-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HoLkPRhh3+TpkTrg8kbiuzRj/usWfd19Egb8c3IR1BoM8c8jL+gnsrNUj6v5aZMI 9VJX8HcPOgtds0uhTBtiow== /in/edgar/work/20000530/0000057201-00-000037/0000057201-00-000037.txt : 20000919 0000057201-00-000037.hdr.sgml : 20000919 ACCESSION NUMBER: 0000057201-00-000037 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COYOTE NETWORK SYSTEMS INC CENTRAL INDEX KEY: 0000057201 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 362448698 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-05486 FILM NUMBER: 645447 BUSINESS ADDRESS: STREET 1: 4360 PARK TERRACE DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8187357600 MAIL ADDRESS: STREET 1: 4360 PARK TERRACE DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 FORMER COMPANY: FORMER CONFORMED NAME: DIANA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FH INDUSTRIES CORP DATE OF NAME CHANGE: 19850814 FORMER COMPANY: FORMER CONFORMED NAME: SCOT LAD FOODS INC DATE OF NAME CHANGE: 19841202 10-Q/A 1 0001.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------------- FORM 10-Q/A Amendment No. 1 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 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: 1-5486 COYOTE NETWORK SYSTEMS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-2448698 ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4360 Park Terrace Drive, Westlake Village, CA 91361 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (818) 735-7600 ------------------------------------------------------ (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. |X| YES |_| NO At May 26, 2000, the Registrant had issued and outstanding an aggregate of 17,426,001 shares of its common stock. ================================================================================ COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets.............................................. 1 Statement of Operations..................................... 2 Statement of Cash Flows..................................... 3 Notes to Financial Statements............................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 14 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds................. 16 Item 6. Exhibits and Reports on Form 8-K.......................... 16 Signatures ........................................................ 17 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in Thousands, Except Share Amounts)
December 31, March 31, 1999 1999 ---------------- ---------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 613 $ 1,225 Receivables net of allowance of $137 at December 31, 1999 and $186 at March 31, 1999 3,400 2,502 Notes receivable - current 12 2,367 Net current assets of discontinued operations 392 --- Other current assets 1,734 4,035 --------- --------- Total current assets 6,151 10,129 Property and equipment, net 4,016 4,807 Intangible assets, net 5,075 5,619 Net long term assets of discontinued operations 4,598 5,312 Notes receivable - non-current 126 771 Investments 1,592 1,550 Other assets 545 619 --------- --------- $ 22,103 $ 28,807 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Lines of credit $ 1,414 $ 1,133 Accounts payable 4,635 2,885 Accrued professional fees and litigation costs 158 676 Other accrued liabilities 1,245 384 Current portion of long-term debt and capital lease obligations 3,039 1,160 Net current liabilities of discontinued operations --- 4,550 --------- --------- Total current liabilities 10,491 10,788 Notes payable --- 8,183 Long-term debt 1,464 1,534 Capital lease obligations 1,634 1,817 Other liabilities 368 428 Commitments and contingencies Shareholders' equity: Preferred stock - $.01 par value: authorized 5,000,000 shares; issued 590 and 700 shares, liquidation preference of $10,000 per share 5,900 7,395 Common stock - $1 par value. Authorized 30,000,000 shares, issued 14,495,236 and 11,167,456 shares 14,495 11,167 Additional paid-in capital 117,981 109,254 Accumulated deficit (124,473) (116,002) Treasury stock at cost (5,757) (5,757) ---------- ---------- Total shareholders' equity 8,146 6,057 --------- --------- $ 22,103 $ 28,807 ========= =========
See notes to condensed consolidated financial statements. 1 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In Thousands, Except Per Share Amounts)
3 Months Ended 9 Months Ended ---------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1999 1998 1999 1998 ---------- ---------- --------- -------- Net sales $ 2,858 $ 3,783 $ 7,166 $ 4,632 Cost of sales 2,578 3,481 6,090 4,533 -------- ------- -------- ------- Gross profit 280 302 1,076 99 Selling and administrative expenses 1,813 2,668 6,771 4,784 -------- ------- -------- ------- Operating loss (1,533) (2,366) (5,695) (4,685) Interest expense (420) (221) (1,100) (263) Non-operating income (expense): Gain on sale of AGT --- --- 6,209 --- Other 24 (17) 207 (268) -------- -------- -------- -------- 24 (17) 6,416 (268) -------- -------- -------- -------- Loss from continuing operations (1,929) (2,604) (379) (5,216) Loss from discontinued operations (3,113) (1,502) (7,866) (1,318) --------- -------- --------- -------- Net loss $ (5,042) $(4,106) $ (8,245) $(6,534) ========= ======== ========= ======== Loss per common share (basic & diluted): Continuing operations $ (.15) $ (.34) $ (.05) $ (.66) Discontinued operations (.24) (.15) (.64) (.14) --------- -------- --------- -------- Net loss per common share (basic & diluted) $ (.39) $ (.49) $ (.69) $ (.80) ========= ======== ========= ======== Weighted average number of common shares outstanding (basic & diluted) 13,257 10,216 12,308 9,604 ======== ======= ======== =======
See notes to condensed consolidated financial statements. 2 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands)
