UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-19377
---------
TCSI Corporation
(Exact name of registrant as specified in its charter)
NEVADA 68-0140975
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1080 Marina Village Parkway, Alameda, CA 94501
- ----------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 749-8500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
22,452,070 shares of Common Stock of the Registrant were outstanding as of
November 13, 1998.
<PAGE>
Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,743 $ 33,566
Marketable securities 17,711 20,301
Receivables 7,985 11,803
Other receivables 786 682
Deferred tax assets 2,114 2,164
Other current assets 815 925
----------------- -----------------
Total current assets 62,154 69,441
Furniture, equipment and leasehold improvements, net 9,283 10,165
Noncurrent marketable securities 8,073 1,600
Noncurrent deferred tax assets 1,971 2,297
Other assets 728 728
----------------- -----------------
$ 82,209 $ 84,231
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,837 $ 2,410
Accrued liabilities 3,991 2,880
Deferred revenue 872 3,640
Income taxes payable 473 1,153
----------------- -----------------
Total current liabilities 7,173 10,083
----------------- -----------------
Shareholders' equity:
Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized;
none issued and outstanding - -
Common Stock, par value $0.10 per share; 75,000,000 shares authorized;
22,452,070 and 22,135,949 shares issued and outstanding, at September
30, 1998 and December 31, 1997, respectively 2,245 2,214
Additional paid-in capital 50,669 49,133
Accumulated other comprehensive loss (412) (126)
Retained earnings 22,534 22,927
----------------- -----------------
Total shareholders' equity 75,036 74,148
----------------- -----------------
$ 82,209 $ 84,231
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 7,383 $ 9,239 $ 24,154 $ 26,097
Software licensing fees 2,333 518 7,706 2,998
--------------- ---------------- ---------------- ----------------
Total revenues 9,716 9,757 31,860 29,095
--------------- ---------------- ---------------- ----------------
Costs, expenses, and special items:
Services 5,378 5,617 14,992 15,899
Product development 3,264 1,408 8,709 4,221
Selling, general and administrative 3,425 4,287 10,933 13,161
Nonrecurring special items - - (550) 1,088
--------------- ---------------- ---------------- ----------------
Total costs, expenses, and special items 12,067 11,312 34,084 34,369
--------------- ---------------- ---------------- ----------------
Loss from operations (2,351) (1,555) (2,224) (5,274)
Interest income 803 808 2,351 2,286
--------------- ---------------- ---------------- ----------------
Income (loss) before income tax provision (benefit) (1,548) (747) 127 (2,988)
Income tax provision (benefit) (150) (254) 520 (1,015)
--------------- --------------- ---------------- ----------------
Net loss $ (1,398) $ (493) $ (393) $ (1,973)
=============== ================ ================ ================
Loss per share-Basic and Diluted $ (0.06) $ (0.02) $ (0.02) $ (0.09)
=============== ================ ================ ================
Shares used to compute basic and diluted loss per share 22,410 21,730 22,315 21,510
=============== ================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (393) $ (1,973)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 2,913 2,816
Deferred tax assets 376 (104)
Changes in assets and liabilities:
Receivables 3,818 16
Other receivables (104) (269)
Other current assets 110 1,318
Accounts payable (573) (2,073)
Accrued liabilities 1,111 (2,067)
Deferred revenue (2,768) 1,444
Income taxes payable (680) 2,686
---------------- -----------------
Net cash provided by operating activities 3,810 1,794
---------------- -----------------
Cash flows from investing activities:
Capital and leasehold improvement expenditures, net (2,145) (5,918)
Purchases of marketable securities (31,457) (13,061)
Maturities and sales of marketable securities 27,574 18,500
Decrease in other noncurrent assets _ 536
---------------- -----------------
Net cash provided by (used in) investing activities (6,028) 57
---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 1,567 2,664
---------------- -----------------
Net cash provided by financing activities 1,567 2,664
---------------- -----------------
Effect of exchange rate changes on cash and cash equivalents (172) (121)
---------------- -----------------
Net change in cash and cash equivalents (823) 4,394
Cash and cash equivalents at the beginning of the period 33,566 30,880
---------------- -----------------
Cash and cash equivalents at the end of the period $ 32,743 $ 35,274
================ =================
Supplemental disclosures of cash flow information:
Cash paid (refunds received) during the period for income taxes $ 663 $ (3,598)
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the management of TCSI Corporation ("TCSI" or the
"Company"), the unaudited consolidated interim financial statements included
herein have been prepared on the same basis as the December 31, 1997 audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary to a fair statement of the results for
the interim periods presented. The results of operations for current interim
periods are not necessarily indicative of results to be expected for the current
year or for any other period. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K (File No. 0-19377).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements and also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company will adopt SFAS 131
for 1998 and is currently studying its provisions which need not be applied to
interim financial statements in the initial year of its application. The Company
does not expect the provisions of SFAS 131 to result in a material future change
in the presentation of its segment financial information nor does it expect a
material future change in its current segment groupings.
In March 1998, the American Institute of Certified Public Accountants
finalized Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which defines the
types of costs that are capitalizable for computer software projects and
requires all other costs to be expensed in the period incurred. The new SOP
requires that in order for costs to be capitalizable they must be intended to
create a new system or add identifiable functionality to an existing system.
This SOP is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe that its
adoption will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes standards for
reporting information about derivative instruments and hedging activities,
requires that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position, and requires that those
instruments be measured at fair value. SFAS 133 is effective for fiscal quarters
beginning after June 15, 1999. The Company does not currently have any
derivative instruments but is currently involved in hedging. Although the
Company has not fully assessed the implications of SFAS 133, the Company does
not believe that its adoption will have a material impact on its financial
statements.
<PAGE>
Reclassifications
Certain 1997 balances have been reclassified to conform to the current year
presentation.
NOTE 2 - RECEIVABLES AND CREDIT RISK
Receivable balances are primarily from large, credit-worthy customers in
the telecommunications industry. The Company performs ongoing credit evaluations
of its customers and does not require collateral. The Company does not
anticipate any significant default from a customer's inability to make a payment
for products received and/or for services rendered. Allowances are maintained
for potential credit losses.
Receivables consist of the following:
September 30, December 31,
1998 1997
----------------- ------------------
(In thousands)
(Unaudited)
Billed receivables $ 4,211 $ 10,366
Unbilled receivables 4,174 1,837
Allowance for doubtful accounts (400) (400)
----------------- ------------------
$ 7,985 $ 11,803
================= ==================
NOTE 3 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
Furniture, equipment, and leasehold improvements are stated at cost.
Straight-line depreciation is provided for furniture and equipment in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of three to five years. Amortization is provided for
leasehold improvements over the life of the lease utilizing the straight-line
method.
Furniture, equipment, and leasehold improvement balances consist of the
following:
September 30, December 31,
1998 1997
----------------- ------------------
(In thousands)
(Unaudited)
Computer and lab equipment $ 16,585 $ 14,814
Furniture and fixtures 3,914 3,613
Leasehold improvements 6,579 6,660
----------------- ------------------
27,078 25,087
Accumulated depreciation and
amortization (17,795) (14,922)
----------------- ------------------
$ 9,283 $ 10,165
================= ==================
<PAGE>
NOTE 4 - INCOME TAXES
The Company anticipates that its total income tax provision for the year
will be approximately equivalent to the taxes paid to foreign jurisdictions as
the Company's overall domestic income tax provision will be approximately zero.
Accordingly, the Company has recorded a tax provision of $0.5 million for the
nine months ended September 30, 1998. The Company's anticipated income tax
provision could change based on a difference in the estimated amount or
geographic mix of the Company's revenues.
At September 30, 1998, the Company had approximately $4.1 million of
deferred tax assets. The realization of these deferred tax assets is dependent
upon the Company generating sufficient taxable income from future operations to
obtain the benefit from the reversal of temporary differences. While there is no
valuation allowance provided for the deferred tax assets at September 30, 1998,
should the Company be unable to project sufficient future taxable income, a
valuation allowance may be necessary for some or all of the deferred tax assets;
this would negatively impact the Company's income tax provision in future
periods.
NOTE 5 - NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the first quarter of 1998. This
statement simplifies the standards for computing earnings (loss) per share
("EPS") as previously defined in Accounting Principles Board Opinion No. 15,
"Earnings Per Share". All prior-period EPS data have been presented in
accordance with SFAS 128. SFAS 128 requires presentation of both basic EPS and
diluted EPS on the face of the statements of operations. Basic EPS is computed
by dividing net income (loss) available to common stockholders (numerator) by
the weighted-average common shares (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period (including stock options) using the treasury stock method. In computing
diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations under SFAS 128:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Basic EPS Computation
Net loss $ (1,398) $ (493) $ (393) $ (1,973)
============= ============= ============== =============
Weighted-average common shares 22,410 21,730 22,315 21,510
============= ============= ============== =============
Loss per share-Basic $ (0.06) $ (0.02) $ (0.02) $ (0.09)
============= ============= ============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Diluted EPS Computation
Net loss $ (1,398) $ (493) $ (393) $ (1,973)
============= ============= ============== =============
Weighted-average common shares
22,410 21,730 22,315 21,510
Effect of dilutive options - - - -
------------- ------------- -------------- -------------
Dilutive potential common shares 22,410 21,730 22,315 21,510
============= ============= ============== =============
Loss per share-Diluted $ (0.06) $ (0.02) $ (0.02) $ (0.09)
============= ============= ============== =============
</TABLE>
Since the Company had an operating loss for the above periods causing
dilutive options to become antidilutive, the following weighted-average common
shares (with an exercise price less than the average market price of the
Company's Common Stock) were not included in the above calculation:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Weighted-average common shares 53 285 156 310
============= ============= ============== =============
Weighted-average exercise price $ 3.15 $ 4.68 $ 5.20 $ 4.14
============= ============= ============== =============
</TABLE>
Antidilutive Securities The following antidilutive securities consist of
options not included in the computation of diluted loss per share because the
exercise price of each of these options was greater than the average market
price of the Company's Common Stock during the period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Absolute options outstanding at end
of period 2,867 1,366 1,367 1,366
============= ============= ============== =============
Weighted-average exercise price $ 6.17 $ 7.08 $ 6.74 $ 7.13
============= ============= ============== =============
</TABLE>
<PAGE>
These antidilutive options outstanding during the three- and nine-month
periods ended September 30, 1998 expire during the years 2000 through 2004.
Antidilutive options outstanding during the three- and nine-month periods ended
September 30, 1997 expire during the years 2000 through 2003.
NOTE 6 - COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998. SFAS 130
establishes standards for the reporting and display of comprehensive income
(loss) and its components; however, the adoption of SFAS 130 had no impact on
the Company's net income (loss) or shareholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
changes in the accumulated foreign currency translation adjustments which, prior
to the adoption of SFAS 130, were reported separately in shareholders' equity.
Prior year financial statements have been reclassified as necessary to conform
to the requirements of SFAS 130.
