<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File Number : 0-22350
MERCURY INTERACTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0224776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1325 Borregas Avenue, Sunnyvale, California 94089
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 822-5200
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 a 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
The number of shares of Registrant's Common Stock outstanding as of July 31,
1999 was 37,943,529.
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MERCURY INTERACTIVE CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
INDEX TO EXHIBITS 19
2
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $100,258 $ 96,073
Short-term investments 40,789 13,130
Trade accounts receivable 24,829 27,903
Other receivables 5,619 6,012
Prepaid expenses and other current assets 12,614 11,511
-------- --------
Total current assets 184,109 154,629
Long-term investments 19,558 20,697
Property and equipment, net 30,659 28,250
-------- --------
$234,326 $203,576
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,431 $ 4,575
Accrued liabilities 22,312 17,792
Income taxes payable 11,820 11,498
Deferred revenue 29,513 24,122
-------- --------
Total current liabilities 68,076 57,987
------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 75 73
Capital in excess of par value 133,871 124,038
Notes receivable from issuance of stock (6,877) (5,130)
Accumulated comprehensive loss (1,158) (775)
Retained earnings 40,339 27,383
-------- --------
Total stockholders' equity 166,250 145,589
-------- --------
$234,326 $203,576
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
License $ 29,300 $ 19,100 $ 53,900 $ 34,700
Service 13,200 8,100 26,200 14,700
------------- ------------- ------------- -------------
Total revenue 42,500 27,200 80,100 49,400
------------- ------------- ------------- -------------
Cost of revenue:
License 1,870 1,550 3,506 2,879
Service 4,441 2,600 8,513 4,934
------------- ------------- ------------- -------------
Total cost of revenue 6,311 4,150 12,019 7,813
------------- ------------- ------------- -------------
Gross profit 36,189 23,050 68,081 41,587
------------- ------------- ------------- -------------
Operating expenses:
Research and development, net 5,480 3,656 10,300 6,679
Marketing and selling 20,220 13,379 39,207 24,362
General and administrative 2,704 1,899 4,949 3,748
------------- ------------- ------------- -------------
Total operating expenses 28,404 18,934 54,456 34,789
------------- ------------- ------------- -------------
Income from operations 7,785 4,116 13,625 6,798
Other income, net 1,417 925 2,569 1,775
------------- ------------- ------------- -------------
Income before provision for income taxes 9,202 5,041 16,194 8,573
Provision for income taxes 1,840 1,008 3,238 1,714
------------- ------------- ------------- -------------
Net income $ 7,362 $ 4,033 $ 12,956 $ 6,859
============= ============= ============= =============
Net income per share (basic) $ 0.20 $ 0.12 $ 0.35 $ 0.20
============= ============= ============= =============
Net income per share (diluted) $ 0.18 $ 0.10 $ 0.31 $ 0.18
============= ============= ============= =============
Weighted average common shares (basic) 37,307 34,570 37,077 34,277
============= ============= ============= =============
Weighted average common shares
and equivalents (diluted) 41,490 38,820 41,377 38,511
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,956 $ 6,859
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,570 2,376
Changes in assets and liabilities:
Trade accounts receivable 3,074 4,801
Other receivables 393 (364)
Prepaid expenses and other current assets (1,403) (3,178)
Accounts payable (144) 1,176
Accrued liabilities 4,520 (427)
Income taxes payable 322 802
Deferred revenue 5,391 7,398
------------- -------------
Net cash provided by operating activities 27,679 19,443
------------- -------------
Cash flows from investing activities:
Purchases of investments, net (26,520) (2,688)
Acquisition of property and equipment, net (4,679) (8,404)
------------- -------------
Net cash used in investing activities (31,199) (11,092)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 9,835 5,853
Notes receivable from issuance of stock (1,747) --
------------- -------------
Net cash provided by financing activities 8,088 5,853
------------- -------------
Effect of exchange rate changes on cash (383) 61
------------- -------------
Net increase in cash and cash equivalents 4,185 14,265
Cash and cash equivalents at beginning of period 96,073 57,211
------------- -------------
Cash and cash equivalents at end of period $ 100,258 $ 71,476
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
MERCURY INTERACTIVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, that in the
opinion of management are necessary to fairly state the Company's
consolidated financial position, the results of its operations, and its
cash flows for the periods presented. This Quarterly Report on Form 10-Q
should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1998, included in the 1998 Form
10-K. The condensed consolidated statements of operations for the three
months and six months ended June 30, 1999 are not necessarily indicative of
results to be expected for the entire fiscal year ending December 31, 1999.
2. The effective tax rate for the three months and six months ended June 30,
1999 differs from statutory tax rates principally because of special
reduced taxation programs sponsored by the government of Israel.
3. The Company obtained no grants for research and development from the Office
of the Chief Scientist in the Israeli Ministry of Industry and Trade in the
three months and six months ended June 30,1999, and obtained grants in the
amount of $410,000 and $1.2 million in the three months and six months
ended June 30, 1998, respectively. These grants were accounted for using
the cost reduction method, under which research and development expenses
were decreased by the amounts of the grants. The Company is not obligated
to repay these grants; however, it has agreed to pay royalties at rates
ranging from 2% to 5% of product sales resulting from the research, up to
the amount of the grants obtained and, for certain grants, up to 150% of
the grants obtained. Royalty expense under these agreements amounted to
approximately $850,000 and $1.6 million for the three months and six months
ended June 30, 1999, respectively, and $586,000 and $1.1 million for the
three months and six months ended June 30, 1998, respectively. As of June
30, 1999, the Company is committed to pay, if and when incurred,
approximately $801,000 in royalties. The Company has not applied for, nor
does it expect to apply for, any future Chief Scientist grants.
4. Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
("SFAS 128"). SFAS 128 requires the Company to report both basic earnings
per share, which is the weighted-average number of common shares
outstanding, and diluted earnings per share, which includes the weighted-
average common shares outstanding and all dilutive potential common shares
outstanding. For the three months and six months ended June 30, 1999 and
1998, dilutive potential common shares outstanding reflected shares
issuable under the Company's stock option plans. The following table
summarizes the Company's earnings per share computations for the quarters
ended June 30, 1999 and 1998:
Net Average Earnings
income shares per share
------ ------- ---------
June 30, 1999:
Basic earnings per share.... $7,362 37,307 $0.20
Dilutive adjustments........ - 4,183
------ ------
Diluted earnings per share.. $7,362 41,490 $0.18
====== ======
June 30, 1998:
Basic earnings per share.... $4,033 34,570 $0.12
Dilutive adjustments........ - 4,250
------ ------
Diluted earnings per share.. $4,033 38,820 $0.10
====== ======
At June 30, 1999 and 1998, there were no options considered anti-dilutive.
6
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5. The Company reports components of comprehensive income (loss) in its annual
consolidated statement of shareholders' equity. Other comprehensive income
(loss) consists of net income and foreign currency translation adjustments.
The Company's total comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 7,362 $ 4,033 $ 12,956 $ 6,859
Other comprehensive gain (loss) (132) (79) (383) 61
---------- ----------- ----------- -----------
Other comprehensive income $ 7,230 $ 3,954 $ 12,573 $ 6,920
========== =========== =========== ===========
</TABLE>
6. In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
Effective Date of a provision of SOP 97-2" ("SOP 98-4"). SOP 98-4 defers
for one year the application of certain provisions of Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). Different informal and
non-authoritative interpretations of certain provisions of SOP 97-2 have
arisen and, as a result, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"), in December 1998 which is effective for
periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The adoption of
SOP 97-2, SOP 98-4 and SOP 98-9 have not had and are not expected to have a
material impact on the Company's results of operations, financial position
or cash flows.
7. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an amendment of FASB Statement No. 133" ("SFAS 137").
SFAS 137 defers for one year the application of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") to all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
The adoption of SFAS 133 AND SFAS 137 have not had and are not expected to
have a material impact on the Company's results of operations, financial
position or cash flows.
8. Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," requires companies to
report financial and descriptive information about their reportable
operating segments. The Company has three reportable operating segments
including the Americas, Europe, and the Rest of the World, which includes
Israel. These segments are organized, managed and analyzed geographically
and operate in one industry segment: the development and marketing of
automated software testing tools and related services. The Company
evaluates operating segment performance based primarily on net revenues and
certain operating expenses. The Company's products are marketed
internationally through the Company's subsidiaries and through referral
partners, system integrators, distributors and value-added resellers.
Financial information for the Company's operating segments is summarized
below for the three months and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net revenue to third parties:
Americas..................................... $ 28,800 $ 17,700 $ 53,200 $ 32,247
Europe....................................... 10,700 7,180 21,100 12,990
Israel and Rest of the World................. 3,000 2,320 5,800 4,163
-------- -------- -------- --------
Consolidated........................... $ 42,500 $ 27,200 $ 80,100 $ 49,400
======== ======== ======== ========
Identifiable assets:
Americas..................................... $165,097 $129,293 $165,097 $129,293
Europe....................................... 13,279 12,512 13,279 12,512
Israel and Rest of the World................. 55,950 23,327 55,950 23,327
-------- -------- -------- --------
Consolidated........................... $234,326 $165,132 $234,326 $165,132
======== ======== ======== ========
</TABLE>
The subsidiary located in the United Kingdom accounted for 11% of the
consolidated revenue to unaffiliated customers for the three months and six
months ended June 30, 1999 and accounted for 12% of the consolidated revenue to
unaffiliated customers for the six months ended June 30, 1998. Operations
located in Israel accounted for 28% of the consolidated identifiable assets at
June 30, 1999, and accounted for 19% of the consolidated identifiable assets at
June 30, 1998. No other subsidiary represented 10% or more of the related
consolidated amounts for the periods presented.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of the Company's expectations
regarding future trends affecting its business. These forward looking statements
and other forward looking statements made elsewhere in this document are made in
reliance upon the safe harbor provision of the Private Securities Litigation
Reform Act of 1995. Please read the section below titled "Factors that may
affect future results" to review conditions which the Company believes could
cause actual results to differ materially from those contemplated by the forward
looking statements. Forward looking statements include, but are not limited to,
those items identified with a footnote symbol /1/. The Company undertakes no
obligation to update the information contained herein.
Results of Operations
Revenue
License revenue increased 53% to $29.3 million during the three months
ended June 30, 1999 from $19.1 million in the three months ended June 30, 1998.
