<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1998
OR
[ ] 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 333-29547
INNOVA CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1453311
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3325 S. 116TH STREET, SEATTLE, WASHINGTON 98168
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 439-9121.
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 [ ].
Common stock, no par value: 14,005,877 shares outstanding
as of June 30, 1998
PAGE 1 OF 18
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INNOVA CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: Financial Information Page
----
<S> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
- December 31, 1997 and June 30, 1998 3
Condensed Consolidated Statements of Operations
- Three Months and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II Other Information 15
Item 6 Exhibits 16
</TABLE>
PAGE 2
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PART I
Item 1. Condensed Financial Statements
INNOVA CORPORATION
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,348 $ 2,455
Short-term investments 6,221 19,319
Accounts receivable - net of allowance 13,448 11,164
Inventories 22,670 12,048
Other current assets 288 250
-------- --------
Total current assets 46,975 45,236
Equipment and leasehold improvements at cost, net 16,657 11,134
Other assets 701 425
-------- --------
$ 64,333 $ 56,795
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 894 $ 1,103
Accounts payable 12,854 5,780
Accrued liabilities 1,207 837
-------- --------
Total current liabilities 14,955 7,720
Obligations under capital leases, excluding current installments 611 970
Stockholders' equity:
Common stock, no par value. Authorized 30,000,000 shares at June 30, 1998
and December 31, 1997; issued and outstanding 14,005,877 shares
at June 30, 1998 and 13,679,593 shares at December 31, 1997 86,801 86,621
Additional paid-in capital 3,262 3,262
Deferred stock option compensation expense (235) (397)
Accumulated other comprehensive income 90 54
Accumulated deficit (41,151) (41,435)
-------- --------
Total stockholders' equity 48,767 48,105
-------- --------
$ 64,333 $ 56,795
======== ========
</TABLE>
See Accompanying Notes
to Condensed Consolidated Financial Statements
PAGE 3
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INNOVA CORPORATION
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net product sales $ 10,208 $ 7,672 $ 24,957 $ 12,582
Cost of products sold 7,842 5,489 17,628 9,570
-------- -------- -------- --------
Gross profit 2,366 2,183 7,329 3,012
Operating Expenses:
Selling, general and administrative 2,277 1,833 4,382 3,471
Research and development 1,608 1,105 3,012 2,216
-------- -------- -------- --------
Total operating expenses 3,885 2,938 7,394 5,687
-------- -------- -------- --------
Loss from operations (1,519) (755) (65) (2,675)
-------- -------- -------- --------
Other income (expense):
Interest income 143 -- 401 --
Interest expense (151) (139) (202) (338)
Other income 8 -- 10 --
-------- -------- -------- --------
-- (139) 209 (338)
-------- -------- -------- --------
Net income(loss) before cumulative effect
of change in accounting principle $ (1,519) $ (894) $ 144 $ (3,013)
======== ======== ======== ========
Cumulative effect of change in
accounting principle -- -- 140 --
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,519) $ (894) $ 284 $ (3,013)
======== ======== ======== ========
Basic and diluted net income (loss) per share
before cumulative effect of change in
accounting principle $ (0.11) $ (0.94) $ 0.01 $ (3.17)
Cumulative basic and diluted per share effect of
change in accounting principle -- -- 0.01 --
-------- -------- -------- --------
Basic and diluted net income (loss) per share $ (0.11) $ (0.94) $ 0.02 $ (3.17)
======== ======== ======== ========
Shares used in computing basic net income
(loss) per share 13,970 950 13,867 949
======== ======== ======== ========
Shares used in computing diluted net income
(loss) per share 13,970 950 17,294 949
======== ======== ======== ========
</TABLE>
See Accompanying Notes
to Condensed Consolidated Financial Statements
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INNOVA CORPORATION
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 284 $ (3,013)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,423 493
Amortization of deferred stock compensation 162 966
Amortization of note payable discount -- 17
Change in certain assets and liabilities:
Increase in accounts receivable (2,284) (3,377)
Increase in inventories (10,622) (3,400)
Increase in other current assets (38) (113)
Increase in accounts payable and accrued liabilities 7,444 1,222
-------- --------
Net cash used in operating activities (3,631) (7,205)
-------- --------
Cash flows from investing activities:
Sale of short-term investment securities 13,098 --
Purchase of equipment and leasehold improvements (6,946) (843)
Increase in other assets (276) (35)
-------- --------
Net cash provided by (used in) investing activities 5,876 (878)
-------- --------
Cash flows from financing activities:
Net repayments from obligations under capital leases (568) (417)
Net proceeds from notes payable -- 5,163
Proceeds from sale of redeemable preferred stock -- 6,956
Proceeds from exercise of common stock options 180 21
-------- --------
Net cash provided by (used in) financing activities (388) 11,723
-------- --------
Effect of translation and exchange rate changes on cash flows 36 21
-------- --------
Net increase in cash and cash equivalents 1,893 3,661
-------- --------
Cash and cash equivalents at beginning of period 2,455 173
-------- --------
Cash and cash equivalents at end of period $ 4,348 $ 3,834
======== ========
Supplemental disclosure of cash flow information - cash paid during the
period for interest $ 202 $ 312
======== ========
Supplemental schedule of noncash financing activities:
Notes payable to stockholders converted into redeemable preferred stock
-- $ 1,500
Estimated fair value of warrant issued in connection with note payable -- 67
Capital lease obligations incurred to acquire equipment -- 1,967
</TABLE>
See Accompanying Notes
to Condensed Consolidated Financial Statements
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INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and related
notes should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K. The accompanying condensed consolidated financial statements
include the accounts of Innova Corporation and subsidiary (the "Company")
and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated
financial statements are unaudited, condensed and do not contain all of
the information required by generally accepted accounting principles to
be included in a full set of financial statements. In the opinion of
management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company,
for the periods presented, have been made. All such adjustments are of a
normal, recurring nature. The results of operations for such interim
periods are not necessarily indicative of the results of operations for
the full year.
2. ACCOUNTING CHANGE
During the first quarter of 1998, the Company implemented a new enterprise
reporting software package, the "Oracle ERP Implementation" which permits
the capturing of detailed manufacturing costs. As a result of being able to
capture detailed manufacturing costs, the Company changed its method of
accounting for certain elements of cost included in its inventories.
Effective January 1, 1998, the Company includes certain additional
purchasing administrative costs as elements of overhead cost included in
its inventories and allocates cost overhead pools to inventory based on
cost of materials and direct labor hours. Previously certain purchasing
administrative costs were expensed as incurred and overhead was allocated
to inventory solely based on direct labor hours. The Company believes that
the change in accounting for its inventories is preferable in the
circumstances because it provides a better matching of the costs incurred
to manufacture the inventories with their related revenues.
The change in accounting is reported as the cumulative effect of a change
in accounting principle in the condensed consolidated statement of
operations. The cumulative effect of the change in accounting principle as
of January 1, 1998 was to increase net income for the three months ended
March 31, 1998 and the six months ended June 30, 1998 by approximately $140
or $0.01 per basic and diluted share. Had the new method of accounting for
certain elements of cost included in inventories been in effect for the
year ended December 31, 1997 net loss and net loss per basic and diluted
share would have been ($920) and ($0.16) respectively.
The effect of this change in accounting principle for the nine month fiscal
period ended December 31, 1996, for the three months ended March 31, 1997,
for the three months ended June 30, 1997 and for the six months ended June
30, 1997 was immaterial.
Net income before the change in accounting principle increased by $164
($0.01 per basic and diluted share) and $243 ($0.02 per basic and diluted
share) for the three months ended March 31, and the six months ended June
30, 1998, respectively, as a result of the change in accounting.
3. NET INCOME (LOSS) PER SHARE
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The Company has presented basic and diluted net income (loss) per share in
accordance with SFAS No. 128. As the company had a net loss for the three
months ended June 30, 1998 and 1997, basic and diluted net loss per share
is the same. Excluded from the computation of diluted earnings per share
for the three months ended June 30, 1998 and 1997 are options to acquire
1,686 and 1,655 shares of common stock, respectively, and warrants
to acquire 1,952 and 2,949 shares of common stock, respectively,
because their effects would be anti-dilutive. Also excluded from the
computation of diluted earnings per share for the three months ended June
30, 1997 are the common equivalent shares resulting from the assumed
conversion of 8,682 shares of redeemable preferred stock because the
effects were antidilutive prior to the conversion of the preferred stock
into common stock upon the closing of the Company's initial public offering
on August 8, 1997. The accretion of the difference between the carrying
value of the redeemable preferred stock and the redemption price has not
been reflected in the net loss per share calculations because the amounts
were not significant for three months ended June 30, 1997.
The following table reconciles the numerator and the denominator of the
basic and diluted per share computations for net income per share for the
six months ended June 30, 1998:
<TABLE>
<CAPTION>
Net Income Weighted Average Shares Net Income
Numerator (Denominator) Per Share
<S> <C> <C> <C>
Basic earnings per share $284 13,867 $.02
Effect of dilutive stock
options and warrants 3,427
Diluted earnings per share $284 17,294 $.02
</TABLE>
Excluded from the computation of diluted earnings per share for the six
months ended June 30, 1998 are options to acquire 192 shares of common
stock because the options' exercise price was greater than the average
market price of the common shares. Excluded from the computation of diluted
earnings per share for the six months ended June 30, 1997 were options to
acquire 1,655 shares of common stock and warrants to acquire 2,949
shares of common stock because their effects would be anti-dilutive. In
addition, 8,682 shares of redeemable preferred stock were excluded from
the computations because the effects were antidilutive prior to the
conversion of the preferred stock into common stock upon the closing of the
Company's initial public offering on August 8, 1997.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
Raw Materials $17,450 $10,383
Work - in - progress 2,306 1,612
Finished goods 2,914 53
------- -------
$22,670 $12,048
======= =======
</TABLE>
5. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130), which establishes standards for reporting and disclosure
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. Statement
130 is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined the
manner in
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which it will present the information required by Statement 130 in its
annual financial statements for the year ending December 31, 1998. The
Company's total comprehensive loss for the three months ended June 30, 1998
and 1997 was ($1,483) and ($878) respectively. The Company's total
comprehensive income (loss) for the six months ended June 30, 1998 and 1997
was $320 and ($2,993), respectively. Total comprehensive income (loss) for
the three and six months ended June 30, 1998 and 1997 consisted of net
income (loss) and foreign currency translation adjustments.
