter, 1998, with increased shipments to Allegiance
Telecom and Sprint. The current quarter sales increase was offset somewhat by
decreased shipment levels to Bell Atlantic, which the Company believes can be
attributed to lingering inventory and product deployment issues. The Company is
continuing to implement strategies designed to bring this customer back to its
historical product usage levels, including product installation training and
support. Periodic fluctuations in customer orders and backlog result from a
variety of factors, including but not limited to the timing of significant
orders and shipments, and are not necessarily indicative of long-term trends in
sales of the Company's products.
GROSS PROFIT
Gross profit for the second quarter of 1999 was $8,366,945 compared to
$8,105,387 for the second quarter of 1998, representing an increase of $261,558,
or 3.2%. Gross profit as a percentage of revenues increased to 58.6% in the
second quarter of 1999, compared to 57.8% in the same quarter last year. The
overall increase in the gross profit from the prior year period resulted
primarily from the increased sales levels, while improvements in gross profit as
a percentage of revenues were primarily due to certain manufacturing and
purchasing efficiencies.
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the second quarter of 1999 was $1,767,547
compared to $1,499,318 for the second quarter of 1998. This increase of
$268,229, or 17.9%, is primarily attributable to an increase in marketing
expenses associated with the Company's comprehensive technical training and
other testability improvement initiative programs as well as increased spending
on advertising, promotion and related marketing activities. As a percentage of
revenues, selling and marketing expenses increased to 12.4% in the second
quarter of 1999 from 10.7% in the second quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the second quarter of 1999 was $964,933,
a decrease of $297,917, or 23.6%, from the $1,262,850 recorded in the second
quarter of 1998. The decrease in general and administrative expense primarily
reflects a reduction in salaries and associated expenses, as well as a decrease
in certain professional service fees. As a percentage of revenues, general and
administrative expenses decreased to 6.8% in the second quarter of 1999 from
9.0% in the second quarter of 1998.
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RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the second quarter of 1999 was $2,157,980,
an increase of $615,530, or 39.9%, over the $1,542,450 recorded in the second
quarter of 1998. The increase is primarily associated with additional personnel
and related development costs to support new product introductions (primarily
Digitest and various cable-related products). The new personnel were hired for
positions in design engineering, hardware and software development, engineering
support, and test engineering. Their efforts are associated with new product
development, as well as support, and feature enhancement of existing products.
As a percentage of revenues, research and development expense increased to 15.1%
in the second quarter of 1999 from 11.0% in the second quarter of 1998.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the second
quarter of 1999, interest and other income was $236,549 compared to $417,366 for
the second quarter of 1998, representing a decrease of $180,817, or 43.3%. This
decrease relates to the net key man life insurance proceeds of approximately
$156,000 associated with the death of Company's former Chairman, R. Craig
Allison being included in the second quarter of 1998. Excluding the effect of
the aforementioned net life insurance proceeds, interest and other income
decreased $24,817, or 9.5%.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of 1999 was $1,339,855, a
decrease of $235,145, or 14.9%, from the $1,575,000 for the second quarter of
1998. The effective income tax rate decreased to approximately 36.1% in the
second quarter of 1999, compared to approximately 37.3% in the second quarter of
1998. The decrease in the effective tax rate between periods reflects certain
refinements for the estimated effective tax rate for fiscal year 1999.
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the second quarter of 1999 was
$2,373,179, a decrease of $269,956, or 10.2%, from the $2,643,135 recorded in
the second quarter of 1998. Basic and diluted earnings per common share of $.41
and $.41, respectively, for the second quarter of 1999 decreased by $.04 and
$.03, or 8.9% and 6.8%, from the $.45 and $.44, respectively, earned in the
second quarter of 1998. The prior year quarter includes approximately $226,000,
or $.04 per share, related to the after-tax effect of the key man life insurance
proceeds. Excluding the effect of these net life insurance proceeds, net income
decreased $43,956, or 1.8%, between periods and diluted earnings per common
share increased $.01, or 2.5%. Basic and diluted weighted average common and
common equivalent shares outstanding were 5,768,925 and 5,805,943, respectively,
in the second quarter of 1999 compared to 5,855,207 and 6,007,594, respectively,
in the second quarter of 1998. As a percentage of revenues, net income for the
second quarter of 1999 decreased to 16.6% compared to the 18.8% for the second
quarter of 1998.
RESULTS OF OPERATIONS - YEAR TO DATE
REVENUES
For the first six months of 1999, revenues were $25,390,064 compared to
$24,788,864 for the first six months of 1998, representing an increase of
$601,200 or 2.4%. The increase in revenues for the first six months of 1999 was
primarily attributable to an increase in unit volume sales of core MCU(R) line
testing products to US West, as well as increases in sales to BellSouth and SBC
Communications. Additionally, sales to Competitive Local Exchange Carriers
improved with increased shipments to Allegiance Telecom. The sales increase in
the first six months of 1999 was offset somewhat by decreased shipment levels to
Bell Atlantic, which the Company believes can be
12
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attributed to lingering inventory and product deployment issues. The Company is
continuing to implement strategies designed to bring this customer back to its
historical product usage levels, including product installation training and
support. Periodic fluctuations in customer orders and backlog result from a
variety of factors, including but not limited to the timing of significant
orders and shipments, and are not necessarily indicative of long-term trends in
sales of the Company's products.
GROSS PROFIT
For the six months of 1999, gross profit increased to $14,735,346 compared to
$14,513,915 for the first six months of 1998, representing an increase of
$221,431, or 1.5%. As a percentage of revenues, gross profit decreased to 58.0%
in the first six months of 1999 compared to 58.6% in the same period for 1998.
The overall increase in gross profit margin resulted primarily from increased
sales levels, while the decrease in gross margin as a percentage of revenues was
primarily a result of increased manufacturing costs associated with the initial
production of certain of the Company's new products.
SELLING AND MARKETING EXPENSE
For the first six months of 1999, selling and marketing expense totaled
$3,165,988 compared to $3,121,202 for the first six months of 1998, representing
an increase of $44,786 ,or 1.4%. This increase is primarily attributable to the
Company's comprehensive customer focused testability improvement initiative
programs. As a percentage of revenue, selling and marketing expense decreased to
12.5% in the first six months of 1999 from 12.6% for the same period of 1998.
GENERAL AND ADMINISTRATIVE EXPENSE
For the first six months of 1999, general and administrative expense totaled
$2,013,369 compared to $2,352,557 for the first six months of 1998, representing
a decrease of $339,188 or 14.4%. The decrease in general and administrative
expense primarily reflects a reduction in salary and related expense associated
with the death of the former Chairman, R. Craig Allison, as well as a reduction
in certain professional service fees between periods. As a percentage of
revenue, general and administrative expense decreased to 7.9% in the first six
months of 1999 from 9.5% for the same period of 1998.
RESEARCH AND DEVELOPMENT EXPENSE
For the first six months of 1999, research and development expense totaled
$4,033,658 compared to $3,170,452 for the first six months of 1998, representing
an increase of $863,206 or 27.2%. This increase is primarily associated with
additional personnel and related development costs to support new product
introductions (primarily Digitest and cable-related products). The new personnel
were hired for positions in design engineering, hardware and software
development, engineering support, and test engineering. Their efforts are
associated with new product development as well as support, and feature
enhancements for existing products. As a percentage of revenues, research and
development expense increased to 15.9% in the first six months of 1999 from
12.8% for the first six months of 1998.
INTEREST AND OTHER INCOME
For the first six months of 1999, interest and other income was $507,763
compared to $605,991 for the first six months of 1998, representing a decrease
of $98,228. This decrease relates to the net key man life insurance proceeds, of
approximately $156,000 associated with the death of Company's former Chairman,
R. Craig Allison being included in the second quarter of 1998. Excluding the
effect of the aforementioned net life insurance proceeds, interest and other
income increased $57,772, or 12.8%. This increase is primarily attributable to
an increase in funds available for investment between periods.
13
<PAGE> 14
PROVISION FOR INCOME TAXES
The provision for income taxes for the first six months of 1999 was $2,170,855
which was a decrease of $217,145, or 9.1%, from $2,388,000 for the first six
months of 1998. The effective income tax rate decreased to approximately 36.0%
in the first six months of 1999, compared to approximately 36.9% in the first
six months of 1998. The decrease in the effective tax rate between periods
reflects certain refinements for the estimated effective tax rate for fiscal
year 1999.
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the first half of 1999 was
$3,859,239, a decrease of $228,456, or 5.6%, from the $4,087,695 recorded in the
first six months of 1998. Basic and diluted earnings per common share of $.67
and $.66, respectively, for the first half of 1999 decreased by $.03 and $.02,
or 4.3% and 2.9%, from the $.70 and $.68, respectively, earned in the first half
of 1998. The prior year period includes approximately $226,000, or $.04 per
share, related to the after-tax effect of the key man life insurance proceeds.
Excluding the effect of these net insurance proceeds, net income decreased
$2,456, or 0.1%, between periods and diluted earnings per common share increased
$.02, or 3.1%. Basic and diluted weighted average common and common equivalent
shares outstanding were 5,778,233 and 5,841,776, respectively, in the first half
of 1999 compared to 5,816,867 and 5,982,179, respectively, in the first half of
1998. As a percentage of revenues, net income for the first half of 1999
decreased to 15.2% compared to the 16.5% for the first half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 26, 1999, the Company had working capital of $43,389,695, which
represented an increase of $2,850,220, or 7.0%, from the $40,539,474 of working
capital as of December 31, 1998. The increase in working capital can be
attributed primarily to operating cash flow (income from operations before
depreciation and amortization) and proceeds from the exercise of stock options
exceeding requirements for purchases of property and equipment and funding of
the Company's stock buyback program. Significant components of the Company's
change in working capital include an increase in inventories associated with
increases in raw materials and work-in-process for new product introductions, as
well as an increase in accounts receivable-trade which reflects the shipment of
certain large bulk purchases during the latter portion of the current quarter.
Management believes that operating cash flow and cash reserves are adequate to
finance currently planned capital expenditures and to meet the overall liquidity
needs of the Company.
The Company made capital expenditures of $750,324 in the first six months of
1999 which were primarily related to test equipment and fixtures for new product
introductions, as well as certain leasehold improvements made to the Company's
facilities. The Company presently has no material capital expenditure
commitments.