License revenue increased 55% to $53.9 million during the six months ended June
30, 1999 from $34.7 million during the six months ended June 30, 1998. The
Company's growth in license revenue reflected growth in license fees from the
LoadRunner, WinRunner and Test Director products, particularly for use by
customers to test electronic business applications.
Service revenue increased 63% to $13.2 million during the three months
ended June 30, 1999 from $8.1 million in the three months ended June 30, 1998.
Service revenue increased 78% to $26.2 million during the six months ended June
30, 1999 from $14.7 million during the six months ended June 30, 1998. For the
three months and six months ended June 30, 1999, service revenue growth was
primarily due to installment based maintenance contract renewals. The Company
expects that service revenue will continue to increase in absolute dollars as
long as the Company's customer base continues to grow./1/
International revenue represented 32% and 34% of total revenue in the
three months and six months ended June 30, 1999, respectively. The absolute
dollar growth in international revenue reflected the Company's continued
investment in international operations. The Company expects international
revenue to continue to increase in absolute dollars, however, achievement of
these results cannot be assured./1/
Cost of revenue
License cost of revenue, as a percentage of license revenue, decreased
to 6% in the three months ended June 30, 1999 and 7% in the six months ended
June 30, 1999, from 8% in both the three months and six months ended June 30,
1998. License cost of revenue includes cost of production personnel, product
packaging and amortization of capitalized software development costs. The
decreased license cost of revenue as a percentage of revenue in the three months
and six months ended June 30, 1999 reflected primarily flat absolute dollar
amortization of capitalized software development costs in the three months and
six months ended June 30, 1999 and 1998.
Service cost of revenue, as a percentage of service revenue was 34%
and 32% in the three months and six months ended June 30, 1999, respectively,
compared to 32% and 34% in the three months and six months ended June 30, 1998,
respectively. Service cost of revenue consists primarily of costs of providing
customer technical support, training and consulting. Service cost of revenue as
a percentage of service revenue may vary based on the degree of outsourcing of
training and consulting and the profitability of individual consulting
engagements.
Research and development, net
Research and development, net was $5.5 million and $10.3 million, or
13% of total revenue for both the three months and six months ended June 30,
1999, respectively, compared to $3.7 million and $6.7 million, or 13% and 14% of
total revenue for the three months and six months ended June 30, 1998,
respectively. The increase in
- ------------------------------
/1/ Forward looking statement
8
<PAGE>
absolute dollars in the three months and six months ended June 30,1999 reflected
an increase in spending due to growth in research and development headcount, and
increased royalty payments to the Office of the Chief Scientist in Israel.
The Company obtained no grants for research and development from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade in
the three months and six months ended June 30, 1999, and obtained grants in the
amount of $410,000 and $1.2 million in the three months and six months ended
June 30, 1998, respectively. These grants were accounted for using the cost
reduction method, under which research and development expenses were decreased
by the amounts of the grants. The Company is not obligated to repay these
grants; however, it has agreed to pay royalties at rates ranging from 2% to 5%
of product sales resulting from the research, up to the amount of the grants
obtained and, for certain grants, up to 150% of the grants obtained. Royalty
expense under these agreements amounted to approximately $850,000 and $1.6
million for the three months and six months ended June 30, 1999, respectively,
and $586,000 and $1.1 million for the three months and six months ended June 30,
1998, respectively. As of June 30, 1999, the Company is committed to pay, if and
when incurred, approximately $801,000 in royalties. The Company has not applied
for, nor does it expect to apply for, any future Chief Scientist grants.
During the three months and six months ended June 30, 1999 and
1998,the Company did not capitalize any software development costs. Amortization
charges included in cost of license revenues were $150,000 and $300,000 for the
three months and six months ended June 30, 1999 and 1998, respectively. At June
30, 1999 and December 31, 1998, the Company had a balance in capitalized
software development costs of approximately $285,000 and $585,000, respectively.
The Company intends to continue making significant expenditures on
research and development to develop new products and expand the platforms and
operating systems on which its products are offered./1/ While the Company
believes that these current research and development expenditures will be
beneficial in the long term development of its business, there can be no
assurance that the development of products will be successful or will not be
rendered obsolete by future technology acquisitions or developments./1/ Research
and development expenditures are incurred substantially in advance of related
revenue and in some cases do not result in the generation of revenue.
Marketing and selling
Marketing and selling expenses were $20.2 million, or 48% of total
revenue, and $39.2 million, or 49% of total revenue, in both the three months
and six months ended June 30, 1999, respectively, from $13.4 million and $24.4
million, or 49% of total revenue, in both the three months and six months ended
June 30, 1998, respectively. The absolute dollar increase in marketing and
selling expenses was primarily due to increased commission expense attributable
to the higher revenue level, an increase in other personnel-related costs
reflecting the growth in sales and marketing headcount, and increased spending
on marketing programs. The Company expects marketing and selling expenses to
increase in absolute dollars as total revenue increases, but such expenses may
vary as a percentage of revenue./1/
General and administrative
General and administrative expenses were $2.7 million and $4.9 million, or
6% of total revenue, in the three months and six months ended June 30, 1999,
respectively, from $1.9 million, or 7% of total revenue, and $3.7 million, or 8%
of total revenue, in both the three months and six months ended June 30, 1998,
respectively. The increase in absolute dollar spending reflected increased
staffing and related spending necessary to manage and support the Company's
growth.