5. PROPOSED MERGER WITH DIGITAL MICROWAVE CORPORATION
On July 22, 1998 the Company signed a definitive agreement to merge with
Digital Microwave Corporation ("DMIC") which designs, manufactures, markets
and supports advanced wireless solutions for the worldwide
telecommunications market. Under the terms of the agreement, DMIC will
exchange 1.05 shares of its Common Stock for each outstanding share of the
Company's stock. Based upon the capitalization of the Company and DMIC as
of June 30, 1998, the Company's shareholders will own approximately 27% of
the combined company, assuming no exercise of outstanding options or
warrants to acquire DMIC or the Company's common stock. The combination is
intended to qualify as a tax-free reorganization accounted for as a
pooling-of-interests transaction. There can be no assurance that the
proposed merger will be consummated by the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short - to medium-distance wireless communications links in developed and
developing telecommunications markets. The Company began shipping the 23, 26 and
38 GHz models of its XP4 radio systems in the quarter ended September 30, 1996.
In addition, the Company began shipments of the 13, 15 and 24 GHz models of the
XP4 line in the quarter ended September 30, 1997 and a 28 GHz model in the
quarter ended June 30, 1998. As of June 30, 1998 the Company had sold its XP4
radios and related accessories to a total of 25 customers, generating $63.1
million in total revenues, $10.2 million of which occurred in the quarter ended
June 30, 1998. Through June 30, 1998 approximately 58% of the Company's XP4
sales have been to Northern Telecom and Societe Anonyme de Telecommunications.
Through June 30, 1998 approximately 93% of the Company's sales have been made
to customers located outside of the United States. The Company anticipates that
international sales will continue to account for at least a majority of its
sales for the foreseeable future. The Company was a development stage company
from its incorporation in 1989 through March 31, 1996. As of June 30, 1998, the
Company had an accumulated deficit of approximately $41.2 million.
The Company's net sales consist primarily of sales of point-to-point millimeter
wave radios to systems integrators, other equipment resellers and service
providers, principally for installation outside the U.S. Other revenues are
generated from the resale of related telecommunications equipment such as
antennas, cables and enclosures. The Company recognizes revenue upon shipment
along with associated reserve for warranties, sales returns and allowances.
Prior to the quarter ended June 30, 1998, XP4 orders had increased more rapidly
than the Company had been able to expand its manufacturing capacity, resulting
in delayed shipping dates and lost orders. However, the Company's backlog
decreased substantially in the second quarter of 1998 with shipments exceeding
firm orders by a wide margin. The decrease in orders is the result of a sharp
increase in competition experienced by Innova in the quarter ended June 30,
1998. Orders for Innova's products have been adversely affected by both an
apparent decrease in worldwide demand (in particular Asia but also to a lesser
degree other markets) and an increase in competition from other radio
manufacturers. Innova's competitors pricing has become increasingly more
competitive due to the continued strength of the U.S. dollar. In addition, many
recent radio contract awards have been influenced strongly by the availability
of vendor financing and or tied to the purchase of entire networks in which
radios comprise a relatively small part. Innova does not at this time see any
reason to believe that the current competitive market environment, or that the
adverse impact of this market environment on orders for the Company's product
or pricing of the Company's product will improve in the near future.
Accordingly, the Company has implemented a program of product and operating cost
reductions to bolster its competitive position. Included in the operating cost
reduction program was a reduction of the Company's labor force of 30% in the
month of June, 1998. This reduction is expected to reduce payroll costs in the
future at an annual rate of over $3 million. The Company has also begun a
redesign of the XP4 product line to incorporate the lower cost technology used
in the XP2. When implemented, this redesign of the XP4 line should result in
substantially lower costs along with significantly improved performance.
In the second quarter of 1998 revenue derived from large customers and
large-scale projects continued to represent a significant portion of its total
revenues. The Company believes that future orders will be distributed over a
broader base of customers. As noted above, price competition among manufacturers
of millimeter wave radios increased substantially in the second quarter of 1998
and may continue to increase over time. This adversely affected the Company's
margins in the second quarter of 1998 and may continue to do so in the future.
The Company has entered into distribution agreements whereby it has agreed to
sell XP4 products at various fixed prices. Certain of these distribution
agreements include "most favored customer" pricing commitments which require the
Company to offer lower prices to such distributors in the event such prices are
offered under like terms and conditions to other customers. In addition, some of
these agreements grant limited manufacturing licenses under certain conditions
or impose penalties for late delivery. The Company anticipates that certain of
its distributors will manufacture certain components of the XP4 radios they
sell. To date both NERA ASA ("NERA") and Societe Anonyme de Telecommunications
("SAT") have exercised to a limited extent manufacturing rights. To the extent
such manufacturing
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by the Company's distributors decreases the number of XP4 units built by the
Company, the Company's manufacturing gross profit will be reduced.
The Company invested $4.1 million in equipment and leasehold improvements during
the second quarter of 1998. This investment substantially completed the
Company's planned capacity expansion by the close of the quarter. The Company at
this time does not expect to continue to invest substantial amounts in
increasing manufacturing capacity. The Company continued to invest in its
software and management information systems during the second quarter of 1998
and successfully brought on line Oracle's ERP software on April 6, 1998.
The Company accrues for warranty expenses on an estimated basis, based on the
costs incurred to date in repairing radios returned to the Company and based on
an estimate of the number of radios which might be returned for repair during
the warranty period. Due to the limited operating history of the Company, this
estimate is based on relatively limited operating experience. It is also based
on management's experience in the millimeter wave radio industry. Actual
warranty expenses for XP4 sales may vary significantly from the Company's
estimates. If warranty expenses exceed the Company's estimate, or if the Company
is required to make in-the-field repairs or adjustments to a significant number
of radio systems, the Company's business, financial condition and results of
operations could be materially adversely affected.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
derived from the Company's Consolidated Statements of Operations expressed as a
percentage of Net Product Sales.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales 100% 100% 100% 100%
Cost of products sold 77% 72% 71% 76%
--- --- --- ---
Gross profit 23% 28% 29% 24%
Operating expenses:
Selling, general and administrative 22% 24% 18% 28%
Research and development 16% 14% 12% 18%
Loss from operations (15)% (10)% 0% (21)%
Other income (expense) 0% (2)% 1% (3)%
Cumulative effect of change in accounting
principle 0% 0% 1% 0%
Net Income (loss) (15)% (12)% 1% (24)%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997
NET PRODUCT SALES. Net product sales increased to $10.2 million for the three
months ended June 30, 1998, as compared to $7.7 million for the three months
ended June 30, 1997. The increase is attributable to the substantially higher
unit sales volumes of XP4 radios during the second quarter of 1998 as compared
to 1997. International sales represented 90% of total net product sales for the
three months ended June 30, 1998. Although XP4 unit shipment volumes have
increased steadily since introduction in late 1996 through the first quarter of
1998, XP4 sales prices have declined over time and are expected to continue to
decline in the future due to increased price competition, particularly with
respect to
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larger volume orders. In addition, orders in the quarter ended June 30, 1998
declined sharply from the first quarter of 1998, and the Company believes this
decline will continue due to decreased demand and increased competition.
GROSS PROFIT. Gross profit increased to $2.4 million for the three months ended
June 30, 1998, as compared to $2.2 million for the three months ended June 30,
1997. The increase in gross profit was primarily attributable to the increased
unit sales volume of XP4 radios and reduced unit material and outside processing
costs resulting from higher volume purchases and lower, negotiated vendor
prices. The gross profit was, however, reduced by lower unit sales prices. (See
also footnote 2 to the condensed consolidated financial statements which
discusses the effect of a change in accounting for certain elements of cost
included in inventories).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2.3 million for the three months ended
June 30, 1998 as compared to $1.8 million for the three months ended June 30,
1997. The increase was due primarily to increased compensation expenses
associated with the addition of sales and marketing staff in the U.S., UK and
other sales offices to support the XP4 product line and administrative staff to
support planned increases in business activity. In addition, the Company has
increased staffing associated with the implementation of its Oracle ERP systems.
Selling, General and administrative expenses declined as a percentage of net
product sales due to increased sales volumes. As a result of the Company
implementing cost reduction programs and the workforce reductions in June, 1998
selling, general and administrative expenses are expected to decline for the
three months ending September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $1.6
million for the three months ended June 30, 1998 as compared to $1.1 million for
the three months ended June 30, 1997. The increase in research and development
expenses was primarily due to increases in staffing. Research and development
expenses incurred for the three months ended June 30, 1998 were related to
improvements to and expansion of the XP4 product line (the 16x data rate radio )
along with the continued development of the low cost, low data rate XP2.
OTHER INCOME (EXPENSE). Other income (expense) decreased to $0 for the three
months ended June 30, 1998 as compared to ($139,000) for the three months ended
June 30, 1997. The change was due to the increase of interest income resulting
from the investment of funds raised in the Company's IPO which closed on August
8, 1997 which partially offset interest expense.
INCOME TAXES. No provision for income taxes has been recorded, as the Company
incurred net operating losses through December 31, 1997. As of June 30, 1998,
the Company had remaining net operating loss carryforwards of $35 million and
additional loss carryovers relating to its UK subsidiary. The U.S. net operating
loss carryforwards will begin to expire in 2005. Although the application of
these amounts is subject to certain annual limitations under the Internal
Revenue Code of 1986, as amended, the Company believes that the availability of
the cumulative Federal net operating loss carryforward is not currently limited.
However, there can be no assurance that future events, such as the issuance of
additional shares of common stock, or transfers of outstanding shares of common
stock by the Company's shareholders, will not cause an ownership change to occur
in the future and limit the availability of the NOLs. The Company anticipates
that its effective income tax rate will approach the statutory rate after these
amounts are applied or expire. The Company has provided a full valuation
allowance on the deferred tax assets because of the uncertainty regarding
realizability.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1997
NET PRODUCT SALES. Net product sales increased to $25.0 million for the six
months ended June 30, 1998, as compared to $12.6 million for the six months
ended June 30, 1997. The increase is attributable to the substantially higher
unit sales volumes of XP4 radios during the first half of 1998 as compared to
1997. International sales represented 87% of total net product sales for the six
months ended June 30, 1998. XP4 unit shipment volumes increased steadily until
the latter part of the six months ended June 30, 1998 at which time the Company
experienced a slow down in orders. XP4 sales prices have declined over time.
This decline in prices accelerated late in the quarter ended June 30, 1998.