On April 22, 1997, the Company's Board of Directors authorized a program to
purchase up to 200,000 shares of its common stock over a two-year period. The
program intended that the shares would be utilized to provide stock under
certain employee benefit programs. As of April 22, 1999, the expiration of this
initial program, the Company had purchased 193,400 shares of common stock under
this program. The Company has used existing cash and short-term investments to
finance these purchases. On May 6, 1999, the Company's Board of Directors
authorized a new program to purchase up to 200,000 shares of its common stock
over a two-year period. As of June 26, 1999, the Company has not initiated any
purchases of common stock under this new program.
14
<PAGE> 15
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications use
two digit rather than four digit date fields to designate an applicable year. As
a result, the systems and applications may not properly recognize the year 2000
or process data which include it, potentially causing data miscalculations or
inaccuracies or operational malfunctions or failures.
The Company has established a Year 2000 committee to transition the Company's
business applications, computing infrastructure and communication systems into
the next millennium. The objectives of the Year 2000 committee are to ensure all
internal computer systems function correctly in the year 2000, ensure data
exchanged with external organizations conforms to year 2000 standards and ensure
all products sold by the Company conform to year 2000 standards. The Company has
developed an inventory of all Company business systems and corresponding
software applications, and has assessed the business priority of each system.
Each system was classified by mission criticality and a determination was made
to either replace or remediate the system depending upon its importance. In
addition, the Year 2000 project included a review of the Year 2000 compliance
efforts of the Company's key suppliers and other principal business partners
and, as appropriate, the development of joint business support and continuity
plans for Year 2000 issues. While this initiative is broad in scope, it has been
structured to identify and prioritize efforts for mission critical systems,
products and key business partners.
As of June 30, 1999, the majority of the Company's critical applications are
currently prepared to process Year 2000 information. In addition, we have
conducted integration testing of our critical systems. During the remainder of
1999, the Year 2000 committee will focus attention to continue remediation and
testing on a few remaining internal business systems and contingency planning.
The Company's products with time-of-day ("TOD") clocks in their design have been
tested for successful Year 2000 operation. Products that do not have TOD clocks
have no potential Year 2000 operational issues and therefore have not been
tested. The Company believes that it will have no material exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
In order to ensure year 2000 compliance among the Company's key suppliers and
business partners, the Year 2000 committee developed surveys that were provided
to the suppliers in addition to verifying compliance efforts via the supplier
and business partners Web site for Year 2000 compliance-related information. The
Company continues to examine where and how outside suppliers and business
partners impact the business and apply the same mission-critical standard to
suppliers and business partners that applies to the Company's own internal
systems. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company currently estimates the expenses associated with the anticipated
Year 2000 efforts to be approximately $0.1 million through 1999 with an
additional $0.3 million for capital improvement costs to support this project.
The costs expensed to date have approximated the Company's initial estimates.
The timing of the Company's expenses may vary and is not necessarily indicative
of readiness efforts or progress to date. The Company anticipates that a portion
of the Year 2000 expenses will not be incremental costs, but rather will
represent the redeployment of existing information technology resources.
15
<PAGE> 16
As part of the Year 2000 initiative, the Company is evaluating scenarios that
may occur as a result of the century change and is in the process of developing
contingency and business plans that address potential Year 2000-related
occurrences. These plans are expected to assess the potential for business
disruption and to provide operational back up, recovery and restoration
alternatives.
The above information is based on the Company's current best estimates. Given
the complexity of the Year 2000 issues and risks, actual results may vary
materially from those anticipated and discussed above. Specific factors that
might cause such differences include, among others, the availability and cost of
personnel trained in this area, the ability to locate and correct all affected
computer systems, applications and products and the timing and success of
remedial efforts of the Company's third party suppliers and business partners.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of June 26, 1999, the Company had a backlog of
$7,431,562 compared to $570,155 at December 31, 1998 and $2,202,611 at June 27,
1998. During the latter part of June 1999, the Company received a non-cancelable
order from an Original Equipment Manufacturing (OEM) customer of approximately
$4 million for one of the company's MCU products. It is expected that all
products subject to the order will be delivered during the third quarter of
1999, but delivery may be deferred until no later than November 30, 1999. The
Company has not been given reason to expect that this order will be repeated by
this customer in comparable volume in the foreseeable future. As with any OEM
purchases, there is a possibility that this order may reduce the Company's
direct sales of other MCU products to its customer base in some future period.
For these reasons, this order is not necessarily indicative of a corresponding
increase in sales during the second half of 1999. Periodic fluctuations in
customer orders and backlog result from a variety of factors, including but not
limited to the timing of significant orders and shipments, and are not
necessarily indicative of long-term trends in sales of the Company's products.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On May 6, 1999, the Company held its annual shareholders meeting. At
the meeting, Christian L. Allison, Daniel P. Barry, and David S. Egan were
elected to the Board of Directors for a three-year term expiring at the annual
meeting of shareholders in 2002. The terms of Directors James J. Barnes and
Rocco L. Flaminio continued after the meeting and will expire at the annual
meeting of shareholders in 2000. The terms of Directors Richard H. Heibel and
Robert W. Kampmeinert also continued after the meeting and will expire at the
annual meeting of shareholders in 2001. In addition, the Company's 1995
Long-Term Incentive Compensation Plan (the "Plan") was amended to increase the
number of shares authorized issuance under the Plan. Also, the shareholders
ratified the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for fiscal year 1999. The results of the voting were as
follows:
<TABLE>
<CAPTION>
Total Votes
Cast For Against Withheld Abstained
---- --- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors:
- ----------------------
Christian L. Allison 5,369,968 5,090,828 -- 279,140 --
Daniel P. Barry 5,369,968 5,091,878 -- 278,090 --
Amendment of 1995 Long-Term Incentive
- -------------------------------------
Compensation Plan 5,369,968 4,300,317 1,018,138 -- 51,513
- -----------------
Ratification of Appointment of 5,369,968 5,314,734 45,018 -- 10,216
- ------------------------------
PricewaterhouseCoopers LLP
- --------------------------
</TABLE>
17
<PAGE> 18
ITEM 5. OTHER INFORMATION
- --------------------------
At a meeting on July 15, 1999, the Board of Directors of the Company approved
the addition of a new Section 3.17 to Article III of the Bylaws of the Company.
The new Section 3.17 requires that any shareholder of the Company intending to
present a nomination of a person for election to the Board of Directors of the
Company or a proposal for action by the shareholders at an annual or special
meeting must give written notice of the nomination or proposal, containing
specified information, to the Secretary of the Company not later than the notice
deadline established under the new Section 3.17 of the Bylaws. The notice
deadline will generally be 60 days prior to the anniversary date of the
Company's proxy statement for the previous year's annual meeting. For the 2000
annual meeting, this notice deadline will be January 26, 2000. Compliance with
the notice requirements of the new section of the Bylaws will be required in
order for a nomination or shareholder proposal to be presented for a shareholder
vote at an annual or special meeting.
The new section of the Bylaws also provides that nominations of persons for
election to the Board of Directors will exclusively be made by the Board or a
Committee appointed by the Board. The Nominating Committee of the Company has
been appointed by the Board to make such nomination and will consider candidates
proposed by shareholders who meet the notice and information requirements
specified in new Section 3.17 of the Bylaws.
The new section of the Bylaws will not affect any rights of a shareholder to
request inclusion of a proposal in the Company's proxy statement pursuant to
Securities and Exchange Commission Rule 14a-8 or to present for action at an
annual meeting any proposal so included. Rule 14a-8 requires that notice of
shareholder proposals requested to be included in the Company's proxy materials
pursuant to that Rule must generally be furnished to the Company not later than
120 days prior to the anniversary date of the Company's proxy statement for the
previous year's annual meeting. For the 2000 annual meeting, the Rule 14a-8
notice deadline is November 26, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit
Number Description
------ -----------
3.2 Amended and Restated Bylaws of the Company dated
July 15, 1999, filed herewith.
10.29 Change in Control Agreement, entered into July 16,
1999 between the Company and Donald J. Pavlek, file
herewith.
15 Letter re unaudited interim financial information
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended June 26, 1999.
18
<PAGE> 19
SIGNATURE
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.
TOLLGRADE COMMUNICATIONS, INC.
(REGISTRANT)
Dated: August 10, 1999 /s/ CHRISTIAN L. ALLISON
-----------------------------------------------
CHRISTIAN L. ALLISON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: August 10, 1999 /s/ SAMUEL C. KNOCH
-----------------------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER AND TREASURER
Dated: August 10, 1999 /s/ BRADLEY N. DINGER
-----------------------------------------------
BRADLEY N. DINGER
CONTROLLER
19
<PAGE> 20
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
- ------ -----------
3.2 Amended and Restated Bylaws of the Company dated July 15, 1999,
filed herewith.
10.29 Change in Control Agreement, entered into July 16, 1999 between
the Company and Donald J. Pavlek, filed herewith.
15 Letter re unaudited interim financial information
27 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 3.2
B Y L A W S
OF
TOLLGRADE COMMUNICATIONS, INC.
(a Pennsylvania Corporation)
...ooOoo...
ARTICLE I
Offices and Fiscal Year
Section 1.01. Registered Office. The registered office of the
corporation in Pennsylvania shall be at 493 Nixon Road, Cheswick, Pennsylvania
15023, until otherwise established by an amendment of the articles or the board
of directors and a record of such change is filed with the Department of State
in the manner provided by law.
Section 1.02. Other Offices. The corporation may also have offices at
such other places within or without Pennsylvania as the board of directors may
from time to time appoint or the business of the corporation may require.
Section 1.03. Fiscal Year. The fiscal year of the corporation shall
begin on the first day of January in each year.
ARTICLE II
Notice - Waivers - Meetings Generally
Section 2.01. Manner of giving notice.
(a) General rule. Whenever written notice is required to be given to
any person under the provisions of the Business Corporation Law or by the
articles or these bylaws, it may be given to the person either personally or by
sending a copy thereof by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier services, charges prepaid, or by telecopier, to the address
(or to the telex, TWX, telecopier or telephone number) of the person appearing
on the books of the corporation or, in the case of directors, supplied by the
director to the corporation for the purpose of notice. If the notice is sent by
mail, telegraph or courier service, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person or, in the case
of telex or TWX, when dispatched. A notice of meeting shall specify the place,
day and hour of the meeting and any other information required by any other
provision of the Business Corporation Law, the articles or these bylaws.
(b) Adjourned shareholder meetings. When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the board
fixes a new record date for the adjourned meeting.