The following is a summary of comprehensive loss for the three- and
nine-month periods ended September 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (1,398) $ (493) $ (393) $ (1,973)
Translation losses (3) (35) (172) (121)
Unrealized gains (losses) on securities (17) (25) (114) 71
------------- ------------- -------------- --------------
Comprehensive loss $ (1,418) $ (553) $ (679) $ (2,023)
============= ============= ============== =============
</TABLE>
NOTE 7 - LITIGATION
On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. On June 5,
1998, plaintiffs filed a second amended complaint. A demurrer to that complaint
was filed on August 21, 1998. Oral argument of that demurrer is scheduled for
November 24, 1998.
On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant
(the "Tinkler Derivative Action"). The complaint in the Tinkler Derivative
Action also names the Company as a nominal defendant. The original complaint in
the Tinkler Derivative Action alleged that as a result of the facts alleged in
the Copperstone State Action, defendants breached their fiduciary duties to the
Company, violated the California Corporations Code, and were unjustly enriched.
The plaintiff in the Tinkler Derivative Action seeks damages of an unspecified
amount. On February 24, 1998, plaintiff filed a second amended complaint
alleging breach of fiduciary duty and violation of the California Corporations
Code. On May 13, 1998, defendants filed a demurrer to the second amended
complaint and on
<PAGE>
October 15, 1998, the Court entered an order granting the demurrer to the
California Corporations Code cause of action with leave to amend, and striking
allegations of nonintentional misconduct. Plaintiff has not amended the
complaint within the time alloted by the Court.
On September 24, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The Copperstone Federal Action
contains virtually identical factual allegations as the Copperstone State
Action, and alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Copperstone
Federal Action also seek damages of an unspecified amount. On January 14, 1998,
defendants moved to dismiss the Copperstone Federal Action. The Court ordered
that plaintiffs seek class certification prior to adjudication of defendants'
motion to dismiss on April 20, 1998. Pursuant to that order, the parties
stipulated to the conditional certification of a plaintiff class, and plaintiffs
sent notice to the putative class members explaining that putative class members
had until August 28, 1998 to opt out of the plaintiff class. The opt-out period
closed on or about August 28, 1998. The Court did not hear oral argument and has
taken the motion under submission.
In 1997, Atmel Corporation made a claim under the 1996 TCSI/Atmel
Corporation Purchase Agreement. In 1998, management obtained an equitable
settlement of this matter with the escrow agent releasing $550,000 (of a $1.0
million escrow fund) plus interest to TCSI, and the remaining $450,000 less fees
to Atmel. The settlement is reported as a nonrecurring special gain in the
statements of operations.
No trial in any of these actions is scheduled. The Company believes it has
meritorious defenses to all of these actions, and intends to defend each of them
vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
presently determinable. In the opinion of management, resolution of these legal
actions is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in a particular period.
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain factors that could cause actual results to differ
materially from those reflected in the forward-looking statements. Such factors
include, but are not limited to, those discussed below and in the Company's Form
10-K for the fiscal year ended December 31, 1997.
Overview
TCSI Corporation provides integrated software products and services for the
global telecommunications ("telecom") industry. Since its inception in 1983, a
significant portion of the Company's revenues has been earned from telecom
service providers and equipment manufacturers. Since 1993, the Company's telecom
growth has been led by sales of SolutionCore(R) and related products and
services. Prior to 1997, the Company also earned revenues from licensing
embedded software contained in wireless products and from the development of
system solutions for customers in the insurance, healthcare, and transportation
industries. During the second half of 1996, the Company divested its non-telecom
product lines by licensing its embedded software product lines and terminating
its final transportation-related development agreement. As a result, since 1997,
the Company has focused almost entirely on offering software solutions to the
telecom industry.
The Company provides services to customers under level-of-effort and fixed
price contracts. Service revenues are generally recognized on the
percentage-of-completion method based on the percentage of contract costs
incurred in relation to total estimated contract costs. Changes in total
estimated contract costs, if any, are recognized in the period such changes are
determined. The scope and size of the Company's system solutions can be large
and complex, typically requiring delivery over several quarters. From
time-to-time, customers have established payment milestones, which can be
achieved only after completion of the related services. In limited cases, some
customers have disputed fees charged for services provided. Although the Company
has been and is under no obligation to compromise its billed amounts, the
Company has periodically reduced its accounts receivable when such disputes
could not be amicably resolved and may do so in the future. Additionally, a
portion of the Company's revenues has been, and is expected to continue to be,
derived from software licensing fees from a limited number of customers. The
Company recognizes revenues from software licensing fees only after delivery of
software products and if there are no remaining significant post-delivery
obligations. The Company recognizes revenues from software licensing fees with
significant post-delivery obligations associated with the related services
contract on a percentage-of-completion basis.
The licensing and implementation of the Company's software products
generally involves a significant commitment of resources by prospective
customers. As a result, the Company's sales process is subject to delays
associated with lengthy approval processes typically accompanying such
significant capital expenditures. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of expenditures
and resource commitments. The variability in the timing of such expenditures
could cause material fluctuations in the Company's business, operating results,
and financial condition.
A substantial portion of the Company's revenues is derived from the sale of
the Company's software products and services to major telecom service providers
and equipment manufacturers. Due to the complex nature of the advanced element,
network, and service management systems being developed, successful deployment
of these systems can contain significant technological risks. The Company has in
the past relied, and will in the future rely, on its development and
implementation expertise. Additionally, development and implementation of these
systems often occurs over several quarters. There exists the risk that a change
in a
<PAGE>
customer's technology or business strategy during such lengthy development and
implementation periods may cause early termination of a project or
discontinuance of future phases. In this regard, the Company, in limited cases,
has experienced and may continue to experience fluctuations in revenues and
operating results on a quarterly basis due to termination, cancellation, or
non-renewal of agreements.
Management believes that continued revenue growth is highly dependent upon
the development and enhancement of software products that meet market needs.
Prior to 1996, the Company's product development was primarily funded by
customers as part of the development of software applications for such
customers. The Company typically retained certain rights to developed software
products. In certain circumstances, however, the Company agreed to restrict its
use of such products to certain markets and during certain time periods. During
1996, the Company began funding a larger portion of its product development
costs. Although management intends to target product development spending at
levels consistent with other software companies, from time to time, spending may
be greater or less than these amounts, as circumstances dictate. Furthermore,
management expects that, from time to time, it may acquire businesses, products,
or technologies to enhance the Company's current product offerings.
Results of Operations
Revenues. The Company generates revenues from the sale of its software
products and related services to the telecom industry. Total revenues for the
quarter ended September 30, 1998 remained consistent with the comparable 1997
period at $9.7 million. Total revenues for the nine months ended September 30,
1998 increased 10% to $31.9 million. NEC, Lucent Technologies ("Lucent"), and
Siemens were the largest customers during the 1998 third quarter. Each of these
customers accounted for more than 10% of the Company's 1998 year-to-date
revenue. Revenues from services ("service revenues") continued a downward trend
to $7.4 million for the quarter ended September 30, 1998 from $9.2 million for
comparable 1997 period. Service revenues decreased to $24.2 million, or 76% of
total 1998 revenues, from $26.1 million. The downward trend may continue until
the Company's existing and future customers ramp up their development efforts.
Revenue from software licensing fees ("license revenues") improved by 350% from
$0.5 million to $2.3 million, or 24% of 1998 third quarter revenues. License
revenues improved to $7.7 million, or 24% of total 1998 revenues. Approximately
two-thirds of license revenues for the quarter were from runtime licenses. The
Company expects that runtime license revenues will continue to vary from quarter
to quarter. GTE, Siemens Nixdorf Information Systems, Ltd., and Lucent accounted
for 72% of TCSI's 1998 third quarter license revenues.
Revenues from the Asia-Pacific region decreased to $4.7 million for the
quarter ended September 30, 1998 from $5.7 million for the comparable period.
For the nine-month period ended September 30, 1998, respectively, revenues from
the Asia-Pacific region increased to $16.7 million from $14.0 million for the
comparable 1997 period. Revenues are attributable to follow-on contracts with
existing customers, particularly NEC and IDC. Revenues from America increased to
$3.2 million and $10.2 million for the three- and nine-month periods ended
September 30, 1998, respectively, compared to $1.8 million and $6.4 million for
the comparable 1997 periods. The increase primarily results from continued
follow-on contract revenues with Lucent, Bell Atlantic, and Motorola. Revenues
from Europe decreased to $1.9 million and $4.9 million for the three- and
nine-month periods ended September 30, 1998, respectively, compared to $2.3
million and $8.6 million for the comparable 1997 periods. The decreases were due
to continued delays in the selling cycle with some of our equipment
manufacturers in Europe. The Company generally recognizes service revenues
involving design, development, testing and deployment over a twelve- to
eighteen-month
<PAGE>
period. The Company expects the geographical mix ofrevenues to vary from period
to period as it responds to global buying habits and develops relationships with
new and existing partners and channels.
To date, a portion of revenues has been concentrated among a limited number
of customers. For the nine months ended September 30, 1998, the concentration of
revenues from the Company's five largest customers increased to 77% from 70% for
the comparable 1997 period. The revenues from these customers represent many
separate and distinct projects that are geographically dispersed throughout the
world. There can be no assurance that such customers will continue to place
orders with the Company which will equal or exceed the comparable levels for
prior periods. (See the "Certain Factors That May Affect Future Results and
Market Price of Stock-Customer Concentration" section.)
Costs of Services. The Company incurs direct costs in the development and
deployment of its customers' software solutions. The major components of direct
costs are employee compensation, subcontractor fees, training costs, and other
billable direct costs, including travel expenses. Direct costs also include an
allocation for benefits, facilities, telephone expenses, information systems
support, and depreciation. Direct costs of services for the quarter ended
September 30, 1998 decreased slightly to $5.4 million from the comparable 1997
period. For the nine months ended September 30, 1998, costs of services declined
6% to $15.0 million from $15.9 million for the comparable 1997 period. Costs of
services were 73% of revenues from services for the quarter ended September 30,
1998 compared to 61% for the comparable 1997 period. Costs of services were 62%
of revenues from services for nine months ended September 30, 1998 compared to
61% for the comparable 1997 period. The cost of service percentage may remain at
the third quarter 1998 levels until existing and future customers ramp up their
development efforts. The Company plans to continue its commitment to quality and
performance.
Product Development. Product development expenses include employee
compensation, subcontractor fees, training costs, and other product development
costs for existing and potential new products, along with an allocation for
benefits, facilities, telephone expenses, information systems support, and
depreciation. For the quarter ended September 30, 1998, the Company invested
$3.3 million or 34% of revenues on product development compared with $1.4
million or 15% of revenues for the quarter ended September 30, 1997. For the
nine months ended September 30, 1998, the Company invested $8.7 million or 27%
of revenues on product development compared with $4.2 million or 15% of revenues
for the nine months ended September 30, 1997. Product development spending
increased as planned during the third quarter and nine-month period of 1998
compared to the same periods of 1997, reflecting the Company's continuing
commitment to become a true software product supplier. The Company expects to
continue to invest in SolutionCore, as well as its new component-based
applications, SolutionSuites(R). There can be no assurance, however, that the
Company's product development spending will result in the successful
introduction of new products.