Other income, net
Other income, net consists primarily of interest income and foreign
exchange gains and losses. The increase in other income, net to $1.4 million
and $2.6 million for the three months and six months ended June 30, 1999,
respectively, from $925,000 and $1.8 million for the three months and six months
ended June 30, 1998,
- ------------------------
/1/ Forward looking statement
9
<PAGE>
respectively, reflected primarily increased interest income on higher average
cash and investment balances in the three months and six months ended June 30,
1999.
Provision for income taxes
The Company participates in special programs sponsored by the
government of Israel relating to taxation, contributing to significant lower
income tax expense than expected based on the U.S. federal income tax rate.
Future provisions for income taxes will depend upon the mix of worldwide income
and the tax rates in effect for various tax jurisdictions.
Net income
The Company reported net income of $7.4 million and $13.0 million in
the three months and six months ended June 30, 1999, respectively, compared to
net income of $4.0 million and $6.9 million in the three months and six months
ended June 30, 1998, respectively. The Company's operating expenses are based,
in part, on its expectations of future revenues, and expenses are generally
incurred in advance of revenues. The Company plans to continue to expand and
increase its operating expenses to support anticipated revenue growth./1/ If
revenue does not materialize in a quarter as expected, the Company's results
from operations for the quarter are likely to be materially adversely affected.
Net income may be disproportionately affected by a reduction in revenue because
only a small portion of the Company's expenses varies with its revenue.
Inflation
Inflation has not had a significant impact on the Company's operating
results to date.
Year 2000
The approach of Year 2000 presents significant issues for many
computer systems, since much of the software in use today may not accurately
process data beyond 1999. The Company has conducted an internal review of its
corporate headquarters computer systems and software ("IT Systems") including
finance, human resources, intranet applications, payroll systems and customer
support organization systems to determine their Year 2000 compliance. As part of
this process, the Company contacted vendors of its relevant corporate IT Systems
and determined potential exposure to Year 2000 issues and has obtained written
assurance from such vendors regarding Year 2000 compliance. The Company is in
the process of implementing software upgrades for certain systems found not to
be Year 2000 compliant. The cost of completing this implementation will not have
a material adverse effect on the Company's results of operations.
At this time, the Company is in the process of determining the state
of compliance of certain third-party suppliers of services such as phone
companies, long distance carriers, financial institutions and utility companies.
The failure of any one of these third-party suppliers could severely disrupt the
Company's ability to carry on its business as well as disrupt the business of
the Company's customers. The Company has received confirmation of Year 2000
compliance from most of these companies and is pursuing confirmation with those
vendors who have not yet responded to inquiries.
Failure of the Company to provide Year 2000 compliant products to its
customers or to receive business solutions from its suppliers could result in
liability to the Company or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
the Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by the Company, which could
result in a material adverse effect on the Company's business, results of
operations and financial condition. The Company could be affected through
disruptions in the operation of the enterprises with which the Company interacts
or from general widespread problems or an economic crisis resulting from
noncompliant Year 2000 systems. Despite the Company's efforts to address the
Year 2000 effect on its internal systems and business operations, such effect
could result in a material disruption of its business or have a material
- -------------------------
/1/ Forward looking statement
10
<PAGE>
adverse effect on the Company's business, financial condition or results of
operations. The Company has developed a contingency plan to respond to
any of the foregoing consequences of internal and external failures to be Year
2000 compliant.
In selling its products, the Company frequently relies on "shrink
wrap" licenses that are not signed by licensees. The provisions in such
licenses limiting the Company's exposure to potential product liability claims
may therefore be unenforceable under the laws of certain jurisdictions.
Further, the Company's license agreements typically contain a representation
that the software is Year 2000 compliant through its description of specifically
how the Company's products process the Year 2000 calendar dates. While the
Company believes its products are Year 2000 compliant, the risk of Year 2000
noncompliance claims may increase as December 31, 1999 approaches and passes.
The Company currently carries errors and omissions insurance against such
claims, however, there can be no assurance that such insurance will continue to
be available on acceptable terms, if at all, or that such insurance will provide
the Company with adequate protection against product liability or other claims.
Although the Company has not experienced any product liability or other Year
2000 claims to date, the sale and support of products by the Company may entail
the risk of such claims. A significant product liability claim against the
Company could have a material adverse effect on the Company's business, results
of operations and financial condition.
Factors that may affect future results
The Company operates in a dynamic and rapidly changing environment
that involves numerous risks and uncertainties. The following section lists
some, but not all, of those risks and uncertainties which may have a material
adverse effect on the Company's business, financial condition or results of
operations. This section should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and Notes thereto included in
Part I -Item 1 of this Quarterly Report on Form 10-Q and the audited
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998, contained in the Company's 1998 Form 10-K. The Company has
identified certain forward looking statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations with a footnote symbol
/1/. The Company may also make oral forward looking statements from time to
time. Actual results may differ materially from those projected in any such
forward looking statements due to a number of factors, including those set forth
below and elsewhere in this Form 10-Q.
The market for software products is characterized by rapidly changing
technology, frequent introduction of new products and changes in customer
requirements which can render existing products obsolete or unmarketable. To
maintain its competitive position, the Company must continue to develop and
introduce in a timely and cost-effective manner enhancements to its existing and
new products that keep pace with technological developments and achieve market
acceptance. There can be no assurance that the Company will be able to identify,
develop, manufacture, market or support new products or enhancements
successfully, that any such new products or enhancements will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes. There can be no assurance that the Company will not
encounter technical or other difficulties that could delay or inhibit
introduction of new products in the future, including the recently announced
Application Performance Management class of products. If the Company is unable
to introduce new products or enhancements and respond to industry changes on a
timely basis, its business could be materially adversely affected.