<PAGE> 2
Section 2.02. Notice of meetings of board of directors. Notice of a
regular meeting of the board of directors need not be given. Written notice of
every special meeting of the board of directors shall be given to each director
by telephone or in writing at least 24 hours (in the case of notice by
telephone, telex or TWX) or 48 hours (in the case of notice by telecopier,
telegraph, courier service or express mail) or five day (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
board need be specified in any notice of the meeting.
Section 2.03. Notice of meetings or shareholders.
(a) General rule. Written notice of every meeting of the shareholders
shall be given by, or at the direction of, the secretary to each shareholder of
record entitled to vote at the meeting at 10 days prior to the day named for the
meeting. If the secretary neglects or refuses to give notice of a meeting, the
person or persons calling the meeting may do so. In the case of a special
meeting of shareholders, the notice shall specify the general nature of the
business to be transacted.
(b) Notice of action by shareholders on bylaws. In the case of a
meeting of shareholders that has as one of its purposes action on the bylaws,
written notice shall be given to each shareholder that the purpose, or one of
the purposes, of the meeting is to consider the adoption, amendment or repeal of
the bylaws. There shall be included in, or enclosed with, the notice a copy of
the proposed amendment or a summary of the changes to be effected thereby.
Section 2.04. Waiver of notice.
(a) Written waiver. Whenever any written notice is required to be
given under the provisions of the Business Corporation Law, the articles or
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of the notice. Except as otherwise required
by this subsection, neither the business to be transacted at, nor the purpose
of, a meeting need be specified in the waiver of notice of the meeting. In the
case of a special meeting of shareholders, the waiver of notice shall specify
the general nature of the business to be transacted.
(b) Waiver by attendance. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
Section 2.05. Modification of proposal contained in notice. Whenever
the language of a proposed resolution is included in a written notice of a
meeting required to be given under the provisions of the Business Corporation
Law or the articles or these bylaws, the meeting considering the resolution may
without further notice adopt it with such clarifying or other amendments as do
not enlarge its original purpose.
Section 2.06. Exception to requirement of notice.
(a) General rule. Whenever any notice or communication is required to
be given to any person under the provisions of the Business Corporation Law or
by the articles or these bylaws or by the terms of any agreement or other
instrument or as a condition precedent to taking any corporate action and
communication with that person is then unlawful, the giving of the notice or
communication to that person shall not be required.
<PAGE> 3
(b) Shareholders without forwarding addresses. Notice or other
communications shall not be sent to any shareholder with whom the corporation
has been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the corporation with a current address. Whenever the
shareholder provides the corporation with a current address, the corporation
shall commence sending notices and other communications to the shareholder in
the same manner as to other shareholders.
Section 2.07. Use of conference telephone and similar equipment. The
board of directors may provide by resolution with respect to a specific meeting
or with respect to a class of meetings that one or more persons may participate
in a meeting of the board of directors or of the shareholders of the corporation
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this section shall constitute presence in
person at the meeting.
ARTICLE III
Meetings of Shareholders
Section 3.01. Place of Meeting. All meetings of the shareholders of
the corporation shall be held at the registered office of the corporation unless
another place is designated by the board of directors in the notice of a
meeting.
Section 3.02. Annual Meeting. The board of directors may fix the date
and time of the annual meeting of the shareholders, but if no such date and time
is fixed by the board, the meeting for any calendar year shall be held on the
first Monday of June in such year, if not a legal holiday under the laws of
Pennsylvania, and, if a legal holiday, then on the next succeeding business day,
not a Saturday, at 10:00 a.m., and at said meeting the shareholders then
entitled to vote shall elect directors and shall transact such other business as
may properly be brought before the meeting. If the annual meeting shall not have
been called and held within six months after the designated time, any
shareholder may call the meeting at any time thereafter.
Section 3.03. Special Meetings. Special meetings of the shareholders
may be called at any time by resolution of the board of directors, which may fix
the date, time or place of the meeting, it shall be the duty of the secretary to
do so. A date fixed by the secretary shall not be more than 60 days after the
date of the adoption of the resolution of the board calling the special meeting.
Section 3.04. Quorum and Adjournment.
(a) General rule. A meeting of shareholders of the corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
board of directors of this corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
(b) Withdrawal of a quorum. The shareholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
<PAGE> 4
(c) Adjournments generally. Any regular or special meeting may be
adjourned for such period and to such place as the shareholders present and
entitled to vote shall direct.
(d) Electing directors at adjourned meeting. Those shareholders
entitled to vote who attend a meeting called for the election of directors that
has been previously adjourned for lack of a quorum, although less than a quorum
as fixed in this section, shall nevertheless constitute a quorum for the purpose
of electing directors.
(e) Other action in absence of quorum. Those shareholders entitled to
vote who attend a meeting of shareholders that has been previously adjourned for
one or more periods aggregating at least IS days because of an absence of a
quorum, although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if the notice states that those shareholders who attend
the adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
Section 3.05. Action by shareholders.
(a) General rule. Except as otherwise provided in the Business
Corporation Law or the articles or these bylaws, whenever any corporate action
is to be taken by vote of the shareholders of the corporation, it shall be
authorized by a majority of the votes cast at a duly organized meeting of
shareholders by the holders of shares entitled to vote thereon.
(b) Interested shareholders. Any merger or other transaction
authorized under the Business Corporation Law between the corporation or a
subsidiary thereof and a shareholder of this corporation, or any voluntary
liquidation authorized under the Business Corporation Law in which a shareholder
is treated differently from other shareholders of the same class (other than any
dissenting shareholders), shall require the affirmative vote of the shareholders
entitled to cast at least a majority of the votes that all shareholders other
than the interested shareholder are entitled to cast with respect to the
transaction, without counting the vote of the interested shareholder, for the
purposes of the preceding sentence, interested shareholder shall include the
shareholder who is a party to the transaction or who is treated differently from
other shareholders and any person, or group of persons, that is acting jointly
or in concert with the interested shareholder and any person who, directly or
indirectly, controls, is controlled by or is under common control with the
interested shareholder. An interested shareholder shall not include any person
who, in good faith and not for the purpose of circumventing this subsection, is
an agent, bank, broker, nominee or trustee for one or more other persons, to the
extent that the other person or persons are not interested shareholders.
(c) Exceptions. Subsection (b) shall not apply to a transaction:
(1) that has been approved by a majority vote of the board of
directors without counting the vote of directors who:
(i) are directors or officers of, or have a material equity
interest in, the interested shareholder; or
(ii) were nominated for election as a director by the interested
shareholder, and first elected as a director, within 24 months of the
date of the vote on the proposed transaction; or
(2) in which the consideration to be received by the shareholders for
shares of any class of which shares are owned by the interested shareholder is
not less than the highest amount paid by the interested shareholder in acquiring
shares of the same class.
(d) Additional approvals. The approvals required by subsection (b)
shall be in addition to, and not in lieu of, any other approval required by the
Business Corporation Law, the articles of these bylaws, or otherwise.
<PAGE> 5
Section 3.06. Organization. At every meeting of the shareholders, the
chairman of the board, the president, or, in the case of vacancy in office or
absence of the chairman of the board, one of the following officers present in
the order stated: the vice presidents in their order of rank and seniority, or a
person chosen by vote of the shareholders present, shall act as chairman of the
meeting. The secretary, or, in the absence of the secretary, an assistant
secretary, or in the absence of both the secretary and assistant secretaries, a
person appointed by the chairman of the meeting, shall act as secretary.
Section 3.07. Voting rights of shareholders. Unless otherwise provided
in the articles, every shareholder of the corporation shall be entitled to one
vote for every share standing in the name of the shareholder on the books of the
corporation.
Section 3.08. Voting and other action by proxy.
(a) General rule.
(1) Every shareholder entitled to vote at a meeting of
shareholders may authorize another person to act for the shareholder
by proxy.
(2) The presence of, or vote or other action at meeting of
shareholders by a proxy of a shareholder shall constitute the presence
of, or vote or action by the shareholder.
(3) Where two or more proxies of a shareholder are present, the
corporation shall, unless otherwise expressly provided in the proxy,
accept as the vote of all shares represented thereby the vote cast by
a majority of them and, if a majority of the proxies cannot agree
whether the shares represented shall be voted or upon the manner of
voting the shares, the voting of the shares shall be divided equally
among those persons.
(b) Minimum requirements. Every proxy shall be executed in writing by
the shareholder and filed with the secretary of the corporation. A proxy, unless
coupled with an interest, shall be revocable at will, notwithstanding any other
agreement or any provision in the proxy to the contrary, but the revocation of a
proxy shall not be effective until written notice thereof has been given to the
secretary of the corporation. An unrevoked proxy shall not be valid after three
years from the date of its execution unless a longer time is expressly provided
therein. A proxy shall not be revoked by the death or incapacity of the maker
unless, before the vote is counted or the authority is exercised, written notice
of the death or incapacity is given to the secretary of the corporation.
Section 3.09. Voting by fiduciaries and pledgees. Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledges, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
Section 3.10. Voting by joint holders of shares.
(a) General rule. Where shares of the corporation are held jointly or
as tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person or
by proxy, all of the shares standing in the names of such persons
shall be deemed to be represented
<PAGE> 6
for the purpose of determining a quorum and the corporation shall
accept as the vote of all the shares the vote cast by a joint owner or
a majority of them; and
(2) if the persons are equally divided upon whether the shares
held by them shall be voted or upon the manner of voting the shares,
the voting of the shares shall be divided equally among the persons
without prejudice to the rights of the joint owners or the beneficial
owners thereof among themselves.
(b) Exception. If there has been filed with the secretary of the
corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
Section 3.11. Voting by corporations.
(a) Voting by corporate shareholders. Any corporation that is a
shareholder of this corporation may vote at meetings of shareholders of this
corporation by any of its officers or agents, or by proxy appointed by any
officer or agent, unless some other person, by resolution of the board of
directors of the other corporation or a provision of its articles or bylaws, a
copy of which resolution or provision certified to be correct by one of its
officers has been filed with the secretary of this corporation, is appointed its
general or special proxy in which case that person shall be entitled to vote the
shares.
(b) Controlled shares. Shares of this corporation owned, directly or
indirectly, by it and controlled, directly or indirectly, by the board of
directors of this corporation, as such, shall not be voted at any meeting and
shall not be counted in determining the total number of outstanding shares for
voting purposes at any given time.
Section 3.12. Determination of shareholders of record.