Selling, General, and Administrative Expenses. Selling expenses include
sales and marketing, employee compensation, promotional material, trade shows,
travel, and facilities expenses. General and administrative expenses include
compensation costs related to executive management, finance, and administrative
personnel along with the other administrative costs including recruiting, legal
and accounting fees, insurance, and bad debt expense. For the quarter ended
September 30, 1998, selling, general, and administrative expenses decreased 20%
to $3.4 million from $4.3 million for the comparable 1997 period. For the nine
months ended September 30, 1998, selling, general, and administrative expenses
decreased 17% to $10.9 million from $13.2 million for the comparable 1997
period. Selling, general, and administrative expenses were 35% of revenues for
the quarter ended September 30, 1998 compared to 45% of revenues in
<PAGE>
the comparable 1997 period. For the nine months ended September 30, 1998,
selling, general, and administrative expenses were 34% of revenues compared to
45% of revenues in the comparable 1997 period. The decrease in spending is due
to lower headcount and a reallocation of telephone and information systems
support expenses to their corresponding user departments. In other words,
telephone and information systems support expenses were charged to general and
administrative expense in periods prior to 1998.
Nonrecurring special items. During the nine months ended September 30,
1998, the Company recorded a nonrecurring gain of $550,000 in following the
settlement of litigation related to the sale of a non-telecom business unit.
During the comparable 1997 period, the Company concluded the sale of equipment
resulting in a nonrecurring loss of $1.1 million.
Income Tax Provision (Benefit). The Company anticipates that its total
income tax provision for the year will be approximately equivalent to the taxes
paid to foreign jurisdictions as the Company's overall domestic income tax
provision will be approximately zero. Accordingly, the Company has recorded a
tax provision of $0.5 million for the nine months ended September 30, 1998. The
Company's anticipated income tax provision could change based on a difference in
the estimated amount or geographic mix of the Company's revenues.
At September 30, 1998, the Company had approximately $4.1 million of
deferred tax assets. The realization of these deferred tax assets is dependent
upon the Company generating sufficient taxable income from future operations to
obtain the benefit from the reversal of temporary differences. While there is no
valuation allowance provided for the deferred tax assets at September 30, 1998,
should the Company be unable to project sufficient future taxable income, a
valuation allowance may be necessary for some or all of the deferred tax assets;
this would negatively impact the Company's income tax provision in future
periods.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $3.8 million for the nine
months ended September 30, 1998, compared to $1.8 million for the comparable
1997 period. Cash flows from operating activities for the nine months ended
September 30, 1998 primarily reflected a net loss of $0.4 million, depreciation
and amortization of $2.9 million, and decreases in receivables and deferred
revenue of $3.8 million and $2.8 million, respectively. Cash flows from
operating activities for the nine months ended September 30, 1997 primarily
reflected a net loss of $2.0 million, depreciation and amortization of $2.8
million, decreases in accounts payable and accrued liabilities of $2.1 million
each and an increase in deferred revenue of $1.4 million. The increase in cash
provided by operating activities over 1997 is primarily due to the decrease in
accounts payable from the payment of year-end liabilities related to the
buildout of the Alameda facility in the first quarter of 1997 and from the
decrease in accrued liabilities resulting from reductions in bonus and
commission payments in 1998 compared to 1997. Other significant changes are the
decreases in deferred revenue and income taxes payable. The decrease in deferred
revenue from 1997 is primarily attributable to a decrease in the volume of
contracts being entered into that incorporate prepayments and to the deployment
of the Data Network Management System for Bell Atlantic. The decrease in income
taxes payable over 1997 is consistent with the refunds received during 1997.
<PAGE>
Investing Activities
Net cash used in investing activities was $6.0 million for the nine months
ended September 30, 1998 compared to net cash provided by investing activities
of $57,000 for the comparable 1997 period. The Company purchased $31.5 million
of marketable securities while $27.6 million of marketable securities matured,
compared to the purchase of $13.1 million and $18.5 million of maturities for
the comparable period in 1997. During the nine months ended September 30, 1998,
the Company also shifted a portion of its investment portfolio into longer-term
investments in anticipation of the predicted decline in interest rates. The net
decrease in cash flows from investing activities also included $5.9 million of
cash used for capital expenditures and leasehold improvements during the first
nine months of 1997 compared to $2.1 million of cash used for capital
expenditures for the comparable period of 1998. The capital expenditures during
1997 are primarily related to the consolidation of the Company's facilities in
Northern California and to the establishment of the Company's new office in the
United Kingdom.
Financing Activities
Net cash provided by financing activities was $1.6 million for the nine
months ended September 30, 1998 compared to $2.7 million for the comparable 1997
period. The decrease was the result of a decrease in stock options exercised and
stock purchased pursuant to the Employee Stock Purchase Plan which is a function
of market conditions and investment decisions made by employees.
As of September 30, 1998, the Company had cash and cash equivalents and
marketable securities of $58.5 million. The Company believes that existing cash
balances (including cash equivalents and marketable securities), together with
existing sources of liquidity, including cash flows from operating activities,
will provide adequate cash to fund its operations for at least the next twelve
months.
Certain Factors That May Affect Future Results and Market Price of Stock
Statements in this report which are prefaced with words such as "expects,"
"anticipates," "believes" and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances which may or may not be within the Company's control and as to
which there can be no firm assurances given. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties that
could cause actual results to differ materially from those projected or
anticipated.
Potential Fluctuations in Future Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on an annual or
quarterly basis as a result of a number of factors, many of which are beyond the
control of the Company. These factors include the cancellation, modification, or
non-renewal of service, license, or maintenance agreements; the size and timing
of significant customer engagements and license fees; the relative proportion of
services and software licensing fees; personnel changes; capital spending
patterns of the Company's customers; concentration of the Company's customers;
the lengthy sales cycles of the Company's products and services; industry
acceptance of the Company's products and services; changes in operating
expenses; new product introductions and product enhancements by the Company or
its
<PAGE>
competitors; the ability of the Company to develop, introduce, and market new
products and product enhancements on a timely basis; changes in pricing policies
by the Company or its competitors; regulatory changes, currency fluctuations,
and general economic factors. These factors are difficult to forecast, and these
or other factors could have a material adverse effect on the Company's business,
operating results, and financial condition.
Historically, a portion of the Company's revenue has been derived from
software licensing fees from a limited number of customers. Variability in the
timing of such license fees has caused and may continue to cause material
fluctuations in the Company's business, operating results, and financial
condition. The Company's products and services generally require significant
capital expenditures by customers as well as the commitment of resources to
implement, monitor, and test the Company's enhancements to such systems.
Accordingly, the Company is substantially dependent on its customers' decisions
as to the timing and level of such expenditures and resource commitments. In
addition, the Company typically realizes a significant portion of license
revenues in the last weeks or even days of a quarter. As a result, the magnitude
of quarterly fluctuations may not become evident until late in, or after the
close of, a particular quarter. The Company's expenses are based in part on the
Company's expectations as to future revenue levels and to a large extent are
fixed in the short-term. If revenues do not meet expectations, the Company's
business, operating results, and financial condition are likely to be materially
adversely affected. In particular, because only a small portion of the Company's
expenses varies with revenues, results of operations may be disproportionately
affected by a reduction in revenues. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Lengthy Sales and Implementation Cycles
The Company's products are typically intended for use in applications that
may be critical to a customer's business. The licensing and implementation of
the Company's software products generally involves a significant commitment of
resources by prospective customers. As a result, the Company's sales process is
often subject to delays associated with lengthy approval processes that
typically accompany significant capital expenditures. For these and other
reasons, the sales cycles associated with the licensing of the Company's
products is often lengthy (averaging approximately nine to twelve months) and
subject to a number of significant delays over which the Company has little or
no control. In addition, the Company does not recognize service revenues until
the services are rendered. The time required to implement the Company's products
can vary significantly with the needs of its customers and is generally a
process that extends for several months. Because of their complexity, larger
implementations may take multiple quarters to complete. From time to time, the
Company has provided services to implement certain large projects, and, although
no contractual basis exists for the customer to do so, certain customers have
delayed payment of a portion of service fees and in some cases have disputed the
fees charged. There can be no assurance the Company will not experience
additional delays or disputes regarding payment in the future, particularly if
the Company receives orders for large, complex installations. Therefore, the
Company believes that its quarterly and annual operating results and financial
condition are likely to vary significantly in the future.
Acceptance of the Company's Products; Product Development Risks
A substantial portion of the Company's revenues are derived from the sale
of the Company's products and services which provide software solutions to major
corporations in the worldwide telecom services and equipment industries.
Although many telecom companies currently seek to integrate their business
operation systems and network operation systems, there can be no assurance that
these or other service providers will continue to seek the integration of such
systems or that such companies will use the Company's products. Due to the
complex nature of the advanced Operations Support System ("OSS") software
developed by the
<PAGE>
Company, the Company has in the past relied and will in the future continue to
rely on its development and implementation expertise. The Company continues to
develop software products that reduce the customization necessary to fully
integrate customers' systems. There can be no assurance, however, that the
Company will continue to successfully develop and market such products or, even
if successful, that the revenues from such products will compensate for any
concurrent loss of development and implementation service revenues. The failure
by the Company to successfully develop and market such products and technologies
would have a material adverse effect on its business, operating results, and
financial condition.
Revenues attributable to the Company's software products and services have
in the past accounted for and are expected to continue to account for a
substantial majority of the Company's revenues. Accordingly, the Company's
future business, operating results, and financial condition are significantly
dependent upon the continued market acceptance of its portfolio of products and
services. There can be no assurance that the Company's technology will continue
to achieve market acceptance or that the Company will be successful in
developing, introducing, or marketing improvements to its products. Moreover,
the life cycle of component-based products is difficult to estimate due in large
part to the recent changes in the telecom market, the effect of future product
enhancements, and competition. A decline in the demand for the Company's
software as a result of new or existing competing technologies, or other factors
would have a material adverse effect on the Company's business, operating
results, and financial condition.
Customer Concentration
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In particular, in 1997 and in
1998, a large portion of revenues was derived from contracts negotiated through
a large equipment manufacturer in Asia. While the recent economic crisis in Asia
has not materially adversely affected the Company, there can be no assurance
that it will not do so in the future. In addition, the Company anticipates that
it will continue to experience significant customer concentration. There can be
no assurance that such customers or any other customers will in the future
continue to place orders with the Company which equal or exceed the comparable
levels for prior periods. In addition, the Company's customers typically
designate one individual to procure network management software. If any of these
individuals were terminated, transferred, or replaced, the Company would be
vulnerable to cancellation of an order if, for example, the Company's
competitors had preexisting relationships with the individual's replacement. As
a result of these factors, the Company's business, operating results, and
financial condition could be materially adversely affected.