9 MONTHS ENDED -------------------------------- December 31, December 31, Operating activities: 1999 1998 ------------- ---------- Net loss $ (8,245) $ (6,534) Adjustments to reconcile loss to net cash provided (used) by operating activities: Depreciation and amortization 964 439 Gain on sale of land --- (20) Gain on sale of AGT (6,209) --- Provision for loss on discontinued operations 314 900 Provision for common stock warrants issued 975 --- Net change in discontinued operations (4,190) 2,928 Changes in current assets and liabilities 3,215 (1,332) -------- --------- Net cash used by operating activities (13,176) (3,619) --------- --------- Investing activities: Purchases of property and equipment (1,038) (637) Proceeds from sales of marketable securities --- 16 Proceeds from sale of land --- 67 Change in notes receivable (43) 270 Increase in investments in affiliate (425) (400) Cash investment in INET --- (1,333) Net change in discontinued operations (353) (2,808) --------- --------- Net cash used by investing activities (1,859) (4,825) --------- --------- Financing activities: Repayments of long-term debt and capital lease obligations (70) (142) Common stock issued net of expenses 13,582 752 Redemption of preferred stock (4,000) --- Increase in notes payable 4,856 --- Increase in borrowing on line of credit 281 --- Preference shares dividend (226) (117) Preference stock issued net of expenses --- 6,345 -------- -------- Net cash provided by financing activities 14,423 6,838 -------- -------- Decrease in cash and cash equivalents (612) (1,606) Cash and cash equivalents: At beginning of the period 1,225 3,746 -------- -------- At end of the period $ 613 $ 2,140 ======== ======== Non-cash transactions: Issuance of common stock warrants $ 975 $ 485 Conversion of Class B Units into common stock 606 --- Conversion of convertible Preferred Stock and interest into common stock 103 3,407 Discount granted for investment in affiliate --- 900 Gain on sale of AGT 6,209 --- Notes receivable off-set against trade payables 1,093 --- Beneficial conversion feature on preference shares --- 1,050
See notes to condensed consolidated financial statements 3 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 BASIS OF PRESENTATION - -------------------------------------------------------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year balances have been changed to conform to the current period presentation. Operating results for the three and nine months ended December 31, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K/A for the fiscal year ended March 31, 1999. NOTE 2 DISCONTINUANCE OF SWITCH BUSINESS - -------------------------------------------------------------------------------- In May 2000, the Board of Directors of the Company approved a restructuring plan that provides for the discontinuance and disposal of the DSS Switch segment of the business, which includes Coyote Technologies, LLC, Coyote Communications Services, LLC and TelecomAlliance. As a result, the Company has reported the operations of the DSS Switch business separately as discontinued operations in the accompanying consolidated statement of operations. Also the assets and liabilities of this segment are presented separately and summarized in the accompanying consolidated balance sheets as follows (dollars in thousands):
December 31, 1999 March 31, 1999 ----------------- -------------- (Unaudited) Current assets: Accounts receivable $ 16,576 $ 9,790 Inventory 2,249 2,130 Prepaids and other current assets 192 286 -------- -------- $ 19,017 $ 12,206 -------- -------- Current liabilities: Accounts payable 3,268 $ 5,275 Other accrued liabilities 3,121 3,515 Deferred revenue and customer deposits 12,236 7,810 Current portion capital leases -- 156 -------- -------- $ 18,625 $ 16,756 -------- -------- Net current assets (liabilities) of discontinued operations $ 392 $ (4,550) ======== ========= Non-current assets: Property and equipment, net $ 2,690 $ 3,374 Capitalized software development 1,808 1,604 Notes receivable 100 100 -------- -------- Net long-term assets of discontinued operations $ 4,598 $ 5,078 ======== ========
4 Expected operating results relating to the discontinued operations from April 1, 2000 until the expected disposal date will be included in the estimated loss on disposal and will be recorded as a charge in the consolidated financial statements in the fourth quarter of fiscal 2000. The Company expects to record a charge for estimated loss on disposal of the switch business of approximately $10.0 million in fiscal 2000, which includes an estimated $3.0 million of expected losses of the segment for the first two quarters of fiscal 2001. The Company expects to dispose of the segment by the end of the second quarter of fiscal 2001. The operating results relating to the above discontinued segment are as follows (dollars in thousands):
3 Months Ended 9 Months Ended ------------------------------ ------------------------------ (Unaudited) (Unaudited) Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998 ------------- ------------- ------------- ------------- Net sales $ 3,964 $ 9,148 $ 17,579 $ 30,001 ======== ========= ========== ======== Income (loss) from discontinued operations $ (3,113) $ (1,502) $ (7,552) $ (418) ========= ========== ========== =========
After the decision to discontinue the switch business, the Company will be operating in only one segment, long distance services. 1996 - 1997 Restructuring - ------------------------- In November 1996 (and revised in February 1997), the Board of Directors of Coyote Network Systems, Inc. (the "Company") approved a restructuring plan (the "Restructuring") to separate its telecom switching equipment business (the "CTL Business") from the following businesses: Segment Company Telecommunications equipment distribution C&L Wire installation and service Valley Wholesale distribution of meat and seafood Entree/APC On February 3, 1997, the Company sold a majority of the assets of APC to Colorado Boxed Beef Company. On November 20, 1997, the Company sold its telecommunications equipment distributor subsidiary, C&L Communications, Inc. ("C&L"), to the management of C&L. In March 1998, the Company sold its 80% owned wire installation and service subsidiary, Valley Communications Inc., to Technology Services Corporation. As of June 18, 1999, the Company had collected all cash related to the sale of discontinued operations of the meat and seafood segment except $410,000 due under a note and the Company's only remaining asset of discontinued operations was real estate related to the land and buildings of the discontinued APC operation. Based upon an estimate of the market value of the real estate, the Company took an additional charge of $900,000 in the second quarter of fiscal 1999. This charge is included in the loss from discontinued operations in the condensed consolidated statement of operations for the three months ended September 30, 1998 and the nine months ended December 31, 1998. The asset book value as of March 31, 1999 was $234,000, net of mortgages and reserves applicable to the property. This value is included in the net long-term assets of discontinued operations as of March 31, 1999. 