(a) Fixing record date. The board of directors may fix a time prior to
the date of any meeting of shareholders as a record date for the determination
of the shareholders entitled to notice of, or to vote at, the meeting, which
time, except in the case of an adjourned meeting, shall be not more than 90 days
prior to the date of the meeting of shareholders. Only shareholders of record on
the date fixed shall be so entitled notwithstanding any transfer of shares on
the books of the corporation after any record date fixed as provided in this
subsection. The board of directors may similarly fix a record date for the
determination of shareholders of record for any other purpose. When a
determination of shareholders of record has been made as provided in this
section for purposes of a meeting, the determination shall apply to any
adjournment thereof unless the board fixes a new record date for the adjourned
meeting.
(b) Determination when a record date is not fixed. If a record date is
not fixed:
(1) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholder shall be at the close
of business on the day next preceding the day on which notice is
given.
(2) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
<PAGE> 7
(c) Certification by nominee. The board of directors may adopt
a procedure whereby a shareholder of the corporation may certify in writing to
the corporation that all or a portion of the shares registered in the name of
the shareholder are held for the account of a specified person or persons. Upon
receipt by the corporation of a certification complying with the procedure, the
persons specified in the certification shall be deemed, for the purposes set
forth in the certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
Section 3.13. Voting lists.
(a) General rule. The officer or agent having charge of the transfer
records for shares of the corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof except that, if the corporation has
5,000 or more shareholders, in lieu of the making of the list the corporation
may make the information therein available at the meeting by any other means.
(b) Effect of list. Failure to comply with the requirements of this
section shall not affect the validity of any action taken at a meeting prior to
a demand at the meeting by any shareholder entitled to vote thereat to examine
the list. The original transfer records, or a duplicate thereof kept in this
Commonwealth, shall be prima facie evidence as to who are the shareholders
entitled to examine the list or transfer records or to vote at any meeting of
shareholders.
Section 3.14. Judges of election.
(a) Appointment. In advance of any meeting of shareholders of the
corporation, the board of directors may appoint judges of election, who need not
be shareholders, to act at the meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of the meeting may, and on
the request of any shareholder shall, appoint judges of election at the meeting.
The number of judges shall be one or three. A person who is a candidate for
office to be filled at the meeting shall not act as a judge.
(b) Vacancies. In case any person appointed as a judge fails to appear
or fails or refuses to act, the vacancy may be filled by appointment made by the
board of directors in advance of the convening of the meeting or at the meeting
by the presiding officer thereof.
(c) Duties. The judges of election shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, the authenticity, validity and effect of
proxies, receive votes or ballots, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes, determine the result and do such acts as maybe proper to
conduct the election or vote with fairness to all shareholders. The judges of
election shall perform their duties impartially, in good faith, to the best of
their ability and as expeditiously as is practical. If there are three judges of
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all.
(d) Report. On request of the presiding officer of the meeting, the
judges shall make a report in writing of any challenge or question or matter
determined by them, and execute a certificate of any fact found by them. Any
report or certificate made by them shall be prima facie evidence of the facts
stated therein.
<PAGE> 8
Section 3.15. Consent of shareholders in lieu of meeting. Any action
required or permitted to be taken at a meeting of the shareholders or of a class
of shareholders may be taken without a meeting only upon the unanimous written
consent of all shareholders who would have been entitled to vote thereon at a
meeting of shareholders called to consider the matter.
Section 3.16. Minors as security holders. The corporation may treat a
minor who holds shares or obligations of the corporation as having capacity to
receive and to empower others to receive dividends, interest, principal and
other payments or distributions, to vote or express consent or dissent and to
make elections and exercise rights relating to such shares or obligations
unless, in the case of payments or distributions on shares, the corporate
officer responsible for maintaining the list of shareholders or the transfer
agent of the corporation or, in the case of payments or distributions or
obligations, the treasurer or paying officer or agent has received written
notice that the holder is a minor.
Section 3.17. Notice of Shareholder Business and Nominations.
(a) Annual Meetings of Shareholders.
(1) Nominations of persons for election to the Board of Directors of
the corporation and the proposal of business to be considered by the
shareholders at an annual meeting of shareholders must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors (including by a Committee appointed by the Board of
Directors), (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors (including by a Committee appointed by the
Board of Directors), or (c) otherwise properly brought before the meeting by a
shareholder of the corporation who was a shareholder of record at the time of
giving of notice provided for in this Section 3.17(a), who is entitled to vote
at the meeting and who complied with the notice procedures set forth in this
Section 3.17(a). Nominations of persons for election to the Board of Directors
of the corporation shall exclusively be made by the Board (or a Committee
thereof appointed by the Board, including the Nominating Committee), which will
consider nominations properly made by shareholders in accordance with the
procedures of Section 3.17(a)(2) below.
(2) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to paragraph (a)(1) of this Section
3.17, the shareholder must have given timely notice thereof in writing to the
Secretary of the corporation and such other business must be a proper matter for
shareholder action. To be timely, a shareholder's notice shall be delivered to
the Secretary at the principal executive offices of the corporation not later
than the close of business on the 60th day nor earlier than the close of
business on the 120th day prior to the first anniversary of the date of the
preceding year's proxy statement for the annual meeting; provided, however, that
in the event that the date of the annual meeting is more than 30 days before or
more than 60 days after the first anniversary of the preceding year's annual
meeting, notice by the shareholder to be timely must be so delivered not earlier
than the close of business on the 120th day prior to such annual meeting and not
later than the close of business on the later of the 90th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a shareholder's notice as described above. Such shareholder's
notice shall set forth (a) as to each person whom the shareholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is
<PAGE> 9
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act",) and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected), along with a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholders; (b) as to any other business that the shareholder proposes to
bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and the
beneficial owner, if any, on whose behalf the proposal is made; (c) a
representation that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person or persons or raise the proposal specified in
the notice; and (d) as to the shareholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (i) the name
and address of such shareholder, as they appear on the corporation's books, and
of such beneficial owner and (ii) the class and number of shares of the
corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this By-Law to the contrary, but subject to Section 4.04 of the
By-Laws, in the event that the number of directors to be elected to the Board of
Directors of the corporation is increased and there is no public announcement
naming all of the nominees for director or specifying the size of the increased
Board of Directors made by the corporation at least 70 days prior to the first
anniversary of the date of the preceding year's proxy statement for the annual
meeting, a shareholder's notice required by this Section 3.17(a) shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the corporation.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors at a special meeting of
shareholders at which directors are to be elected pursuant to the corporation's
notice of meeting must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors
(including by a Committee appointed by the Board of Directors), (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors (including by a Committee appointed by the Board of Directors), or (c)
otherwise properly brought before the meeting by a shareholder of the
corporation who was a shareholder of record at the time of giving of notice
provided for in this Section 3.17(b), who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 3.17(b).
Nominations of persons for election to the Board of Directors of the corporation
shall exclusively be made by the Board (or a Committee thereof appointed by the
Board, including the Nominating Committee), which will consider nominations
properly made by shareholders in accordance with the procedures of Section
3.17(b) below. In the event the corporation calls a special meeting of
shareholders for the purpose of electing one or more directors to the Board of
Directors, any such shareholder may propose for nomination a person or persons
(as the case may be), for election to such position(s) as specified
<PAGE> 10
in the corporation's notice of meeting, if the shareholder's notice required by
paragraph (a)(2) of this Section 3.17 shall be delivered to the Secretary at the
principal executive offices of the corporation not earlier than the close of
business on the 120th day prior to such special meeting and not later than the
close of business on the later of the 90th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
shareholder's notice as described above.
(c) General.
(1) Only such persons who are nominated by the Board of Directors or a
Committee of the Board in accordance with the procedures set forth in this
Section 3.17 shall be eligible to serve as directors and only such business
shall be conducted at a meeting of shareholders as shall have been brought
before the meeting in accordance with the procedures set forth in this Section
3.17. Except as otherwise provided by law, the Chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made, or proposed, as the case may
be, in accordance with the procedures set forth in this Section 3.17 and, if any
proposed nomination or business is not in compliance with this Section 3.17, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 3.17, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 3.17, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 3.17. Nothing in this Section 3.17 shall be deemed to
affect any rights of (i) shareholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) the holders of any series of Preferred Stock to elect directors under
specified circumstances.
ARTICLE IV
Board of Directors
Section 4.01. Powers; personal liability.
(a) General rule. Unless otherwise provided by statute, all powers
vested by law in the corporation shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be managed under the
direction of, the board of directors.
(b) Standard of care; justifiable reliance. A director shall stand in
a fiduciary relation to the corporation and shall perform his or her duties as a
director, including duties as a member of any committee of the board upon which
the director may serve, in good faith, in a manner the director reasonably
believes to be in the best interests of the corporation and with such care,
including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. In performing his or her duties,
a director shall be entitled to rely in good faith on information, opinions,
reports or statements, including financial statements and other financial data,
in each case prepared or presented by any of the following:
<PAGE> 11
(1) One or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the
matters presented.
(2) Counsel, public accountants or other persons as to matters
which the director reasonably believes to be within the professional
or expert competence of such person.
(3) A committee of the board upon which the director does not
serve, duly designated in accordance with law, as to matters within
its designated authority, which committee the director reasonably
believes to merit confidence.
A director shall not be considered to be acting in good faith if the director
has knowledge concerning the matter in question that would cause his or her
reliance to be unwarranted.
(c) Consideration of factors. In discharging the duties of their
respective positions, the board of directors, committees of the board and
individual directors may have, in considering the best interests of the
corporation, consider the effects of any action upon employees, upon suppliers
and customers of the corporation and upon communities in which offices or other
establishments of the corporation are located, and all other pertinent factors.
The consideration of those factors shall not constitute a violation of
subsection (b).
(d) Presumption. Absent breach of fiduciary duty, lack of good faith
or self-dealing, actions taken as a director or any failure to take any actin
shall be presumed to be in the best interests of the corporation.
(e) Personal liability of directors.
(1) A director shall not be personally liable, as such, for
monetary damages for any action taken, or any failure to take any
actin, unless:
(i) the director has breached or failed to perform the
duties of his or her office under this section; and
(ii) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
(2) The provisions of paragraph (1) shall not apply to the
responsibility or liability of a director pursuant to any criminal
statute, or the liability of a director for the payment of taxes
pursuant to local, State or Federal law.
(f) Notation of dissent. A director who is present at a meeting of the
board of directors, or of a committee of the board, at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his or her dissent is entered in the minutes of the meeting or unless the
director files a written dissent to the action with the secretary of the meeting
before the adjournment thereof or transmits the dissent in writing to the
secretary of the corporation immediately after the adjournment of the meeting,
the right to dissent shall not apply to a director who voted in favor of the
action. Nothing in this section shall bar a director from asserting that minutes
of the meeting incorrectly omitted his or her dissent if, promptly upon receipt
of a copy of such minutes, the director notifies the secretary, in writing, of
the asserted omission or inaccuracy.