Product Defects
The Company provides complex software products for major telecom equipment
manufacturers, systems integrators, and service providers. The development and
enhancement of such complex software entails substantial risks of product
defects. The Company has in the past identified software defects in certain of
its products. There can be no assurance that errors will not be found in
existing or new products or releases after commencement of commercial licensing,
which may result in delay or loss of revenues, loss of market share, failure to
achieve market acceptance, or may otherwise adversely impact the Company's
business, operating results, and financial condition.
<PAGE>
Implementation Risks
As is characteristic of companies providing software solutions to the
telecom industry, the complexities involved in implementing the Company's
software solutions entail risks of performance shortfalls. In some cases, the
Company has agreed to accept some financial responsibility, in the form of
negotiated penalty amounts, if the Company's products did not meet
specifications or cause customer system downtime. There can be no assurance that
the Company will not encounter delays or other difficulties due to such
implementation complexities. Because the Company's customer base consists of a
relatively limited number of customers, the product defects or implementation
errors would be potentially damaging to the Company's reputation. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.
International Sales
Revenues outside of the Americas accounted for 68% of the Company's total
revenues for the nine months ended September 30, 1998. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues in future periods. The Company intends to penetrate additional
international markets and to further expand its existing international
operations. The Company's international business involves a number of inherent
risks, including greater difficulty in accounts receivable collection and,
therefore, longer accounts receivable collection periods; difficulty in staffing
and managing foreign operations; a longer sales cycle than with domestic
customers; potentially unstable political and economic conditions; language
barriers; cultural differences in the conduct of business; seasonality;
unexpected changes in regulatory requirements; including a slowdown in the rate
of privatization of telecom service providers; reduced protection for
intellectual property rights in some countries; potentially adverse tax
consequences; tariffs; and other trade barriers. In addition, while the recent
economic crisis in Asia has not materially adversely affected the Company, there
can be no assurance that it will not do so in the future. Also, access to
foreign markets is often difficult due to the established relationships between
government owned or controlled communications companies and local suppliers of
communications products. There can be no assurance the Company will be able to
successfully penetrate such foreign markets. In addition, there can be no
assurance that the Company will be able to sustain or increase revenues derived
from international licensing and services or that the foregoing factors will not
have a material adverse effect on the Company's future international business,
and consequently, on the Company's business, operating results, and financial
condition.
International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations in
currency exchange rates associated with international revenues by pricing its
products and services in United States dollars whenever possible. The Company,
however, generally pays the expenses of its international operations in local
currencies and generally does not engage in hedging transactions with respect to
such obligations. Upward fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive to foreign customers,
leading to a reduction in sales or profitability. Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in the Company's operating results. In order to
reduce the risk of exchange rate losses from foreign currency denominated sales,
which historically have not been material, the Company has engaged in a limited
quantity of hedging transactions. There can be no assurance that such hedging
transactions will not have a material adverse effect on the Company's business,
operating results, and financial condition.
<PAGE>
Dependence on Telecommunications Carriers; Government Regulation
Many of the Company's principal customers are major telecom carriers. Such
companies operate within the telecom industry, which has recently been
characterized by intense competition in the development of new technology,
equipment, and customer services. The Company believes that large telecom
carriers have become increasingly cautious in making significant capital
expenditures, due in part to increased competition from smaller, rapidly
developing alternative carriers, decreasing prices for telecom services and
equipment, and regulatory rate structures that have become less dependent on the
level of carriers' capital expenditures. These and other factors have in the
past and may in the future cause such customers to experience significant
fluctuations in capital expenditures for network management software solutions.
The telecom industry is subject to extensive regulation in the United
States and other countries, and the Company's customers generally must receive
regulatory approvals in conducting their businesses. Although the telecom
industry has recently been characterized by government deregulation, there can
be no assurance that deregulatory trends will continue or that reregulation will
not occur. Government regulatory policies are likely to continue to have a major
impact on the Company's ability to attract and retain customers. For example,
regulatory authorities may continue to oversee the pricing of new and existing
telecom services, which, in turn impact carriers' ability to make significant
capital expenditures. The enactment by federal, state, or foreign governments of
new laws or regulations or change in the interpretation of existing regulations
could adversely affect the Company's customers, and thereby affect the Company's
business, operating results, and financial condition.
Competition
The Company offers products and services in the evolving market for telecom
OSS software. Competition in this market is intense and is characterized by
rapidly changing technologies, evolving industry standards, changing regulatory
requirements, frequent new product introductions, and rapid changes in customer
requirements. To maintain and improve its competitive position, the Company must
continue to develop and introduce, in a timely and cost-effective manner, new
services, products, and product features that keep pace with competitive
offerings by telecom companies and independent software vendors, technological
developments, and emerging industry standards in the development of
telecommunications network management software solutions. The principal
competitive factors in the Company's market are quality, performance, price,
customer support, corporate reputation, and product features such as
scalability, interoperability, functionality, customizability, and ease of use.
The Company's current and prospective competitors offer a variety of
solutions to address OSS needs. The Company faces competition in each of the
three functional areas the Company believes are necessary for the delivery of
complete OSS software: telecom applications platform, configurable applications,
and custom services. The Company's SolutionCore and SolutionSuites product lines
enable the Company to provide its customers with both application development
software and telecom applications. Because certain of the Company's competitors
focus only on one functional area of OSS software, such competitors may be in a
position to develop competitive products targeted solely at the segment they
serve. These competitors include major communications service providers, and
equipment and computer manufacturers, each of which may have substantially
greater financial, manufacturing, technical, marketing, distribution, greater
name recognition, longer-standing relationships with customers than the Company
and other resources. Furthermore, many of the Company's current and potential
customers continuously evaluate
<PAGE>
whether to design, develop, and support internally the software solutions
provided by the Company, thereby obviating the need for relying on an outside
vendor such as the Company. There can be no assurance that the Company's current
or potential competitors will not develop products comparable or superior to
those developed by the Company or adapt more quickly than the Company to new
technologies, evolving industry standards, new product introductions, or
changing customer requirements.
Rapid Technological Change; Need to Manage Product Transitions
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions, and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. This poses substantial risks for the Company because the
Company's products and software solutions typically have lengthy development and
sales cycles. The Company's future success will depend on its ability to enhance
its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and address the
evolving needs of its customers. There can be no assurance that the Company will
be successful in developing and marketing new products or product features that
respond to technological change or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction, and marketing of these new products and features, or
that its new products or product features will adequately meet the requirements
of the marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce enhancements of
existing products or new products in a timely manner, the Company's business,
operating results, and financial condition will be materially adversely
affected.
The Company's products are designed to operate on a variety of hardware and
software platforms and with a variety of databases employed by its customers in
their networks. The Company must continually modify and enhance its products to
keep pace with changes in hardware and software platforms and database
technology. As a result, uncertainties related to the timing and nature of new
product announcements, and introductions or modifications by systems vendors and
by vendors of relational database software could materially adversely impact the
Company's business, operating results, and financial condition. In addition, the
failure of the Company's products to operate across the various existing and
evolving versions of hardware and software platforms and database environments
employed by consumers would have a material adverse effect on the Company's
business, operating results, and financial condition.
The introduction or announcement of products by the Company or one or more
of its competitors embodying new technologies, or changes in industry standards
or customer requirements, could render the Company's software products and
solutions obsolete or unmarketable. The introduction of new or enhanced versions
of its products requires the Company to manage the transition from older
products in order to minimize disruption in customer ordering. There can be no
assurance that the introduction or announcement of new product offerings by the
Company or one or more of its competitors will not cause customers to defer
licensing of existing Company products or engaging the Company's services. Any
deferral of license or service revenues could have a material adverse effect on
the Company's business, operating results, and financial condition.
<PAGE>
Protection of Intellectual Property
The Company's success and ability to compete is dependent in part upon its
proprietary software technology. The Company relies on a combination of patent,
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements, and technical measures to protect its proprietary rights. To date,
the Company has patents and patents pending related to its telecom products. The
Company expects to continue to file patent applications where it believes it is
appropriate to protect its proprietary technologies. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
the Company's products. In addition, effective patent, copyright, trademark, and
trade secret protection may be unavailable or limited in certain foreign
countries. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, operating
results, and financial condition.
While the Company believes that its products and trademarks and their use
by customers does not infringe upon the proprietary rights of third parties,
there can be no assurance that the Company will not receive future
communications from third parties asserting that the Company's products or their
use by customers infringe, or may infringe, the proprietary rights of such third
parties. The Company expects that software product developers will be
increasingly subject to infringement claims as the numbers of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, including
meritless claims, could result in costly, time-consuming litigation, and
diversion of technical and management personnel. In the event any third party
was to make a valid claim and a license was not made available on commercially
reasonable terms, or if the Company was unable to develop non-infringing
alternative technology, the Company's business, operating results, and financial
condition could be materially adversely affected.
In addition, certain of the Company's customers regard the solutions
provided by the Company to be proprietary to such customers and may attempt to
prohibit the Company from using or otherwise benefiting from certain of the
advances made in developing such solutions. Although the Company intends to
increasingly standardize its integration solutions through the use of
component-based software products, there can be no assurance that the
prohibition or restrictions imposed by certain customers on the use of certain
intellectual property will not adversely affect the Company's business,
operating results, and financial condition.
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third party software licenses will continue to be available
to the Company on commercially reasonable terms or that such licenses will not
be terminated. Although the Company believes that alternative software is
available from other third-party suppliers, the loss of or inability to maintain
any of these software licenses or the inability of the third parties to enhance
their products in a timely and cost-effective manner could result in delays or
reductions in product shipments by the Company until equivalent software could
be developed internally or identified, licensed, and integrated, which would
have a material adverse effect on the Company's business, operating results, and
financial condition.
<PAGE>
Dependence on Key Personnel
The Company's future growth and success depends to a significant extent on
its ability to attract and retain qualified managerial, sales, and software
engineering personnel. The Company has at times experienced and continues to
experience difficulty in attracting and retaining qualified personnel. The
Company's future success will also depend on the ability of its current and
future management personnel to operate effectively, both independently and as a
group. The Company has recently experienced changes in its executive management.
For example, in November 1998, the Company appointed a new Vice President of
Marketing. Competition for the hiring of such personnel in the software industry
is intense, and there can be no assurance that the Company will be successful in
locating candidates with appropriate qualifications. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, operating results, and financial condition.
Risks Associated with Acquisitions
The Company periodically evaluates potential acquisitions of complementary
businesses, products, and technologies. To support its growth plans, the Company
may acquire companies that have a significant installed base of products not yet
offered by the Company, have strategic distribution channels or customer
relationships, or otherwise present opportunities which management believes
enhance the Company's competitive position. Such acquisitions could subject the
Company to numerous risks, including risks associated with the integration into
the Company of new employees and technology. Moreover, the negotiation and
acquisition of such transactions involve the diversion of substantial management
resources and the evaluation of such opportunities requires substantial
diversion of engineering and technological resources. In addition, transactions
involving the issuance by the Company of common stock or other securities could
result in immediate and substantial dilution to the Company's existing
shareholders, large one-time write-offs, or the creation of goodwill or other
intangible assets that could result in amortization expenses. To date, the
Company has not consummated an acquisition transaction. The failure to
successfully evaluate, negotiate, and effect acquisition transactions could have
a material adverse effect on the Company's business, operating results, and
financial condition.