GROSS PROFIT. Gross profit increased to $7.3 million for the six months ended
June 30, 1998, as compared to $3.0 million for the six months ended June 30,
1997. The increase in gross profit was primarily attributable to the increased
unit sales volume of XP4 radios and reduced unit material and outside processing
costs resulting from higher volume purchases
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and lower, negotiated vendor prices. The gross profit was, however, reduced by
lower unit sales prices. See also footnote 2 to the consolidated financial
statements which discusses the effect of a change in accounting for certain
elements of cost included in inventories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $4.4 million for the six months ended June
30, 1998 as compared to $3.5 million for the six months ended June 30, 1997. The
increase was due primarily to increased compensation expenses associated with
the addition of sales and marketing staff in the U.S., UK and other sales
offices to support the XP4 product line and administrative staff to support
increased business activity. In addition, the Company increased, in early 1998,
staffing associated with the implementation of its Oracle ERP systems. As a
result of the Company implementing cost reduction programs and the workforce
reductions in June, 1998 selling, general and administrative expenses are
expected to decline for the three months ending September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $3.0
million for the six months ended June 30, 1998 as compared to $2.2 million for
the six months ended June 30, 1997. The increase in research and development
expenses was primarily due to increases in staffing. Research and development
expenses incurred for the six months ended June 30, 1998 were associated
primarily with the 16x data rate and the XP2 low capacity programs.
OTHER INCOME (EXPENSE). Other income (expense) increased to $209,000 for the six
months ended June 30, 1998 as compared to ($338,000) for the six months ended
June 30, 1997. The increase was due to the increase of interest income resulting
from the investment of funds raised in the Company's IPO which closed on August
8, 1997 along with the reduction of interest expense resulting from the
repayment of amounts previously borrowed under a working capital bank line of
credit which was repaid out of the IPO proceeds.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997 the Company completed the sale of 3,162,500 shares of common
stock through an initial public offering at a price of $13.00 per share. The net
proceeds of the Offering totaled approximately $37.3 million. The Company also
raised an additional $8.5 million from the private placement of equity
securities prior to the Offering in March and June of 1997. Concurrent with the
Company's initial public offering all of the outstanding redeemable preferred
stock totaling 8,682,287 shares with a carrying value of $47,768,859 immediately
prior to the closing of the Company's initial public offering, were converted
into an equal number of shares of common stock.
The Company used the $ 37.3 million net proceeds from its initial public
offering to repay the $2.0 million outstanding principal and accrued interest of
its credit line. In addition, the Company used $1.5 million of the net proceeds
to repay the Company's outstanding principal balance and accrued interest on its
term loan. Approximately $13.9 million of the net proceeds has been used to
acquire equipment and building improvements. The remainder of the net proceeds,
$19.9 million, has been used for working capital purposes and investments in
short-term securities with a maturity of six months or less at date of purchase.
As a result of the excess of capacity over current booking levels, the Company
expects to invest relatively minor amounts in additional equipment, leasehold
improvements and information systems over the balance of 1998. The balance of
the net proceeds will be used for working capital and other general corporate
purposes.
The Company had $10.6 million and $21.8 million of cash, cash equivalents and
short term investment securities at June 30, 1998 and December 31, 1997
respectively. Working capital decreased from $37.5 million as of December 31,
1997 to $32.0 million as of June 30, 1998. Accounts receivable increased to
$13.4 million at June 30, 1998 as compared to $11.2 million at December 31,
1997. This was partially the result of a slowdown in payments by certain large
customers. Inventories increased to $22.7 million at June 30, 1998 compared to
$12.0 million at December 31, 1997. This increase was related to increased
inventory purchases in anticipation of customer demand which did not materialize
in the quarter. Accounts payable increased to $12.9 million at June 30, 1998 as
compared to $5.8 million at December 31, 1997 largely due to the increase in
inventory and includes large balances related to equipment purchases made in the
three months ended June 30, 1998.
PAGE 12
<PAGE> 13
The Company believes that its current working capital will be sufficient to meet
its liquidity requirements for at least the next 12 months provided that order
levels improve from those experienced at the end of the second quarter of 1998.
To the extent additional capital is necessary, the Company could be required to
obtain additional credit facilities or to sell additional equity, debt or
convertible securities. There can be no assurance that additional financing will
be available at the time or in the amounts that may be needed, or that any
financing which is available will be on terms favorable to the Company and its
shareholders.
Approximately 93% of the Company's sales through June 30, 1998 were made to
customers located outside the United States. While the operating income the
Company will rely upon to meet a portion of its liquidity needs will come in
significant part from international customers, the Company has experienced no
appreciable difference in pricing, inventory levels or receivables realization
between its domestic and international customers. Additionally, as substantially
all of the Company's sales to date have been denominated in U.S. dollars and the
Company anticipates that this will continue for the foreseeable future, the
Company's operating revenues are not subject to appreciable exchange rate risk
and the Company has consequently not implemented any programs to specifically
address such risk.
QUARTERLY RESULTS OF OPERATIONS.
The Company's historical quarterly operating results have fluctuated
significantly, principally due to the fact that the Company was, until mid-1996,
a development stage company and to the fact that subsequent to the commencement
of significant shipments, units sales volumes have grown exceptionally quickly
from low base levels. In consequence, these fluctuations are largely explained
by variation in expenses incurred in connection with the development of the
Company's XP4 systems and the significant increase in the volume of shipments.
The Company may continue to experience significant quarterly fluctuations in
sales, gross margins and operating results; however, these fluctuations are
likely to be caused by different factors than those that existed in the past,
making prediction of the Company's performance difficult, if not impossible.
Because of the many factors which may affect the Company's performance in any
particular period and because the Company changed from a development stage
Company to an operating Company relatively recently, the Company believes that
period to period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS.
Statements in this report concerning sales, costs, expenses, adequacy of working
capital and other matters which are not historical facts, constitute
forward-looking statements which are subject to a number of risks and
uncertainties which might cause actual results to differ materially from stated
expectations. Such risks and uncertainties include delays in shipments of the
Company's new products, dependence, in significant part, on contracts with
limited number of customers, declining product prices and margins, ability of
its suppliers to provide components and assemblies, uncertain market acceptance
of new products, growth in the marketplace in which the Company operates,
competitive product offerings, unfavorable foreign currency fluctuations and
adverse changes in general economic conditions in any of the countries in which
the Company does business, and other risks set forth in the Company's filings
with the Securities and Exchange Commission, including its annual report for the
year ended December 31, 1997 on Form 10-K. During the last twelve months, the
PAGE 13
<PAGE> 14
Company's competitors have continued to make a variety of product announcements
and offerings. The Company continues to release new versions of its product
lines and the successful acceptance of these products will be a key determinant
of future growth. The impact of any of these factors is difficult to predict or
forecast.
The Company's future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis, due to a variety of factors,
including factors noted above. Any shortfall in revenue or earnings from levels
expected by securities analysts could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
Additionally, the Company often does not learn of such shortfalls until late in
the fiscal quarter at which time budgeted expenses have already been committed,
which could result in an even more immediate and adverse effect on the trading
price of the Company's common stock. The Company participates in a highly
dynamic industry, which often results in significant volatility of the Company's
common stock price. Consequently, purchasing or holding of the Company's stock
involves a high degree of risk.
RISKS ASSOCIATED WITH THE YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 problem is
concerned with whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 problem is pervasive and complex, as virtually every
company's computer operation will be affected in some way. The Company has
determined that its newly installed information management system has been
certified by Oracle to be Year 2000 compliant. The Company has also completed an
assessment of the embedded software incorporated in its products, and has
determined that it is year 2000 compliant as well. The Company believes that it
will not be dependent upon any single supplier in the year 2000, and therefore
has made a determination not to contact its primary suppliers and subcontractors
to determine that they are developing plans to address processing transactions
in the year 2000. However, there can be no assurance that Year 2000 problems
will not occur with respect to the Company's computer systems. The Year 2000
problem may impact other entities with which the Company transacts business,
and the Company cannot predict the effect of the Year 2000 problems on such
entities. There can be no assurance that the failure by other parties to
properly address the year 2000 problem will not have a material adverse effect
on the Company's financial condition and results of operations.
PAGE 14
<PAGE> 15
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (D)
INNOVA CORPORATION
FORM 10 Q
QUARTER ENDED 6/30/98
PART II - OTHER INFORMATION
(f) Use of proceeds from recent sales of registered securities:
(1) Effective date of the Securities Act registration statement 08/08/97
(2) Offering date 08/08/97
(3) N/A
(4)
(i) The offering terminated after sale of all of the securities
registered
(ii) Managing underwriters - UBS Securities, Hambrecht & Quist, Wessels,
Arnold & Henderson
(iii) Registered securities - Common Stock
(iv)
<TABLE>
<S> <C>
Amount registered 3,162,500 shs
Aggregate offering price of the amount registered $41,112,500
Amount sold 3,162,500
Aggregate offering price of the amount sold to date $41,112,500
</TABLE>
<TABLE>
<CAPTION>
Payments Payments to Others Total
To Directors Estimated Expenses
(v) etc. Paid Balance Due
<S> <C> <C> <C> <C>
Expenses incurred:
Underwriters discounts None $2,877,875 None $2,877,875
Accountants fees None 167,090 None 167,090
Attorneys fees None 309,099 309,099
Printing None 320,199 None 320,199
Travel expenses None 20,477 None 20,477
SEC and Nasdaq fees None 70,620 70,620
Presentation expenses None 23,917 23,917
3,789,277 None 3,789,277
</TABLE>
(vi)
<TABLE>
<S> <C>
Net offering proceeds $37,323,223
</TABLE>
<TABLE>
<CAPTION>
Payments Payments
To Directors To
etc. Others
<S> <C> <C>
(vii)
Use of net offering proceeds as of 6/30/98
Construction of plant, building & facilities None $850,176
Purchase of equipment None 13,056,053
Purchase of real estate None None
Acquisition of other businesses None None
Repayment of indebtedness None 3,491,918
Working capital None 13,704,076
Temporary investments None 6,221,000
None $37,323,223
</TABLE>
(viii)
The use of proceeds to date does not represent a material change in the
use of proceeds described in the prospectus.
PAGE 15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The following exhibit is filed as part of this report.
3.1 Restated Articles of Incorporation dated August 13, 1997.
Incorporated by reference to exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 333-29547.
3.3 Amended and Restated Bylaws dated June 16, 1998.
27 Financial Data Schedule.
Reports on Form 8-K.
On July 29, 1998, the Company filed a report on form 8-K, and
pursuant to item 5 of such form, announced that it had entered into
an agreement and plan of reorganization and merger with Digital
Microwave Corporation.