Section 4.02. Qualifications and selection of directors.
(a) Qualifications. Each director of the corporation shall be a
natural person of full age who need not be a resident of this commonwealth or a
shareholder of the corporation.
(b) Election of directors. The candidates receiving the highest number
of votes from each class or group of classes, if any, entitled to elect
directors separately up to the number of directors to be elected by the class or
group of classes shall be elected. If at any meeting of
<PAGE> 12
shareholders, directors of more than one class are to be elected, each class of
directors shall be elected in a separate election.
Section 4.03. Number and term of office.
(a) Number. The board of directors shall consist of such number of
directors, not more than nine, as may be determined from time to time by
resolution of the board of directors.
(b) Term of office. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
has been selected and qualified or until his or her earlier death, resignation
or removal. A decrease in the number of directors shall not have the effect of
shortening the term of any incumbent director.
(c) Resignation. Any director may resign at any time upon written
notice to the corporation. The resignation shall be effective notice to the
corporation. The resignation shall be effective upon receipt thereof by the
corporation or at such subsequent time as shall be specified in the notice of
resignation.
(d) Classified board of directors. The directors shall be classified
in respect of the time for which they shall severally hold office as follows:
(1) Each class shall be as nearly equal in number as possible.
(2) The term of office of at least one class shall expire in each
year.
(3) The members of each class shall be elected for a period of
three years.
Section 4.04. Vacancies.
(a) General Rule. Vacancies in the board of directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the board though less than a
quorum, or by a sole remaining director, and each person so selected shall be a
director to serve until the next selection of the class for which such director
has been chosen, and until a successor has been selected and qualified or until
his or her earlier death, resignation or removal.
(b) Action by resigned directors. When one or more directors resign
from the board effective at a future date, the directors then in office,
including those who have so resigned, shall have power by the applicable vote to
fill the vacancies, the vote thereon to take effect when the resignations become
effective.
Section 4.05. Removal of directors.
(a) Removal by the shareholders. The entire board of directors, or any
class of the board, or any individual director may be removed from office by
vote of the shareholders entitled to vote thereon only for cause. In case the
board or a class of the board or any one or more directors are so removed, new
directors may be elected at the same meeting. The repeal of a provision of the
articles or these bylaws prohibiting, or the addition of a provision to the
articles or bylaws permitting, the removal by the shareholders of the board, a
class of the board or a director without assigning any cause shall not apply to
any incumbent director during the balance of the term for which he was selected.
(b) Removal by the board. The board of directors may declare vacant
the office of a director who has been judicially declared of unsound mind or who
has been convicted of an offense punishable by imprisonment for a term of more
than one year or if within 60 days after notice of his or her selection, the
director does not accept the office either in writing or by attending a meeting
of the board of directors.
<PAGE> 13
Section 4.06. Place of meetings. Meetings of the board of directors
may be held at such place within or without Pennsylvania as the board of
directors may from time to time appoint or as may be designated in the notice of
the meeting.
Section 4.07. Organization of meetings. At every meeting of the board
of directors, the chairman of the board, if there be one, or, in the case of a
vacancy in the office or absence of the chairman of the board, one of the
following officers present in the order stated: the vice chairman of the board,
if there be one, the president, the vice presidents in their order of rank and
seniority, or a person chosen by a majority of the directors present, shall act
as chairman of the meeting. The secretary, or, in the absence of the secretary,
an assistant secretary, or in the absence of the secretary and the assistant
secretaries, any person appointed by the chairman of the meeting, shall act as
secretary.
Section 4.08. Regular Meetings. Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors.
Section 4.09. Special Meetings. Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors.
Section 4.10. Quorum of and action of directors.
(a) General rule. A majority of the directors in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present shall be the acts
of the board of directors.
(b) Action by written consent. Any action required or permitted to be
taken at a meeting of the directors may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto by all of the directors
in office is filed with the secretary of the corporation.
Section 4.11. Executive and Other Committees.
(a) Establishment and powers. The board of directors may, by
resolution adopted by a majority of the directors in office, establish one or
more committees to consist of one or more directors of the corporation. Any
committee, to the extent provided in the resolution of the board of directors,
shall have and may exercise all of the powers and authority of the board of
directors except that a committee shall not have any power or authority as to
the following:
(1) The submission to shareholders of any action requiring
approval of shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the board of
directors.
(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the board that
by its terms is amendable or repealable only by the board.
(5) Action on matters committed by a resolution of the board of
directors to another committee of the board.
(b) Alternate committee members. The board may designate one or more
directors as alternate members of any committee who may replace any absent or
disqualified member at any meeting of the committee or for the purposes of any
written action by the committee. In the absence or disqualification of a member
and alternate member or members of a committee, the member or
<PAGE> 14
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another director
to act at the meeting in the place of the absent or disqualified member.
(c) Term. Each committee of the board shall serve at the pleasure of
the board.
(d) Committee Procedures. The term "board of directors" or "board,"
when used in any provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the board of directors, shall be
construed to include and refer to any executive or other committee of the board.
Section 4.12. Compensation. The board of directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the corporation.
ARTICLE V
Officers
Section 5.O1. Officers Generally.
(a) Number, qualifications and designation. The officers of the
corporation shall be a chairman and chief executive officer, a chief operating
officer and a president, one or more vice presidents, a secretary, a treasurer,
and such other officers as may be elected in accordance with the provisions of
Section 5.03. Officers may but need not be directors or shareholders of the
corporation. The president and secretary shall be natural persons of full age.
The treasurer may be a corporation, but if a natural person shall be of full
age. The board of directors shall elect from among the members of the board a
chairman of the board who shall be an officer of the corporation. Any number of
offices may be held by the same person.
(b) Resignations. Any officer may resign at any time upon written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as may be specified in the
notice of resignation.
(c) Bonding. The corporation may secure the fidelity of any or all of
its officers by bond or otherwise.
(d) Standard of care. Except as otherwise provided in the articles, an
officer shall perform his or her duties as an officer in good faith, in a manner
he or she reasonably believes to be in the best interests of the corporation and
with such care, including reasonable inquiry, skill and diligence, as a person
of ordinary prudence would use under similar circumstances. A person who so
performs his or her duties shall not be liable by reason of having been an
officer of the corporation.
Section 5.02. Election and terms of office. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03, shall be elected annually by the board of directors, and each such officer
shall hold office for a term of one year and until a successor has been selected
and qualified or until his or her earlier death, resignation or removal.
Section 5.03. Subordinate officers, committees and agents. The board
of directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws or as the board of
directors may
<PAGE> 15
from time to time determine. The board of directors may delegate to any officer
or committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof and to prescribe the authority
and duties of such subordinate officers, committees, thereof and to prescribe
the authority and duties of such subordinate officers, committees, employees or
other agents.
Section 5.04. Removal of officers and agents. Any officer or agent of
the corporation may be removed by the board of directors with or without cause.
The removal shall be without prejudice to the contract rights, if any, of any
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights.
Section 5.05. Vacancies. A vacancy, in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the board of directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03, as the case may be, and
if the office is one for which these bylaws prescribe a term, shall be filled
for the unexpired portion of the term.
Section 5.06. Authority. All officers of the corporation, as between
themselves and the corporation, shall have such authority and perform such
duties in the management of the corporation as may be provided by or pursuant to
resolutions or orders of the board of directors or in the absence of controlling
provisions in the resolutions or orders of the board of directors, as may be
determined by or pursuant to these bylaws.
Section 5.07. The Chairman of the Board and President. The Chairman of
the Board or in the absence of the Chairman, the President, shall preside at all
meetings of the shareholders and of the board of directors and shall perform
such other duties as may from time to time be requested by the board of
directors.
Section 5.08. The Chairman. The Chairman shall be the Chief Executive
Officer of the corporation and shall have general supervision over all business
and operations of the corporation, subject however, to the control of the board
of directors. The Chairman shall sign, execute, and acknowledge, in the name of
the corporation, deeds, mortgages, bonds, contracts or other instruments
authorized by the board of directors, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors, or by
these bylaw, to some other officer or agent of the corporation; and, in general,
shall perform all duties incident to the office of chairman and such other
duties as from time to time may be assigned by the board of directors. Further,
the general responsibilities of the Chairman shall include the physical plant,
investor relations, equity events, key management morale, employee morale and
government relations.
Section 5.09. The Vice-Chairman. The Vice Chairman shall serve as
Chief Technology Officer but will have no additional powers or duties incident
to the honorary office of Vice-Chairman.
Section 5.10. The President. The President shall be the Chief
Operating Officer of the corporation and shall have responsibility for the day
to day operations of the business. Further, the general responsibilities of the
President shall include supervision of sales and marketing, long term strategic
planning, research and development, finance and production. The President shall
perform all duties, including the operational duties of the Chairman in the
absence of the Chairman. The President shall be a member of the Board of
Directors.
Section 5.11. The Vice President. The Vice Presidents of the
corporation shall consist of a Senior Vice President, Engineering, a Senior Vice
President, Design, a Senior Vice President,
<PAGE> 16
Strategic Products and such other Vice Presidents as may be designated from time
to time by resolution of the board of directors.
Section 5.12. The Secretary. The secretary or an assistant secretary
shall attend all meetings of the shareholders and of the board of directors and
shall record all the votes of the shareholders and of the directors and the
minutes of the meetings of the shareholders and of the board of directors and of
committees of the board in a book or books to be kept for that purpose; shall
see that notices are given and records and reports properly kept and filed by
the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties as
may from time to time be assigned by the board of directors or the president.
Section 5.13. The Treasurer. The treasurer or an assistant treasurer
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the board of directors may from time to time
designate; shall, whenever so required by the board of directors, render an
account showing all transactions as treasurer and the financial condition of the
corporation; and, in general, shall discharge such other duties as may from time
to time be assigned by the board of directors or the president.
Section 5.14. Salaries. The salaries of the officers elected by the
board of directors shall be fixed from time to time by the board of directors or
by such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from receiving
such salary or other compensation by reason of the fact that the officer is also
a director of the corporation.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
Section 6.01. Share certificates. Certificates for shares of the
corporation shall be in such form as approved by the board of directors, and
shall state that the corporation is incorporated under the laws of Pennsylvania,
the name of the person to whom issued, and the number and class of shares and
the designation of the series (if any) that the certificate represents. The
share transfer records and blank share certificates shall be kept by the
secretary or by any transfer agent or registrar designated by the board of
directors for that purpose.