5 Prior to the sale of the land and buildings in July 1999, additional expenses of $314,000 were incurred related to property taxes. These costs are included in the loss from discontinued operations in the condensed consolidated statement of operations for the nine months ($314,000) ended December 31, 1999. NOTE 3 DISPOSITION OF ASSETS - -------------------------------------------------------------------------------- On October 27, 1999, pursuant to a Purchase Agreement, dated September 30, 1999, among the Company, American Gateway Telecommunications, Inc. ("AGTI"), Coyote Gateway, LLC d/b/a American Gateway Telecommunications, ("AGT"), Prinvest Corp. ("PVC"), Prinvest Financial Corp. ("PFC"; together with PVC, "Prinvest") and Arnold A. Salinas ("Salinas"), the Company sold its approximately 80% membership interest in AGT to AGT's remaining member, AGTI, which previously held an approximately 20% membership interest in AGT (the "Sale"). In consideration for the Sale, the Company will receive, for next 18 months, a monthly margin participation payment from AGT equal to $0.0025 per minute of telecommunications traffic switched or routed by AGT through AGT's telecommunications network, which the Company estimates will be less than $50,000 and will record any such revenue upon receipt. Pursuant to the terms of the Agreement, AGT will remain directly liable for its $10.2 million credit facility (the "Credit Facility") with Prinvest, whose affiliate owns 53.75% of AGTI. The Company will be released from its obligations under its pledge agreement with Prinvest which pledge secured the Credit Facility and, in connection therewith, Prinvest will return to the Company the 708,692 treasury shares of the Company's common stock which had been pledged by the Company as collateral under the Credit Facility. In addition, as a result of the Sale, the Company will no longer be required to reflect the Credit Facility on its consolidated financial statements and, accordingly, the Company has recognized a gain of $6,209,000 from the Sale. The Company will not receive any immediate cash payments as a result of the Sale. In addition, for the next 18 months, the Company shall be the exclusive supplier of telecommunications switches to AGT; AGT shall receive a fifty percent discount on all Company-manufactured switches it purchases from the Company during this time period. As of May 26, 2000, the Company has not received any switch purchase orders from AGT and does not anticipate any. Coyote Communications Services, LLC, an affiliate of the Company which is included in the discontinued operations, shall continue to provide maintenance and technical support services to AGT on a month-to-month renewable basis, pursuant to the parties' existing maintenance and servicing agreement. For the nine months ended December 31, 1999, sales, operating losses, depreciation and capital expenditures of $425,000, $1,602,000, $59,000 and $346,000, respectively, of Coyote Gateway are included in the Company's long distance services business. The identifiable assets as at December 31, 1999, however, exclude the assets of Coyote Gateway. NOTE 4 SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- Options and Warrants - ---------------------------------------------- During the quarter ended December 31, 1999, the Board of Directors granted five-year options to purchase a total of 308,481 shares of the Company's common stock to certain employees. The per share exercise prices of these grants is 6 equal to the closing market price of the Company's common stock on the date of the grant and range from $4.00 to $4.625. These options vest in one-third increments over three years. During the quarter ended December 31, 1999, in consideration for administrative consulting services, the Board of Directors granted to certain outside consultants fully vested options to purchase 212,000 shares of the Company's common stock at an exercise price of $4.00 per share and 55,000 shares of the Company's common stock at $4.50 per share and a three-month term. The per share exercise prices of these grants is equal to the closing market price of the Company's common stock on the date of the grant. A fair market value of $224,000 was recorded as administrative expense for these options. The fair market value was determined using the Black Scholes model. In December 1999, two employees, David Held and Bruce Thomas, converted their holdings of 500 Class B Units into 275,624 shares of the Company's common stock in accordance with the terms of conversion available to the holders. During the quarter ended December 31, 1999, a total of 524,979 options were exercised which resulted in proceeds of $2.3 million. These exercises were in accordance with the terms of the Coyote Technologies Employees Non-Qualified Stock Option Plan and Company common stock was issued for that number of common shares. NOTE 5 RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- In October and November 1999, the Company has completed and received funding under a series of two demand loans. The first loan for a total amount of $600,000 was provided to the Company by Mr. Fiedler in the amount