PAGE 16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Innova Corporation
(Registrant)
(Registrant) By: /s/JEAN-FRANCOIS GRENON
--------------------------------
Jean-Francois Grenon
President and Chief Executive
Officer
Officer By: /s/JOHN M. HEMINGWAY
--------------------------------
John M. Hemingway
Chief Financial Officer
Date: August 14, 1998
PAGE 17
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
INNOVA CORPORATION
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
INNOVA CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Special Meetings . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . 3
1.4 Quorum; Vote Requirement . . . . . . . . . . . . . . . . . . 5
1.5 Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . 5
1.6 Fixing Record Date . . . . . . . . . . . . . . . . . . . . . 6
1.7 Shareholders' List for Meeting . . . . . . . . . . . . . . . 6
1.8 Ratification . . . . . . . . . . . . . . . . . . . . . . . . 6
1.9 Action by Shareholders Without a Meeting . . . . . . . . . . 7
1.10 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Responsibility of Board of Directors . . . . . . . . . . . . 7
2.2 Number of Directors; Qualification . . . . . . . . . . . . . 8
2.3 Election of Directors; Nominations . . . . . . . . . . . . . 8
2.4 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.7 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . 11
2.9 Special Meetings . . . . . . . . . . . . . . . . . . . . . . 11
2.10 Notice of Meeting . . . . . . . . . . . . . . . . . . . . . . 11
2.11 Quorum of Directors . . . . . . . . . . . . . . . . . . . . . 12
2.12 Dissent by Directors . . . . . . . . . . . . . . . . . . . . 13
2.13 Action by Directors Without a Meeting . . . . . . . . . . . . 13
2.14 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . 13
2.15 Compensation . . . . . . . . . . . . . . . . . . . . . . . . 13
2.16 Committees . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE III OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2 Qualification . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Officers Enumerated . . . . . . . . . . . . . . . . . . . . . 15
3.4 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.6 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.7 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.8 Other Officers and Agents . . . . . . . . . . . . . . . . . . 18
3.9 Compensation . . . . . . . . . . . . . . . . . . . . . . . . 18
3.10 General Standards for Officers . . . . . . . . . . . . . . . 18
ARTICLE IV CONTRACTS, CHECKS AND DRAFTS . . . . . . . . . . . . . . . . . . . 18
4.1 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 Checks, Drafts, Etc. . . . . . . . . . . . . . . . . . . . 18
4.3 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE V STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.1 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . 19
5.2 Certificates of Stock . . . . . . . . . . . . . . . . . . . . 19
5.3 Stock Records . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 Restrictions on Transfer . . . . . . . . . . . . . . . . . . 20
5.5 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VI RECORDS OF CORPORATE MEETINGS . . . . . . . . . . . . . . . . . . . 21
ARTICLE VII FINANCIAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VIII DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE IX CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE X INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.2 Mandatory Indemnification . . . . . . . . . . . . . . . . . . 22
10.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.4 Changes in Law . . . . . . . . . . . . . . . . . . . . . . . 23
10.5 Exclusivity; Nature of Rights; Amendment . . . . . . . . . . 23
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE XI MISCELLANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.1 Communications by Facsimile . . . . . . . . . . . . . . . . . 24
11.2 Inspector of Elections . . . . . . . . . . . . . . . . . . . 24
11.3 Rules of Order . . . . . . . . . . . . . . . . . . . . . . . 24
11.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . 25
11.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE XII AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XIII AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
iii
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
INNOVA CORPORATION
These Bylaws are promulgated pursuant to the Washington Business
Corporation Act, as set forth in Title 23B of the Revised Code of Washington
(the "Act").
ARTICLE I
SHAREHOLDERS
1.1 ANNUAL MEETING.
1.1.1 TIME AND PLACE OF MEETING. The annual meeting of
the shareholders of the corporation for the election of directors and for the
transaction of such other business as may properly come before the meeting
shall be held each year at a place, day, and time to be set by the Board of
Directors.
1.1.2 BUSINESS CONDUCTED AT MEETING.
(a) At an annual meeting of shareholders, an
item of business may be conducted, and a proposal may be considered and acted
upon, only if such item or proposal is brought before the meeting (i) by, or at
the direction of, the Board of Directors, or (ii) by any shareholder of the
corporation who is entitled to vote at the meeting and who complies with the
procedures set forth in the remainder of this Section 1.1.2. This Section 1.1.2
shall not apply to matters of procedure that, pursuant to Section 11.3(a) of
these Bylaws, are subject to the authority of the chairman of the meeting.
(b) For an item of business or proposal to be brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a shareholder's notice must be delivered to, or mailed and received at,
the principal office of the corporation not less than seventy (70) days prior
to the date scheduled for the meeting (regardless of any postponements,
deferrals or adjournments of that meeting to a later date), or, if notice or
public disclosure of the date scheduled for the meeting is not given or made at
least eighty (80) days prior thereto, not more than ten (10) days following the
day on which notice of the date scheduled for the
1
<PAGE> 6
meeting is mailed or the day on which disclosure of that date is made,
whichever is earlier.
(c) A shareholder's notice to the Secretary under
Section 1.1.2(b) shall set forth, as to each item of business or proposal the
shareholder intends to bring before the meeting (i) a brief description of the
item of business or proposal and the reasons for bringing it before the
meeting, (ii) the name and address, as they appear on the corporation's books,
of the shareholder and of any other shareholders that the shareholder knows or
anticipates will support the item of business or proposal, (iii) the number and
class of shares of stock of the corporation that are beneficially owned on the
date of such notice by the shareholder and by any such other shareholders, and
(iv) any financial interest of the shareholder or any such other shareholders
in such item of business or proposal.
(d) The Board of Directors, or a designated committee
thereof, may reject a shareholder's notice that is not timely given in
accordance with the terms of Section 1.1.2(b). If the Board of Directors, or a
designated committee thereof, determines that the information provided in a
shareholder's notice does not satisfy the requirements of Section 1.1.2(c) in
any material respect, the Secretary of the corporation shall notify the
shareholder of the deficiency in the notice. The shareholder shall have an
opportunity to cure the deficiency by providing additional information to the
Secretary within such period of time, not to exceed five (5) days from the date
such deficiency notice is given to the shareholder, as the Board of Directors
or such committee shall reasonably determine. If the deficiency is not cured
within such period, or if the Board of Directors or such committee determines
that the additional information provided by the shareholder, together with
information previously provided, does not satisfy the requirements of Section
1.1.2(c) in any material respect, then the Board of Directors or such committee
may reject the shareholder's notice.
(e) Notwithstanding the procedures set forth in
Section 1.1.2(d), if a shareholder desires to bring an item of business or
proposal before an annual meeting, and neither the Board of Directors nor any
committee thereof has made a prior determination of whether the shareholder has
complied with the procedures set forth in this Section 1.1.2 in connection with
such item of business or proposal, then the chairman of the meeting shall
determine and declare at the meeting whether the shareholder has so complied.
If the chairman determines that the shareholder has so complied, then the
chairman shall so state and ballots shall be provided for use at the meeting
with respect to such item of business or proposal. If the chairman determines
that the shareholder has not so complied, then, unless the chairman, in his
sole and absolute discretion, determines to waive such compliance, the chairman
shall state that the shareholder has not so complied and the item of business
or proposal shall not be brought before the meeting.
2
<PAGE> 7
(f) This Section 1.1.2 shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees of the Board of Directors, but, in
connection with such reports, no item of business may be conducted, and no
proposal may be considered and acted upon, unless there has been compliance
with the procedures set forth in this Section 1.1.2 in connection therewith.
1.2 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the Board of Directors or by
the Chairman of the Board (if one be appointed) or by the President or by one
or more shareholders holding shares representing not less than one-tenth (1/10)
of all the votes entitled to be cast on any issue proposed to be considered at
that meeting, to be held at such time and place as the Board or the Chairman
(if one be appointed) or the President may prescribe; provided, that, at any
time when the corporation is subject to the reporting requirements of Section
13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), special meetings of the shareholders for any purpose or
purposes may be called at any time only by the Board of Directors or the
Chairman of the Board (if one be appointed) or the President or one or more
shareholders holding shares representing not less than twenty- five percent
(25%) of all the votes entitled to be cast on any issue proposed to be
considered at that meeting.
Subject to the requirements of Section 2.3.2 if the purpose of the
special meeting is the election of directors, if a special meeting is called by
any person or persons other than the Board of Directors or the Chairman of the
Board (if one be appointed) or the President, then a written demand, describing
with reasonable clarity the purpose or purposes for which the meeting is called
and specifying the general nature of the business proposed to be transacted,
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Secretary of the corporation. Upon receipt
of such a demand, the Secretary shall cause notice of such meeting to be given,
within thirty (30) days after the date the demand was delivered to the
Secretary, to the shareholders entitled to vote, in accordance with the
provisions of Section 1.3 of these Bylaws.
1.3 NOTICE OF MEETINGS. Except as otherwise provided below, the
Secretary, Assistant Secretary, or any transfer agent of the corporation shall
give, in any manner permitted by law, not less than ten (10) nor more than
sixty (60) days before the date of any meeting of shareholders, written notice
stating the place, day, and time of the meeting to each shareholder of record
entitled to vote at such meeting. If mailed, notice to a shareholder with
first-class postage prepaid, correctly addressed to the shareholder at the
shareholder's address as it appears on the current record of shareholders of
the corporation, shall be effective when mailed. Otherwise, written notice
shall be effective at the earliest of the following: (a) when received or (b)
on the date shown on the return receipt, if sent by
3
<PAGE> 8
registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the addressee.
1.3.1 NOTICE OF SPECIAL MEETING. In the case of a special
meeting, the written notice shall also state with reasonable clarity the
purpose or purposes for which the meeting is called and the general nature of
the business proposed to be transacted at the meeting. No business other than
that within the purpose or purposes specified in the notice may be transacted
at a special meeting.
1.3.2 PROPOSED ARTICLES OF AMENDMENT, MERGER, EXCHANGE, SALE,
LEASE, OR DISPOSITION. If the business to be conducted at any meeting includes
any proposed amendment to the Articles of Incorporation or any proposed merger
or exchange of shares, or any proposed sale, lease, exchange, or other
disposition of all or substantially all of the property and assets (with or
without the goodwill) of the corporation not in the usual or regular course of
its business, then the written notice shall state that the purpose or one of
the purposes is to consider the proposed amendment or plan of merger, exchange
of shares, sale, lease, exchange, or other disposition, as the case may be,
shall describe the proposed action with reasonable clarity, and shall be
accompanied by a copy of the proposed amendment or plan. Written notice of such
meeting shall be given to each shareholder of record, whether or not entitled
to vote at such meeting, not less than twenty (20) days before such meeting, in
the manner provided in Section 1.3 above.
