-----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, UdovxlehvukVxV14sFkJsv6Jwv/QXrJxYwkq9XYF76prXdIcuwE2Sqn3lAprnuzk a+cxbrqjIEGnI2X0zHMnkQ== 0000057201-99-000024.txt : 19991117 0000057201-99-000024.hdr.sgml : 19991117 ACCESSION NUMBER: 0000057201-99-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COYOTE NETWORK SYSTEMS INC CENTRAL INDEX KEY: 0000057201 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 362448698 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05486 FILM NUMBER: 99755968 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 1 QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 9, 1999, the Registrant had issued and outstanding an aggregate of 13,094,049 shares of its common stock. ================================================================================ COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets.............................................. 2 Statement of Operations..................................... 3 Statement of Cash Flows..................................... 4 Notes to Financial Statements............................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 11 Item 2. Changes in Securities and Use of Proceeds................... 11 Item 3. Defaults upon Senior Securities............................. 11 Item 4. Submission of Matters to a Vote of Security Holders......... 11 Item 5. Other Information........................................... 11 Item 6. Exhibits and Reports on Form 8-K............................ 11 Signatures ............................................................ 13 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - -------------------------------------------- COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In Thousands)
Sept. 30, 1999 March 31, 1999 Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,036 $ 1,225 Receivables (including deferred profit of $10,550 at 9/30/99), net of allowance of $522 at September 30, 1999 and $402 at March 31, 1999 19,447 10,092 Inventories 2,392 2,130 Notes receivable - current 352 2,367 Other current assets 1,548 4,323 --------- --------- Total current assets 24,775 20,137 Property and equipment, net 6,939 8,192 Capitalized software development 2,008 1,604 Intangible assets, net 5,259 5,620 Net assets of discontinued operations --- 234 Notes receivable - non-current 928 871 Investments 1,550 1,550 Other assets 2,729 2,820 --------- --------- $ 44,188 $ 41,028 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Lines of credit $ 1,008 $ 1,133 Accounts payable 7,551 8,161 Deferred revenue and customer deposits 13,702 5,611 Accrued professional fees and litigation costs 211 676 Other accrued liabilities 4,699 3,900 Current portion of long-term debt and capital lease obligations 1,004 1,315 --------- --------- Total current liabilities $ 27,975 $ 20,796 Notes payable --- 8,183 Long-term debt 1,464 1,534 Capital lease obligations 1,634 1,830 Customer deposits and other liabilities 2,628 2,628 Commitments and contingencies Shareholders' equity: Preferred stock - $.01 par value: authorized 5,000,000 shares; issued 600 and 700 shares, liquidation preference of $10,000 per share 6,000 7,255 Common stock - $1 par value: authorized 30,000,000 shares, issued 13,677,496 and 11,167,456 shares 13,678 11,167 Additional paid-in capital 115,925 109,394 Accumulated deficit (119,359) (116,002) Treasury stock at cost (5,757) (5,757) ---------- ---------- Total shareholders' equity 10,487 6,057 --------- --------- $ 44,188 $ 41,028 ========= =========
See notes to condensed consolidated financial statements. 2 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In Thousands, Except Per Share Amounts)
3 MONTHS ENDED 6 MONTHS ENDED --------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net sales - product $ 5,069 $14,444 $13,615 $21,508 - long distance services 2,449 720 4,308 849 ------- ------- ------- ------- Total 7,518 15,164 17,923 22,357 ------- ------- ------- ------- Cost of sales - product 4,285 8,419 10,174 11,477 - long distance services 2,099 890 3,512 1,052 ------- ------- ------- ------- Total 6,384 9,309 13,686 12,529 ------- ------- ------- ------- Gross profit (loss) - product 784 6,025 3,441 10,031 - long distance services 350 (170) 796 (203) ------- -------- ------- -------- Total 1,134 5,855 4,237 9,828 ------- ------- ------- ------- Selling and administrative expenses 4,594 3,155 8,674 6,095 Engineering, research and development 1,944 2,431 4,164 4,368 ------- ------- ------- ------- Total operating expenses 6,538 5,586 12,838 10,463 ------- ------- ------- ------- Operating income (loss) (5,404) 269 (8,601) (635) Interest expense (482) (27) (834) (42) Non-operating income (expense) 6,287 (721) 6,392 (880) ------- -------- ------- -------- Profit (loss) from continuing operations 401 (479) (3,043) (1,557) Profit (loss) from discontinued operations (4) (900) (314) (900) -------- -------- -------- -------- Net profit (loss) $ 397 $(1,379) $(3,357) $(2,457) ======= ======== ======== ======== Profit (loss) per common share (basic & diluted): Continuing operations $ .03 $ (.05) $ (.25) $ (.17) Discontinued operations --- (.09) (.03) (.10) ------- -------- --------- -------- Net profit (loss) per common share (basic & diluted) $ .03 $ (.14) $ (.28) $ (.27) ======= ======== ======== ======== Weighted average number of common shares outstanding - basic 12,704 9,586 11,960 9,125 - diluted 15,601 9,586 11,960 9,125
See notes to condensed consolidated financial statements. 3 COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands)
6 MONTHS ENDED ------------------------------ Sept. 30, 1999 Sept. 30, 1998 Operating activities: -------------- -------------- Net loss $(3,357) $(2,457) Adjustments to reconcile loss to net cash provided (used) by operating activities: Depreciation and amortization 1,057 578 Gain on sale of land --- (17) Gain on sale of Coyote Gateway, LLC (6,209) Provision for loss on discontinued operations 310 900 Provision for common stock warrants issued 455 485 Net change in discontinued operations (76) (163) Changes in current assets and liabilities (85) 10,319 -------- ------- Net cash provided (used) by operating activities (7,905) 9,645 -------- ------- Investing activities: Purchases of property and equipment (1,257) (2,338) Proceeds from sales of marketable securities --- 16 Proceeds from sale of land --- 67 Change in notes receivable 40 270 Increase in investments in affiliate (383) (400) Cash investment in INET --- (1,333) ------- -------- Net cash provided (used) by investing activities (1,600) (3,718) -------- -------- Financing activities: Repayments of long-term debt and capital lease obligations (309) (71) Common stock issued, net of expenses 11,332 306 Redemption of preferred stock (4,000) Increase in note payable 2,417 --- Decrease in borrowing on line of credit (124) --- Preference stock issued net of expenses --- 6,345 Preference stock dividends paid --- (29) ------- -------- Net cash provided by financing activities 9,316 6,551 ------- ------- Increase (decrease) in cash and cash equivalents (189) 12,478 Cash and cash equivalents: At beginning of the period 1,225 3,746 ------- ------- At end of the period $ 1,036 $16,224 ======= ======= Non-cash transactions: Issuance of common stock warrants 455 485 Conversion of convertible notes and interest into common stock --- 3,407 Discount granted for investment in affiliate --- 900 Issuance of common stock for INET acquisition --- 1,686 Conversion of Class B Units into common stock 330 --- Gain on sale of Coyote Gateway, LLC 6,209 ---
See notes to condensed consolidated financial statements. 4 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 months ended September 30, 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 for the fiscal year ended March 31, 1999. The computation of profit or loss per common share is determined by using the weighted average number of shares of common stock outstanding during each period. NOTE 2 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 the 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. 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 relieved of its obligations under its pledge agreement with Prinvest which 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 for 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 purchase discount on all Company-manufactured switches it purchases from the Company during this time period. Coyote Communications Services, LLC, an affiliate of the Company, 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. 5 NOTE 3 BUSINESS SEGMENT INFORMATION - ------------------------------------------ In addition to operating the telecom switching equipment business segment, in fiscal 1999, the Company acquired Coyote Gateway (April 1998) and INET Interactive Network System, Inc. (September 1998) and through these subsidiaries operates an international long distance services business segment. The accounting policies are the same for all segments; however, the Company evaluates performance based on operating income. The telecom switching equipment business segment consists solely of the operations of Coyote Technologies, LLC. Information by industry segment is as follows (in thousands):