of $175,000, by Mr. Latham in the amount of $75,000 and by Mr. Alan J. Andreini, an affiliate shareholder of the Company, in the amount of $350,000 in October 1999. This loan bore interest at bank's prime rate (8.25% at December 31, 1999) plus 1% per year, was repayable on demand and was secured against the Company's investment in Systeam, S.p.A. The second loan for a total amount of $1,225,000 was provided to the Company by Mr. Richard L. Haydon, an affiliate shareholder of the Company, in the amount of $500,000, by Mr. Alan J. Andreini in the amount of $225,000 and by three non-affiliate shareholders in a combined total amount of $500,000 in November 1999. This loan bore interest at the rate of 17.5% per year and was repayable, on demand by the lenders, no earlier than March 31, 2000. The maximum term of the loan was three years to November 2002. This loan was secured by a pledge of shares of the common stock of INET Interactive Network System, Inc., a wholly owned subsidiary of the Company. Under the terms of this loan, the lenders were granted, pro-rata, a combined total of 73,500 three-year warrants to purchase shares of common stock of the Company at an exercise price of $4.50 per share. The warrants will result in a non-cash interest expense charge of $0.3 million to be recognized over the term of the debt. These borrowings together with accrued interest were fully repaid in February and March 2000. On January 25, 2000, the Company entered into a Financial Services Agreement with First Venture Leasing LLC ("First Venture"), pursuant to which a limited liability company (the "LLC") was formed by First Venture to offer certain leasing and credit packages to the Company's customers. First Venture is an entity in which Mr. James McCullough, the Company's Chief Executive Officer and a director, had a 25% interest, which he relinquished effective upon his 7 becoming an officer and director of the Company on February 2, 2000. The terms of the agreement with First Venture were the result of arms' length negotiation in which Mr. McCullough did not participate. The agreement with First Venture was approved by our Board of Directors. In connection with the Financial Services Agreement, First Venture was issued 620,000 warrants to purchase common stock at $5.00 per share and 261,600 warrants at $7.35. The closing price of the Company's common stock on the date of grant was $11.00. These warrants vested upon grant. These warrants are subject to shareholder approval, therefore, the Company will determine the charge, if any, to earnings once shareholder approval is obtained. On January 26, 2000, the Company also entered into a Remarketing Agreement and two separate license agreements with the LLC formed by First Venture, pursuant to which such LLC shall act as the Company's agent in remarketing equipment leased to third parties upon the termination of such leases and shall have the right to use certain trademarks, service marks, trade names and other designations in connection with the services to be provided by the LLC. On January 26, 2000, the Company also entered into a Consulting Agreement with KRJ, LLC ("KRJ"). Pursuant to the Consulting Agreement, KRJ provided assistance in identifying strategic partners and business opportunities, making introductions to IP Telephony customers, introducing new management, restructuring vendor finance programs, investor relations, and identifying credit facilities. The Company issued to KRJ 2,000,000 shares of common stock. Of such shares, 1,250,000 will be held in escrow to be released to KRJ in three equal annual installments, subject to acceleration if certain common stock price targets are met and sustained. In addition, unless there is a change of control of the Company (as defined in the Consulting Agreement), KRJ has agreed not to sell, pledge, hypothecate or otherwise transfer any of the 2,000,000 shares for a period 12 months after the respective dates of delivery of any of such shares. Mr. McCullough has an approximately one-third interest in KRJ and the balance of KRJ is owned by affiliates of First Venture. The Consulting Agreement also provides that over the next three years, KRJ will provide assistance in further identification of additional business opportunities both in the domestic and international markets. Compensation for these additional services will be specifically negotiated at a future date. The Consulting Agreement has been approved by the Company's Board of Directors and the terms of the agreement with KRJ were the result of arms' length negotiation in which Mr. McCullough did not participate. In connection with the issuance of the 2,000,000 shares to KRJ, the Company anticipates recording a one-time, non-cash charge to earnings of approximately $10 million in the fourth quarter of fiscal 2000. In January 2000, the Company restructured its management and business strategy. On January 14, 2000, the Company issued options to Mr. McCullough to purchase 750,000 shares of common stock at $5.00 per share. The closing price of the Company's common stock on the date of grant was $5.50. Three hundred thousand options vested upon grant, with the remaining options vesting in one-third increments over three years, beginning January 14, 2001, subject to acceleration if certain common stock price targets are met and sustained. The options are subject to shareholder approval, therefore, the Company will determine the charge, if any, to earnings once shareholder approval is obtained. NOTE 6 LOSS PER COMMON SHARE - -------------------------------------------------------------------------------- The basic loss per common share is determined by using the weighted average number of shares of common stock outstanding during each period. Diluted loss per common share is equal to the basic loss per share for all periods due to the loss from continuing operations as the effect of options and warrants would be antidilutive . 8 The beneficial conversion feature ($1.05 million) applicable to the Series A Convertible Preferred Stock has been accounted for as a dividend to Series A Convertible Preferred shareholders and has been recorded from the date of the Series A sale through to the earliest date the preferred shareholders could convert into common stock (September 1, 1999 to December 31, 1999). In computing the earnings or net loss per share applicable to common stock shareholders, all dividends on preferred stock have been deducted from the earnings or added to the losses to arrive at the earnings or losses applicable to common shares as follows:
3 Months Ended 9 Months Ended ------------------------------- ------------------------------- Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998 ------------- ------------- ------------- ------------- Net loss $ (5,042) $ (4,106) $ (8,245) $ (6,534) Beneficial conversion feature --- (788) --- (1,050) Preferred dividend (72) (88) (226) (117) ---------- ---------- ---------- ---------- $ (5,114) $ (4,982) $ (8,471) $ (7,701) ---------- --------- --------- ---------
NOTE 7 SUBSEQUENT EVENTS - -------------------------------------------------------------------------------- Subsequent to December 31, 1999, the following events have occurred: 1. In December 1999 and January 2000, JNC Opportunity Fund Ltd., the holder of 600 shares of 5% Series A Convertible Preferred Stock, converted a total of 356 shares of Series A Preferred Stock and accrued dividends into shares of the Company's common stock. A total of 626,835 shares of common stock were issued. 2. In January and February 2000, the Company raised $13.9 million (net of expenses) from the sale of approximately 3.2 million shares of 6% Series B Convertible Preferred Stock. 3. In February 2000, the Company sold its approximately 9% interest in Systeam, S.p.A. for $1.2 million in cash. A gain on the sale of approximately $0.4 million will be recorded in the fourth quarter of fiscal 2000. 4. In May 2000, the Board of Directors approved a plan that included the discontinuance of the Company's switch business. The financial statements have been restated to present the operations of the switch business as discontinued operations (see Note 2.) 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General - --------------- Discontinuance of Switch Segment In May 2000, we decided to discontinue and dispose of our switch business including the manufacture, development, sale and service of DSS Switches and IP Gateway equipment. Prior to the May 2000 decision, this segment was our largest segment in terms of revenues. Expected operating results relating to the discontinued operations from April 1, 2000 until the expected disposal date will be included in the estimated loss on disposal and will be recorded as a charge in the consolidated financial statements in the fourth quarter of fiscal 2000. The Company expects to record a charge for estimated loss on disposal of the switch business of approximately $10.0 million in fiscal 2000, which includes an estimated $3.0 million of expected losses of the segment for the first two quarters of fiscal 2001. The Company expects to dispose of the segment by the end of the second quarter of fiscal 2001. Following this decision to discontinue the operations of the telecommunications switching business, our business is reported for as one continuing operating segment, long distance services. As a result of the discontinuances, dispositions, acquisitions and other events described above, the comparison of year-to-year results may not be meaningful. Results of Operations - ------------------------------------ The results for the third quarter and nine months ended December 31, 1999 and the comparative historical results have been restated to reflect the operations of our DSS Switch business segment separately as discontinued operations. The following discussion relates to the continuing operations of the long distance services and our corporate administration offices. The long distance services business was comprised of two subsidiaries: AGT, which was acquired in April 1998 and sold in October 1999; and INET, which was acquired in September 1998. Three Months Ended December 31, 1999 versus Three Months Ended December 31, 1998 - -------------------------------------------------------------------------------- The continuing operations of the two international long distance service subsidiaries that were acquired during fiscal 1999 generated revenues of $2.9 million in the third quarter of fiscal 2000 compared to $3.8 million for the third quarter of fiscal 1999, a decrease of $0.9 million, or 24%. This decrease was primarily due to the decrease of $1.9 million, or 50%, of revenues from AGT between the two periods as a result of its sale in October 1999. Revenues of INET between the two periods increased by $0.7 million, or 32%, primarily due to increased sales from international long distance services provided to Asia. Cost of sales for the third quarter of fiscal 2000 were $2.6 million, compared to $3.5 million for the prior quarter, a decrease of $0.9 million, or 26%. The decrease in cost of sales primarily results from the sale of AGT in October 1999 offset by increases in cost of sales of INET of $0.6 million, or 30% due to the increase in the volume of traffic carried. Gross profit on the continuing long distance services was $0.3 million for the third quarter of fiscal 2000 and of fiscal 1999. The slight improvement in gross profit as a percentage of revenue was primarily due to more utilization of the fixed costs of the INET switching equipment. 