Volatility of Stock Price
The market price of the shares of the Company's Common Stock has been and
is likely to continue to be highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's business,
operating results, and financial condition, announcements of technological
innovations, new products, or new contracts by the Company or its competitors,
developments with respect to proprietary rights, adoption of new accounting
standards affecting the software industry, general market conditions, and other
factors. Due to the foregoing factors, it is likely that the Company's revenues
or operating results will be below the expectations of public market analysts
and investors in some future period. In addition, the stock market from time to
time has experienced significant price and volume fluctuations that have
particularly affected the market prices of technology company stocks. These
types of broad market fluctuations may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been initiated against such company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results, and financial condition. In this regard, in late 1996, two lawsuits on
behalf of certain of the Company's shareholders were filed against the Company
and various of its officers and
<PAGE>
directors. In late September 1997, a class action lawsuit was filed in U.S.
Federal Court on behalf of certain shareholders against the Company and various
of its officers and directors. The state actions allege violations of state
securities laws during 1995 and 1996, and the federal action alleges violations
of the federal securities laws. Management believes that the lawsuits are
without merit and is contesting them.
Year 2000 Compliance
While the Company believes its products are Year 2000 compliant, it has not
concluded its final assessments of the Year 2000 problem. Many currently
installed computer systems and software products are coded to accept only
two-digit entries in the date code field. Beginning in the year 2000, these date
code fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than two years, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. In early 1998, the Company developed
procedures for evaluating and managing the risks and costs associated with Year
2000 problems. TCSI believes it is devoting the necessary resources to identify
and modify its systems and products impacted by the Year 2000 problem and to
implement new systems and release new product versions to become Year 2000
compliant in a timely manner.
The Company believes that its costs associated with implementing these
procedures will not have a material adverse effect on the results of operations
or financial condition of the Company. However, there can be no assurance that
unexpected delays or increased costs associated with implementation will not
have an adverse effect on the Company's operations. In addition, there can be no
assurance that the Company's software contains all date code changes necessary
to prevent processing errors potentially arising from calculations using the
Year 2000 date. Any disruptions in product development or other operations of
the Company as a result of Year 2000 noncompliance would materially adversely
affect the Company's business, financial condition and results of operations.
TCSI believes that the purchasing patterns of customers and potential
customers may also be affected by Year 2000 issues as companies expend
significant resources to upgrade their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products such as those offered by the Company. Furthermore, there can be no
assurance that the Company's customers and suppliers are or will be Year 2000
compliant. Failure of the Company's customers and suppliers to address the Year
2000 issues at all, sufficiently, or in a timely manner, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
<PAGE>
TCSI CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. On June 5,
1998, plaintiffs filed a second amended complaint. A demurrer to that complaint
was filed on August 21, 1998. Oral argument of that demurrer is scheduled for
November 24, 1998.
On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant
(the "Tinkler Derivative Action"). The complaint in the Tinkler Derivative
Action also names the Company as a nominal defendant. The original complaint in
the Tinkler Derivative Action alleged that as a result of the facts alleged in
the Copperstone State Action, defendants breached their fiduciary duties to the
Company, violated the California Corporations Code, and were unjustly enriched.
The plaintiff in the Tinkler Derivative Action seeks damages of an unspecified
amount. On February 24, 1998, plaintiff filed a second amended complaint
alleging breach of fiduciary duty and violation of the California Corporations
Code. On May 13, 1998 defendants filed a demurrer to the second amended
complaint and on October 15, 1998, the Court entered an order granting the
demurrer to the California Corporations Code cause of action with leave to
amend, and striking allegations of nonintentional misconduct. Plaintiff has not
amended the complaint within the time alloted by the Court.
On September 24, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The Copperstone Federal Action
contains virtually identical factual allegations as the Copperstone State
Action, and alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Copperstone
Federal Action also seek damages of an unspecified amount. On January 14, 1998,
defendants moved to dismiss the Copperstone Federal Action. The Court ordered
that plaintiffs seek class certification prior to adjudication of defendants'
motion to dismiss on April 20, 1998. Pursuant to that order, the parties
stipulated to the conditional certification of a plaintiff class, and plaintiffs
sent notice to the putative class members explaining that putative class members
had until August 28, 1998 to opt out of the plaintiff class. The opt-out period
closed on or about August 28, 1998. The Court did not hear oral argument and has
taken the motion under submission.
In 1997, Atmel Corporation made a claim under the 1996 TCSI/Atmel
Corporation Purchase Agreement. In 1998, management obtained an equitable
settlement of this matter with the escrow agent releasing $550,000 (of a $1.0
million escrow fund) plus interest to TCSI, and the remaining $450,000 less fees
to Atmel. The settlement is reported as a nonrecurring special gain in the
statements of operations.
No trial in any of these actions is scheduled. The Company believes it has
meritorious defenses to all of these actions, and intends to defend each of them
vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
<PAGE>
presently determinable. In the opinion of management, resolution of these legal
actions is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in a particular period.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
3.4 Amended and Restated Bylaws
27 Financial Data Schedule
See Exhibit Index on page 28.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
<PAGE>
TCSI CORPORATION
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, on November 16, 1998.
TCSI CORPORATION
(Registrant)
By /s/ Arthur H. Wilder
Arthur H. Wilder
Chief Financial Officer, Secretary, and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE>
TCSI Corporation
INDEX OF EXHIBITS
Exhibit No. Description
- ----------------- ----------------------------------------------------------
3.4 Amended and Restated Bylaws
27 Financial Data Schedule
TCSI CORPORATION
AMENDMENT TO BYLAWS
I, Christine M. Davis, do hereby certify as follows:
That I am the duly elected and acting Assistant Secretary of TCSI
Corporation, a Nevada corporation (the "Corporation");
That the following amendment to the Bylaws of the Corporation was duly
adopted at a meeting of the Corporation's Board of Directors on May 30, 1997;
Article III, Section 2 of the Bylaws was amended to read as follows:
"Section 2. NUMBER OF QUALIFICATION OF DIRECTORS. The
authorized number of directors of the corporation shall be neither less
than three (3) nor more than seven (7). Until changed, within the
limits specified above, by a resolution duly adopted by the Board of
Directors or by the shareholders, the exact number of directors shall
be seven (7), at least two (2) of which shall be independent directors.
For purposes of this Section, an "independent director" shall mean a
person other than an officer or employee of the corporation or its
subsidiaries, if any, or any other individual having a relationship
which, in the opinion of the board of directors of the corporation,
would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director."
IN WITNESS WHEREOF, I have duly executed this Amendment to Bylaws this
30th day of May, 1997.
/s/ Christine M. Davis
-----------------------------------------
Christine M. Davis
<PAGE>
TEKNEKRON COMMUNICATIONS SYSTEMS, INC.
AMENDMENT TO BYLAWS
I, Janelle F. Bradshaw, do hereby certify as follows:
That I am the duly elected and acting Secretary of Teknekron Communications
Systems, Inc., a Nevada corporation (the "Company");
That the following amendments to the Bylaws of the corporation were duly
adopted by Unanimous Written Consent of the Board of Directors thereof, dated
May 17, 1991;
Article III, Section 2 of the Bylaws was amended to read as follows:
"Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of directors of the corporation shall be not less than three (3) nor
more than seven (7). Until changed, within the limits specified above, by a
resolution duly adopted by the Board of Directors or by the shareholders,
the exact number of directors shall be four (4), at least two (2) of which
shall be independent directors. For purposes of this Section, an
"independent director" shall mean a person other than an officer or
employee of the corporation or its subsidiaries, if any, or any other
individual having a relationship which, in the opinion of the board of
directors of the corporation, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director."
Article III, Section 16 of the Bylaws was amended to include the following
new paragraph:
"Notwithstanding the foregoing, the Board shall establish and maintain
an Audit Committee, a majority of the members of which shall be independent
directors (as defined in Article III, Section 2 of these Bylaws). In
addition to reviewing potential conflict of interest situations where
appropriate, the Audit Committee shall exercise such powers as are
delegated to it by the Board of Directors."
<PAGE>
Article IV, Section 9 of the Bylaws was amended to read as follows:
"Section 9. SENIOR AND EXECUTIVE VICE PRESIDENTS. In the absence or
disability of the Chief Executive Officer and the President, the Executive
Vice President or the Senior Vice President 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 Executive Vice
President and the Senior Vice President shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board."
Article IV, Section 12 of the Bylaws was added to read as follows:
"Section 12. HONORARY TITLES. The Board of Directors may, from time to
time, bestow the honorary title "Vice President" upon certain employees
nominated by the Chairman of the Board, the President, the Executive Vice
President or the Senior Vice President. Titles bestowed pursuant to this
Section 12 shall not be deemed to constitute the election of an officer
pursuant to Sections 1, 2, 3 or 9 of this Article IV. Persons holding the
honorary title of Vice President shall not be officers of the corporation
and shall not have the authority to perform any duties of an officer of the
corporation set forth in this Article IV. The honorary Vice Presidents
shall have the duties and responsibilities as the Board may from time to
time determine."
Article V of the Bylaws was amended by deleting all of Section 7.
<PAGE>
Article VI, Section 2 of the Bylaws was amended to read as follows:
"Section 2. INDEMNIFICATION OF CORPORATE AGENTS. 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, 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, to the fullest extent permitted
by Nevada law and the Articles of Incorporation. The rights conferred on
any person above shall not be exclusive or any other right such person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise."
IN WITNESS WHEREOF, I have duly executed this Amendment to Bylaws and
affixed the seal of the corporation this 22 day of May, 1991.
/s/ Janelle F. Bradshaw
--------------------------------------------------
Janelle F. Bradshaw
3
<PAGE>
TEKNEKRON COMMUNICATIONS SYSTEMS, lNC.
AMENDMENT TO BYLAWS
I, Janelle F. Bradshaw, do hereby certify as follows:
That I am the duly elected and acting Secretary of Teknekron Communications
Systems, Inc., a Nevada corporation;
That the following amendment to the Bylaws of the corporation was duly
adopted by Unanimous Written Consent of the Board of Directors thereof, dated
July 3, 1989;
Article V of the Bylaws was amended to add a new Section 7 to read as
follows:
"Section 7. REPORTS TO SHAREHOLDERS. The corporation hereby expressly
waives, to the maximum extent permitted by law, the requirement set forth
in Section 1501 of the California Corporations Code, to the extent the same
may be applicable to the corporation, and any and all other similar
requirements under any other applicable state statutes, to deliver annual
reports to shareholders; provided, however, that nothing herein shall be
interpreted as prohibiting the Board from issuing annual or other periodic
reports to shareholders as the Board may determine from time to time."
IN WITNESS WHEREOF, I have duly executed this Amendment to Bylaws and
affixed the seal of the corporation this 3rd day of July, 1989.