3 Months Ended 6 Months Ended ------------------------------- ------------------------------- Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998 -------------- -------------- --------------- -------------- Net Sales: Switching equipment $ 5,069 $14,444 $13,615 $21,508 Long distance services 2,449 720 4,308 849 ------- ------- ------- ------- $ 7,518 $15,164 $17,923 $22,357 ======= ======= ======= ======= Operating Profit (Loss): Switching equipment (2,988) 1,133 (4,439) 1,084 Long distance services (1,778) (632) (2,881) (947) Corporate (638) (232) (1,281) (772) -------- -------- -------- -------- $(5,404) $ 269 $(8,601) $ (635) ======== ======= ======== ======== Depreciation and amortization: Switching equipment 271 249 571 510 Long distance services 271 3 381 15 Corporate 50 50 105 53 ------- ------- ------- ------- $ 592 $ 302 $ 1,057 $ 578 ======= ======= ======= ======= Capital expenditures: Switching equipment 106 358 137 900 Long distance services 214 484 710 650 Corporate 1 11 6 25 ------- ------- ------- ------- $ 321 $ 853 $ 853 $ 1,575 ======= ======= ======= ======= Identifiable assets: Switching equipment 27,104 20,784 Long distance services 8,559 13,510 Discontinued operations --- 172 Corporate 8,925 13,038 ------- ------- $44,188 $47,504 ======= =======
Effective September 30, 1999, the Company sold its interest in Coyote Gateway (See Note 2 above). Sales, operating losses, depreciation and capital expenditures of $425, $1,602, $59 and $346, respectively, of Coyote Gateway are included in the Company's long distance services business segment information of Coyote Gateway. The identifiable assets as at September 30, 1999, however, exclude the assets of Coyote Gateway. 6 NOTE 4 SHAREHOLDERS' EQUITY - ------------------------------------------- Options and Warrants - --------------------------------- In September 1999, the Board of Directors approved an amendment to the Coyote Technologies, LLC Employees Non-Qualified Stock Option Plan, increasing the number of underlying shares of the Company common stock available to be granted under the plan from 2,100,000 to 4,000,000. During the quarter ended on September 30, 1999, the Board of Directors granted options to purchase a total of 608,750 shares of the Company's common stock to certain employees. During the quarter ended on September 30, 1999, in consideration for administrative consulting services, the Board of Directors granted options to purchase a total of 302,500 shares of the Company's common stock to certain outside consultants. A fair market value of $355,000 was recorded as administrative expense for these options. The fair market value was determined using the Black Scholes model. In September 1999, an officer converted 174 Class B Units into 95,813 shares of the Company's common stock in accordance with the terms of conversion available to the holder. In September 1999, an officer exercised warrants to acquire 75,075 shares of the Company's common stock at an exercise price of $2.86 per share. During the quarter ended September 30, 1999, a total of 195,566 vested options were exercised 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 September 1999, Mr. James J. Fiedler, the Company's Chairman and Chief Executive Officer, exercised warrants to acquire 75,075 shares of Company common stock at an exercise price of $2.86 per share. In September 1999, Mr. Daniel W. Latham, the Company's President and Chief Operating Officer, converted 174 Class B Units into 95,813 shares of Company common stock. This conversion was made in accordance with the conversion terms available to holders of Class B Units. Since August 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. This loan bears interest at bank's prime rate plus 1% per year, is repayable on demand and is 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. This loan bears interest at the rate of 17.5% per year and is repayable, on demand by the lenders, no earlier than March 31, 2000. The maximum term of the loan is three years to November 2002. This loan is secured by 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 have been 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. Of the above funding, $475,000 was received by the Company during to the quarter ended September 30, 1999 and $1,350,000 was received by the Company during October and November 1999. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Results of Operations for the Quarter Ended September 30, 1999 - -------------------------------------------------------------- For the second quarter of fiscal year 2000, we had revenues of $7.5 million, representing a $7.6 million, or a 50% decrease from the second quarter of the prior fiscal year and a 28% decrease from the previous quarter. Shipments of DSS Switches and related product services were $5.1 million compared to $14.4 million in the prior year and $8.6 million in the previous quarter. The international long distance service subsidiaries that were acquired during the prior fiscal year generated revenues of $2.4 million, representing an increase of 33% over the prior quarter and an increase of 288% over the corresponding quarter of the prior year. Total revenues for the fiscal year to date are $17.9 million, representing a decrease of 20% from the first six months of the prior fiscal year. Shipments of switching equipment were supplied under contracts to two customers during the quarter, representing $4.7 million of the switching equipment revenues. We have granted extended payment terms to these customers while they are in the process of seeking lease financing for their capital purchases. In view of the extended payment terms and the comparatively short operating history of these customers, we have deferred recognition of all of the profit ($3.3 million) attributable to these shipments until payment is received or all contingencies are removed. The revenue generated from switching equipment is $5.1 million in the quarter with a gross margin of 15%. If the gross margin for the switching equipment was not impacted by the $3.3 million profit deferral described above, the gross margin on revenue of $5.1 million would be 80% compared to 42% in the second fiscal quarter of the prior year. The international long distance service subsidiaries that were acquired during the prior fiscal year generated a gross margin of $0.4 million or 14% of long distance service revenues during the quarter ended September 30, 1999. The total gross margin for all lines of business for the second fiscal quarter is $1.1 million, or 15% of total revenues, as compared to $5.9 million or 41% of total revenues for the second quarter of the prior fiscal year. The total gross margin for the fiscal year to date is $4.2 million or 24% of total revenues, as compared to $9.8 million or 46% of total revenues for the first six months of the prior fiscal year. Selling and general administrative expenses for the second fiscal quarter were $4.6 million compared to $3.2 million for the second quarter of the prior fiscal year. The increase is primarily related to the additional operating expenses incurred by the long distance service providers acquired in fiscal 1999. As a proportion of total revenues, the selling and general administrative expenses increased to 61% from 39% in the prior quarter and from 22% in the second quarter of the prior fiscal year. Engineering, research and development expenses for the second quarter of fiscal 2000 were $1.9 million, or 26% of sales, as compared with $2.2 million, or 21% of sales, for the first quarter and $2.4 million, or 16% of sales, for the second quarter of the prior fiscal year. We have continued to enhance product offerings to meet current and anticipated customer demand, including further refinement of our client/server architecture on our switch and the development of voice over Internet Protocol. The operating loss for the second quarter is $5.4 million versus a loss of $3.2 million in the first quarter and an operating income of $0.3 million in the second quarter of the prior fiscal year. The operating loss for the fiscal year to date is $8.6 million, an increase of $8.0 million over the operating loss for the first six months of the prior fiscal year. The increase in the operating loss is primarily the result of the lower equipment sales and the lower gross margin due to the profit deferrals referred to above as well as the increased operating expenses incurred in support of the long distance service subsidiaries. Interest expense for the quarter is $0.5 million versus $0.02 million for the second quarter of the prior fiscal year. The increased expense is comprised entirely of financing costs related to the operations of the international long distance service subsidiaries. 