6.02. Issuance. The share certificates of the corporation shall be
numbered and registered in the transfer records of the corporation as they are
issued. They shall be signed by the president or a vice president and by the
secretary or an assistant secretary or the treasurer or an assistant treasurer,
and shall bear the corporate seal, which may be a facsimile, engraved or
printed; but where such certificate is signed by a transfer agent or a registrar
the signature of any corporate office upon such certificate may be a facsimile,
engraved or printed. In case any officer who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer because of death, resignation or otherwise, before the certificate
is issued, it may be
<PAGE> 17
issued with the same effect as if the officer had not ceased to be such at the
date of its issue. The provisions of this Section 6.02 shall be subject to any
inconsistent or contrary agreement at this the between the corporation and any
transfer agent or registrar.
Section 6.03. Transfer. Transfers or shares shall be made on the
transfer records of the corporation upon surrender of the certificates therefor,
endorsed by the person named in the certificates or by an attorney lawfully
constituted in writing. No transfer shall be made inconsistent with the
provisions of the Uniform Commercial Code, 13 Pa.C.S. Sections 8101 et seq., and
its amendments and supplements.
Section 6.04. Record holder of shares. The corporation shall be
entitled to treat the person in whose name any share or shares of the
corporation stand on the books of the corporation s the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
Section 6.05. Lost, destroyed or mutilated certificates. The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefor, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate, upon satisfactory proof of such loss or
destruction and, if the board of directors shall so determine, the deposit of a
bond in such form and in such sum, and with such surety or sureties, as it may
direct.
ARTICLE VII
Indemnification of Directors, Officers
and other Authorized Representatives
Section 7.01. Scope of Indemnification.
(a) General Rule. The corporation shall indemnify an indemnified
representative against any liability incurred in connection with any proceeding
in which the indemnified representative may be involved as a party or otherwise
by reason of the fact that such person is or was serving in an indemnified
capacity, including, without limitation, liabilities resulting from any actual
or alleged breach or neglect of duty, error, misstatement or misleading
statement, negligence, gross negligence or act giving rise to strict products
liability, except:
(1) where such indemnification is expressly prohibited by
applicable law;
(2) where the conduct of the indemnified representative has been
finally determined pursuant to Section 7.06 or otherwise.
(i) to constitute willful misconduct or recklessness within
the meaning of 15 Pa.C.S. Section 1713 or any superseding
provision of law sufficient in the circumstances to bar
indemnification against liabilities arising from the conduct; or
(ii) to be based upon or attributable to the receipt by the
indemnified representative from the corporation of a personal
benefit to which the indemnified representative is not legally
entitled; or
(3) to the extent such indemnification has been finally
determined in a final adjudication pursuant to Section 7.06 to be
otherwise unlawful.
<PAGE> 18
(b) Partial Payment. If an indemnified representative is entitled to
indemnification in respect of a portion, but not all, of any liabilities to
which such person may be subject, the corporation shall indemnify such
indemnified representative to the maximum extent for such portion of the
liabilities.
(c) Presumption. The termination of a proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendera or its equivalent
shall not of itself create a presumption that the indemnified representative is
not entitled to indemnification.
(d) Definitions. For purposes of this Article:
(1) "indemnified capacity" means any and all past, present and
future service by an indemnified representative in ore or more
capacities as a director, officer, employee or agent of the
corporation, as a director, officer, employee, agent, fiduciary or
trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other entity or enterprise;
(2) "indemnified representative" means any and all directors and
officers of the corporation and any other person designated as an
indemnified representative by the board of directors of the
corporation (which may, but need not, include any person serving at
the request of the corporation, as a director, officer, employee,
agent, fiduciary or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgment, amount paid in
settlement, fine, penalty, punitive damages, excise tax assessed with
respect to an employee benefit plan, or cost or expense, of any nature
(including, without limitation, attorneys' fees and disbursements);
and
(4) "proceeding" means any threatened, pending or completed
action, suit, appeal or other proceedings of any nature, whether
civil, criminal, administrative or investigative, whether formal or
informal, and whether brought by or in the right of the corporation, a
class of its security holders or otherwise.
Section 7.02. Proceedings initiated by indemnified representatives.
Notwithstanding any other provision of this Article, the corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 7.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
Section 7.03. Advancing expenses. The corporation shall pay the
expenses (including attorneys' fees and disbursements) incurred in advance in
good faith by an indemnified representative in advance of the final disposition
of a proceeding described in Section 7.01 or 7.02 upon receipt of an undertaking
by or on behalf of the indemnified representative to repay the amount if it is
ultimately determined pursuant to Section 7.06 that such person is not entitled
to be indemnified by the corporation pursuant to this Article. The financial
ability of any indemnified representative to repay an advance shall not be a
prerequisite to the making of such advance.
<PAGE> 19
Section 7.04. Securing of indemnification obligations. To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust, escrow, cash collateral or other
fund or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the corporation, or use any
other mechanism or arrangement whatsoever in such amounts, at such costs, and
upon such other terms and conditions as the board of directors shall deem
appropriate. Absent fraud, the determination of the board of directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall not be subject to
voidability.
Section 7.05. Payment of indemnification. An indemnified
representative shall be entitled to indemnification within 30 days after a
written request for indemnification has been delivered to the secretary of the
corporation.
Section 7.06. Arbitration.
(a) General rule. Any dispute related to the right to indemnification,
contribution or advancement of expenses as provided under this Article, except
with respect to indemnification for liabilities arising under the Securities Act
of 1933 that the corporation has undertaken to submit to a court for
adjudication, shall be decided only by arbitration in the metropolitan area in
which the principal executive offices of the corporation are located at the
time, in accordance with commercial arbitration rules then in effect of the
American Arbitration Association, before a panel of three arbitrators, one of
whom shall be selected by the corporation, the second of whom shall be selected
by the indemnified representative and the third of whom shall be selected by the
other two arbitrators. In the absence of the American Arbitration Association,
or if for any reason arbitration under the arbitration rules of the American
Arbitration Association cannot be initiated, or if one of the parties fails or
refuses to select an arbitrator or if the arbitrators selected by the
corporation and the indemnified representative cannot agree on the selection of
the third arbitrator within 30 days after such time as the corporation and the
indemnified representative have each been notified of the selection of the
other's arbitrator, the necessary arbitrator or arbitrators shall be selected by
the presiding judge of the court of general jurisdiction in such metropolitan
area.
(b) Qualifications of arbitrators. Each arbitrator selected as
provided herein is required to be or have been a director or executive officer
of a corporation whose shares of common stock were listed during at least one
year of such service on the New York Stock Exchange or the American Stock
Exchange or quoted on the National Association of Securities Dealers Automated
Quotations System.
(c) Burden of proof. The party or parties challenging the right of an
indemnified representative to the benefits of this Article shall have the burden
of proof.
(d) Expenses. The corporation shall reimburse an indemnified
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration.
(e) Effect. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by any party in
accordance with applicable law in any court of competent jurisdiction, except
that the corporation shall be entitled to interpose as a defense in any such
judicial enforcement proceeding any prior final judicial determination adverse
to the indemnified representative under Section 7.01(a)(2) in a proceeding not
directly involving indemnification under this Article. This arbitration
provision shall be specifically enforceable.
<PAGE> 20
Section 7.07. Contribution. If the indemnification provided for in
this Article or otherwise is unavailable for any reason in respect of any
liability or portion thereof, the corporation shall contribute to the
liabilities to which the indemnified representative may be subject in such
proportion as is appropriate to reflect the intent of this Article or otherwise.
Section 7.08. Mandatory indemnification of directors, officers, etc.
To the extent that an authorized representative of the corporation has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in 15 Pa.C.S. Sections 1741 and 1742 or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees and disbursements) actually and reasonably incurred
by such person in connection therewith.
Section 7.09. Contract rights; amendments or repeal. All rights under
this Article shall be deemed a contract between the corporation and the
indemnified representative pursuant to which the corporation and each
indemnified representative pursuant to which the corporation and each
indemnified representative intend to be legally bound. Any repeal, amendment or
modification hereof shall be prospective only and shall not affect any rights or
obligations then existing.
Section 7.10. Scope of article. The rights granted by this Article
shall not be deemed exclusive or any other rights to which those seeking
indemnification, contribution or advancement of expenses may be entitled under
any statute, agreement, vote of shareholders or disinterested directors or
otherwise both as to action in an indemnified capacity and as to action in any
other capacity. The indemnification, contribution and advancement of expenses
provided by or granted pursuant to this Article shall continue as to a person
who has ceased to be an indemnified representative in respect of matters arising
prior to such time, and shall inure to the benefit of the heirs, executors,
administrators and personal representatives of such a person.
Section 7.11. Reliance on provisions. Each person who shall act as an
indemnified representative of the corporation shall be deemed to be doing so in
reliance upon the rights provided by this Article.
Section 7.12. Interpretation. The provisions of this Article are
intended to constitute bylaws authorized by 15 Pa.C.S.A. ss.513 (relating to
non-exclusivity and supplementary coverage).
ARTICLE VIII
Miscellaneous
Section 8.01. Corporate Seal. The corporation shall have a corporate
seal in the form of a circle containing the name of the corporation, the year of
incorporation and such other details as may be approved by the board of
directors.
Section 8.02. Checks. All checks, notes, bills or exchange or other
orders in writing shall be signed by such persons or persons as the board of
directors or any person authorized by resolution of the board of directors may
from time to time designate.
Section 8.03 Contracts.
(a) General Rule. Except as otherwise provided in the Business
Corporation Law in the cases of transactions which require action by the
shareholders, the board of directors may authorize any officer or agent to enter
into any contract or to execute or deliver any instrument on behalf of the
corporation, and such authority may be general or confined to specific
instances.
<PAGE> 21
(b) Statutory form of execution of instruments. Any note, mortgage,
evidence of indebtedness, contract or other document, or any assignment or
endorsement thereof, executed or entered into between the corporation and any
other person, when signed by one or more officers or agents having actual or
apparent authority to sign it, or by the president or vide president and
secretary or assistant secretary or treasurer or assistant treasurer of the
corporation, shall be held to have been properly executed for and in behalf of
the corporation, without prejudice to the rights of the corporation against any
person who shall have executed the instrument in excess of his or her actual
authority.