1.3.3 PROPOSED DISSOLUTION. If the business to be conducted
at any meeting includes the proposed voluntary dissolution of the corporation,
then the written notice shall state that the purpose or one of the purposes is
to consider the advisability thereof. Written notice of such meeting shall be
given to each shareholder of record, whether or not entitled to vote at such
meeting, not less than twenty (20) days before such meeting, in the manner
provided in Section 1.3 above.
1.3.4 DECLARATION OF MAILING. A declaration of the mailing or
other means of giving any notice of any shareholders' meeting, executed by the
Secretary, Assistant Secretary, or any transfer or other agent of the
corporation giving notice on its behalf, shall be prima facie evidence of the
giving of such notice.
1.3.5 WAIVER OF NOTICE. A shareholder may waive notice of any
meeting at any time, either before or after such meeting. Except as provided
below, the waiver must be in writing, be signed by the shareholder entitled to
the notice, and be delivered to the corporation for inclusion in the minutes or
filing with the corporate records. A shareholder's attendance at a meeting in
person or by proxy waives objection to lack of notice or defective notice of
the meeting unless the
4
<PAGE> 9
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting on the ground that the meeting is not
lawfully called or convened. In the case of a special meeting, or an annual
meeting at which fundamental corporate changes are considered, a shareholder
waives objection to consideration of a particular matter that is not within the
purpose or purposes described in the meeting notice unless the shareholder
objects to considering the matter when it is presented.
1.4 QUORUM; VOTE REQUIREMENT. A quorum shall exist at any meeting of
shareholders if a majority of the votes entitled to be cast is represented in
person or by proxy. Once a share is represented for any purpose at a meeting
other than solely to object to holding the meeting or transacting business at
the meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is or
must be set for that adjourned meeting. Subject to the foregoing, the
determination of the voting groups entitled to vote (as required by law), and
the quorum and voting requirements applicable thereto, must be made separately
for each matter being considered at a meeting. In the case of any meeting of
shareholders that is adjourned more than once because of the failure of a
quorum to attend, those who attend the third convening of such meeting,
although less than a quorum, shall nevertheless constitute a quorum for the
purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than
one-third of the shares entitled to vote.
If a quorum exists, action on a matter (other than the election of
directors) is approved by a voting group if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group
opposing the action unless a greater number of affirmative votes is required by
law or by the Articles of Incorporation.
1.5 ADJOURNED MEETINGS. An adjournment or adjournments of any
shareholders' meeting, whether by reason of the failure of a quorum to attend
or otherwise, may be taken to such date, time, and place as the chairman of the
meeting may determine without new notice being given if the date, time, and
place are announced at the meeting at which the adjournment is taken. However,
if the adjournment is for more than one hundred twenty (120) days from the date
set for the original meeting, a new record date for the adjourned meeting shall
be fixed and a new notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting, in accordance
with the provisions of Section 1.3 of these Bylaws. At any adjourned meeting,
the corporation may transact any business which might have been transacted at
the original meeting. Any meeting at which directors are to be elected shall be
adjourned only from day to day until such directors are elected.
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1.6 FIXING RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders (or, subject to
Section 1.5 above, any adjournment thereof), the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than seventy (70) days prior to the
meeting. If no such record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, then the day
before the first notice is delivered to shareholders shall be the record date
for such determination of shareholders. If no notice is given because all
shareholders entitled to notice have waived notice, then the record date for
the determination of shareholders entitled to notice of or to vote at a meeting
shall be the date on which the last such waiver of notice was obtained or the
date of the meeting, if earlier. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, except as
provided in Section 1.5 of these Bylaws. If no notice is given because all
shareholders entitled to notice have signed a consent as described in Section
1.9 below, the record date for determining shareholders entitled to take action
without a meeting is the date the first shareholder signs the consent.
1.7 SHAREHOLDERS' LIST FOR MEETING. The corporation shall cause to be
prepared an alphabetical list of the names of all of its shareholders on the
record date who are entitled to notice of a shareholders' meeting or any
adjournment thereof. The list must be arranged by voting group (and within each
voting group by class or series of shares) and show the address of and the
number of shares held by each shareholder. The shareholders' list must be
available for inspection by any shareholder, beginning ten (10) days prior to
the meeting and continuing through the meeting, at the principal office of the
corporation or at a place identified in the meeting notice in the city where
the meeting will be held. Such list shall be produced and kept open at the time
and place of the meeting. During such ten-day period, and during the whole time
of the meeting, the shareholders' list shall be subject to the inspection of
any shareholder, or the shareholder's agent or attorney. In cases where the
record date is fewer than ten (10) days prior to the meeting because notice has
been waived by all shareholders, the Secretary shall keep such record available
for a period from the date the first waiver of notice was delivered to the date
of the meeting. Failure to comply with the requirements of this section shall
not affect the validity of any action taken at the meeting.
1.8 RATIFICATION. Subject to the requirements of RCW 23B.08.730 and
23B.19.040, any contract, transaction, or act of the corporation or of any
director or officer of the corporation that shall be authorized, approved, or
ratified by the affirmative vote of a majority of shares represented at a
meeting at which a quorum is present shall, insofar as permitted by law, be as
valid and as binding as though ratified by every shareholder of the
corporation.
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1.9 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which may be
or which is required by law to be taken at any meeting of shareholders may be
taken, without a meeting or notice of a meeting, if one or more consents in
writing, setting forth the action so taken, are signed by all of the
shareholders entitled to vote or, in the place of any one or more of such
shareholders, by a person holding a valid proxy to vote with respect to the
subject matter thereof, and are delivered to the corporation for inclusion in
the minutes or filing with the corporate records. If notice of the proposed
action to be taken by unanimous consent of the voting shareholders is required
by law to be given to nonvoting shareholders, the corporation must give its
nonvoting shareholders written notice of the proposed action at least ten (10)
days before the action is taken. The notice must contain or be accompanied by
the same material that, by law, would have been required to be sent to
nonvoting shareholders in a notice of meeting at which the proposed action
would have been submitted to such shareholders for action. Action taken by
unanimous written consent is effective when all consents are in possession of
the corporation, unless the consent specifies a later effective date. Such
consent shall have the same force and effect as a meeting vote of shareholders
and may be described as such in any articles or other document filed with the
Secretary of State of the State of Washington.
1.10 TELEPHONIC MEETINGS. Shareholders may participate in a meeting by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at a
meeting.
ARTICLE II
BOARD OF DIRECTORS
2.1 RESPONSIBILITY OF BOARD OF DIRECTORS. The business and affairs
and property of the corporation shall be managed under the direction of a Board
of Directors. A director shall discharge the duties of a director, including
duties as a member of a committee, in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner the director reasonably believes to be in the best interests of
the corporation. In discharging the duties of a director, a director is
entitled to rely on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by:
(a) one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters presented; (b)
legal counsel, public accountants, or other persons as to matters the director
reasonably believes are within the person's professional or expert competence;
or (c) a committee of the Board of Directors of which the
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director is not a member, if the director reasonably believes the committee
merits confidence. A director is not acting in good faith if the director has
knowledge concerning the matter in question that makes reliance otherwise
permitted above unwarranted. The creation of, delegation of authority to, or
action by a committee does not alone constitute compliance by a director with
the standards of conduct imposed by law upon directors. A director is not
liable for any action taken as a director, or any failure to take any action,
if the director performed the duties of the director's office in compliance
with this section.
2.2 NUMBER OF DIRECTORS; QUALIFICATION. The exact number of directors
of the corporation shall be seven (7) until amended in accordance with these
Bylaws. No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
No director need be a shareholder of the corporation or a resident of
Washington. Each director must be at least eighteen (18) years of age.
2.3 ELECTION OF DIRECTORS; NOMINATIONS.
2.3.1 ELECTION AND TERM OF OFFICE. At each annual meeting of
shareholders, the shareholders shall elect directors. Directors may also be
elected at a special meeting of shareholders called specifically for that
purpose. Each director so elected shall hold office until the next annual
meeting of shareholders or, in the case of staggered terms as permitted by RCW
23B.08.060, for the term for which he is elected, and in each case until his
successor shall have been elected and qualified.
2.3.2 NOMINATIONS FOR DIRECTORS.
(a) Nominations of candidates for election as
directors at an annual or special meeting of shareholders may only be made (i)
by, or at the direction of, the Board of Directors, or (ii) by any shareholder
of the corporation who is entitled to vote at the meeting and who complies with
the procedures set forth in the remainder of this Section 2.3.2.
(b) If a shareholder proposes to nominate one or more
candidates for election as directors at an annual or special meeting, the
shareholder must have given timely notice thereof in writing to the Secretary
of the corporation. To be timely, a shareholder's notice must be delivered to,
or mailed and received at, the principal office of the corporation not less
than seventy (70) days prior to the date scheduled for the meeting (regardless
of any postponements, deferrals or adjournments of that meeting to a later
date), or, if notice or public disclosure of the date scheduled for the meeting
is not given or made at least eighty (80) days prior thereto, not more than ten
(10) days following the day on
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which notice of the date scheduled for the meeting is mailed or the day on
which disclosure of that date is made, whichever is earlier.
(c) A shareholder's notice to the Secretary under
Section 2.3.2(b) shall set forth, as to each person whom the shareholder
proposes to nominate for election as a director (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number and class of shares of stock of the
corporation that are beneficially owned on the date of such notice by such
person, and (iv) if the corporation at such time has any security registered
pursuant to Section 12 of the Exchange Act, any other information relating to
such person required to be disclosed in solicitations of proxies with respect
to nominees for election as directors pursuant to Regulation 14A under the
Exchange Act, including but not limited to information required to be disclosed
by Schedule 14A of Regulation 14A, and any other information that the
shareholder would be required to file with the Securities and Exchange
Commission in connection with the shareholder's nomination of such person as a
candidate for director or the shareholder's opposition to any candidate for
director nominated by, or at the direction of, the Board of Directors. In
addition to the above information, a shareholder's notice to the Secretary
under Section 2.3.2(b) shall (A) set forth (i) the name and address, as they
appear on the corporation's books, of the shareholder and of any other
shareholders that the shareholder knows or anticipates will support any
candidate or candidates nominated by the shareholder, and (ii) the number and
class of shares of stock of the corporation that are beneficially owned on the
date of such notice by the shareholder and by any such other shareholders, and
(B) be accompanied by a written statement, signed and acknowledged by each
candidate nominated by the shareholder, that the candidate agrees to be so
nominated and to serve as a director of the corporation if elected at the
meeting.