8 Non-operating income for the quarter of $6.3 million includes a $6.2 million non-cash gain recorded on the Company's sale of its long distance service subsidiary Coyote Gateway. An affiliate of one of our sources of lease financing owns a majority of the buyer, AGTI, and was owed the debt which was assumed by AGTI in the sale. The net income from continuing operations for the second quarter of fiscal 2000 is $0.4 million versus a net loss of $0.5 million for the corresponding quarter of the prior year. The income represents a basic and fully diluted earnings per common share of $0.03 versus a loss of $0.05 for the corresponding quarter of the prior year. The net loss for the six months of fiscal 2000 is $3.4 million or $0.28 per common share compared to a net loss of $2.5 million or $0.27 per common share for the corresponding six-month period of the prior year. Liquidity and Capital Resources - ------------------------------------------- We used cash from operating activities of $3.6 million during the second quarter of fiscal 2000, compared to providing $8.7 million during the second quarter of fiscal 1999. During the first six months of fiscal 2000 we used $7.9 million compared to providing $9.6 million during the first six months of fiscal 1999. This decline in operating cash flow is due primarily to the increase in the operating loss and the increase in working capital required to support the extended payment terms granted to our customers while they are in the process of obtaining lease financing. We used cash for investing activities of $1.6 million during the first six months of fiscal 2000 compared to $3.7 million used for investing activities in the corresponding period of fiscal 1999. Capital expenditures on equipment purchases and software of $1.3 million in the first six months of fiscal 2000 represented a reduction of $1.0 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 segment of the business and software for certain Internet Protocol and compression capabilities. 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. Financing activities during the second quarter of fiscal 2000 provided $3.0 million, including $1.1 million from the exercises of stock options and warrants, $1.7 million from increases in notes payable and a $0.2 million increase in borrowings under a line of credit. In connection with the sale of our approximately 80% membership interest in Coyote Gateway on September 30, 1999, the Coyote Gateway liability for notes payable of $10.2 million was assumed by the buyer, AGTI. We have a $2.2 million revolving line of credit secured against certain trade receivables. As at September 30, 1999, $1.0 million has 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 plus 4%. The line of credit expires on February 29, 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. At September 30, 1999, we have a negative working capital of $3.2 million and we are currently exploring means of raising additional capital through debt and equity financing to fund our immediate working capital needs. As part of this activity, we have recently completed and received $1.8 million in funding on two demand loans. The first loan, which is for a total amount of $0.6 million, bears interest at the bank's prime rate plus 1% per year, is repayable on demand and is secured by our investment in Systeam, S.p.A. The second loan, which is for a total amount of $1.2 million, bears interest at the rate of 17.5% per year and is repayable on demand after March 31, 2000. The maximum term of this loan is three years to November 2002 and is secured by our investment in our wholly owned subsidiary INET Interactive Network System, Inc. Under the terms of this second loan, the lenders, certain of whom are affiliates of ours, have also been granted three-year warrants to purchase a combined total of 73,500 shares of our common stock at an exercise price of $4.50 per share. 9 We believe that we will be able to continue to fund our operations and acquisitions by obtaining additional outside financing; however, there can be no assurance that we will be able to obtain the necessary financing when needed on acceptable terms or at all. 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 for the fiscal year ended March 31, 1999. The Company disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------------------------------- Please see Note 7 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999, for information on various legal proceedings. There are no material developments to report at this time. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - -------------------------------------------------- c) Issuances of equity securities not registered under the Securities Act of 1933 are described in Note 5 of the Condensed Consolidated Financial Statements. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - --------------------------------------------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ Not applicable. ITEM 5. OTHER INFORMATION - --------------------------------------------------- Not applicable. 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 Form of Demand Loan Agreement between the Company and certain affiliate and non-affiliate shareholders dated November 1, 1999. 4.02 Form of Pledge Agreement between the Company and certain affiliate and non-affiliate shareholders dated November 1, 1999. 4.03 Form of Common Stock Purchase Warrant Certificate between the Company and certain affiliate and non-affiliate shareholders dated November 1, 1999. 27 Financial Data Schedule 11 b) Reports on Form 8-K: (1) A Form 8-K was filed by the Company on July 2, 1999, which covered: Item 5. Other Events At a hearing on May 24, 1999, the district court granted final approval to the settlement of the stockholder class action litigation against the Company and certain of its officers and directors. The settlement consisted of $8,000,000 in cash, all of which will be provided by the Company's insurance carriers and three-year warrants to purchase up to 2,225,000 shares of common stock at (i) $9.00 per share during the first year, (ii) $10.00 per share during the second year and (iii) $11.00 per share during the last year prior to expiration. Certain charges with respect to the issuance of warrants were fully reserved for in the Company's financial statements for the fiscal year ended March 31, 1998. (2) A Form 8-K was filed by the Company on November 12, 1999, which covered: Item 2. Acquisition or Disposition of Assets Pursuant to the Purchase Agreement dated September 30, 1999, on October 27, 1999, the Company completed the sale of its approximately 80% membership interest in Coyote Gateway to AGTI. 12 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: November 15, 1999 By: /s/ James J. Fiedler ------------------------------ James J. Fiedler Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: November 15, 1999 By: /s/ Brian A. Robson ------------------------------ Brian A. Robson Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 13 EX-4.01 2 FORM OF DEMAND LOAN AGREEMENT Demand Loan Agreement This Agreement, dated as of November 1, 1999, is by and between Coyote Network Systems, Inc. ("CNS") and ____________________________ ("Lender"): 1. Term Loan. Lender agrees to loan CNS $__________ (the "Loan"), and CNS agrees to repay the Loan, under the following terms and conditions: (a) The principle balance of the Loan shall bear interest at the rate of 17.5 % per annum, payable in quarterly installments of interest only. (b) The full principal balance and any accrued interest on the Loan shall be due and payable on the third anniversary of this Agreement (the "Due Date") or thirty (30) days following CNS' receipt of written demand by the Lender for repayment ("Demand Date"), provided, however that the Lender agrees not to issue such demand before March 1, 2000. (c) CNS may prepay the Loan, or any part of it, at any time prior to the Due Date without premium or penalty. 2. Security. The Loan shall be secured by CNS's pledge of _________ shares of the common stock of INET Interactive System, Inc., in accordance with the Stock Pledge Agreement attached as Exhibit A hereto and incorporated herein by reference. 3. Default. If CNS fails to make a quarterly interest payment within 15 day of the date upon which it is due, or if CNS fails to make full payment on the Due Date or Demand Date, Lender shall have the right to declare a default, accelerate the full balance outstanding, and to pursue its rights under this Agreement and the stock pledge. Following default, any amounts due and owing shall bear interest at 18% per annum. 