Section 8.04. Interested directors or officers; quorum.
(a) General rule. A contract or transaction between the corporation
and one or more of its directors or officers or between the corporation and
another corporation, partnership, joint venture, trust or other enterprise in
which one or more of its directors or officers are directors or officers or have
a financial or other interest, shall not be void or voidable solely for that
reason, or solely because the director of officer is present at or participate
in the meeting of the board of directors that authorizes the contract or
transaction, solely because his, or her or their votes are counted for that
purpose, if:
(1) the material facts as to the relationship or interest and as
to the contract or transaction are disclosed or are known to the board
of directors and the board authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors
even though the disinterested directors are less than a quorum;
(2) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon and the contract or
transaction is specifically approved in good faith by vote of those
shareholders; or
(3) the contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified by the board of
directors or the shareholders.
(b) Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board which authorizes
a contract or transaction specified in subsection (a).
Section 8.05. Deposits. All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositaries as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
Section 8.06. Corporate Records.
(a) Required records. The corporation shall keep complete and accurate
books and records of account, minutes of the proceedings of the incorporators,
shareholders and directors and a share registrar giving the names and addresses
of all shareholders and the number and class of shares held by each. The share
register shall be kept at either the registered office of the corporation in
this Commonwealth or at its principal place of business wherever situated or at
the office of its registrar or transfer agent. Any books, minutes or other
records may be in written form or any other form capable of being converted into
written form within a reasonable time.
(b) Right of inspection. Every shareholder shall, upon written
verified demand stating the purpose thereof, have a right to examine, in person
or by agent or attorney, during the usual hours for business for any proper
purpose, the share register, books and records of account, and
<PAGE> 22
records of the proceedings of the incorporators, shareholders and directors and
to make copies of extracts therefrom. A proper purpose shall mean a purpose
reasonably related to the interest of the person as a shareholder. In every
instance where an attorney or other agent is the person who seeks the right of
inspection, the demand shall be accompanied by a verified power of attorney or
other writing that authorizes the attorney or other agent to so act on behalf of
the shareholder. The demand shall be directed to the corporation at its
registered office in Pennsylvania or at its principal place of business wherever
situated.
Section 8.07. Amendment of By-Laws. These bylaws may be amended or
repealed, or new by-laws may be adopted, either (i) by vote of the shareholders
at any duly organized annual or special meeting of shareholders, or (ii) with
respect to those matters which are not by statute reserved exclusively to the
shareholders and regardless of whether the shareholders have previously adopted
or approved the by-law being amended or repealed, by vote of a majority of the
board of directors of the corporation in office at any regular or special
meeting of directors. Any change in these by-laws shall take effect when adopted
unless otherwise provided in the resolution effecting the change. See Section
2.03(b) (relating to notice of action by shareholders on by-laws).
<PAGE> 1
EXHIBIT 10.29
AGREEMENT
This Agreement, made as of the 16th day of July, 1999 by and between
TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation")
and Donald J. Pavlek, an individual residing in the Commonwealth of Pennsylvania
and an employee of the Corporation (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interests of the Corporation to enter into this Agreement with
the Executive to provide for compensation of the Executive upon termination of
employment under certain circumstances relating to a change in control of the
Corporation; and
WHEREAS, the Executive desires to obtain such benefits in the event
the Executive's employment is terminated under the circumstances provided
herein.
NOW, THEREFORE, in consideration of the covenants and premises
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITION OF TERMS. The following terms when used in this
Agreement shall have the meaning hereafter set forth:
"ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average
percentage increase in base salary for all elected officers of the
Corporation during the two full calendar years immediately preceding
the time to which such percentage is being applied; provided however,
that if after a Change-in-Control, as hereinafter defined, there
should be a significant change in the number of elected officers of
the Corporation or in the manner in which they are compensated, then
the foregoing definition shall be changed by substituting for the
phrase "elected officers of the Corporation" the phrase "persons then
performing the functions formerly performed by the elected officers of
the Corporation."
"CAUSE FOR TERMINATION" shall mean:
(a) the deliberate and intentional failure by the Executive to devote
substantially his entire business time and best efforts to the
performance of his duties (other than any such failure resulting
from the Executive's incapacity due to physical or mental illness
or disability) after a demand for substantial performance is
delivered to the Executive by the Board of Directors which
specifically identifies the manner in which the Board of
Directors believes that the Executive has not substantially
performed his duties, or
<PAGE> 2
(b) wilfully engaging by the Executive in conduct which constitutes a
fraud against the Corporation or a material breach of this
Agreement,
or
(c) the Executive's conviction of any crime which constitutes a
felony.
For purposes of this definition, no act, or failure to act, on the
Executive's part shall be considered "deliberate and intentional" or
"willfully" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that his action or
omission was in the best interests of the Corporation.
"CHANGE-IN-CONTROL" shall mean the determination (which may be made
effective as of a particular date specified by the Board of Directors
of the Corporation) by the Board of Directors of the Corporation, made
by a majority vote that a change in control has occurred, or is about
to occur. Such a change shall not include, however, a restructuring,
reorganization, merger, or other change in capitalization in which the
Persons who own an interest in the Corporation on the date hereof (the
"Current Owners")(or any individual or entity which receives from a
Current Owner an interest in the Corporation through will or the laws
of descent and distribution) maintain more than a sixty-five percent
(65%) interest in the resultant entity. Regardless of the Board's vote
or whether or not the Board votes, a Change-in-Control will be deemed
to have occurred as of the first day any one (1) or more of the
following subparagraphs shall have been satisfied:
(a) Any Person (other than the Person in control of the Corporation
as of the date of this Agreement, or other than a trustee or
other fiduciary holding securities under an employee benefit plan
of the Corporation, or a corporation owned directly or indirectly
by the stockholders of the Corporation in substantially the same
proportions as their ownership of stock of the Corporation),
becomes the beneficial owner, directly or indirectly, of
securities of the Corporation representing more than thirty five
percent (35%) of the combined voting power of the Corporation's
then outstanding securities; or
(b) The stockholders of the Corporation approve:
(i) A plan of complete liquidation of the Corporation;
(ii) An agreement for the sale or disposition of all or
substantially all of the Corporation's assets; or
(iii) A merger, consolidation, or reorganization of the
Corporation with or involving any other corporation, other
than a merger, consolidation, or reorganization that would
result in the voting securities of the Corporation
outstanding immediately
<PAGE> 3
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) at least sixty-five percent (65%) of
the combined voting power of the voting securities of the
Corporation (or such surviving entity) outstanding
immediately after such merger, consolidation, or
reorganization.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a
purchasing group which consummates the Change-in-Control transaction.
The Executive shall be deemed "part of the purchasing group" for
purposes of the preceding sentence if the Executive is an equity
participant or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership of less
than five percent (5%) of the voting securities of the purchasing
company; or (ii) ownership of equity participation in the purchasing
company or group which is otherwise deemed not to be significant, as
determined prior to the Change-in-Control by a majority of the
non-employee continuing Directors of the Board of Directors of the
Corporation).
"DATE OF TERMINATION" shall mean:
(a) if the Executive's employment is terminated for Disability, the
date that a Notice of Termination is given to the Executive;
(b) if the Executive terminates due to his death or Retirement, the
date of death or Retirement, respectively;
(c) if the Executive decides to terminate employment upon Good Reason
for Termination, the date following such decision specified by
the Corporation after it has been notified of the Executive's
decision to terminate employment; or
(d) if the Executive's employment is terminated for any other reason,
the date on which such termination becomes effective pursuant to
a Notice of Termination.
"DISABILITY" shall mean such incapacity due to physical or mental
illness or injury as causes the Executive to be unable to perform his
duties with the Corporation during 180 consecutive days.
"GOOD REASON FOR TERMINATION" shall mean the occurrence of:
(a) without the Executive's express written consent, the assignment
to the Executive of any duties materially and substantially
inconsistent with his positions, duties, responsibilities and
status with the Corporation immediately prior to a
Change-in-Control, or a material change in his reporting
responsibilities, titles or offices as in effect immediately
prior to a Change-in-Control, or any removal of the Executive
from or any failure to re-elect the Executive to any of such
positions, except in connection with the termination of the
Executive's employment due to Cause for Termination, Disability
or Retirement (as hereinafter defined) or as a result of the
Executive's death;
<PAGE> 4
(b) (i) a reduction by the Corporation prior to a Change-in-Control
in the Executive's base salary unless such reduction is the
result of the Board of Directors of the Corporation determining
that the Executive has not adequately discharged his duties;
(ii) a reduction by the Corporation after a Change-in-Control in
the Executive's base salary as in effect immediately prior to any
Change-in-Control or a failure by the Corporation after a
Change-in-Control to increase the Executive's base salary by the
Annual Salary Adjustment Percentage;
(c) a failure by the Corporation to continue to provide incentive
compensation comparable to that provided by the Corporation
immediately prior to any Change-in-Control;
(d) a failure by the Corporation after a Change-in-Control to
continue in effect any benefit or compensation plan, stock option
plan, pension plan, life insurance plan, health and accident plan
or disability plan in which the Executive is participating
immediately prior thereto (provided, however, that there shall
not be deemed to be any such failure if the Corporation
substitutes for the discontinued plan, a plan providing the
Executive with substantially similar benefits) or the taking of
any action by the Corporation which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any of such plans or deprive the Executive of any
material fringe benefit enjoyed by the Executive immediately
prior to a Change-in-Control (provided, however, that any act or
failure to act by the Corporation that is on a plan-wide basis,
i.e., it similarly affects all employees of the Corporation or
all employees eligible to participate in any such plan, as the
case may be, shall not constitute Good Reason for Termination);
(e) the failure of the Corporation to obtain the assumption of this
Agreement by any successor as contemplated in SECTION 10(C)
hereof;
(f) any purported termination of the employment of the Executive by
the Corporation which is not (i) due to the Executive's
Disability, Retirement (as hereinafter defined) or Cause for
Termination, or (ii) effected as a Notice of Termination, as
defined herein; or
(g) the Corporation's requiring the Executive to be based anywhere
other than the Corporation's executive offices at which the
Executive has his principal office immediately prior to a
Change-in-Control or executive offices located within 50 miles of
the location of the Corporation's executive offices immediately
prior to a Change-in-Control, except for required travel on the
Corporation's business to an extent substantially consistent with
the Executive's present business travel obligations.