(d) The Board of Directors, or a designated committee
thereof, may reject any shareholder's nomination of one or more candidates for
election as directors if the nomination is not made pursuant to a shareholder's
notice timely given in accordance with the terms of Section 2.3.2(b). If the
Board of Directors, or a designated committee thereof, determines that the
information provided in a shareholder's notice does not satisfy the
requirements of Section 2.3.2(c) in any material respect, the Secretary of the
corporation shall notify the shareholder of the deficiency in the notice. The
shareholder shall have an opportunity to cure the deficiency by providing
additional information to the Secretary within such period of time, not to
exceed five (5) days from the date such deficiency notice is given to the
shareholder, as the Board of Directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the Board
of Directors or such committee determines that the additional information
provided by the shareholder, together with information previously provided,
does not satisfy the
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requirements of Section 2.3.2(c) in any material respect, then the Board of
Directors or such committee may reject the shareholder's notice.
(e) Notwithstanding the procedures set forth in
Section 2.3.2(d), if a shareholder proposes to nominate one or more candidates
for election as directors at an annual or special meeting, and neither the
Board of Directors nor any committee thereof has made a prior determination of
whether the shareholder has complied with the procedures set forth in this
Section 2.3.2 in connection with such nomination, then the chairman of the
meeting shall determine and declare at the meeting whether the shareholder has
so complied. If the chairman determines that the shareholder has so complied,
then the chairman shall so state and ballots shall be provided for use at the
meeting with respect to such nomination. If the chairman determines that the
shareholder has not so complied, then, unless the chairman, in his sole and
absolute discretion, determines to waive such compliance, the chairman shall
state that the shareholder has not so complied and the defective nomination
shall be disregarded.
2.4 VACANCIES. Except as otherwise provided by the Articles of
Incorporation or by law, any vacancy occurring in the Board of Directors
(whether caused by resignation, death, or otherwise) may be filled by the
affirmative vote of a majority of the directors present at a meeting of the
Board at which a quorum is present, or, if the directors in office constitute
less than a quorum, by the affirmative vote of a majority of all of the
directors in office. Notice shall be given to all of the remaining directors
that such vacancy will be filled at the meeting. However, if the vacant
director's position was held by a director elected by one or more voting groups
composed of less than all of the voting shareholders, such vacancy may only be
filled by (i) the remaining directors, if any, elected by the same voting group
or groups; or (ii) the shareholders in the voting group or groups that elected
the director who formerly held the vacant office. A director elected to fill
any vacancy shall hold office until the next meeting of shareholders at which
directors are elected, and until his successor shall have been elected and
qualified.
2.5 REMOVAL. One or more members of the Board of Directors (including
the entire Board) may be removed, with or without cause, at a special meeting
of shareholders called expressly for that purpose. A director (or the entire
Board) may be removed if the number of votes cast in favor of removing such
director (or the entire Board) exceeds the number of votes cast against
removal; provided that, if a director (or the entire Board) has been elected by
one or more voting groups, only those voting groups may participate in the vote
as to removal. However, if the Articles of Incorporation grant shareholders
the right to cumulate their votes in the election of directors, a director may
not be removed if a number of votes sufficient to elect such director under
cumulative voting (computed on the basis of the number of votes actually cast
at the meeting on the question of removal) is cast against such director's
removal.
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2.6 RESIGNATION. A director may resign at any time by delivering
written notice to the Board of Directors, its Chairman, the President, or the
Secretary. A resignation is effective when the notice is delivered unless the
notice specifies a later effective date.
2.7 ANNUAL MEETING. The first meeting of each newly elected Board of
Directors shall be known as the annual meeting thereof and shall be held
without notice immediately after the annual shareholders' meeting or any
special shareholders' meeting at which a Board of Directors is elected. Such
meeting shall be held at the same place as such shareholders' meeting unless
some other place shall be specified by resolution of the shareholders.
2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held at such place, day, and time as shall from time to time be fixed by
resolution of the Board without notice other than the delivery of such
resolution as provided in Section 2.10 below.
2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by the President or the Chairman of the Board (if one be appointed)
or any two or more directors, to be held at such place, day, and time as
specified by the person or persons calling the meeting.
2.10 NOTICE OF MEETING. Notice of the place, day, and time of any
meeting of the Board of Directors for which notice is required shall be given,
at least two (2) days preceding the day on which the meeting is to be held, by
the Secretary or an Assistant Secretary, or by the person calling the meeting,
in any manner permitted by law, including orally. Any oral notice given by
personal communication over the telephone or otherwise may be communicated
either to the director or to a person at the office of the director who, the
person giving the notice has reason to believe, will promptly communicate it to
the director. Notice shall be deemed to have been given on the earliest of (a)
the day of actual receipt, (b) the date notice is sent by facsimile
transmission, (c) three (3) days after the day on which written notice is
deposited in the United States mail, as evidenced by the postmark, with
first-class postage prepaid and correctly addressed, or (d) on the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee.
No notice of any regular meeting need be given if the place, day, and
time thereof have been fixed by resolution of the Board of Directors and a copy
of such resolution has been given to each director, either by personally
delivering the copy to the director at least two (2) days, or by depositing the
copy in the United States mail with first-class postage prepaid and correctly
addressed to the director at the director's address as it appears on the
records of the corporation at least five (5)
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days (as evidenced by the postmark), prior to the day of the first meeting held
in pursuance thereof.
Notice of a meeting of the Board of Directors need not be given to any
director if it is waived by the director in writing, whether before or after
such meeting is held. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting unless required by law, the
Articles of Incorporation, or these Bylaws.
A director's attendance at or participation in a meeting shall
constitute a waiver of notice of such meeting except when a director attends or
participates in a meeting for the express purpose of objecting on legal grounds
prior to or at the beginning of the meeting (or promptly upon the director's
arrival) to the holding of the meeting or the transaction of any business and
does not thereafter vote for or assent to action taken at the meeting. Any
meeting of the Board of Directors shall be a legal meeting without any notice
thereof having been given if all of the directors have received valid notice
thereof, are present without objecting, or waive notice thereof, or any
combination thereof.
2.11 QUORUM OF DIRECTORS. Except in particular situations where a
lesser number is expressly permitted by law, and unless a greater number is
required by the Articles of Incorporation, a majority of the number of
directors specified in or fixed in accordance with these Bylaws shall
constitute a quorum for the transaction of business, and the affirmative vote
of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. If the number of directors
in office at any time is less than the number specified in or fixed in
accordance with these Bylaws, then a quorum shall consist of a majority of the
number of directors in office; provided that in no event shall a quorum consist
of fewer than one-third of the number specified in or fixed in accordance with
these Bylaws.
Directors at a meeting of the Board of Directors at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, provided such withdrawal does not reduce the number of
directors attending the meeting below the level of a quorum.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the Board of Directors to another time and
place. If the meeting is adjourned for more than forty-eight (48) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 2.10 of these
Bylaws, to the directors who were not present at the time of the adjournment.
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2.12 DISSENT BY DIRECTORS. Any director who is present at any meeting
of the Board of Directors at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless the director
objects at the beginning of the meeting (or promptly upon the director's
arrival) to the holding of, or the transaction of business at, the meeting; or
unless the director's dissent or abstention shall be entered in the minutes of
the meeting; or unless the director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before the
adjournment thereof or to the corporation within a reasonable time after the
adjournment of the meeting. Such right to dissent or abstention shall not be
available to any director who votes in favor of such action.
2.13 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by law
to be taken or which may be taken at a meeting of the Board of Directors may be
taken without a meeting if one or more consents in writing, setting forth the
action so taken, shall be signed either before or after the action so taken by
all of the directors and delivered to the corporation for inclusion in the
minutes or filing with the corporate records. Such consent shall have the same
effect as a meeting vote. Action taken under this section is effective when the
last director signs the consent, unless the consent specifies a later effective
date.
2.14 TELEPHONIC MEETINGS. Except as may be otherwise restricted by the
Articles of Incorporation, members of the Board of Directors may participate in
a meeting of the Board by any means of communication by which all directors
participating in the meeting may simultaneously hear each other during the
meeting. Participation by such means shall constitute presence in person at a
meeting.
2.15 COMPENSATION. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, and may be paid a fixed sum or a
stated salary as a director, for attendance at each meeting of the Board. No
such payment shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor.
2.16 COMMITTEES. The Board of Directors, by resolution adopted by the
greater of (a) a majority of all of the directors in office, or (b) the number
of directors required by the Articles of Incorporation or these Bylaws to take
action may from time to time create, and appoint individuals to, one or more
committees, each of which must have at least two (2) members. If a committee is
formed for the purpose of exercising functions of the Board, the committee must
consist solely of directors. If the only function of a committee is to study
and make recommendations for action by the full Board, the committee need not
consist of directors. Members of a committee composed solely of directors, in
fulfilling their standard of conduct, may rely upon Section 2.1 above.
Committees of directors may exercise the authority of the Board of Directors to
the extent specified by such
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resolution or in the Articles of Incorporation or these Bylaws. However, no
committee shall:
(a) authorize or approve a distribution (as defined in
RCW 23B.01.400) except according to a general formula or method prescribed by
the Board of Directors;
(b) approve or propose to shareholders action that by
law is required to be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any
of its committees;
(d) amend the Articles of Incorporation;
(e) adopt, amend, or repeal Bylaws;
(f) approve a plan of merger not requiring shareholder
approval; or
(g) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee of directors (or a senior
executive officer of the corporation) to do so within limits specifically
prescribed by the Board of Directors.
Committees shall be governed by the same provisions as govern the
meetings, actions without meetings, notice and waiver of notice, quorum and
voting requirements, and standards of conduct of the Board of Directors. The
Executive Committee (if one be established) shall meet periodically between
meetings of the full Board. All committees shall keep regular minutes of their
meetings and shall cause them to be recorded in books kept for that purpose at
the office of the corporation.
ARTICLE III
OFFICERS
3.1 APPOINTMENT. The officers of the corporation shall be appointed
annually by the Board of Directors at its annual meeting held after the annual
meeting of the shareholders. If the appointment of officers is not held at such
meeting, such appointment shall be held as soon thereafter as a Board meeting
conveniently may be held. Except in the case of death, resignation, or removal,
each officer shall hold
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office until the next annual meeting of the Board of Directors and until his
successor is appointed and qualified.