4. Warrants. As an additional inducement to the Lender, CNS has granted Lender _________ warrants to purchase shares of CNS common stock at an exercise price of $4.50 per share, pursuant to the warrant agreement attached as Exhibit B. 5. CNS Representations and Warranties. CNS represents and warrants as follows: 1 (a) It is a Delaware Corporation in good standing; (b) The INET shares pledged hereunder are duly issued, validly authorized and free and clear of any other liens or encumbrances; (c) The CNS shares that are the subject of Section 4 will be duly issued, validly authorized, and will be free and clear of any liens and encumbrances upon exercise of the warrants referenced in Section 4; and (d) This Agreement has been duly authorized by CNS, constitutes a valid and binding obligation of CNS, and the execution and performance of this Agreement does not conflict with any other material obligations of CNS. 6. Lender Representations and Warranties. Lender represents and warrants as follows: (a) Lender represents that it is an "accredited investor" within the meaning of Rule 501 under the Securities Act of 1933, as amended (the "Securities Act"), and is a sophisticated financial or institutional investor that makes loans and purchases equity securities in the ordinary course of business. Lender is making the Loan and acquiring the warrants referenced in Section 4 for investment purposes only, for its own account, and not with a view to the distribution thereof, other than pursuant to Rule 144 under the Securities Act or other exemption from or registration under the Securities Act. Lender understands that the offer and sale of this Agreement, the warrants referenced in Section 4 or any of the CNS shares that are the subject of Section 4 to Lender has not been registered under the Securities Act or under state securities laws and, accordingly, may not be transferred unless so registered or exemptions from such registration are available. (b) Lender has reviewed CNS's public filings as the date hereof, including Form 10-K for the year ended March 31, 1999, its Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and Current Reports on Form 8-K filed since the date of the March 31, 1999 Form 10-K, the contents of which are incorporated herein by reference. (c) Lender acknowledges that it has, independently and without reliance upon CNS or any agent, employee or representative of CNS, or any other investor, made its own investment analysis and decision to enter into this Agreement based solely on the public filings listed above, the information disclosed herein and such other documents and information as it has deemed appropriate. Lender is not relying upon any statements of CNS or 2 any agent, employee or representative of CNS, express or implied, oral or written, regarding past, present or future conditions of CNS. (d) Lender understands and acknowledges that the making of the Loan and an investment in the warrants referenced in Section 4 or any of the CNS shares that are the subject of Section 4 are speculative and involve a high degree of risk. 7. Entire Agreement. This Agreement constitutes the entire agreement between the parties and all prior agreements, discussions and understandings of the parties are merged and made a part of this Agreement. 8. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 9. Notice. Any notice required or permitted to be given or made by either party to the other hereunder shall be deemed delivered if hand delivered, five days after being mailed postage prepaid, one business day after being sent prepaid by overnight courier or delivery service, or after being sent by facsimile transmission and received by receiving equipment to the parties at their respective addresses set forth opposite the signatures hereto or to such changed address as either party shall designate by proper notice to the other. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of State of California without regard to the principles of conflicts of law thereunder. LENDER: _______________________________ _______________________________ Name: _______________________________ BORROWER: COYOTE NETWORK SYSTEMS, INC. BY /s/ James J. Fiedler ------------------------------- Its Chairman of the Board and Chief Executive Officer 3 EX-4.02 3 FORM OF PLEDGE AGREEMENT Exhibit A PLEDGE AGREEMENT THIS PLEDGE AGREEMENT, dated as of November 1, 1999, is by and between COYOTE NETWORK SYSTEMS, INC., a Delaware corporation ("CNS"), and _____________________ ("Lender"). RECITALS CNS and Lender acknowledge the following: A. Lender has agreed to provide a loan to CNS in the principal amount of $_______ pursuant to the Term Loan Agreement dated even date herewith (the "Term Loan Agreement") between Lender and CNS. B. Lender requires, as a condition to making the Loan that CNS execute and deliver this Pledge Agreement. AGREEMENTS In consideration of the Recitals and in order to induce Lender to extend credit to CNS, CNS hereby agrees with Lender as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Term Loan Agreement. All terms defined in the California Uniform Commercial Code (the "UCC") and used herein shall have the meanings assigned in the UCC. 2. Pledge. To secure the payment and performance by CNS of all of its obligations, debts and liabilities to Lender under the Term Loan Agreement (the "Secured Obligations"), CNS hereby pledges to Lender for the benefit of Lender and grants to Lender for the benefit of Lender a first priority security interest in all its right, title and interest in and to the collateral described in section 3 below (the "Pledged Collateral"). 3. Description of Pledged Collateral. The Pledged Collateral consists of: 1 (a) ________ shares of common stock (the "Shares") of INET Acquisition, Inc. (n/k/a INET Interactive Network System, Inc.), a California corporation ("INET"); and (b) All right, title and interest of CNS in and to all present and future payments, proceeds, dividends, distributions, instruments, compensation, property, assets, interests and rights, and all monies, due or to become due and payable to CNS in connection with the Pledged Collateral or otherwise paid, issued or distributed from time to time in respect of or in exchange therefor, and any certificate, instrument or other document evidencing or representing the same (including all proceeds of dissolution or liquidation). 4. Delivery of Pledged Collateral. CNS shall deliver to Lender or its designated agent: (a) The Shares on or before the date hereof; and (b) Any other original shares of stock, certificates, instruments or other documents constituting Pledged Collateral within five days after CNS's receipt thereof. All Pledged Collateral which are certificated securities shall be in bearer form and accompanied by blank stock powers, duly executed by CNS, in the name of Lender. 5. Representations, Warranties and Covenants of CNS. CNS hereby represents, warrants and covenants that: (a) Pledged Collateral. Set forth on Schedule I is a complete and accurate list and description of all Pledged Collateral as of the date of this Agreement. The Shares are unregistered and have endorsed thereon a restricted legend relating thereto. (b) Due Authorization, Etc., of Shares. The Shares have been duly authorized and validly issued and are fully paid and nonassessable and constitute ___% of the authorized, issued and outstanding shares of common stock of INET. (c) Sale or Other Disposition of Pledged Collateral. CNS will not assign (by operation of law or otherwise), sell, lease, transfer, pledge or grant a security interest in or otherwise dispose of or abandon any Pledged 2 Collateral, and the inclusion of "proceeds" of the Pledged Collateral under the security interest granted herein shall not be deemed a consent by Lender to any sale or other disposition of any Pledged Collateral except as expressly permitted herein. (d) Required Consents. Except for any consents as may be required in connection with any disposition of any portion of the Pledged Collateral by laws affecting the offering and sale of securities generally, no consent of any other person or entity (including stockholders and creditors of CNS) is required in connection with (i) the execution, delivery, performance, validity or enforceability of this Pledge Agreement; (ii) the perfection or maintenance of the security interest created hereby (including the first priority nature of such security interest); or (iii) the exercise by Lender of the voting or other rights provided for in this Pledge Agreement. (e) Nature of Security Interest. When the Pledged Collateral are delivered to Lender, Lender will obtain a valid and perfected first security interest in such Pledged Collateral for the benefit of Lender as security for the repayment of the Secured Obligations, prior to all other liens and encumbrances thereon and security interests therein. (f) Action Impairing Value of Pledged Collateral. CNS has not and will not, without the prior written consent of Lender, execute any document or instrument or take any other action in connection with any of the Pledged Collateral which would impair the value of the interest or rights of CNS or Lender therein. None of the Pledged Collateral is subject to an option to purchase or similar right of any person or entity. (g) Further Assurances. CNS will, at its sole cost and expense, perform all acts and execute all documents requested by Lender from time to time to evidence, perfect, maintain or enforce Lender's first priority security interest in the Pledged Collateral or otherwise in furtherance of the provisions of this Pledge Agreement. 