/s/ Janelle F. Bradshaw
--------------------------------------------------
Janelle F. Bradshaw
(SEAL)
<PAGE>
BYLAWS
OF
TEKNEKRON COMMUNICATIONS SYSTEMS, INC.
<PAGE>
INDEX
Page
ARTICLE I Offices 1
Section 1. Principal Office in Nevada 1
Section 2. Principal Office in California 1
Section 3. Other Offices 1
ARTICLE II Shareholders 1
Section 1. Place of Meetings 1
Section 2. Annual Meetings 1
Section 3. Special Meetings 2
Section 4. Notice of Shareholders' Meetings 2
Section 5. Manner of Giving Notice; Affidavit of Notice 2
Section 6. Quorum 3
Section 7. Voting 3
Section 8. Record Date 5
Section 9. Actions at Meetings Not Regularly Called:
Ratification and Approval 5
Section 10. Shareholder Action by Written
Consent Without A Meeting 6
Section 11. Proxies 6
Section 12. Inspectors of Election 6
ARTICLE III Directors 7
Section 1. Powers 7
Section 2. Number and Qualification of Directors 8
Section 3. Election and Term of Office 8
Section 4. Removal 8
Section 5. Vacancies 8
Section 6. Place of Meeting 9
Section 7. Regular Meetings 9
Section 8. Special Meetings 10
Section 9. Quorum 10
Section 10. Participation in Meetings by
Conference Telephone 10
Section 11. Waiver of Notice 11
Section 12. Adjournment 11
i
<PAGE>
Page
Section 13. Fees and Compensation 11
Section 14. Action At Meetings Not
Regularly Called:
Ratification and Approval 11
Section 15. Rights of Inspection 11
Section 16. Committees 12
ARTICLE IV Officers 12
Section 1. Officers 12
Section 2. Election 12
Section 3. Subordinate Officers 12
Section 4. Removal and Resignation 13
Section 5. Vacancies 13
Section 6. Chairman of the Board 13
Section 7. Chief Executive Officer 13
Section 8. President 13
Section 9. Vice Presidents 14
Section 10. Secretary 14
Section 11. Chief Financial Officer 15
ARTICLE V Other Provisions 15
Section 1. Inspection of Documents 15
Section 2. Endorsement of Documents;
Contracts 15
Section 3. Certificates of Stock 15
Section 4. Representation of Shares of
Other Corporations 16
Section 5. Stock Purchase Plans 16
Section 6. Construction and Definitions 17
ARTICLE VI Indemnification 17
Section 1. Definitions 17
Section 2. Indemnification of Corporate
Agents 17
Section 3. Advancement of Expenses 17
Section 4. Indemnification Contracts 18
Section 5. Insurance 18
ARTICLE VII Emergency Provisions 18
Section 1. General 18
Section 2. Unavailable Directors 19
Section 3. Authorized Number of Directors 19
Section 4. Quorum 19
-ii-
<PAGE>
Page
Section 5. Creation of Emergency Committee 19
Section 6. Constitution of Emergency
Committee 19
Section 7. Powers of Emergency Committee 20
Section 8. Directors Becoming Available 20
Section 9. Election of Board of Directors 20
Section 10. Termination of Emergency
Committee 20
ARTICLE VIII Amendments 20
Section 1. Amendment by Shareholders 20
Section 2. Amendment by Directors 21
-iii-
<PAGE>
BYLAWS
Bylaws For The Regulation, Except
As Otherwise Provided By Statute Or
Its Articles of Incorporation Of
TEKNEKRON COMMUNICATIONS SYSTEMS, INC.
a Nevada corporation
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE IN NEVADA. The principal office of the
corporation within the State of Nevada shall be at the 894 Incline Way, Incline
Village, Nevada 89450.
Section 2. PRINCIPAL OFFICE IN CALIFORNIA. The principal office of the
corporation within the State of California shall be at 2121 Allston Way,
Berkeley, California 94704.
The Board of Directors (herein called the "Board") is hereby granted full
power and authority to change said principal office from one location to
another. Any such change shall be noted on the Bylaws opposite this Section, or
this Section may be amended to state the new location.
Section 3. OTHER OFFICES. Branch or subordinate offices may at any time be
established by the Board at any place or places.
ARTICLE II
SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at the
principal office of the corporation, or at any other place within or without the
State of Nevada which may be designated either by the Board or by the written
consent of all persons entitled to vote thereat, given either before or after
the meeting and filed with the Secretary.
Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be
held on such date and such time as may be fixed by the Board; provided, however,
that should said day fall upon a Saturday, Sunday, or legal holiday observed by
the corporation at its principal office, then any such annual meeting of
shareholders shall be held at the same time and place on the next day thereafter
ensuing which is a full business day. If the annual meeting shall not be held on
the date above specified, the Board of Directors shall cause a meeting in lieu
thereof to be held as soon thereafter as convenient, and, in any case, not later
than sixty (60) days after the date designated above, and any business
transacted or
<PAGE>
election held at such meeting shall be valid as if transacted or held at the
annual meeting. At such meetings directors shall be elected and any other proper
business may be transacted.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time by the Board, the Chairman of the Board, the President, or by
the holder's of shares entitled to cast not less than ten percent (10%) of the
votes at such meeting. Upon request in writing to the Chairman of the Board, the
President, any Vice President or the Secretary by any person (other than the
Board) entitled to call a special meeting of shareholders, the officer forthwith
shall cause notice to be given to the shareholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than ten (10) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty (20) days after receipt
of the request, the persons entitled to call the meeting may give the notice.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be given in accordance with Section 5 of this Article II not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
The notice shall specify the place, date and hour of the meeting and (i) in the
case of a special meeting, the purpose or purposes for which the meeting is
called, or (ii) in the case of the annual meeting, those matters which the
Board, at the time of giving the notice, intends to present for action by the
shareholders. The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees intended at the time of the
notice to be presented by the Board for election.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail,
postage prepaid, addressed to a shareholder entitled to vote at the meeting at
the address of that shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice. Upon such
mailing of any such notice the service thereof shall be complete, and the time
of the notice shall begin to run from the date upon which such notice is
deposited in the mail for transmission to such shareholder. Personal delivery of
any such notice to any officer of a corporation or association or to any member
of a partnership, shall constitute delivery of such notice to such corporation,
association, or partnership.
Notice duly delivered or mailed to a shareholder in accordance with the
provisions of this section, shall be deemed sufficient, and in the event of the
transfer of his stock after
-2-
<PAGE>
such delivery or mailing and prior to the holding of the meeting, it shall not
be necessary to deliver or mail notice of the meeting to the transferee. Any
shareholder may waive notice of any meeting by a writing signed by him, or his
only authorized attorney, either before or after the meeting.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, Assistant Secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
Section 6. QUORUM. A majority of the shares entitled to vote, represented
in person or by proxy, shall constitute a quorum at any meeting of shareholders.
The affirmative vote of a majority of the shares represented and voting at a
duly called meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required herein. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
Section 7. VOTING. The shareholders entitled to notice of any meeting or to
vote at any such meeting shall be only persons in whose name shares stand on the
stock records of the corporation on the record date determined in accordance
with Section 8 of this Article.
Voting shall in all cases be subject to the following provisions:
(a) Shares held by an administrator, executor, guardian,
conservator or custodian may be voted by such holder either in person or by
proxy, without a transfer of such shares into the holder's name; and shares
standing in the name of a trustee may be voted by the trustee, either in person
or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by
such receiver; and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into the receiver's name if
authority to do so is contained in the order of the court by which such receiver
was appointed.
-3-
<PAGE>
(c) Except where otherwise agreed in writing between the
parties, a shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor 5 property has been
appointed and written notice of such appointment given to the corporation.
(e) Shares standing in the name of another corporation, domestic
or foreign, may be voted by such officer, agent or proxy-holder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the board, president or any vice president of such other corporation.
(f) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a shareholder voting agreement
or otherwise, or if two or more persons (including proxy-holders) have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so
voting binds all;
(iii)If more than one votes, but the votes are evenly split
on any particular matter, each faction may vote the
securities in question proportionately.
If the instrument so filed or the registration of the shares shows that any
such tenancy is held in unequal interests, a majority or even split for the
purpose of this section shall be a majority or even split in interest.
-4-
<PAGE>
Elections need not be by ballot. In any election of directors, the
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for then up to the number of directors to be elected by
such shares are elected; votes against the director and votes withheld shall
have no legal effect.
Section 8. RECORD DATE. The Board may fix, in advance, a record date for
the determination of the shareholders entitled to notice of any meeting or to
vote or entitled to receive payment of any dividend or other distribution, or
any allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than sixty (60) days prior to
the date of the meeting nor more than sixty (60) days prior to any other action.
When a record date is so fixed, only shareholders of record at the close of
business on that date are entitled to notice of and to vote at the meeting or to
receive the dividend, distribution, or allotment of rights, or to exercise of
the rights, as the case may be, notwithstanding any transfer of shares on the
books of the corporation after the record date. A determination of shareholders
of record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting unless the Board fixes a new record date
for the adjourned meeting. The Board shall fix a new record date if the meeting
is adjourned for more than forty-five (45) days from the date set for the
original meeting.
If no record date is fixed by the Board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held.
Section 9. ACTIONS AT MEETINGS NOT REGULARLY CALLED: RATIFICATION AND
APPROVAL. Whenever all shareholders entitled to vote at any meeting consent,
either by: (a) a writing on the records of the meeting or filed with the
secretary; or (b) presence at such meeting and oral consent entered on the
minutes; or (c) taking part in the deliberation at such meeting without
objection; the doings of such meeting shall be as valid as if had at a meeting
regularly called and noticed. At such meeting any business may be transacted
which is not excepted from the written consent or to the consideration of which
no objections for want of notice is made at the time. If any meeting be
irregular for want of notice or of such consent, provided a quorum was present
at such meeting, the proceeding: of the meeting may be ratified and approved and
rendered likewise valid and the irregularity or defect therein waived by writing
signed by all parties having the right to vote at such
-5-
<PAGE>
meeting. Such consent or approval of stockholders may be by proxy or attorney,
but all such proxies and powers of attorney must be in writing.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by shareholders holding at least a
majority of the voting power, except that, if any greater proportion of voting
power is required for such action at a meeting, then the greater proportion of
written consents is required, and this provision for action by written consent
does not supersede any specific provision for action by written consent
contained in the Nevada General Corporation Law.
Section 11. PROXIES. Every person entitled to vote shares has the right to
do so either in person or by one or more persons authorized by a written proxy
executed by such shareholder and filed with the Secretary. Any proxy duly
executed is not revoked and continues in full force and effect until revoked by
the person executing it prior to the vote pursuant thereto by a writing
delivered to the secretary of the corporation stating that the proxy is revoked
or by a subsequent proxy executed by the person executing the prior proxy and
presented to the meeting, or, as to any meeting, by attendance at such meeting
and voting in person by the person executing the proxy; provided, however, that
no proxy shall be valid after the expiration of 6 months from the date of its
execution unless otherwise provided in the proxy or unless coupled with an
interest.