3.2 QUALIFICATION. None of the officers of the corporation need be a
director, except as specified below. Any two or more of the corporate offices
may be held by the same person.
3.3 OFFICERS ENUMERATED. Except as otherwise provided by resolution
of the Board of Directors, the officers of the corporation and their respective
powers and duties shall be as follows:
3.3.1 CHAIRMAN OF THE BOARD. The Chairman of the Board (if
such an officer be appointed) shall be a director and shall perform such duties
as shall be assigned to him by the Board of Directors and in any employment
agreement. The Chairman shall preside at all meetings of the shareholders and
at all meetings of the Board at which he is present. The Chairman may sign
deeds, mortgages, bonds, contracts, and other instruments, except when the
signing thereof has been expressly delegated by the Board or by these Bylaws to
some other officer or agent of the corporation or is otherwise required by law
to be signed by some other officer or in some other manner. If the President
dies or becomes unable to act, the Chairman shall perform the duties of the
President, except as may be limited by resolution of the Board of Directors,
with all the powers of and subject to all the restrictions upon the President.
3.3.2 PRESIDENT. Subject to such supervisory powers as may be
given by the Board of Directors to the Chairman of the Board (if such an
officer be appointed), the President shall be the chief executive officer of
the corporation unless some other officer is so designated by the Board and,
subject to the control of the Board and the Executive Committee (if one be
established), shall supervise and control all of the assets, business, and
affairs of the corporation. If no Chairman of the Board has been appointed, the
President shall be a director. The President may sign certificates for shares
of the corporation, deeds, mortgages, bonds, contracts, and other instruments,
except when the signing thereof has been expressly delegated by the Board or by
these Bylaws to some other officer or agent of the corporation or is otherwise
required by law to be signed by some other officer or in some other manner. The
President shall vote the shares owned by the corporation in other corporations,
domestic or foreign, unless otherwise prescribed by law or resolution of the
Board. In general, the President shall perform all duties incident to the
office of President and such other duties as may be prescribed by the Board
from time to time. In the absence of the Chairman of the Board, the President,
if a director, shall preside over all meetings of the shareholders and over all
meetings of the Board of Directors. The President shall have the authority to
appoint one or more Assistant Secretaries and Assistant Treasurers, as he deems
necessary.
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3.3.3 VICE PRESIDENTS. If no Chairman of the Board has been
appointed, in the absence or disability of the President, the Vice Presidents,
if any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board shall perform all the duties
of the President and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the President; provided that no such Vice
President shall assume the authority to preside as Chairman of meetings of the
Board unless such Vice President is a member of the Board. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be respectively prescribed for them by the Board, these Bylaws, the
President, or the Chairman of the Board (if one be appointed).
3.3.4 SECRETARY. The Secretary shall:
(a) have responsibility for preparing minutes of
meetings of the shareholders and the Board of Directors and for authenticating
records of the corporation;
(b) see that all notices are duly given in accordance
with the provisions of Sections 1.3, 1.5, 2.8, and 2.10 of these Bylaws and as
required by law;
(c) be custodian of the corporate records and seal of
the corporation, if one be adopted;
(d) keep a register of the post office address of each
shareholder and director;
(e) attest certificates for shares of the corporation;
(f) have general charge of the stock transfer books of
the corporation;
(g) when required by law or authorized by resolution
of the Board of Directors, sign with the President, or other officer authorized
by the President or the Board, deeds, mortgages, bonds, contracts, and other
instruments; and
(h) in general, perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
by the President or the Board of Directors.
In the absence of the Secretary, an Assistant Secretary may perform the
duties of the Secretary.
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3.3.5 TREASURER. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board shall determine. The
Treasurer shall:
(a) have charge and custody of and be responsible for all funds and
securities of the corporation;
(b) receive and give receipts for moneys due and
payable to the corporation from any source whatsoever and deposit all such
moneys in the name of the corporation in banks, trust companies, or other
depositories selected in accordance with the provisions of these Bylaws; and
(c) in general, perform all of the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned by the President or the Board of Directors.
In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
3.4 DELEGATION. In case of the absence or inability to act of any
officer of the corporation and of each person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any other officer or other person whom it may select.
3.5 RESIGNATION. Any officer may resign at any time by delivering
notice to the corporation. Any such resignation shall take effect at the time
the notice is delivered unless the notice specifies a later effective date.
Unless otherwise specified therein, acceptance of such resignation by the
corporation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
3.6 REMOVAL. Any officer or agent may be removed by the Board with or
without cause. An officer empowered to appoint another officer or assistant
officer also has the power to remove any officer he would have the power to
appoint whenever in his judgment the best interests of the corporation would be
served thereby. The removal of an officer or agent shall be without prejudice
to the contract rights, if any, of the corporation or the person so removed.
Appointment of an officer or agent shall not of itself create contract rights.
3.7 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification, creation of a new office, or any other cause may be
filled by the Board of Directors for the unexpired portion of the term or for a
new term established by the Board.
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<PAGE> 22
3.8 OTHER OFFICERS AND AGENTS. One or more Vice Presidents and such
other officers and assistant officers as may be deemed necessary or advisable
may be appointed by the Board of Directors or, to the extent provided in
Section 3.3.2 above, by the President. Such other officers and assistant
officers shall hold office for such periods, have such authorities, and perform
such duties as are provided in these Bylaws or as may be provided by resolution
of the Board. Any officer may be assigned by the Board any additional title
that the Board deems appropriate. The Board may delegate to any officer or
agent the power to appoint any such assistant officers or agents and to
prescribe their respective terms of office, authorities, and duties.
3.9 COMPENSATION. Compensation, if any, for officers and other agents
and employees of the corporation shall be determined by the Board of Directors,
or by the President to the extent such authority may be delegated to him by the
Board. No officer shall be prevented from receiving compensation in such
capacity by reason of the fact that he is also a director of the corporation.
3.10 GENERAL STANDARDS FOR OFFICERS. Officers with discretionary
authority shall discharge their duties under that authority in accordance with
the same standards of conduct applicable to directors as specified in Section
2.1 above (except for subsection (c) thereof).
ARTICLE IV
CONTRACTS, CHECKS AND DRAFTS
4.1 CONTRACTS. The Board of Directors may authorize any officer or
officers or agent or agents to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation. Such authority
may be general or confined to specific instances. Subject to the limitations
set forth in RCW 23B.08.700 through 23B.08.730 and 23B.19.040, to the extent
applicable, the corporation may enter into contracts and otherwise transact
business as vendor, purchaser, lender, borrower, or otherwise with its
directors and shareholders and with corporations, associations, firms, and
entities in which they are or may be or become interested as directors,
officers, shareholders, members, or otherwise. Any such contract or transaction
shall not be affected or invalidated or give rise to liability by reason of the
director's or shareholder's having an interest in the contract or transaction.
4.2 CHECKS, DRAFTS, ETC. All checks, drafts, and other orders for the
payment of money, notes, and other evidences of indebtedness issued in the name
of the corporation shall be signed by such officer or officers or agent or
agents of the
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<PAGE> 23
corporation and in such manner as may be determined from time to time by
resolution of the Board of Directors.
4.3 DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Treasurer, subject to the
direction of the Board of Directors, may select.
ARTICLE V
STOCK
5.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued
unless authorized by the Board of Directors, which authorization shall include
the maximum number of shares to be issued, the consideration to be received for
each share, and, if the consideration is in a form other than cash, the
determination of the value of the consideration.
5.2 CERTIFICATES OF STOCK. All shares of the corporation shall be
represented by certificates in such form, not inconsistent with the Articles of
Incorporation, as the Board of Directors may from time to time prescribe.
Certificates of stock shall be issued in numerical order and shall be signed by
the President or a Vice President, attested to by the Secretary or an Assistant
Secretary, and sealed with the corporate seal, if any. If any certificate is
manually signed by a transfer agent or a transfer clerk and by a registrar, the
signatures of the President, Vice President, Secretary or Assistant Secretary
upon that certificate may be facsimiles that are engraved or printed. If any
person who has signed or whose facsimile signature has been placed on a
certificate no longer is an officer when the certificate is issued, the
certificate may nevertheless be issued with the same effect as if the person
were still an officer at the time of its issue. Every certificate of stock
shall state:
(a) The state of incorporation;
(b) The name of the registered holder of the shares
represented thereby;
(c) The number and class of shares, and the
designation of the series, if any, which such certificate represents;
(d) If the corporation is authorized to issue
different classes of shares or different series within a class, either a
summary of (on the face or back of the certificate), or a statement that the
corporation will furnish to any share-
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<PAGE> 24
holder upon written request and without charge a summary of, the designations,
relative rights, preferences, and limitations applicable to each class and the
variations in rights, preferences and limitations determined for each series,
and the authority of the Board of Directors to determine variations for future
series; and
(e) If the shares are subject to transfer or other
restrictions under applicable securities laws or contracts with the
corporation, either a complete description of or a reference to the existence
and general nature of such restrictions on the face or back of the certificate.
5.3 STOCK RECORDS. The corporation or its agent shall maintain at the
registered office or principal office of the corporation, or at the office of
the transfer agent or registrar of the corporation, if one be designated by the
Board of Directors, a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders in
alphabetical order by class of shares showing the number and class of shares
held by each. The person in whose name shares stand on the books of the
corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
5.4 RESTRICTIONS ON TRANSFER. The Board of Directors shall have the
authority to issue shares of the capital stock of this corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose. Except to the extent that the corporation has obtained an
opinion of counsel acceptable to the corporation that transfer restrictions are
not required under applicable securities laws, all certificates representing
shares of the corporation shall bear the following legend (or a legend of
substantially the same import) on the face of the certificate or on the reverse
of the certificate if a reference to the legend is contained on the face:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this certificate have not been
registered under the Securities Act of 1933, or any state
securities laws, and may not be offered, sold, transferred,
encumbered, or otherwise disposed of except upon satisfaction of
certain conditions. Information concerning these restrictions may
be obtained from the corporation or its legal counsel. Any offer
or disposition of these securities without satisfaction of said
conditions will be wrongful and will not entitle the transferee to
register ownership of the securities with the corporation.