6. Remedies. (a) If CNS shall fail to pay its obligations under the Term Loan Agreement when due, Lender may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party 3 on default under the UCC (whether or not applicable to the affected Pledged Collateral) and may also, without obligation to resort to other security, at any time and from time to time sell, resell, assign and deliver, in its discretion, all or any of the Pledged Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, on any securities exchange on which any Pledged Collateral or any of them may be listed, or at public or private sale, for cash, upon credit or for future delivery, and in connection therewith Lender may grant options, CNS hereby waiving and releasing any and all equity or right of redemption. (b) If any of the Pledged Collateral is sold by Lender upon credit or for future delivery, Lender shall not be liable for the failure of the purchaser to purchase or pay for the same and, in the event of any such failure, Lender may resell such Pledged Collateral. In no event shall any part of the proceeds of sale of any Pledged Collateral be credited against the Secured Obligations until the payment therefor has actually been received by Lender. (c) Lender may apply the cash proceeds actually received from any sale or other disposition of the Pledged Collateral to the Secured Obligations in any order or manner which Lender may determine, and CNS shall remain liable and will pay Lender on demand any deficiency remaining. (d) CNS recognizes that Lender may be unable to effect a public sale of the Pledged Collateral consisting of securities by reason of certain prohibitions contained in the Securities Act, or in applicable Blue Sky or other state securities laws, as now or hereafter in effect, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. CNS agrees that any such Collateral sold at any such private sale may be sold at a price and upon other terms less favorable to the seller than if sold at public sale and that each such private sale shall be deemed to have been made in a commercially reasonable manner. Lender shall have no obligation to delay sale of any such securities for the period of time necessary to permit CNS, even if CNS would agree, to register such securities for public sale under the Securities Act. CNS agrees that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) Lender shall give CNS thirty days' prior notice of the time and place that any sale or other disposition is to be made, which notice CNS 4 agrees is reasonable, all other demands, advertisements and notices being hereby waived. Within such 30 day period, Lender and Lender agree that CNS may repurchase or cause another to purchase the Shares at a price equal to or better than the price set forth in the above-referenced notice. (f) Unless CNS exercises its right to repurchase the Shares set forth in subsection (e) above, Lender shall not be obligated to make any sale of Pledged Collateral if it shall determine not to do so, regardless of the fact that notice of sale may have been given. Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. (g) The remedies provided herein in favor of Lender shall not be exclusive, but shall be cumulative and in addition to all other remedies in favor of Lender existing at law or in equity. 7. Lender Appointed Attorney-in-Fact. (a) To effectuate the terms and provisions hereof, CNS hereby appoints Lender as CNS's attorney-in-fact upon the occurrence and during the continuance of a default under the Term Loan Agreement for the purpose of carrying out the provisions of this Pledge Agreement and taking any action and executing any instrument which Lender may deem necessary or advisable to accomplish the purposes hereof. Without limiting the generality of the foregoing, Lender shall have the right and power to: (i) receive, endorse and collect all checks and other orders for the payment of money made payable to CNS representing any interest or dividend or other distribution or amount payable in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (ii) execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Pledged Collateral. (b) Other than any action which constitutes gross negligence or willful misconduct, all acts done under the foregoing authorization are hereby ratified and approved and neither Lender nor any designee or Lender 5 thereof shall be liable for any act or omission, for any error of judgment or for any mistake of fact or law. (c) This power of attorney, being coupled with an interest, is irrevocable while any Secured Obligations remain unpaid or unperformed. 8. Lender's Duties; Reasonable Care. (a) Lender shall have the duty to exercise reasonable care in the custody and preservation of any Pledged Collateral in its possession, which duty shall be fully satisfied if Lender maintains safe custody of such Pledged Collateral. (b) Lender shall have no further obligation to ascertain the occurrence of, or to notify CNS with respect to, any events and shall not be deemed to assume any such further obligation as a result of the establishment by Lender of any internal procedures with respect to any securities in its possession, nor shall Lender shall not be deemed to assume any other responsibility for, or obligation or duty with respect to, any Pledged Collateral, or its use, of any nature or kind, or any matter or proceedings arising out of or relating thereto, including any obligation or duty to take any action to collect, preserve or protect its or CNS's rights in the Pledged Collateral or against any prior parties thereto, but the same shall be at CNS's sole risk and responsibility at all times. (c) CNS hereby releases Lender, Lender, and their respective officers, directors, employees and agents, from any claims, causes of action and demands at any time arising out of or with respect to this Pledge Agreement, the Pledged Collateral and/or any actions taken or omitted to be taken by Lender with respect thereto (except, in the case of Lender, such claims, causes of action and demands arising from the gross negligence or willful misconduct of Lender), and CNS hereby agrees to hold Lender, Lender and their respective officers, directors, employees and agents harmless from and with respect to any and all such claims, causes of action and demands (except such claims, causes of action and demands arising from the gross negligence or willful misconduct of Lender). 9. Governing Law. This Agreement is being delivered in and shall be deemed to be a contract governed by the laws of the State of California and shall be interpreted and enforced in accordance with the laws of that state without regard to the principles of conflicts of laws. 6 10. Admissibility of Pledge Agreement. CNS agrees that a copy of this Pledge Agreement signed by CNS and transmitted by facsimile for delivery to Lender shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence. 11. Notices. All notices provided herein shall be in writing and shall be (a) delivered; (b) sent by express or first class mail; or (c) sent by facsimile transmission and confirmed in writing provided to the recipient in a manner described in (a) or (b), and, if to CNS, addressed to it at 4630 Park Terrace Drive, Westlake Village, California, 91361, Facsimile No. 818-878-7633 and if to Lender, addressed to it at ____________________________________________________, Facsimile No. _______________, or to such other address with respect to either party as such party shall notify the other in writing; such notices shall be deemed given when so delivered, mailed or transmitted. 12. Entire Agreement; Amendments and Modification. This Pledge Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements. No provision of this Agreement shall be amended or modified except by a written instrument executed by CNS and Lender. 13. Continuing Pledge Agreement. (a) This Pledge Agreement shall create a continuing security interest in the Pledged Collateral and shall be binding upon CNS and its successors and assigns and inure to the benefit of, and be enforceable by, Lender, Lender and their respective successors, transferees and assigns. (b) Upon the payment in full of the Loan and all other amounts payable under this Pledge Agreement, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to CNS. Upon any such termination, Lender will, at CNS's expense and without representation or warranty of any nature whatsoever and wholly without recourse, return to CNS such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to CNS such documents as CNS shall reasonably request to evidence such termination. 7 14. Captions; Separability. The captions of the sections and subsections of this Pledge Agreement have been inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Pledge Agreement. If any term of this Pledge Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby. BORROWER: COYOTE NETWORK SYSTEMS, INC. BY /s/ James J. Fiedler ------------------------------ Its Chairman of the Board and Chief Executive Officer LENDER: ____________________________________ Name: ____________________________ 8 SCHEDULE I Pledged Collateral - ---------------------------- ------------------------------ -------------------- Owner Description Certificate No(s). - ---------------------------- ------------------------------ -------------------- Coyote Network Systems, Inc. _________ shares of common _______ stock of INET Acquisition, Inc. (n/k/a INET Interactive Network System, Inc.), a California corporation - ---------------------------- ------------------------------ -------------------- 9 EX-4.03 4 FORM OF COMMON STOCK PURCHASE WARRANT CERTIFICATE EXHIBIT B THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. COMMON STOCK PURCHASE WARRANT CERTIFICATE Dated: November 1, 1999 To Purchase _________ Shares of Common Stock of COYOTE NETWORK SYSTEMS, INC. COYOTE NETWORK SYSTEMS, INC. a Delaware corporation ("CNS"), hereby certifies that _____________________________ , its permissible transferees, designees, successors and assigns (collectively, the "Holder"), for value received, is entitled to purchase from CNS at any time before November 1, 2002 up to ________ shares (each a "Share" and collectively the "Shares") of CNS's common stock, $1.00 par value per share (the "Common Stock"), at an exercise price (the "Exercise Price") of $4.50 per Share. This Certificate shall be valid for a period of three years from the date hereof. The number of Shares purchasable hereunder and the Exercise Price are subject to adjustment as provided in Section 5 hereof. 