Section 12. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any such meeting may, and on the
request of any shareholder or shareholder's proxy shall, make such appointment
at the meeting. The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares represented in person or by proxy shall determine whether
one or three inspectors shall be appointed.
The duties of such inspectors shall include: determining the number of
shares outstanding and the voting power of each; determining the number of
shares represented at the meeting and the existence of a quorum; determining the
authenticity, validity, and effect of proxies; receiving votes, ballots, or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote;
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counting and tabulating all votes or consents; determining when the polls shall
close; determining the result of any vote; and doing such acts as may be proper
to conduct the election or vote with fairness to all shareholders. If there are
three inspectors of election, the decision, act, or certification of a majority
is effective in all respects as decision, act, or certificate of all.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to limitations of the Articles of Incorporation,
of these Bylaws, and of the Nevada General Corporation Law relating to action
required to be approved by the shareholders 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. The Board may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board. Without prejudice to
such general powers, but subject to the same limitations, it is hereby expressly
declared that the Board shall have the following powers in addition to the other
powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents, and
employees of the corporation, prescribe the powers and duties for them as may
not be inconsistent with law, or with the Articles of Incorporation or these
Bylaws, fix their compensation, and require from them security for faithful
service.
(b) To conduct, manage, and control the affairs and business of
the corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles of Incorporation or these Bylaws, as they may
deem best.
(c) To adopt, make, and use a corporate seal, and to prescribe
the forms of certificates of stock, and to alter the form of such seal and of
such certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of the
corporation from time to time, upon such terms and for such consideration as may
be lawful.
(e) To borrow money and incur indebtedness for the purposes of
the corporation, and to cause to be executed and delivered therefor or, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges,
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hypothecation's, or other evidences of debt and securities therefor.
(f) To make, adopt or amend these Bylaws.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall be not less than three (3) nor more than
seven (7). The exact number of directors shall be three (3) until changed,
within the limits specified above, by a resolution duly adopted by the Board of
Directors or Bylaw amending this Section 2, duly adopted by the Board or by the
shareholders.
Section 3. ELECTION AND TERM OF OFFICE. Unless elected pursuant to the
written consent of shareholders, the directors shall be elected at each annual
meeting of shareholders but if any such annual meeting is not held or the
directors are not elected thereat, or if the directors are not elected pursuant
to the written consent of shareholders, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director shall hold
office until the next annual meeting and until a successor has been elected and
qualified.
Section 4. REMOVAL. The Board may declare vacant the office of a director
who has been declared of unsound mind by an order of court or who has been
convicted of a felony.
Any or all of the directors may be removed without cause if such removal is
approved by not less than two-thirds of the issued and outstanding shares
entitled to vote, provided, however, that (a) if the Articles of Incorporation
or an amendment thereto, provide for the election of directors by cumulative
voting, no director shall be removed from office except upon the vote or written
consent of shareholders owning sufficient shares to have prevented his election
to office in the first instance, (b) the Articles of Incorporation may require
the concurrence of a larger percentage of the stock entitled to voting power in
order to remove a director, and (c) when by the provisions of the Articles of
Incorporation the holders of the shares of any class or series, voting as a
class or series, are entitled to elect one or more directors, any director so
selected may be removed only by the applicable vote of the holders of the shares
of that class or series. Any reduction of the authorized number of directors
does not, by itself, remove any director prior to the expiration of such
director's term of office.
Section 5. VACANCIES. Any director may resign effective upon giving written
notice to the Chairman of the Board, the President, Secretary, or the Board,
unless the notice specifies a later time for the effectiveness of such
resignation. If the
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resignation is effective at a future time, a successor may b~ elected to take
office when the resignation becomes effective.
All vacancies on the Board, including those existing as a result of a
removal of a director or those caused by an increase in the number of directors,
may be filled by a majority of the remaining directors, though less than a
quorum, or by a sole remaining director, and each director so elected shall hold
office until the next annual meeting and until such director's successor has
been elected and qualified.
A vacancy or vacancies on the Board shall be deemed to exist in case of the
death, resignation, or removal of any director, or if the authorized number of
directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are to be elected, to
elect the total authorized number of directors to be voted for at that meeting.
If the directors shall not be elected on the day designated for that purpose,
the corporation shall not be dissolved but every director shall continue to hold
his office and discharge his duties until his successor has been elected.
The Board may declare vacant the office of a director who has been declared
of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent, other than to fill a vacancy created by removal, requires the consent
of a majority of the outstanding shares entitled to vote. If the Board accepts
the resignation of a director tendered to take effect at a future time, the
Board or the shareholders shall have power to elect a successor to take office
when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term of office.
Section 6. PLACE OF MEETING. Regular or special meetings of the Board may
be held at any place within or without - the State of Nevada which has been
designated from time to time by the Board. In the absence of such designation,
regular meetings shall be held at the principal office of the corporation.
Section 7. REGULAR MEETINGS. Immediately following each annual meeting of
shareholders the Board shall hold a regular
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meeting for the purpose of organization, election of officers, and the
transaction of other business.
Other regular meetings of the Board shall be held without call at such time
as shall from time to time be fixed by the Board. This Bylaw hereby expressly
dispenses with call and notice of all regular meetings of the Board.
Section 8. SPECIAL MEETINGS. Special meetings of the Board for any purpose
or purposes may be called at any time by the Chairman of the Board, the
President, or the Secretary, or by any two directors.
Special meetings of the Board shall be held upon three (3) days written
notice by mail or twenty-four (24) hours' notice given personally or by
telephone, telegraph, telex or other similar means of communication. Any such
notice shall be addressed or delivered to each director at such director's
address as it is shown upon the records of the corporation or as may have been
given to the corporation by the director for purposes of notice.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.
Section 9. QUORUM. A majority of the authorized number of directors
constitutes a quorum of the Board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles of Incorporation. 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
of the required quorum for such meeting.
Section 10. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of
the Board may participate in a meeting through use of a conference telephone
network or a similar communications method, so long as all members participating
in such meeting can hear one another. Each person participating
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in the meeting shall sign the minutes thereof. The minutes may be signed in
counterparts.
Section 11. WAIVER OF NOTICE. The transactions of any meeting of the Board,
however called and noticed or wherever held, are as valid as though had at a
meeting duly held after regular call and notice if a quorum be present and if,
either before or after the meeting, each of the directors not present signs a
written waiver of notice, a consent to holding such meeting or an approval of
the minutes thereof. All such waivers, consents, or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Section 12. ADJOURNMENT. A majority of the directors present, whether or
not a quorum is present, may adjourn any directors' meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned. If the meeting is adjourned for more than twenty-four (24) hours,
notice of any adjournment to another time or place shall be given prior to the
time of the adjourned meeting to the directors who were not present at the time
of the adjournment.
Section 13. FEES AND COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by the Board.
Section 14. ACTION AT MEETINGS NOT REGULARLY CALLED: RATIFICATION AND
APPROVAL. Whenever all directors entitled to vote at any meeting, consent,
either by: (a) a writing on the records of the meeting or filed with the
secretary; or (b) presence at such meeting and oral consent entered on the
minutes; or (c) taking part in the deliberations at such meeting without
objection; the doings of such meeting shall be as valid as if had at a meeting
regularly called and noticed. At such meeting any business may be transacted
which is not excepted from the written consent or to the consideration of which
no objections for want of notice is made at the time. If any meeting be
irregular for want of notice or of such consent, provided a quorum was present
at such meeting, the proceedings of the meeting may be ratified and approved and
rendered likewise valid and the irregularity or defect therein waived by writing
signed by all parties having the right to vote at such meeting.
Section 15. RIGHTS OF INSPECTION. Every director shall have the absolute
right at any reasonable time to inspect and copy all books, records, and
documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
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inspection by a director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.
Section 16. COMMITTEES. The Board may, by resolution or resolutions passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more directors of the corporation, which, to the
extent provided in the resolution or resolutions, shall have and may exercise
the powers of the Board in the management of the business and affairs of the
corporation, and the power to authorize the seal of the corporation to be
affixed to all papers on which the corporation desires to place a seal.
Members and alternate members of a committee must be appointed by
resolution adopted by a majority of the authorized number of directors and such
committee may be designated an Executive Committee or such other name as the
Board shall specify. The Board shall have the power to prescribe the manner in
which proceedings of any such committee shall be conducted. In the absence of
any such prescription, such committee shall have the power to prescribe the
manner in which its proceedings shall be conducted. Unless the Board or such
committee shall otherwise provide, the regular and special meetings and other
actions of any such committee shall be governed by the provisions of this
Article applicable to meetings and actions of the Board. Minutes shall be kept
of each meeting of each committee.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a chief
executive officer, a president, a secretary, a chief financial officer and a
resident agent. The corporation may also have, at the discretion of the Board, a
chairman of the board, one or more vice-presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as may be
elected or appointed in accordance with the provisions of Section 3 of this
Article. Any person may hold two or more offices.
Section 2. ELECTION. The officers of the corporation, except such officers
as may be elected or appointed in accordance with the provisions of Section 3 or
Section 5 of this Article, shall be chosen annually by, and shall serve at the
pleasure of, the Board, and shall hold their respective offices until their
resignation, removal, or other disqualification from service, or until their
respective successors shall be elected.
Section 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the
Chief Executive Officer or President to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office for such
period,
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have such authority, and perform such duties as are provided in these Bylaws or
as the Board may from time to time determine.
Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with
or without cause, by the Board of Directors at any time, or, except in the case
of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of employment
of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause shall be filled in
the manner prescribed in these Bylaws for regular election or appointment to
such office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall
be such an officer, shall, if present, preside at all meetings of the Board and
exercise and perform such other powers and duties as may be from time to time
assigned by the Board.
Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
preside over all of the operations of the corporation, shall preside at all
shareholders meetings, and all officers and employees shall be reportable to the
Chief Executive Officer. The Chief Executive Officer shall make such reports and
perform such other duties as may be established from time to time by the Board
of Directors.
Section 8. PRESIDENT. Subject to such powers, if any, as may be given by
the Board to the Chief Executive Officer and the Chairman of the Board, if there
be such an officer, the President is the general manager of the corporation and
has, subject to the control of the Board, general supervision, direction, and
control of the business and officers of the corporation. The President shall
preside at all meetings of the shareholders in the absence of the Chief
Executive Officer and, in the absence of the Chairman of the Board, or if there
be none, at all meetings of the Board. The President has the general powers and
duties of management usually vested in the office of president and general
manager of a corporation and such other powers and duties as may be prescribed
by the Board or the Chief Executive Officer.
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Section 9. VICE PRESIDENTS. In the absence or disability of the Chief
Executive Officer, the President, the Vice Presidents in order of their rank as
fixed by the Board or, if not ranked, the Vice President designated by the
Board, shall perform all the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President. 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.