20
<PAGE> 25
5.5 TRANSFERS. Shares of stock may be transferred by delivery of the
certificates therefor, accompanied by:
(a) an assignment in writing on the back of the
certificate, or an assignment separate from certificate, or a written power of
attorney to sell, assign, and transfer the same, signed by the record holder of
the certificate; and
(b) such additional documents, instruments, and other
items of evidence as may be reasonably necessary to satisfy the requirements of
any transfer restrictions applicable to such shares, whether arising under
applicable securities or other laws, or by contract, or otherwise.
Except as otherwise specifically provided in these Bylaws, no shares of
stock shall be transferred on the books of the corporation until the
outstanding certificate therefor has been surrendered to the corporation. All
certificates surrendered to the corporation for transfer shall be canceled, and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that, in case
of a lost, destroyed, or mutilated certificate, a new one may be issued
therefor upon such terms (including indemnity to the corporation) as the Board
of Directors may prescribe.
ARTICLE VI
RECORDS OF CORPORATE MEETINGS
The corporation shall keep, as permanent records, minutes of all
meetings of its shareholders and Board of Directors, a record of all actions
taken by the shareholders or Board of Directors without a meeting, and a record
of all actions taken by a committee of the Board of Directors exercising the
authority of the Board of Directors on behalf of the corporation. The
corporation shall keep at its principal office a copy of the minutes of all
shareholders' meetings that have occurred, and records of all action taken by
shareholders without a meeting, within the past three (3) years. Any person
dealing with the corporation may rely upon a copy of any of the records of the
proceedings, resolutions, or votes of the Board or shareholders when certified
by the President or Secretary.
ARTICLE VII
FINANCIAL MATTERS
The corporation shall maintain appropriate accounting records at its
principal office and shall prepare the annual financial statements required by
RCW 23B.16.200. Except to the extent otherwise expressly determined by the
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<PAGE> 26
Board of Directors or otherwise required by law, the accounting records of the
corporation shall be kept and prepared in accordance with generally accepted
accounting principles applied on a consistent basis from period to period. The
fiscal year of the corporation shall be the calendar year unless otherwise
expressly determined by the Board of Directors.
ARTICLE VIII
DISTRIBUTIONS
The Board of Directors may from time to time authorize, and the
corporation may make, distributions (as defined in RCW 23B.01.400) to its
shareholders to the extent permitted by RCW 23B.06.400, subject to any
limitation in the Articles of Incorporation. A director who votes for or
assents to a distribution made in violation of RCW 23B.06.400 is personally
liable to the corporation for the amount of the distribution that exceeds that
which could have been distributed without violating RCW 23B.06.400 if it is
established that the director did not perform the director's duties in
compliance with Section 2.1 above.
ARTICLE IX
CORPORATE SEAL
The Board of Directors may, but shall not be required to, adopt a
corporate seal for the corporation in such form and with such inscription as
the Board may determine. If such a corporate seal shall at any time be so
adopted, the application of or the failure to apply such seal to any document
or instrument shall have no effect upon the validity or invalidity of such
document or instrument under otherwise applicable principles of law.
ARTICLE X
INDEMNIFICATION
As provided by Section 6.5 of the Articles of Incorporation:
10.1 DEFINITIONS. The capitalized terms in this Article X shall have
the meanings set forth in RCW 23B.08.500.
10.2 MANDATORY INDEMNIFICATION. The Corporation shall indemnify and
hold harmless each individual who is or was serving as a Director or officer of
the Corporation or who, while serving as a Director or officer of the
Corporation, is or
22
<PAGE> 27
was serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against any and all Liability incurred with respect to any Proceeding to which
the individual is or is threatened to be made a Party because of such service,
and shall make advances of reasonable Expenses with respect to such Proceeding,
to the fullest extent permitted by law, without regard to the limitations in
RCW 23B.08.510 through 23B.08.550; provided that no such indemnity shall
indemnify any Director or officer from or on account of (a) acts or omissions
of the Director or officer finally adjudged to be intentional misconduct or a
knowing violation of law; (b) conduct of the Director or officer finally
adjudged to be in violation of RCW 23B.08.310; or (c) any transaction with
respect to which it was finally adjudged that such Director or officer
personally received a benefit in money, property, or services to which the
Director or officer was not legally entitled.
10.3 INSURANCE. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee, or agent
of the Corporation or, who, while a director, officer, employee, or agent of
the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise against Liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee, or agent, whether or not the Corporation would
have power to indemnify the individual against such Liability under RCW
23B.08.510 or 23B.08.520.
10.4 CHANGES IN LAW. If, after the effective date of this Article X,
the Act is amended to authorize further indemnification of Directors or
officers, then Directors and officers of the Corporation shall be indemnified
to the fullest extent permitted by the Act as so amended.
10.5 EXCLUSIVITY; NATURE OF RIGHTS; AMENDMENT. To the extent permitted
by law, the rights to indemnification and advance of reasonable Expenses
conferred in this Article X shall not be exclusive of any other right which any
individual may have or hereafter acquire under any statute, provision of the
Bylaws, agreement, vote of shareholders or disinterested directors, or
otherwise. The right to indemnification conferred in this Article X shall be a
contract right upon which each Director or officer shall be presumed to have
relied in determining to serve or to continue to serve as such. Any amendment
to or repeal of this Article X shall not adversely affect any right or
protection of a Director or officer of the Corporation for or with respect to
any acts or omissions of such Director or officer occurring prior to such
amendment or repeal.
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<PAGE> 28
ARTICLE XI
MISCELLANY
11.1 COMMUNICATIONS BY FACSIMILE. Whenever these Bylaws require
notice, consent, or other communication to be delivered for any purpose,
transmission by phone, wire, or wireless equipment which transmits a facsimile
of such communication shall constitute sufficient delivery for such purpose.
Such communication shall be deemed to have been received by or in the
possession of the addressee upon completion of the transmission.
11.2 INSPECTOR OF ELECTIONS. Before any annual or special meeting of
shareholders, the Board of Directors may appoint an inspector of elections to
act at the meeting and any adjournment thereof. If no inspector of elections is
so appointed by the Board, then the chairman of the meeting may appoint an
inspector of elections to act at the meeting. If any person appointed as
inspector fails to appear or fails or refuses to act, then the chairman of the
meeting may, and upon the request of any shareholder or a shareholder's proxy
shall, appoint a person to fill that vacancy.
Such inspector of elections shall:
(a) determine the number of shares outstanding and the
voting power of each, the number of shares represented at the meeting, the
existence of a quorum, and, with the advice of legal counsel to the
corporation, the authenticity, validity, and effect of proxies pursuant to RCW
23B.07.220 and 23B.07.240 and any procedure adopted by the Board of Directors
pursuant to RCW 23B.07.230;
(b) receive votes, ballots, or consents;
(c) hear and determine all challenges and questions in
any way arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine the result; and
(f) do any other acts that may be proper to conduct
the election or vote with fairness to all shareholders.
11.3 RULES OF ORDER. The rules contained in the most recent edition of
Robert's Rules of Order, Revised, shall govern all meetings of shareholders
where
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<PAGE> 29
those rules are not inconsistent with the Articles of Incorporation or Bylaws,
subject to the following:
(a) The chairman of the meeting shall have absolute
authority over matters of procedure, and there shall be no appeal from the
ruling of the chairman. If the chairman in his absolute discretion deems it
advisable to dispense with the rules of parliamentary procedure for any meeting
or any part thereof, the chairman shall so state and shall clearly state the
rules under which the meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents
continuation of the legitimate business of the meeting, the chairman may quit
the chair and announce the adjournment of the meeting; upon so doing, the
meeting shall be deemed immediately adjourned, subject to being reconvened in
accordance with Section 1.5 or 2.11 of these Bylaws, as the case may be.
(c) The chairman may ask or require that anyone not a
bona fide shareholder or proxy leave the meeting of shareholders.
(d) A resolution or motion at a meeting of
shareholders shall be considered for vote only if proposed by a shareholder or
duly authorized proxy and seconded by an individual who is a shareholder or
duly authorized proxy other than the individual who proposed the resolution or
motion.
11.4 CONSTRUCTION. Within these Bylaws, words of any gender shall be
construed to include any other gender, and words in the singular or plural
number shall be construed to include the plural or singular, respectively,
unless the context otherwise requires.
11.5 SEVERABILITY. If any provision of these Bylaws or any application
thereof shall be invalid, unenforceable, or contrary to applicable law, the
remainder of these Bylaws, and the application of such provisions to
individuals or circumstances other than those as to which it is held invalid,
unenforceable, or contrary to applicable law, shall not be affected thereby.
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<PAGE> 30
ARTICLE XII
AMENDMENT OF BYLAWS
Subject to the requirements of RCW 23B.10.210 relating to supermajority
quorum provisions for the Board of Directors, the Bylaws of the corporation may
be amended or repealed, or new Bylaws may be adopted, by: (a) the
shareholders, even though the Bylaws may also be amended or repealed, or new
Bylaws may also be adopted, by the Board of Directors; or (b) subject to the
power of the shareholders of the corporation to change or repeal the Bylaws,
the Board of Directors, unless such power is reserved, by the Articles of
Incorporation or by law, exclusively to the shareholders in whole or in part,
or unless the shareholders, in amending or repealing a particular bylaw,
provide expressly that the Board of Directors may not amend or repeal that
bylaw.
ARTICLE XIII
AUTHENTICATION
The foregoing Amended and Restated Bylaws were read, approved and duly
adopted by the Board of Directors of Innova Corporation on June _____, 1997,
and by the shareholders of the Corporation on __________________, 1997,
effective as of _____________________, 1997, and the President and Secretary of
the corporation were empowered to authenticate such Bylaws by their signatures
below.
________________________________________
Jean-Francois Grenon,
President and Chief Executive
Officer
ATTEST:
________________________________
John M. Hemingway, Secretary and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INNOVA
CORPORATION FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,348,339
<SECURITIES> 6,221,330
<RECEIVABLES> 13,897,927
<ALLOWANCES> (450,000)
<INVENTORY> 22,670,068
<CURRENT-ASSETS> 46,975,408
<PP&E> 22,009,647
<DEPRECIATION> (5,353,013)
<TOTAL-ASSETS> 64,333,112
<CURRENT-LIABILITIES> 14,954,983
<BONDS> 0
0
0
<COMMON> 86,799,729
<OTHER-SE> 3,026,680
<TOTAL-LIABILITY-AND-EQUITY> 64,333,112
<SALES> 10,207,717
<TOTAL-REVENUES> 10,207,717
<CGS> 7,842,426
<TOTAL-COSTS> 7,842,426
<OTHER-EXPENSES> 3,884,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150,783
<INCOME-PRETAX> (1,519,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,519,573)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