1. Condition Precedent. The warrants represented by this Common Stock Purchase Warrant Certificate (the "Warrant Certificate" or "Certificate") shall not be eligible for exercise and CNS shall be under no obligation to honor any attempted exercise until CNS has received a countersigned original of this Certificate. 2. Exercise of Warrants. Upon presentation and surrender of this Warrant Certificate, or a lost certificate affidavit in form reasonably 1 acceptable to CNS, accompanied by a completed Election to Purchase in the form attached hereto as Exhibit A (the "Election to Purchase") duly executed, at the office of CNS at 4360 Park Terrace Drive, Westlake Village, CA 91361, Attn: President, together with a check payable to CNS in the amount of the Exercise Price multiplied by the number of Shares being purchased, CNS or CNS's Transfer Agent as the case may be, shall, within three (3) Trading Days (as defined below) of receipt of the foregoing, deliver to the Holder hereof, certificates of fully paid and non-assessable Common Stock which in the aggregate represent the number of Shares being purchased. The certificates so delivered shall be in such denominations as may be reasonably requested by the Holder and shall be registered in the name of the Holder, or such other name as shall be designated by the Holder (provided that the Holder supplies CNS with a legal opinion of counsel, acceptable to CNS and its counsel, that the issuance of the certificate to other than the Holder is permitted under applicable federal and state securities laws and does not affect the exemption from registration relied upon by CNS in this offering). All or less than all of the Warrants represented by this Certificate may be exercised and, in case of the exercise of less than all, CNS, upon receipt of this Warrant Certificate, will at CNS's expense deliver to the Holder, a new Warrant Certificate or Certificates (in such denominations as may be requested by the Holder) of like tenor, containing the same terms as this Warrant Certificate and dated the date hereof entitling the Holder to purchase the number of Shares represented by this Certificate which have not been exercised. 3. Exchange, Transfer and Replacement. (a) Exchange. At any time prior to the exercise hereof, this Certificate may be exchanged upon presentation and surrender to CNS, alone or with other Certificates of like tenor of different denominations registered in the name of the same Holder, for another Certificate or Certificates of like tenor, containing the same terms as the Warrant Certificate, in the name of such Holder, exercisable for the aggregate number of Shares as provided in the Certificate or Certificates surrendered. (b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably satisfactory to CNS of the loss, theft, destruction, or mutilation of this Warrant Certificate and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to CNS, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant Certificate, CNS, at its expense, will execute and deliver in lieu thereof, a new Warrant Certificate of like tenor and containing the same terms and conditions as this Warrant Certificate. 2 (c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant Certificate to CNS in connection with any transfer, exchange or replacement as provided in this Section 3, this Warrant Certificate shall be promptly canceled by CNS. CNS shall pay all taxes (other than securities transfer taxes and the Holder's income taxes) and all other expenses (other than legal expenses, if any, incurred by the Holder as any transferees) and charges payable in connection with the preparation, execution and delivery of Warrant Certificates pursuant to this Section 3. (d) Warrant Register. CNS shall maintain, at its principal executive offices (or at the offices of the transfer agent for the Warrant Certificate or such other office or agency of CNS as it may designate by notice to the holder hereof), a register for this Warrant Certificate (the "Warrant Register"), in which CNS shall record the name and address of the entity in whose name this Warrant Certificate has been issued, as well as the name and address of each permitted transferee and each prior owner of this Warrant Certificate. 4. Rights and Obligations of Holders of this Certificate. The Holder of this Certificate shall not, by virtue hereof, be entitled to any rights of a stockholder in CNS, either at law or in equity; provided, however, that in the event any certificate representing shares of Common Stock or other securities is issued to the Holder hereof upon exercise of some or all of the Warrants, such Holder shall, for all purposes, be deemed to have become the holder of record of such Common Stock on the date on which this Certificate, together with a duly executed Purchase Form, was surrendered and payment of the aggregate Exercise Price was made, irrespective of the date of delivery of such share certificate. 5. Adjustments. (a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the event CNS: (i) pays a dividend in Common Stock or makes a distribution in Common Stock, (ii) subdivides its outstanding Common Stock into a greater number of shares, (iii) combines its outstanding Common Stock into a smaller number of shares or (iv) increases or decreases the number of shares of Common Stock outstanding by reclassification of its Common Stock (including a recapitalization in connection with a consolidation or merger in which CNS is the continuing corporation), then (1) the Exercise Price on the record date of such division or distribution or the effective date of such action shall be adjusted by multiplying such Exercise Price by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event, and (2) the number of shares of Common 3 Stock for which this Warrant Certificate may be exercised immediately before such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the Exercise Price immediately before such event and the denominator of which is the Exercise Price immediately after such event. (b) Cash Dividends and Other Distributions. In the event that at any time or from time to time CNS shall distribute to all holders of Common Stock (i) any dividend or other distribution of cash, evidences of its indebtedness, shares of its capital stock or any other properties or securities or (ii) any options, warrants or other rights to subscribe for or purchase any of the foregoing (other than in each case, (w) the issuance of any rights under a shareholder rights plan, (x) any dividend or distribution described in Section 5(a), (y) any rights, options, warrants or securities described in Section 5(c) and (z) any cash dividends or other cash distributions from current earnings), then the number of shares of Common Stock issuable upon the exercise of each Warrant Certificate shall be increased to a number determined by multiplying the number of shares of Common Stock issuable upon the exercise of such Warrant Certificate immediately prior to the record date for any such dividend or distribution by a fraction, the numerator of which shall be such Current Market Value (as hereinafter defined) per share of Common Stock on the record date for such dividend or distribution, and the denominator of which shall be such Current Market Value per share of Common Stock on the record date for such dividend or distribution less the sum of (x) the amount of cash, if any, distributed per share of Common Stock and (y) the fair value (as determined in good faith by the Board of Directors of CNS, whose determination shall be evidenced by a board resolution, a copy of which will be sent to the Holders upon request) of the portion, if any, of the distribution applicable to one share of Common Stock consisting of evidences of indebtedness, shares of stock, securities, other property, warrants, options or subscription or purchase rights; and the Exercise Price shall be adjusted to a number determined by dividing the Exercise Price immediately prior to such record date by the above fraction. Such adjustments shall be made whenever any distribution is made and shall become effective as of the date of distribution, retroactive to the record date for any such distribution. No adjustment shall be made pursuant to this Section 5(b) which shall have the effect of decreasing the number of shares of Common Stock issuable upon exercise of each Warrant Certificate or increasing the Exercise Price. (c) Rights Issue. In the event that at any time or from time to time CNS shall issue rights, options or warrants entitling the holders thereof to subscribe for shares of Common Stock, or securities convertible into or exchangeable or exercisable for Common Stock to all holders of Common Stock (other than in connection with the adoption or implementation of a shareholder 