Section 10. SECRETARY. The Secretary shall keep, or cause to be kept, at
the principal office and such other place as the Board may order, a book of
minutes of all meetings of shareholders, the Board, and its committees, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the names of those present at Board and
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof. The Secretary shall keep, or cause to be
kept, a copy of the Bylaws of the corporation at the principal office or
business office in accordance with Section 78.105 of the Nevada Revised
Statutes.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent or registrar, if one be
appointed, a share register, or a duplicate share register, showing the names of
the shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same, 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 the meetings
of the shareholders and of the Board and of any committees thereof required by
these Bylaws or by law to be given, shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board.
Section 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of the
corporation shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
corporation, and shall send or cause to be sent to the shareholders of the
corporation such financial statements and reports as are by law or these Bylaws
required to be sent to them. The books of account shall at all times be open to
inspection by any director.
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ARTICLE V
OTHER PROVISIONS
Section 1. INSPECTION OF DOCUMENTS. The corporation shall keep in its
principal office a certified copy of its Articles of Incorporation and all
amendments thereto, certified copy of these Bylaws and all amendments thereto, a
stock ledger or duplicate stock ledger, revised annually, containing the names,
alphabetically arranged, of all persons who are stockholders of the corporation,
showing their places of residence, if known, and the number of shares held by
them respectively or in lieu of the stock ledger or duplicate stock ledger, a
statement setting out the name of the custodian of the stock ledger or duplicate
stock ledger, and the present and complete post office address, including street
and number, if any, where such stock ledger or duplicate stock ledger is kept.
The original or a copy of these Bylaws as amended to date which shall be open to
inspection by shareholders at all reasonable times during office hours. If the
principal office of the corporation is outside the State of Nevada and the
corporation has no principal business office in such state, it shall upon the
written notice of any shareholder furnish to such shareholder a copy of these
Bylaws as amended to date.
Section 2. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions
of applicable law, any note, mortgage, evidence of indebtedness, contract, share
certificate, conveyance, or other instrument in writing and any assignment or
endorsement thereof executed or entered into between this corporation and any
other person, when signed by the Chairman of the Board, the President or any
Vice President, and the Secretary or any Assistant Secretary, the Chief
Financial Officer or any Assistant Treasurer of this corporation shall be valid
and binding on this corporation in the absence of actual knowledge on the part
of the other person that the signing officers had not authority to execute the
same. Any such instruments may be signed by any other person or persons and in
such manner as from time to time shall be determined by the Board and, unless so
authorized by the Board, 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 amount.
Section 3. CERTIFICATES OF STOCK. Every holder of shares of the corporation
shall be entitled to have a certificate signed in the name of the corporation by
the Chairman of the Board, the President or a Vice President and by the Chief
Financial Officer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Any or all of the signatures on the certificate may be
facsimile. If any officer, transfer agent, or registrar who has signed or whose
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facsimile signature has been placed upon a certificate shall have 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 such person were an
officer, transfer agent, or registrar at the date of issue.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this Section no new certificate for shares shall be
issued in lieu of an old one unless the latter is surrendered and cancelled at
the same time. The Board may, however, in case any certificate for shares is
alleged to have been lost, stolen, or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft, or destruction of such
certificate or the issuance of such new certificate.
Section 4. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or
any other officer or officers authorized by the Board or the President are each
authorized to vote, represent, and exercise on behalf of the corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of the corporation. The authority herein granted may be
exercised either by any such officer in person or by any other person authorized
so to do by proxy or power of attorney duly executed by said officer.
Section 5. STOCK PURCHASE PLANS. The corporation may adopt and carry out a
stock purchase plan or agreement or stock option plan or agreement providing for
the issue and sale for such consideration as may be fixed of its unissued
shares, or of issued shares acquired or to be acquired, to one or more of the
employees or directors of the corporation or of a subsidiary or to a trustee on
their behalf and for the payment for such shares in installments or at one time,
and may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes, or otherwise.
Any such stock purchase plan or agreement or stock option plan or agreement
may include, among other features, the fixing of eligibility for participation
therein, the class and price of shares to be issued or sold under the plan or
agreement, the number of shares which may be subscribed for, the method of
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payment therefor, the reservation of title until full payment therefor, the
effect of the termination of employment and option or obligation on the part of
the corporation to repurchase the shares upon termination of employment,
restrictions upon transfer of the shares, the time limits of and termination of
the plan, and any other matters, not in violation of applicable law, as may be
included in the plan as approved or authorized by the Board or any committee of
the Board.
Section 6. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction, and definitions
contained in the General Provisions of the Nevada Revised Statutes shall govern
the construction of these Bylaws.
ARTICLE VI
INDEMNIFICATION
Section 1. DEFINITIONS. For the purposes of this Article, "agent" means any
person who is or was a director, officer, employee, or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise, or was a
director, officer, employee, or agent of a foreign or domestic corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
Section 2. INDEMNIFICATION OF CORPORATE AGENTS. The corporation shall
indemnify any person who was or is a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, 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, to the fullest extent
permitted by Nevada law and the Articles of Incorporation. The rights conferred
on any person above shall not be exclusive of any other right such person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, bylaw, agreement, vote of shareholders or disinterested directors
or otherwise.
Section 3. ADVANCEMENT OF EXPENSES. The expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding upon receipt of
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an undertaking by or on behalf of the director or officer to repay the amount if
it is ultimately determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the corporation. The provisions of this subsection
do not affect any rights to advancement of expenses to which corporate personnel
other than directors or officers may be entitled under any contract or otherwise
by law.
Section 4. INDEMNIFICATION CONTRACTS. The Board of Directors is authorized
to enter into a contract with any director, officer, employee or agent of the
corporation, or any person serving at the request of the corporation as a
director, office, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in Section 2 of this Article VI.
Section 5. INSURANCE. The corporation shall have power to purchase and
maintain insurance or make other financial arrangements on behalf of any agent
of the corporation for any liability asserted against or incurred by the agent
in such capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against such liability
under the provisions of this Article. The other financial arrangements made by
the corporation may include, but shall not be limited to, any of the
arrangements set forth in the Nevada General Corporation Law, as the same may be
amended from time to time.
ARTICLE VII
EMERGENCY PROVISIONS
Section 1. GENERAL. The provisions of this Article shall be operative only
during a national emergency declared by the President of the United States or
the person performing the President's functions, or in the event of a nuclear,
atomic, or other attack on the United States or a disaster making it impossible
or impracticable for the corporation to conduct its business without recourse to
the provisions of this Article. Said provisions in such event shall override all
other Bylaws of this corporation in conflict with any provisions of this
article, and shall remain operative so long as it remains impossible or
impracticable to continue the business of the corporation otherwise, but
thereafter shall be inoperative; provided that all actions taken in good faith
pursuant to such provisions shall thereafter remain in full force and effect
unless and until revoked by action taken pursuant to the provisions of the
Bylaws other than those contained in this Article.
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Section 2. UNAVAILABLE DIRECTORS. All directors of the corporation who are
not available to perform their duties as directors by reason of physical or
mental incapacity or for any other reason or who are unwilling to perform their
duties or whose whereabouts are unknown shall automatically cease to be
directors, with like effect as if such persons had resigned as directors, so
long as such unavailability continues.
Section 3. AUTHORIZED NUMBER OF DIRECTORS. The authorized number of
directors shall be the number of directors remaining after eliminating those who
have ceased to be directors pursuant to Section 2, or the minimum number
required by law, whichever number is greater.
Section 4. QUORUM. The number of directors necessary to constitute a quorum
shall be one-third of the authorized number of directors as specified in the
foregoing Section, or such other minimum number as, pursuant to the law or
lawful decree then in force, it is possible for the Bylaws of a corporation to
specify.
Section 5. CREATION OF EMERGENCY COMMITTEE. In the event the number of
directors remaining after eliminating those who have ceased to be directors
pursuant to Section 2 is less than the minimum number of authorized directors
required by law, then until the appointment of additional directors to make up
such required minimum, all the powers and authorities which the Board could by
law delegate, including all powers and authorities which the Board could
delegate to a committee, shall be automatically vested in an emergency
committee, and the emergency committee shall thereafter manage the affairs of
the corporation pursuant to such powers and authorities and shall have all such
other powers and authorities as may by law or lawful decree be conferred on any
person or body of persons during a period of emergency.
Section 6. CONSTITUTION OF EMERGENCY COMMITTEE. The emergency committee
shall consist of all the directors remaining after eliminating those who have
ceased to be directors, pursuant to Section 2, provided that such remaining
directors are not less than three in number. In the event such remaining
directors are less than three in number, the emergency committee shall consist
of three persons, who shall be the remaining director or directors and either
one or two officers or employees of the corporation, as the remaining director
or directors may in writing designate. If there is no remaining director, the
emergency committee shall consist of the three most senior officers of the
corporation who are available to serve, and if and to the extent that officers
are not available to serve, and if and to the extent that officers are not
available, the most senior employees of the corporation. Seniority shall be
determined in accordance with
-19-
<PAGE>
any designation of seniority in the minutes of the proceedings of the Board, and
in the absence of such designation, shall be determined by rate of remuneration.
In the event that there are no remaining directors and no officers or employees
of the corporation available, the emergency committee shall consist of three
persons designated in writing by the shareholder owning the largest number of
shares of record as of the last record date.
Section 7. POWERS OF EMERGENCY COMMITTEE. The emergency committee, once
appointed, shall govern its own procedures and shall have power to increase the
number of members thereof beyond the original number, and in the event of a
vacancy or vacancies therein, arising at any time, the remaining member or
members of the emergency committee shall have the power to fill such vacancy or
vacancies. In the event at any time after its appointment, all members of the
emergency committee shall die or resign or become unavailable to act for any
reason whatsoever, a new emergency committee shall be appointed in accordance
with the foregoing provisions of this Article.
Section 8. DIRECTORS BECOMING AVAILABLE. Any person who has ceased to be a
director pursuant to the provisions of Section 2 and who thereafter becomes
available to serve as a director shall automatically become a member of the
emergency committee.
Section 9. ELECTION OF BOARD OF DIRECTORS. The emergency committee shall,
as soon after its appointment as is practicable, take all requisite action to
secure the election of a board of directors, and upon such election all the
powers and authorities of the emergency committee shall cease.
Section 10. TERMINATION OF EMERGENCY COMMITTEE. In the event, after the
appointment of an emergency committee, a sufficient number of persons who ceased
to be directors pursuant to Section 2 become available to serve as directors, so
that if they had not ceased to be directors as aforesaid, there would be enough
directors to constitute the minimum number of directors required by law, then
all such persons shall automatically be deemed to be reappointed as directors
and the powers and authorities of the emergency committee shall be at an end.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote.
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<PAGE>
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article VIII to adopt, amend, or
repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board.
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<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Teknekron
Communications Systems, Inc., a Nevada corporation; and
2. That the foregoing Bylaws, comprising twenty (20) pages, are a true and
correct copy of the Bylaws of said corporation as duly adopted by approval of
the Board of Directors thereof by written consent dated 1987.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of said corporation on November 2, 1987.
/s/ Mary Hofman
--------------------------------------------------
Mary Hofmann, Secretary
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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TO SUCH FINANCIAL STATEMENTS.
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