10 Selling and administrative expenses of the continuing operations for the third quarter of fiscal 2000 were $1.8 million, compared to $2.7 million for the third quarter of fiscal 1999, a decrease of $0.9 million, or 33%. This decrease was primarily due to the sale of AGT in October 1999 and reductions in corporate marketing and administrative expenses. Selling and administrative expenses as a percentage of revenues for the third quarter of fiscal 2000 were 63%, compared to 71% for the third quarter of fiscal 1999. The operating loss for the third quarter of fiscal 2000 was $1.5 million, compared to $2.4 million in the third quarter of fiscal 1999, a decrease of $0.9 million, or 38%. This decrease was primarily due to decreases in cost of sales and selling and administrative expenses described above that exceeded the decrease in revenues. Interest expense for the third quarter of fiscal 2000 was $0.4 million, compared to $0.2 million for the third quarter of fiscal 1999. The increased expense resulted primarily from an increase in notes payable. Loss from continuing operations for the third quarter of fiscal 2000 was $1.9 million, compared to $2.6 million for the third quarter of fiscal 1999, a decrease of $0.7 million, or 27%. The decrease resulted primarily from the reduced level of selling and administrative expenses discussed above. The loss from discontinued operations for the third quarter of fiscal year 2000 was $3.1 million, compared to $1.5 million in the third quarter of fiscal 1999, an increase of $1.6 million or 107%. This increase was primarily due to decreases in revenues of $5.2 million for the period, resulting from a reduction in orders received for equipment shipments in the quarter and from lower margins on equipment sales. Margin decreased from 26% to 3% due mainly to deferral of profit of $2.3 million related to switching equipment supplied under extended payment terms granted to customers who are in process of obtaining third party lease financing. This profit will be recognized when the Company receives payment from these customers. Nine Months Ended December 31, 1999 versus Nine Months Ended December 31, 1998 - -------------------------------------------------------------------------------- The continuing operations acquired during fiscal 1999 generated revenues of $7.2 million in the first nine months of fiscal 2000 compared to $4.6 million for the first nine months of fiscal 1999, an increase of $2.6 million, or 57%. This increase was primarily due to $4.6 million of revenues generated through INET, which was acquired in September 1998, offset by a decrease in revenues of $2.0 million for AGT. The decrease in revenues of AGT primarily results from its sale in October 1999. Cost of sales for the first nine months of fiscal 2000 were $6.1 million, compared to $4.5 million for the prior period, an increase of $1.6 million, or 36%. The increase in cost of sales primarily results from our acquisition of INET and also reflects the increase in the sales volume, offset by decreases in cost of sales of AGT resulting from its sale. Gross profit on the continuing long distance services for the first nine months of fiscal 2000 was $1.1 million, compared to $0.1 million for the prior period. The improvement in gross profit was primarily due to the increases in revenue generated by INET, with improved margins from the more profitable international traffic to Asia. Selling and administrative expenses of the continuing operations for the first nine months of fiscal 2000 were $6.8 million, compared to $4.8 million for the first nine months of fiscal 1999, an increase of $2.0 million, or 42%. This 11 increase was primarily related to the additional selling and administrative expenses incurred by INET which was acquired in the third quarter of fiscal 1999, offset by the reduction in expenses related to AGT, which was sold in the third quarter of fiscal 2000. The operating loss for the first nine months of fiscal 2000 was $5.7 million, compared to $4.7 million in the first nine months of fiscal 1999, an increase of $1.0 million, or 21%. This increase was primarily due to the increase in selling and administrative expenses described above offset by the improvement in gross profit. Interest expense for the first nine months of fiscal 2000 was $1.1 million, compared to $0.3 million for the first nine months of fiscal 1999. The increased expense results from a $4.9 million increase in notes payable and a $0.3 increase in borrowings under a line of credit. Non-operating income for the first nine months of fiscal 2000 was $6.4 million, compared to non-operating expense of $0.3 million in the first nine months of fiscal 1999. Non-operating income in the first nine months of fiscal 2000 included a $6.2 million non-cash gain recorded on the Company's sale of AGT. Non-operating expense in the first nine months of fiscal 1999 consisted primarily of losses on the sale of marketable securities. Loss from continuing operations for the first nine months of fiscal 2000 was $0.4 million, compared to $5.2 million for the first nine months of fiscal 1999, a decrease of $4.8 million or 92%. The decrease resulted primarily from the $6.2 million non-cash gain from the sale of AGT and the other reasons discussed above. The loss from discontinued operations for the first nine months of fiscal year 2000 was $7.9 million, compared to $1.3 million in the first nine months of fiscal 1999, a increase of $6.6 million. This increase was primarily due to decreases in revenues of $12.4 million for the period and a decrease in margins from 41% to 21%. This decrease is mainly due to deferrals of profit in the first nine months of $9.6 million relating to switching equipment supplied under extended payment terms to customers who are in the process of obtaining third party lease financing. This profit will be recognized when the Company receives payment from these customers. Liquidity and Capital Resources - --------------------------------------- As of December 31, 1999, we had a negative working capital of $4.3 million. During the first nine months of fiscal 2000 we used $13.2 million compared to using $3.6 million during the first nine months of fiscal 1999. This decline in operating cash flow is due primarily to the increase in the losses incurred in the continuing long distance services and in the discontinued switch business as well as increases in working capital required to support the discontinued switch business operations. We used cash for investing activities of $1.9 million during the first nine months of