4 rights plan by CNS or in connection with existing or future employee stock option plans approved by the Board of Directors of CNS) without any charge, entitling such holders to subscribe for or purchase shares of Common Stock at a price per share that as of the record date for such issuance is less than the then Current Market Value per share of Common Stock, the number of shares of Common Stock issuable upon the exercise of each Warrant Certificate shall be increased to a number determined by multiplying the number of shares of Common Stock theretofore issuable upon exercise of each Warrant Certificate by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, options, warrant or securities plus the number of additional shares of Common Stock offered for subscription or purchase or into or for which such securities that are issued are convertible, exchangeable or exercisable, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, option, warrants or securities plus the total number of shares of Common Stock which the aggregate consideration expected to be received by CNS (assuming the exercise or conversion of all such rights, options, warrants or securities) would purchase at the then Current Market Value per share of Common Stock. In the event of any such adjustment, the Exercise Price shall be adjusted to a number determined by dividing the Exercise price immediately prior to such date of issuance by the aforementioned fraction. Such adjustment shall be made immediately after such rights, options or warrants are issued and shall become effective, retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or securities. No adjustment shall be made pursuant to this Section 5(c) which shall have the effect of decreasing the number of shares of Common Stock purchasable upon exercise of each Warrant Certificate or of increasing the Exercise Price. (d) Combination; Liquidation. (i) Except as provided in Section 5(d)(ii) below, in the event of a Combination (as defined below), each Holder shall have the right to receive upon exercise of the Warrant Certificates the kind and amount of shares of capital stock or other securities or property which such Holder would have been entitled to receive upon or as a result of such Combination had such Warrant Certificate been exercised immediately prior to such event (subject to further adjustment in accordance with the terms hereof). Unless paragraph (ii) is applicable to a Combination, CNS shall provide that the surviving or acquiring Person (the "Successor Company") in such Combination, if it is other than CNS, will assume by written instrument the obligations under this Warrant Certificate and the obligation to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to acquire. The provisions of this Section 5(d)(i) 5 shall similarly apply to successive Combinations involving any Successor Company. "Combination" means an event in which CNS consolidates with, mergers with or into, or sells all or substantially all of its assets to another Person, where "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. (ii) In the event of (x) a Combination where consideration to the holders of Common Stock in exchange for their shares is payable solely in cash or (y) the dissolution, liquidation or winding-up of CNS, the Holder shall be entitled to receive, upon surrender of this Warrant Certificate, distributions on an equal basis with the holders of Common Stock or other securities issuable upon exercise of the Warrant Certificates, as if the Warrant Certificates had been exercised immediately prior to such event, less the Exercise Price. In case of any Combination described in this Section 5(d)(ii), the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding-up of CNS, CNS, shall deposit promptly following the consummation of such combination or at the time of such dissolution, liquidation or winding-up with an agent or trustee for the benefit of the Holder, the funds, if any, necessary to pay to the Holder the amounts to which it is entitled as described above. After such funds and the surrendered Warrant Certificate is received, CNS is required to deliver a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Person or Persons as it may be directed in writing by the Holder surrendering the Warrant Certificate. (e) Notice of Adjustment. Whenever the Exercise Price or the number of shares of Common Stock and other property, if any, issuable upon exercise of the Warrant Certificate is adjusted, as provided in this Section 5, CNS shall deliver to the Holder of the Warrant Certificate in accordance with Section 10, a certificate of CNS's Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which (i) the Board of Directors determined the fair value of any evidences of indebtedness, other securities or property or warrants, options or other subscription or purchase rights and (ii) the Current Market Value of the common Stock was determined, if either of such determinations were required), and specifying the Exercise Price and number of shares of Common Stock issuable upon exercise of Warrant Certificate after giving effect to such adjustment. (f) Notice of Certain Transactions. In the event that CNS shall propose (a) to pay any dividend payable in securities of any class to the 6 holders of its Common Stock or to make any other non-cash dividend or distribution to the holders of its Common Stock, (b) to offer the holders of its Common Stock rights to subscribe for or to purchase any securities convertible into shares of Common Stock or shares of stock of any class or any other securities, rights or options, (c) to effect any capital reorganization, reclassification, consolidation or merger affecting the class of Common Stock, as a whole, or (d) to effect the voluntary or involuntary dissolution, liquidation or winding-up of CNS, CNS shall, within the time limits specified below, send to the Holder a notice of such proposed action or offer. Such notice shall be mailed to the Holder at the address as it appears in the Warrant Register (as defined in Section 3(d)), which notice shall specify the record date for and the purposes of such dividend, distribution or rights, or the date such issuance or event is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, and shall briefly indicate the effect of such action on the number of shares of Common Stock and on the number and kind of any other shares of stock and on other property, if any, and the number of shares of Common Stock and other property, if any, issuable upon exercise of this Warrant Certificate and the Exercise Price after giving effect to any adjustment pursuant to Section 5 which will be required as a result of such action. Such notice shall be given as promptly as possible and (x) in the case of any action covered by clause (a) or (b) above, at least 10 days prior to the record date for determining holders of the Common Stock for purposes of such action or (y) in the case of any other such action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock, whichever shall be the earlier. (g) Current Market Value. "Current Market Value" per share of Common Stock or any other security at any date means (i) if the security is not registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the value of the security, determined in good faith by the Board of Directors of CNS or (ii) if the security is registered under the Exchange Act, the average of the daily closing bid prices (or the equivalent in an over-the-counter market) for each day on which the Common Stock is traded for any period on the principal securities exchange or other securities market on which the common Stock is being traded (each, a "Trading Day") during the period commencing ten (10) Trading Days before such date and ending on the date one (1) Trading Day prior to such date, or if the security has been registered under the Exchange Act for less than ten (10) consecutive Trading Days before such date, the average of the daily closing bid prices (or such equivalent) for all of the Trading Days before such date for which daily closing bid prices are available; provided, however, that if the closing bid price is not determinable for at least five (5) Trading Days in such period, the "Current Market Value" of the 7 security shall be determined as if the security were not registered under the Exchange Act. (h) No Impairment of Holder's Rights. CNS will not, by amendment of its certificate of incorporation or bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, except as contemplated hereby, avoid or seek to avoid the observance or performance of any of the terms of this Warrant Certificate, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. 