The Company's current products and products under development are
limited in number and concentrated exclusively in the automated software testing
market. This market has experienced rapid worldwide growth, and it remains
relatively new and not well penetrated. Although the Company believes that the
current trend toward increased use of automated software testing will continue,
there can be no assurance that the automated software testing market will
continue to expand or that the Company's products will be accepted in any
expanded market./1/ Price reductions or declines in demand for the Company's
software testing products, whether as a result of competition, technological
change or other factors, would have a material adverse effect on the Company's
results of operations or financial position.
The Company may from time to time experience significant fluctuation
in quarterly operating results due to a variety of factors, some of which are
outside of the Company's control. A significant portion of the Company's
- -----------------------
/1/ Forward looking statement
11
<PAGE>
operating expenses is relatively fixed, and planned expenditures are based on
sales forecasts. Products are generally shipped as orders are received, and,
consequently, quarterly sales and operating results depend significantly on the
volume and timing of orders received during the quarter, which are difficult to
forecast. In particular, the Company has historically received a substantial
portion of its orders at the end of a quarter, up to the last few days of a
quarter. If an unanticipated order shortfall occurs at the end of a quarter,
the Company's operating results for the quarter could be materially adversely
affected. In addition, product orders are affected by the buying patterns of
customers. The buying trends of customers may be impacted by internal budgetary
considerations relating to Year 2000 remediation or Euro conversion efforts. All
of the foregoing may result in unanticipated quarterly earning shortfalls or
losses. Accordingly, the Company believes that quarter-to-quarter comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
The computer software market is intensely competitive. The Company
continues to face direct competition mainly from well established, publicly-held
companies. There could be a material adverse effect on the Company's results of
operations or financial position if any of the major software manufacturers,
which have significantly greater financial and technical resources than the
Company, decided to devote substantial resources to entering the software
testing market or if there is an increase in developing testing utilities
internally by the Company's customers or potential customers. A variety of
external and internal factors could materially adversely affect the Company's
ability to compete. These include the relative functionality, price, performance
and reliability of the products offered by the Company and its competitors, the
timing and success of new product development or enhancement efforts of the
Company and its competitors, and the effectiveness of the marketing and sales
efforts of the Company and its competitors. The Company expects to face
increasing competition in the automated software testing market./1/ There can
be no assurance that the Company will be able to compete successfully in the
future or that competitive pressures will not materially adversely affect the
Company's business.
The Company has derived a substantial portion of its revenues from
sales of its products through alternate distribution channels such as referral
partners, system integrators, and value-added resellers. The Company expects
that sales of its products through its alternate distribution channels will
continue to account for a substantial portion of its revenues for the
foreseeable future. Each of the Company's system integrators and value added
resellers can cease marketing the Company's products with limited notice and
with little or no penalty. There can be no assurance that the Company's current
system integrators and value added resellers will continue to offer the
Company's products, that the Company's current system integrators and value
added resellers will be able to effectively sell new products or product
applications, or that the Company will be able to recruit additional or
replacement system integrators and value added resellers. The loss of one or
more of the Company's major system integrators and value added resellers could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's system integrators and value added
resellers also offer competitive products manufactured by third parties. There
can be no assurance that the Company's system integrators and value added
resellers will give priority to the marketing of the Company's products as
compared to its competitors' products. Any reduction or delay in sales of the
Company's products by its system integrators and value added resellers could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Sales to customers located outside the United States have historically
accounted for a significant percentage of revenue and the Company anticipates
that such sales will continue to be a significant percentage of the Company's
total revenue./1/ Accordingly, such factors as currency fluctuations, political
and economic instability and trade restrictions could have a negative impact on
the Company's financial performance.
As a global concern, the Company faces exposure to adverse movements
in foreign currency exchange rates. Historically, the Company's primary exposure
has been related to non-dollar denominated sales and operating expenses in
Europe and the Pacific Rim. As the Company continues to expand its international
operations, the Company expects to see an increase in exposures related to non-
dollar denominated sales./1/ The Company attempts to limit foreign exchange
exposure through operational strategies and by using forward contracts to offset
the effects of exchange rate changes on intercompany trade balances. These
efforts depend upon estimates of transaction activity in various currencies.
There can be no assurance that the company will be successful in making these
- -------------------------
/1/ Forward looking statement
12
<PAGE>
estimates. To the extent these estimates are overstated or understated during
periods of currency volatility, the Company could experience unanticipated
material currency gains or losses.
Since 1991, the Company has experienced significant annual increases
in revenue. This growth has placed and, if it continues, will place a
significant strain on the Company's management, resources and operations. To
accommodate its recent growth, the Company has been implementing a variety of
new or expanded business and financial systems, procedures and controls,
including the improvement of its accounting and other internal management
systems. There can be no assurance that the implementation of such systems,
procedures and controls can be completed successfully, or without disruption of
the Company's operations. If the Company's growth continues, the Company will
be required to hire and integrate substantial numbers of new employees. The
market has become increasingly competitive both in the United States and
internationally and may require the Company to pay higher salaries. The
Company's failure to manage growth effectively could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's success depends to a significant extent on the
performance of its senior management and certain key employees. Competition for
highly skilled employees, including sales, technical and management personnel,
is intense in the computer industry. The Company's continued success depends in
significant part on its ability to attract additional qualified employees and to
retain the services of current key employees. In particular, the loss of the
services of one or more of the Company's executive officers could have a
material adverse effect on the Company's business and results of operations.