<PAGE> 5
"NOTICE OF TERMINATION" shall mean a written statement which sets
forth the specific reason for termination and, if such is claimed to
be a Cause for Termination or Good Reason for Termination, in
reasonable detail the facts and circumstances which indicate that such
is Cause for Termination or Good Reason for Termination.
"OPTIONS" shall mean any stock options issued pursuant to any present
or future stock option plan of the Corporation.
"PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934, as in effect on the
date hereof and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"RETIREMENT" shall mean the termination of the Executive's employment
after age 65 or in accordance with any mandatory retirement
arrangement with respect to an earlier age agreed to by the Executive.
"STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights
issued pursuant to any stock option plan of the Corporation or any
future stock appreciation rights plan.
2. TERMS OF EMPLOYMENT. The Executive acknowledges that this Agreement
does not constitute an employment contract and that the Executive's employment
relationship with the Corporation is at-will and not for any particular period.
Rather, this Agreement is only intended to set forth certain liquidated damages
to be paid in the event of termination of the Executive upon the terms and
conditions specified herein.
3. TERM OF AGREEMENT. The initial term of this Agreement shall be for
a period of four (4) years. Upon expiration of the initial term, the Company
shall, in its sole discretion, determine whether this Agreement shall be renewed
upon such terms it deems advisable.
4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A
CHANGE-IN-CONTROL.
(a) If the Executive's employment with the Corporation shall be
terminated:
(i) due to the Executive's death,
(ii) by the Executive other than the Executive's having
terminated for Good Reason for Termination following a
Change-in-Control, or
(iii) by the Corporation due to Cause for Termination or for
Disability or Retirement,
then the Corporation shall have no obligations to the Executive
other than to pay the Executive any unpaid portion of base salary
due until the Date of Termination and any other sums due in
accordance with the then various policies, practices and benefit
plans of the Corporation.
<PAGE> 6
(b) If the Executive's employment with the Corporation shall have
terminated during the period commencing six months prior to the
date of a Change-in-Control and ending on the third anniversary
of a Change-in-Control other than in the circumstances described
in subsection (a) above, then the Corporation shall pay on or
before the fifth day following the Date of Termination (or if the
Date of Termination preceded the date of the Change-in-Control,
on or before the fifth day following the date of the
Change-in-Control), to the Executive the following sums:
(i) in cash any unpaid portion of the Executive's full base
salary for the period from the last period for which the
Executive was paid to the Date of Termination, or the date
of the Change-in-Control, as the case may be; and
(ii) an amount in cash as liquidated damages for lost future
renumeration equal to the product obtained by multiplying
(A) the lesser of
(1) two, or
(2) a number equal to the number of calendar months
remaining from the Date of Termination to the
date on which the Executive is 65 years of age
(or, if earlier, the age agreed to by the
Executive pursuant to any prior arrangement)
divided by twelve, or
(3) a number equal to the greater of (i) one (1.0)
and (ii) thirty six (36) less the number of
completed months commencing after the date of the
Change-in-Control during which the Executive was
employed by the Corporation and did not have Good
Reason for Termination times (iii) one-twelfth
(1/12)
times
(B) the sum of
(1) the greater of
(i) the Executive's annual base salary for the
year in effect on the Date of Termination
(provided that in the case of Termination for
Good Reason by the Executive the date
immediately preceding the date of the earliest
event which gave rise to the Termination for
Good Reason by the Executive shall be used
instead of the Date of Termination)
or
<PAGE> 7
(ii) the Executive's annual base salary for the
year in effect on the date of the
Change-in-Control;
plus
(2) the greater of
(i) the average annual cash award received by the
Executive as incentive compensation or bonus
for one calendar year immediately preceding
the Date of Termination (provided that in the
case of Termination for Good Reason by the
Executive the date immediately preceding the
date of the event which gave rise to the
Termination for Good Reason by the Executive
shall be used instead of the Date of
Termination)
or
(ii) the average annual cash award received by the
Executive as incentive compensation or bonus
for one calendar year immediately preceding
the date of the Change-in-Control.
5. OUTPLACEMENT SERVICES. If the Executive's employment with the
Corporation should terminate under circumstances as to entitle the Executive to
receive payment hereunder, the Corporation shall reimburse the Executive for any
reasonable fees or other costs incurred by the Executive during the two (2)
years following the Date of Termination in retaining executive placement
agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of
the Executive's base salary at the time of such termination. Such reimbursement
shall be made within five (5) days following the Executive's presentment of
bills or other evidence of the costs incurred with executive placement agencies.
6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to
this Agreement result in a tax being imposed on the Executive pursuant to
Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor
provision ("Section 4999"), then the Corporation shall, at the Executive's
option, either (i) reduce the total payments payable to the Executive to the
maximum amount payable without incurring the Section 4999 tax, or (ii) pay to
the Executive the total amount payable, with the understanding that Section 4999
tax will be due on that total amount.
<PAGE> 8
7. BENEFITS. If the Executive's employment with the Corporation should
terminate under circumstances as to entitle the Executive to receive payment
hereunder, the Executive shall also be deemed, for purposes of medical
insurance, pension and other benefits of the Corporation, to have remained in
the continuous employment of the Corporation for the two (2) year period
following the Date of Termination and shall be entitled to all of the medical
insurance, pension or other benefits provided by the Corporation as if the
Executive had so remained in the employment of the Corporation. If, for any
reason, whether by law or provisions of the Corporation's employee medical
insurance, pension or other benefit plans, or otherwise any benefits which the
Executive would be entitled to under this SECTION 6 cannot be paid pursuant to
such employee benefit plans, then the Corporation contractually agrees to pay
the Executive the difference between the benefits which the Executive would have
received in accordance with this Section if the relevant employee medical
insurance, pension or other benefit plan could have paid such benefit and the
amount of benefits, if any, actually paid by such employee medical insurance,
pension or other benefit plan. The Corporation shall not be required to fund its
obligation to pay the foregoing difference.
8. OTHER EMPLOYMENT. In the event of termination under the
circumstances contemplated in SECTION 4(B) hereunder, the Executive shall have
no duty to seek any other employment after termination of his employment with
the Corporation and the Corporation hereby waives and agrees not to raise or use
any defense based upon the position that the Executive had a duty to mitigate or
reduce the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should the Executive obtain other employment, then
the only effect of such on the obligations of the Corporation shall be that the
Corporation shall be entitled to credit against any payments that would
otherwise be made pursuant to SECTION 7 hereof, any comparable payments to which
the executive is entitled under the employee benefit plans maintained by the
Executive's other employer or employers in connection with services to such
employer or employers after termination of this employment with the Corporation.
9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's
employment should terminate under circumstances as to entitle the Executive to
receive payment hereunder, then with respect to any standing Stock Appreciation
Rights and/or Options which did not immediately become exercisable upon the
occurrence of a Change-in-Control, such Stock Appreciation Right or Option shall
be automatically vested and remain outstanding in accordance with its terms and
be exercisable thereafter until the stated expiration date of such Stock
Appreciation Right or Option.
10. MISCELLANEOUS.
(a) This Agreement shall be construed under the laws of the
Commonwealth of Pennsylvania.
(b) This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and may
only be amended or modified by written agreement signed by the
parties hereto.
<PAGE> 9
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the
Corporation, by agreement in form and substance satisfactory to
the Executive, to expressly assume and agree to perform this
Agreement in the same manner required of the Corporation and to
perform it as if no such succession had taken place. As used in
this Agreement, "Corporation" shall mean the Corporation as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement
provided for in this subsection (c) or which otherwise becomes
bound by all of the terms and provisions of this Agreement by
operation of law.
(d) This Agreement shall inure to the benefit of and be enforceable
by the Executive and the Corporation and their respective legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die
while any amounts would still be payable to him hereunder if he
had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of
this Agreement to his devisee, legatee or other designee or, if
there be no such designee, to his estate.
(e) Any notice or other communication provided for in this Agreement
shall be in writing and, unless otherwise expressly stated
herein, shall be deemed to have been duly given if mailed by
United States registered mail, return receipt requested, postage
prepaid, addressed in the case of the Executive to his office at
the Corporation with a copy to his residence and in the case of
the Corporation to its principal executive offices, attention to
the Chief Executive Officer.
<PAGE> 10
(f) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and approved by
resolution of the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made
by either party which are not set forth expressly in this
Agreement.
(g) The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or unenforceability of
any other provision of this Agreement, which shall remain in full
force and effect. If any provision hereof shall be deemed invalid
or unenforceable, either in whole or in part, this Agreement
shall be deemed amended to delete or modify, as necessary, the
offending provision and to alter the bounds thereof in order to
render it valid and enforceable.
(h) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which taken
together will constitute one and the same instrument.
(i) If litigation should be brought to enforce, interpret or
challenge any provision contained herein, the prevailing party
shall be entitled to its reasonable attorney's fees and
disbursements and other costs incurred in such litigation and, if
a money judgment be rendered in favor of the Executive, to
interest on any such money judgment obtained calculated at the
prime rate of interest in effect from time to time at Mellon
Bank, N.A., from the date that the payment should have been made
or damages incurred under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on the date first
above written.
TOLLGRADE COMMUNICATIONS, INC.
By: /s/ SARA M. ANTOL, SECRETARY
----------------------------
WITNESS:
/s/ DONALD J. PAVLEK
- ---------------------------------- ----------------------------
Donald J. Pavlek
<PAGE> 1
EXHIBIT 15
August 10, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Tollgrade Communications, Inc. and subsidiaries
1). Form S-8 (Registration No. 333-4290) 1995 Long-Term Incentive
Compensation Plan and Individual Stock Options Granted to Certain Directors and
Employees Prior to the Adoption of the Plan
2). Form S-8 (Registration No. 333-52907) 1998 Employee Incentive
Compensation Plan
Ladies and gentlemen:
We are aware that our report dated July 13, 1999 on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries for the
three-month and six month periods ended June 26, 1999 and included within the
Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in the registration statement referred to above.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED 6/26/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-28-1999
<PERIOD-END> JUN-26-1999
<CASH> 9,666,494
<SECURITIES> 12,073,738
<RECEIVABLES> 12,028,872
<ALLOWANCES> 198,801
<INVENTORY> 14,875,931
<CURRENT-ASSETS> 48,091,953
<PP&E> 7,613,021
<DEPRECIATION> 4,088,543
<TOTAL-ASSETS> 53,408,726
<CURRENT-LIABILITIES> 4,702,258
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0
0
<COMMON> 1,192,013
<OTHER-SE> 47,504,505
<TOTAL-LIABILITY-AND-EQUITY> 53,408,726
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<CGS> 5,902,774
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