6. Registration Rights. CNS agrees to use its best efforts to file for registration of the Common Stock available upon exercise of the Warrants as soon as practicable. Moreover, if, at any time while this Warrant Certificate is exercisable or the Holder owns any shares of CNS's Common Stock received upon exercise of this Warrant Certificate and such shares are not tradable pursuant to the provisions of Rule 144 under the Securities Act of 1933, as amended, CNS decides to register any of its securities for its own account or for the account of others (excluding registrations relating to equity securities to be issued solely in connection with an acquisition of any entity or business or in connection with stock option or other employee benefit plans), CNS will promptly give the Holder written notice thereof, and will use its best efforts to include in such registration all or any part of the shares which may be received (or have previously been received) upon exercise of this Warrant Certificate so requested by such Holder (excluding any Registrable Securities previously included in a Registration Statement). The Holder's request for registration must be given to CNS in writing within ten (10) days after receipt of the notice from CNS. If the registration for which CNS gives notice is a public offering involving an underwriting, CNS will so advise the Holder as part of the above-described written notice. In such event, if the managing underwriter(s) of the public offering impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in such underwriter(s)' judgment, such limitation would be necessary to effect an orderly public distribution, then CNS will be obligated to include only such limited portion, if any, of the shares requested by the Holder which the managing underwriter(s) deems appropriate giving first preference to the shares to be sold by CNS. 7. Issuance of Certificates. Within three (3) Trading Days of receipt of a duly completed Election to Purchase form, together with this Certificate and payment of the Exercise Price, CNS, at its expense, will cause to be issued 8 in the name of and delivered to the Holder of this Warrant Certificate, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which that holder shall be entitled on such exercise. In lieu of issuance of a fractional share upon any exercise hereunder, CNS will pay the cash value of that fractional share, calculated on the basis of the Exercise Price. Prior to registration of the resale of the shares of Common Stock underlying this Warrant Certificate, all such certificates shall bear a restrictive legend to the effect that the Shares represented by such certificate have not been registered under the 1933 Act, and that the Shares may not be sold or transferred in the absence of such registration or an exemption therefrom, such legend to be substantially in the form of the bold-face language appearing at the top of Page 1 of this Warrant Certificate. 8. Disposition of Warrants or Shares. The Holder of this Warrant Certificate, each transferee hereof and any holder and transferee of any Shares, by his or its acceptance thereof, agrees that no public distribution of Warrants or Shares will be made in violation of the provisions of the 1933 Act. Furthermore, it shall be a condition to the transfer of this Warrant Certificate that any transferee thereof deliver to CNS his or its written agreement to accept and be bound by all of the relevant terms and conditions contained in this Warrant Certificate. 9. Merger or Consolidation. CNS will not merge or consolidate with or into any other corporation, or sell or otherwise transfer its property, assets and business substantially as an entirety to another corporation, unless the corporation resulting from such merger or consolidation (if not CNS), or such transferee corporation, as the case may be, shall expressly assume, by supplemental agreement reasonably satisfactory in form and substance to the Holder, the due and punctual performance and observance of each and every covenant and condition of this Warrant Certificate to be performed and observed by CNS. 10. Notices. Except as otherwise specified herein to the contrary, all notices, requests, demands and other communications required or desired to be given hereunder shall only be effective if given in writing by certified or registered U.S. mail with return receipt requested and postage prepaid; by private overnight delivery service (e.g. Federal Express); by facsimile transmission (if no original documents or instruments must accompany the notice); or by personal delivery. Any such notice shall be deemed to have been given (a) on the business day immediately following the mailing thereof, if mailed by certified or registered U.S. mail as specified above; (b) on the business day immediately following deposit with a private overnight delivery service if sent by said service; (c) upon receipt of confirmation of transmission if sent by facsimile transmission; or (d) upon personal delivery of the notice. All such notices shall be sent to the following addresses (or to such other address or addresses as a party may have advised the other in the manner provided in this Section 10): 9 If to CNS: Coyote Network Systems, Inc. 4360 Park Terrace Drive Westlake Village, CA 91361 Attention: President with a copy to: Reinhart, Boerner, Van Deuren, et al. 1700 Lincoln Street, Suite 3725 Denver, CO 80203 Attention: Timothy G. Atkinson, Esq. If to Holder: ------------------------------ ------------------------------ ------------------------------ ------------------------------ (Social Security or Tax Identification Number) With a copy to: ------------------------------ ------------------------------ ------------------------------ Notwithstanding the time of effectiveness of notices set forth in this Section, an Election to Purchase shall not be deemed effectively given until it has been duly completed and submitted to CNS together with the original Warrant Certificate to be exercised and payment of the Exercise Price in the manner set forth in this Warrant Certificate. 11. Successors and Assigns. This Warrant Certificate shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 10 12. Headings. The headings of various sections of this Warrant Certificate have been inserted for reference only and shall not affect the meaning or construction of any of the provisions hereof. 13. Severability. If any provision of this Warrant Certificate is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant Certificate, and the balance hereof shall be interpreted as if such provision were so excluded. 14. No Short Sales. Holder agrees that so long as it possesses Warrant under this Warrant Certificate, it will not engage in any short sales of CNS's Common Stock, "short sales against the box," or any similar hedged trading of CNS's Common Stock. 15. Modification and Waiver. This Warrant Certificate and any provision hereof may be amended, waived, discharged or terminated only by an instrument in writing signed by CNS and the Holder. 16. Specific Enforcement. CNS and the Holder acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Warrant Certificate were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Warrant Certificate and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. 17. Assignment. This Warrant Certificate may not be transferred or assigned, in whole or in part, without the prior written consent of CNS. 11 IN WITNESS WHEREOF, CNS has caused this Warrant Certificate to be duly executed, manually or by facsimile, by one of its officers thereunto duly authorized. COYOTE NETWORK SYSTEMS, INC. Date: November 1, 1999 By: /s/James J. Fiedler ------------------------------------ Name: James J. Fiedler Title: Chairman of the Board and Chief Executive Officer -------------------------------------- By:____________________________________ Name: Title: 12 EXHIBIT A ELECTION TO PURCHASE To Be Executed by the Holder in Order to Exercise the Common Stock Purchase Warrant Certificate The undersigned Holder hereby elects to exercise _______ of the Warrants represented by the attached Common Stock Purchase Warrant Certificate, and to purchase the shares of Common Stock issuable upon the exercise of such Warrants, and requests that certificates for securities be issued in the name of: ---------------------------------------------------------- ---------------------------------------------------------- (Please type or print name and address) ---------------------------------------------------------- (Social Security or Tax Identification Number) and delivered to:______________________________________________________________ _________________________________________________________________ . (Please type or print name and address if different from above) If such number of Warrants being exercised hereby shall not be all the Warrants evidenced by the attached Common Stock Purchase Warrant Certificate, a new Common Stock Purchase Warrant Certificate for the balance of such Warrants shall be registered in the name of, and delivered to, the Holder at the address set forth below. In full payment of the Exercise Price with respect to the Warrants exercised and transfer taxes, if any, the undersigned hereby tenders payment of $__________ by check, money order or wire transfer payable in United States currency to the order of Coyote Network Systems, Inc. HOLDER: Dated:___________________ By:___________________________________ Name: Title: Address: EX-27 5 FDS --
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 SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-2000 JUL-01-1999 SEP-30-1999 1036 0 19969 (522) 2392 24775 9691 (2751) 44188 27975 1464 0 6000 13678 (3191) 44188 7518 7518 6384 6384 6538 0 482 397 0 401 (4) 0 0 397 .03 .03
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