The Company's stock price has been, and will continue to be, subject
to significant volatility. Past financial performance should not be considered
a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If
revenues or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on the Company's
stock price. In addition, the Company's stock price may be impacted by events
or broader market trends that are unrelated to the Company's operating results,
including but not limited to the financial performance of companies in related
industries.
As part of its growth strategy, the Company may, from time to time,
acquire or invest in complimentary businesses, products or technologies. While
there are currently no commitments with respect to any particular acquisition or
investment, the Company's management frequently evaluates strategic
opportunities available related to complimentary businesses, products or
technologies. The process of integrating an acquired company's business into the
Company's operations may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of the Company's business.
Moreover, there can be no assurance that the anticipated benefits of any
acquisition or investment will be realized. Future acquisitions or investments
by the Company could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the Company's operating results and financial
condition.
The Company currently relies on a combination of trademark, copyright
and trade secret laws and contractual provisions to protect its proprietary
rights in its products. The Company holds four patents for elements contained
in certain of its products, and it has filed several other U.S. patent
applications on various elements of its products. There can be no assurance
that any of the Company's patent applications will result in an issued patent or
that, if issued, such patent would be upheld if challenged. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. There can also be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development by others of
similar technology. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty or cross-license
arrangements or result in costly litigation.
13
<PAGE>
Since its inception, the Company has obtained royalty-bearing grants
from various Israeli government agencies. The Company received and recognized
$1.6 million in such grants in 1998; however, it has not applied nor does it
currently anticipate applying for future grants./1/ The Company believes these
grants are no longer needed to subsidize the Company's research and development
projects./1/ The terms of certain grants prohibit the manufacture of products
developed under these grants outside of Israel and the transfer of technology
developed pursuant to the terms of these grants to any person, without the prior
written consent of the government of Israel. As a result, if the Company is
unable to obtain the consent of the government of Israel, the Company may not be
able to take advantage of strategic manufacturing and other opportunities
outside of Israel.
In selling its products, the Company frequently relies on "shrink
wrap" licenses that are not signed by licensees. The provisions in such
licenses limiting the Company's exposure to potential product liability claims
may therefore be unenforceable under the laws of certain jurisdictions.
Further, the Company's license agreements typically contain a representation
that the software is Year 2000 compliant through its description of specifically
how the Company's products process the Year 2000 calendar dates. While the
Company believes its products are Year 2000 compliant, the risk of Year 2000
noncompliance claims may increase as December 31, 1999 approaches and passes.
The Company currently carries errors and omissions insurance against such
claims, however, there can be no assurance that such insurance will continue to
be available on acceptable terms, if at all, or that such insurance will provide
the Company with adequate protection against any product liability or other
claims. Although the Company has not experienced any product liability or other
Year 2000 claims to date, the sale and support of products by the Company may
entail the risk of such claims. A significant product liability claim against
the Company could have a material adverse effect upon the Company's business,
results of operations and financial condition.
The approach of Year 2000 presents significant issues for many
computer systems, since much of the software in use today may not accurately
process data beyond 1999. The Company has conducted an internal review of its
corporate headquarters computer systems and software ("IT Systems") including
finance, human resources, intranet applications, payroll systems and customer
support organization systems to determine their Year 2000 compliance. As part of
this process, the Company contacted vendors of its relevant corporate IT Systems
and determined potential exposure to Year 2000 issues and has obtained written
assurance from such vendors regarding Year 2000 compliance. The Company is in
the process of implementing software upgrades for certain systems found not to
be Year 2000 compliant. The cost of completing this implementation will not have
a material adverse effect on the Company's results of operations.
At this time, the Company is in the process of determining the state
of compliance of certain third-party suppliers of services such as phone
companies, long distance carriers, financial institutions and utility companies.
The failure of any one of these third-party suppliers could severely disrupt the
Company's ability to carry on its business as well as disrupt the business of
the Company's customers. The Company has received confirmation of Year 2000
compliance from most of these companies and is pursuing confirmation with those
vendors who have not yet responded to inquiries.
Failure of the Company to provide Year 2000 compliant products to its
customers or to receive business solutions from its suppliers could result in
liability to the Company or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
the Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by the Company, which could
result in a material adverse effect on the Company's business, results of
operations and financial condition. The Company could be affected through
disruptions in the operation of the enterprises with which the Company interacts
or from general widespread problems or an economic crisis resulting from
noncompliant Year 2000 systems. Despite the Company's efforts to address the
Year 2000 effect on its internal systems and business operations, such effect
could result in a material disruption of its business or have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has developed a contingency plan to respond to any of the foregoing
consequences of internal and external failures to be Year 2000 compliant.
- ---------------------------
/1/ Forward looking statement
14
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the financial
statements and the recorded amounts of expenses during the reporting period. A
change in the facts and circumstances surrounding these estimates could result
in a change to the estimates and impact future operating results.