fiscal 2000 compared to $4.8 million used in the corresponding period of fiscal 1999. Capital expenditures on equipment purchases of $1.0 million in the first nine months of fiscal 2000 represented an increase of $0.4 million from the corresponding period of the prior fiscal year. Purchases were primarily for additional switching equipment required to support the expansion of the international long distance services business. Net cash used in investing activities in fiscal 2000 also included cash paid in connection with increases in investment in affiliates of $0.4 million. Investment expenditure on discontinued operations of $0.4 million comprised capital expenditure on equipment and software for the first nine months of fiscal 2000 compared to $2.8 million in the prior year. 12 Financing activities during the third quarter of fiscal 2000 provided $5.3 million, including $2.3 million from the exercises of stock options and warrants, $2.4 million from increases in notes payable and a $0.4 million increase in borrowings under a line of credit. Net cash provided by financing activities for the first nine months of fiscal 2000 was $14.4 million, compared to $6.8 million for the corresponding period of fiscal 1999. This increase of $7.6 million results primarily from the net proceeds of a private placement in May 1999 of $10.2 million, increases of $4.9 in notes payable and $3.4 million from the exercise of stock options and warrants offset by a $4.0 million cost of redemption of 100 shares of Series A Preference Shares. In July 1999, we received an offer for a commitment for a stand-by credit facility from certain shareholders that would provide a funding commitment to us of $3.5 million. The shareholders offering this facility were Strategic Restructuring Partnership, Mr. Alan J. Andreini, Junction Investors, Ardent Research Partners and Mr. Fred Stein. This facility would be secured by the stock of INET, bear 12.5% interest on the outstanding principal balance and be repayable on March 31, 2000. We intend to enter into a definitive agreement only if these funds are needed to support the operation. During the third quarter of 1999, the Company completed and received funding under a series of two demand loans. The first loan for a total amount of $600,000 was provided to the Company by Mr. Fiedler in the amount of $175,000, by Mr. Latham in the amount of $75,000 and by Mr. Alan J. Andreini, an affiliate shareholder of the Company, in the amount of $350,000 in October 1999. This loan bore interest at bank's prime rate plus 1% per year (9.25% at December 31, 1999), was repayable on demand and was secured against the Company's investment in Systeam, S.p.A. The second loan for a total amount of $1,225,000 was provided to the Company by Mr. Richard L. Haydon, an affiliate shareholder of the Company, in the amount of $500,000, by Mr. Alan J. Andreini in the amount of $225,000 and by three non-affiliate shareholders in a combined total amount of $500,000 in November 1999. This loan bore interest at the rate of 17.5% per year and was repayable, on demand by the lenders, no earlier than March 31, 2000. The maximum term of the loan was three years to November 2002. This loan was secured by a pledge of shares of the common stock of INET Interactive Network System, Inc., a wholly owned subsidiary of the Company. Under the terms of this loan, the lenders were granted, pro-rata, a combined total of 73,500 three-year warrants to purchase shares of common stock of the Company at an exercise price of $4.50 per share. The warrants will result in a non-cash interest expense charge of $0.3 million recognized over the term of the debt. Of the above funding, $475,000 was received by the Company during the quarter ended September 30, 1999 and $1,350,000 was received by the Company during October and November 1999. These borrowings together with the accrued interest were fully repaid in February and April 2000. We had capital lease obligations of $2.6 million at December 31, 1999 payable through 2004. We have a $2.2 million revolving line of credit secured against certain trade receivables. As at December 31, 1999, $1.4 million had been drawn against the line representing the maximum amount available at that time. This line of credit bears interest at the bank's prime rate (8.25% at December 31, 1999) plus 4%. The line of credit expires on June 30, 2000. We have a long-term obligation in the amount of $1.6 million in connection with principal and interest due on subordinated debentures, which bear interest of 11.25% per year. The debentures mature in the year 2002 and interest only is due until such time. 13 In January and February 2000, we completed two private placements with accredited investors and sold 3,157,895 shares of our 6% Series B Preferred Stock at $4.75 per share. The total cash we received was $13.9 million, net of fees and expenses associated with the placements. In February 2000, we completed the sale of our investment in Systeam, S.p.A. and received a cash payment of $1.2 million. A gain on the sale of this investment of approximately $0.4 million will be recorded in the fourth quarter of fiscal 2000. In March 2000, four of our customers completed third party lease contracts in respect of $14.2 million of switching equipment previously sold under extended payment terms. In April 2000, we received net payments of $11.5 million. We expect to receive the remaining balance of $2.7 million once the lessees complete their payment obligations to the lessor. We believe that we will be able to continue to fund our operations and acquisitions by obtaining additional outside financing; however, we cannot assure you that we will be able to obtain the necessary financing when needed on acceptable terms or at all. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company is not currently subject to a significant level of direct market risk related to foreign currency exchange rates, commodity prices or equity prices. The Company has no derivative instruments and does not expect to derive a material amount of its revenues from interest bearing securities. Currently the Company has no significant foreign operations. To the extent that the Company establishes significant foreign operations in the future, it will attempt to mitigate risks associated with foreign currency exchange rates contractually and through the use of hedging activities and other means considered appropriate. The Company holds no equity market securities, but does face equity market risk relative to its own equity securities. This risk is most likely to be manifested by influencing the Company's ability to raise debt or equity financing, if needed. Our primary market risk exposure is interest rate risk related to our borrowings under our revolving line of credit. Interest Rate Sensitivity Model - --------------------------------- The table below presents the principal (or notional) amounts and related interest of our borrowings by expected maturity dates. The table presents the borrowings that are sensitive to changes in interest rates and the effect on interest expense of future hypothetical changes in such rates. Twelve Months Ended December 31 ------------------------------- (U.S. Dollars - Thousands) 1999 2000 2001 2002 ---- ---- ---- ---- Line of credit borrowings $1,414 $1,000 $500 $500 Interest expense (A) 120 85 43 43 Interest expense (B) 134 95 48 48 Interest expense (C) 106 75 38 38 - The borrowings bear interest at the bank's prime rate plus 1/2% for the line of credit. 14 - The interest expense shown for line (A) is based upon the actual bank's prime rate at December 31, 1999 of 8.25%. - The interest expense shown for line (B) is based upon a hypothetical increase of one percentage point in the bank's prime rate to 9.25%. - The interest expense shown for line (C) is based upon a hypothetical decrease of one percentage point in the bank's prime rate to 7.50%. Forward Looking Statements - ----------------------------------------- All statements other than historical statements contained in this Report on Form 10-Q constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limitation, these forward looking statements include statements regarding new products to be introduced by the Company in the future, statements about the Company's business strategy and plans, statements about the adequacy of the Company's working capital and other financial resources, and in general statements herein that are not of a historical nature. Any Form 10-K, Annual and Quarterly Reports to Shareholders, Form 10-Q, Form 8-K or press release of the Company may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made or may in the future be made by the Company, including statements regarding future operating performance, short- and long-term revenue and earnings estimates, backlog, the status of litigation, the value of new contract signings, and industry growth rates and the Company's performance relative thereto. These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from such statements. These include, but are not limited to: risks associated with recent operating losses, no assurance of profitability, the need to increase sales, liquidity deficiency and, in general, the other risk factors set forth in the Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 1999. The Company does not undertake any obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. 15 PART II. OTHER INFORMATION ------------------------------------ ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - -------------------------------------------------------------------------------- c) Information regarding issuances of equity securities not registered under the Securities Act of 1933 is incorporated by reference from Notes 4 and 5 of the Condensed Consolidated Financial Statements in Item 1 of Part I. The sale of such securities was exempt from registration under Section 4(2) of the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- a) Exhibits: 3.01 Restated Certificate of Incorporation, as amended September 1, 1992 (incorporated herein by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8 Reg. No. 333-63017). 3.02 By-Laws of the Company incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended March 31, 1997. 4.01 Certificate of Designations, Preferences and Rights of Series B Preferred Stock, filed January 31, 2000 (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K filed on February 14, 2000). 27 Financial Data Schedule b) Reports on form 8-K: (1) A Form 8-K dated November 18, 1999 was filed by the Company on December 1, 1999; reporting the termination of the SEC's previously disclosed staff inquiry, under Item 5, Other Events. (2) A Form 8-K dated October 27, 1999 was filed by the Company on November 12, 1999, reporting the completion of the sale of the Company's approximately 80% membership interest in Coyote Gateway to AGTI on October 27, 1999, pursuant to a Purchase Agreement dated September 30, 1999, under Item 2, Acquisitions or Dispositions of Assets, and Item 7, Financial Statements and Exhibits (3) A Form 8-K/A dated October 27, 1999 was filed by the Company on January 10, 2000, amending the Form 8-K filed on November 12, 1999 to include pro forma financial information under Item 7, Financial Statements and Exhibits. 16 SIGNATURES ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COYOTE NETWORK SYSTEMS, INC. DATE: May 26, 2000 By: /s/ James R. McCullough ----------------------------- James R. McCullough Chief Executive Officer (Principal Executive Officer) DATE: May 26, 2000 By: /s/ Brian A. Robson ----------------------------- Brian A. Robson Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 17 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF COYOTE NETWORKS SYSTEMS, INC. AS OF AND FOR THE QUARTER ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-2000 OCT-01-1999 DEC-31-1999 613 0 3537 (186) 0 6151 4456 (440) 22103 10491 1464 0 5900 14495 (12249) 22103 2858 2858 2578 2578 1813 0 420 (1929) 0 (1929) (3113) 0 0 (5042) (.39) (.39)
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