-----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, Fr3yxMeC2uUErqcYVGhqZWny3EYBrdIN4ylqaeZK8H6luzw5NLD7ImvQI0we/gOs Xyi81de1p1JwGbqu/QZMwA== /in/edgar/work/0000891554-00-002402/0000891554-00-002402.txt : 20001116 0000891554-00-002402.hdr.sgml : 20001116 ACCESSION NUMBER: 0000891554-00-002402 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUENTRA NETWORKS 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 SEC ACT: SEC FILE NUMBER: 001-05486 FILM NUMBER: 768659 BUSINESS ADDRESS: STREET 1: 1640 S SEPULVEDA BOULEVARD STREET 2: SUITE 222 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 8009358506 MAIL ADDRESS: STREET 1: 1640 S SEPULVEDA BOULEVARD STREET 2: SUITE 222 CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: COYOTE NETWORK SYSTEMS INC DATE OF NAME CHANGE: 19971212 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 10-Q 1 form10q_24042.txt FORM 10-Q 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, 2000 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 QUENTRA NETWORKS, 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) 1640 South Sepulveda Boulevard, Suite 320, Los Angeles, California 90025 (Address of principal executive offices) (Zip Code) (800) 935-8506 (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 13, 2000, the Registrant had issued and outstanding an aggregate of 24,878,769 shares of its common stock. QUENTRA NETWORKS, INC. AND SUBSIDIARIES Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets................................................. 1 Statements of Operations...................................... 2 Statements 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 1. Legal Proceedings............................................... 16 Item 2. Changes in Securities and Use of Proceeds....................... 16 Item 4. Submission of Matters to a Vote of Security Holders............. 16 Item 6. Exhibits and Reports on Form 8-K............................17 & 18 Signatures.............................................................. 19 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUENTRA NETWORKS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars In Thousands, Except Per Share Amounts) Sept. 30, March 31, 2000 2000 ----------- --------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 865 $ 16,278 Receivables, net of allowance of $1,919 at September 30, 2000 and $593 at March 31, 2000 4,051 3,628 Deposits and other current assets 1,887 1,842 --------- --------- Total current assets 6,803 21,748 Property and equipment, net 7,155 4,668 Intangible assets, net 7,998 2,070 Investments and other assets 1,535 1,482 --------- --------- $ 23,491 $ 29,968 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Lines of credit $ 423 $ 1,705 Accounts payable 9,518 6,665 Accrued liabilities and other 3,497 6,418 Current portion of long-term debt and capital lease obligations 1,111 1,572 Notes payable - current 1,742 2,130 Discontinued operations - reserve for loss on disposal -- 792 Discontinued operations - net current liabilities 26 -- --------- --------- 16,317 19,282 Long-term debt 2,369 1,393 Capital lease obligations 1,613 1,369 Other liabilities 3,694 366 Commitments and contingencies Shareholders' equity (deficit): Preferred stock - $.01 par value: authorized 10,000,000 shares; Series A: 124 shares issued and outstanding liquidation preference of $10,000 per share 1,570 1,570 Series B: 3,157,895 issued and outstanding liquidation preference of $4.75 per share 27,338 27,338 Common stock -$1 par value: authorized 70,000,000 shares, Issued 20,073,395 and 18,106,593 shares 20,073 18,107 Additional paid-in capital 139,957 132,075 Deferred compensation (242) (278) Accumulated deficit (183,441) (165,497) Treasury stock at cost (5,757) (5,757) --------- --------- Total shareholders' equity (deficit) (502) 7,558 --------- --------- $ 23,491 $ 29,968 ========= ========= See notes to condensed consolidated financial statements. 1 QUENTRA NETWORKS, 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, 2000 1999 2000 1999 -------- -------- -------- -------- Net sales $ 7,214 $ 2,447 $ 12,281 $ 4,307 Cost of sales 6,595 2,099 10,870 3,512 -------- -------- -------- -------- Gross profit 619 348 1,411 795 Selling and administrative expenses 12,482 3,164 18,620 5,620 -------- -------- -------- -------- Operating loss (11,863) (2,816) (17,209) (4,825) Interest expense, net (196) (328) (184) (680) Other non-operating income -- 6,208 -- 6,392 -------- -------- -------- -------- Income (loss) from continuing operations (12,059) 3,064 (17,393) 887 Income (loss) from discontinued operations 112 (2,592) (77) (4,090) -------- -------- -------- -------- Net income (loss) $(11,947) $ 472 $(17,470) $ (3,203) ======== ======== ======== ======== Preferred stock dividends $ (242) $ (75) $ (474) $ (154) Net income (loss) (11,947) 472 (17,470) (3,203) -------- -------- -------- -------- Income (loss) applicable to common shareholders $(12,189) $ 397 $(17,944) $ (3,357) ======== ======== ======== ======== Income (loss) per common share - basic: Continuing operations $ (.64) $ .23 $ -- $ .06 Discontinued operations .01 (.20) (.94) (.34) -------- -------- -------- -------- Net income (loss) per common share - basic $ (.63) $ .03 $ (.94) $ (.28) ======== ======== ======== ======== Income (loss) per common share - diluted: Continuing operations $ (.64) $ .19 $ -- $ .05 Discontinued operations .01 (.16) (.94) $ (.27) -------- -------- -------- -------- Net income (loss) per common share - diluted $ (.63) .03 $ (.94) $ (.22) ======== ======== ======== ======== Weighted average number of common shares outstanding Basic 19,498 12,704 19,087 11,960 Diluted 19,498 15,602 19,087 15,070
See notes to condensed consolidated financial statements. 2 QUENTRA NETWORKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands)