Liquidity and Capital Resources
At June 30, 1999, the Company's short-term and long-term investments
consisted of investments in high-quality financial, government and corporate
securities. Cash, cash equivalents and investments increased to $160.6 million
at June 30, 1999, from $129.9 million at December 31, 1998. During the six
months ended June 30, 1999, the Company generated approximately $27.7 million
from operations due primarily to profits from operations, collection of trade
receivables and an increase in accrued liabilities and deferred revenue. In
addition, during the six months ended June 30, 1999, the Company received $8.1
million from the issuance of common stock under the employee stock option and
stock purchase plans.
During the six months ended June 30, 1999, the Company's primary
investing activities were net acquisitions of property and equipment totaling
$4.7 million. This included $2.6 million for construction of a new research and
development facility in Israel and expansion of the Sunnyvale facility. The
Company expects to spend an additional $2.0 million to complete construction of
the Israel facility before relocating its Israel subsidiary there in the third
quarter of 1999.
Assuming there is no significant change in the Company's business, the
Company believes that its current cash and investment balances and cash flows
from operations, will be sufficient to fund the Company's cash needs for at
least the next twelve months./1/
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk. The Company's exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. The Company has not used derivative financial instruments in its
investment portfolio. The Company places its investments with high quality
issuers and, by policy, limits the amount of credit exposure to any one issue or
issuer. At June 30, 1999, $100 million (62%) of the Company's cash, cash
equivalents and investment portfolio carried a maturity of less than 90 days,
and $141 million (88%) carried a maturity of less than one year. All investments
mature, by policy, in less than two years. The Company has the ability and
intent to hold the portfolio to maturity. The effect of a 10% rate decline would
not have a material effect on the portfolio.
Foreign currency risk. The Company transacts business in various
foreign currencies, primarily in Europe and the Pacific Rim. Accordingly, the
Company is subject to exposure from movements in foreign currency exchange
rates. The Company's operating expenses in each of these countries are in the
local currencies, which mitigates a significant portion of the exposure related
to local currency revenues.
In addition, the Company uses forward contracts to offset the effects
of exchange rate changes on intercompany trade payables. The Company has not
entered into forward foreign exchange contracts for speculative or trading
purposes. The Company's accounting policies for these contracts are based on the
Company's designation of the contracts as hedging transactions. The criteria the
Company uses for designating a contract as a hedge include the contract's
effectiveness in risk reduction and one-to-one matching of hedging instruments
to underlying transactions. Gains and losses on forward foreign exchange
contracts are recognized in income in the same period as gains and losses on the
underlying transactions. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
- -----------------------
/1/ Forward looking statement
15
<PAGE>
MERCURY INTERACTIVE CORPORATION
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Stockholders
(a) The 1999 Annual Meeting of the Stockholders of Mercury Interactive
Corporation was held at the Company's offices at 1325 Borregas Avenue,
Sunnyvale, California 94089 on May 26, 1999 at 10:00 a.m.
(b) At the Annual Meeting, the following five persons were elected to the
Company's Board of Directors, constituting all members of the Board of
Directors.
<TABLE>
<CAPTION>
Nominee For Withheld
- ------- --- --------
<S> <C> <C>
Aryeh Finegold 33,314,268 50,485
Amnon Landan 33,315,408 49,345
Igal Kohavi 33,314,678 50,075
Yair Shamir 33,309,678 55,075
Giora Yaron 33,315,678 49,075
</TABLE>
(c) The following additional proposals were considered at the Annual Meeting
with their results according to the respective vote of the stockholders:
PROPOSAL 2 - Ratification and approval to increase the authorized number of
shares of Common Stock of the Company to 120,000,000.
For Against Abstentions Broker Non-Votes
--- -------- ----------- ----------------
31,576,085 1,765,909 22,759 0
PROPOSAL 3 - Ratification and approval to increase the authorized number of
shares reserved for the 1999 Stock Option Plan by an additional 1,850,000
shares of Common Stock for issuance under the 1999 Stock Option Plan.
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
19,793,193 13,543,397 28,163 0
PROPOSAL 4 - Ratification and approval of the appointment of
PriceWaterhouse Coopers LLP as independent accountants of the Company for
the year ending December 31, 1999.
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
33,249,894 98,748 16,111 0
Item 5. Other Information
(a) On July 15, 1999 Mr. Aryeh Finegold resigned as Chairman of the Board of
Directors and a member of the Board of Directors of the Company and Mr.
Amnon Landan was appointed Chairman of the Board. Mr. Finegold stepped
down to focus on working with young entrepreneurs and start-up ventures in
Israel. The Bylaws were amended to reduce the authorized number of
directors to four.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) 3.2 - Amended and Restated Bylaws.
(b) 27.1 - Financial Data Schedule.
(c) No reports on Form 8-K were filed during the three months ended June
30, 1999.
17
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 MERCURY INTERACTIVE CORPORATION
(Registrant)
/s/ Sharlene Abrams
--------------------------------------------
Sharlene Abrams
Vice-President of Finance and Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
- -----------------
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
<S> <C> <C>
3.2 Amended and Restated Bylaws 20
27.1 Financial Data Schedule 44
</TABLE>
19
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
--------------------
BY-LAWS
-------
OF
--
MERCURY INTERACTIVE CORPORATION
-------------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation in the State of Delaware shall be
1209 Orange Street, Wilmington, County of New Castle, Delaware, 19801. The name
of the registered agent of the corporation at such location is The Corporation
Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
1
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the board
of directors, or by the chairman of the board, or by the president. No other
person or persons are permitted to call a special meeting. No business may be
conducted at a special meeting other than the business brought before the
meeting by the board of directors or the chairman of the board or the president.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these by-laws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
corporation. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these by-laws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
2
<PAGE>
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these by-laws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these by-
laws, a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these by-laws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
3
<PAGE>
If the action which is consented to is such as would have required the filing of
a certificate under any section of the General Corporation Law of Delaware if
such action had been voted on by stockholders at a meeting thereof, then the
certificate filed under such section shall state, in lieu of any statement
required by such section concerning any vote of stockholders, that written
notice and written consent have been given as provided in Section 228 of the
General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
-------
4
<PAGE>
Each stockholder entitled to vote at a meeting of stockholders or to express
consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES
--------------------------------------
Nominations of persons for election to the Board of directors of the
corporation may be made at a meeting of stockholders by or at the discretion of
the board of directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-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 class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to
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such person that is required by law to be disclosed in solicitations of proxies
that is required by law to be disclosed in solicitations of proxies for election
of directors, and (v) such person's written consent to being named as a nominee
and to serving as a director if elected; and (b) as to the stockholder giving
the notice: (i) the name and address, as they appear on the corporation's books,
of such stockholder, and (ii) the class and number of shares of the corporation
which are beneficially owned by such stockholder, and (iii) a description of all
arrangements or understandings between such stockholder and each nominee and any
other person or persons (naming such person or persons) relating to the
nomination. At the request of the board of directors any person nominated by the
Board for election as a director shall furnish to the secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this Section. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
bylaws, and if he should so determine, he shall so declare at the meeting and
the defective nomination shall be disregarded.
2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS
--------------------------------------
At the annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. Business to be brought
before an annual meeting by a stockholder shall not be considered properly
brought if the stockholder has not given timely notice thereof in writing to the
secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) nor more than sixty (60) days prior to the
meeting; provided, however, that in the event that less than thirty (30) days
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation, which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business, and
(v) any other information that is required by law to be provided by the
stockholder in his capacity as a proponent of a stockholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section. The chairman of the annual meeting shall, if the facts
warrant, determine and declare at the meeting that business was not properly
brought before the
6
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meeting and in accordance with the provisions of this Section, and, if he should
so determine, he shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and any
limitations in the certificate of incorporation or these by-laws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The Board of Directors shall consist of four (4) persons until changed by a
proper amendment of this Section 3.2.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these by-laws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these by-laws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
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3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors so resigns and the
resignation is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
by-laws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these by-laws, or may
apply to the Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either
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within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone 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. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority
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of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these by-
laws, a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these by-
laws, the board of directors shall have the authority to fix the compensation of
directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these by-laws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, so long
as stockholders of the corporation are entitled to cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against his or her removal would be sufficient to elect such
director if then cumulatively voted at an election of the entire board of
directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors or in the by-laws of the corporation, shall
have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the
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corporation or a revocation of a dissolution, or (v) amend the bylaws of the
corporation; and, unless the board resolution establishing the committee, the
by-laws or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to authorize
the issuance of stock, or to adopt a certificate of ownership and merger
pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these by-laws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those by-laws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
by-laws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these by-laws. Any number of
offices may be held by the same person.
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5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed in
accordance with the provisions of Sections 5.3 or 5.5 of these by-laws, shall be
appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these by-laws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the board
of directors or as may be prescribed by these by-laws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these by-laws.
5.7 PRESIDENT
---------
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Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
or nonexistence of a chairman of the board, at all meetings of the board of
directors. The president shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
by-laws.
5.8 VICE PRESIDENTS
---------------
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 of directors, 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. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these by-laws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these by-laws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these by-laws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
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The chief financial officer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all his or her transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or these by-laws.
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the board of directors or these by-laws.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these by-Laws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
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5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the corporation, which approval shall not be unreasonably
withheld) actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
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6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (if such settlement is approved in advance
by the corporation, which approval shall not be unreasonably withheld) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection therewith.
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6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because the person has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the Board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders. Notwithstanding the
foregoing, a director, officer, employee or agent of the Corporation shall be
entitled to contest any determination that the director, officer, employee or
agent has not met the applicable standard of conduct set forth in Sections 6.1
and 6.2 by petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that the individual is not entitled to be
indemnified by the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in their official
capacity and as to action in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against the
person and incurred by the person in any such capacity or arising out of the
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article VI.
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6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as the person would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
19
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ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive officer or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock ledger,
a list of its stockholders, and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
20
<PAGE>
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these by-laws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile
21
<PAGE>
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if the person were such officer,
transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares shall
be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these by-laws. Without limiting the generality of
this provision, the singular number includes the plural, the
22
<PAGE>
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the board
of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and which
may be altered by the board of directors, and may use the same by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its
23
<PAGE>
books as the owner of shares to receive dividends and to vote as such owner,
shall be entitled to hold liable for calls and assessments the person registered
on its books as the owner of shares, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
another person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
----------
The by-laws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal by-
laws upon the directors. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal by-laws.
24
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<PAGE>
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