6 MONTHS ENDED ---------------------- Sept. 30, Sept. 30, 2000 1999 ---------- ---------- Operating activities: Net loss $(17,470) $ (3,203) Adjustments to reconcile loss to net cash used by operating activities: Depreciation and amortization 1,390 351 Provision for doubtful accounts 1,326 -- Gain on sale of AGT -- (6,209) Provision for loss on discontinued operations -- 310 Compensation expense related to stock options and warrants 723 455 Common stock and options granted for services 1,054 -- Net change in discontinued operations (766) 1,010 Changes in current assets and liabilities 2,160 (3,537) -------- -------- Net cash used by operating activities (11,583) (10,823) -------- -------- Investing activities: Purchases of property and equipment (2,458) (570) Change in notes receivable -- 1,958 Investment in joint ventures and other (182) -- Acquisitions of Ariana and Polylink (140) -- Net change in discontinued operations -- (171) -------- -------- Net cash provided (used) by investing activities (2,780) 1,217 -------- -------- Financing activities: Repayments of debt and capital lease obligations (1,710) (60) Common stock issued, net of expenses -- 11,332 Preferred dividends (474) (154) Redemption of preferred stock -- (4,000) Exercise of options and warrants 1,746 -- Increase in note payable 670 2,424 Decrease in borrowing on line of credit (1,282) (125) -------- -------- Net cash provided (used) by financing activities (1,050) 9,417 -------- -------- Decrease in cash and cash equivalents (15,413) (189) Cash and cash equivalents: At beginning of the period 16,278 1,225 -------- -------- At end of the period $ 865 $ 1,036 ======== ========
See notes to condensed consolidated financial statements. 3 QUENTRA NETWORKS, 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, 2000, are not necessarily indicative of results to be expected for the fiscal year ending March 31, 2001. 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, 2000. 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 sale 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):
September 30, 2000 March 31, 2000 ------------------ -------------- (Unaudited) Current assets (liabilities): Accounts receivable, net of reserves $ 143 $ 1,642 Inventory 283 3,716 Accrued liabilities (452) (2,189) ------- ------- (26) 3,169 Less - reserve for loss on disposition -- (3,169) ------- ------- Net current assets (liabilities) of discontinued operations $ (26) $ -- ======= ======= Non-current assets: Property and equipment, net $ -- $ 2,118 Capitalized software development and intellectual rights -- 4,921 ------- ------- 7,039 Less - reserve for loss on disposition -- (7,039) ------- ------- Net long-term assets of discontinued operations $ -- $ -- ======= =======
On June 16, 2000, the Company entered into an agreement and bill of sale with Carrier Solutions, LLC (Carrier Solutions) whereby the Company transferred all of its interests in the switch business inventories and fixed assets to Carrier Solutions. The purchase price for these assets is a percentage (60% for the first year commencing June 16, 2000, 40% for the second year and 20% for the third year) of the gross sale proceeds received by Carrier Solutions for its sale of switch equipment. Additionally, the Company entered into a technology license agreement with Carrier Solutions that grants a nonexclusive license to use the DSS switch and all related intellectual property rights. As part of the license agreement, the Company will receive a license fee of 10% of 4 Carrier Solutions' gross sales (as defined by the agreement) for three years from June 16, 2000. As of September 30, 2000, there were no significant amounts earned or due to the Company from Carrier Solutions for equipment sales or license fees. Expected operating losses relating to the discontinued operations from April 1, 2000 until the expected disposal date were included in a reserve against net assets of discontinued operations at March 31, 2000. The Company recorded a charge for estimated loss on disposal of the switch business of approximately $11.0 million in the fourth quarter of fiscal 2000, which included an estimated $3.0 million of expected losses of the segment for the first two quarters of fiscal 2001. As of September 30, 2000, the Company has determined that no reserve is required for expected future operating losses or loss on disposal of the switch business. The operating results relating to the discontinued operations are as follows (dollars in thousands):
3 Months Ended 6 Months Ended ---------------------------- ------------------------------ (Unaudited) (Unaudited) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999 -------------- -------------- -------------- -------------- Net sales $ -- $ 870 $ -- $ 3,516 ======== ======= ========= ======= Income (loss) from discontinued operations $ 112 $(2,588) $ (77) $(3,776) ======== ======= ========= =======
After the decision to discontinue the switch business, the Company is operating in only one segment, long distance services. NOTE 3 ACQUISITIONS On April 30, 2000, the Company purchased a certain customer base of approximately 4,000 residential and small business long distance customers (the "Matrix Base") from Group Long Distance, Inc., (GLDI), a non-facilities based reseller of long distance services to more than 15,000 small and medium-sized businesses and residential customers. The purchase price for the Matrix Base was $1,000,000, payable with $50,000 in cash and a promissory note in the principal amount of $950,000 bearing interest at 8%, with interest only payable monthly, maturing April 30, 2002, secured by the assets sold. On May 1, 2000, the Company entered into a Merger Agreement with GLDI pursuant to which a subsidiary of the Company would merge into GLDI. The Company will issue 750,000 shares of the Company's common stock (subject to adjustment based upon the trading price of the common stock prior to closing) to GLDI's shareholders upon the consummation of the merger; however, the minimum number of shares of common stock that the Company will issue in the merger is 562,500 shares. Under the terms of the agreement, either party may cancel the merger if the five-day average price of the Company's common stock is less than $4.00 per share. The merger is subject to certain closing conditions, including approval of the GLDI shareholders and effectiveness of a registration statement registering the 750,000 shares to be issued in the merger. In June 2000, the Company entered into a Stock Purchase Agreement with Ariana Telecommunications, Inc. (Ariana) and its shareholders. Under this agreement, on June 1, 2000 the Company acquired 100% of the stock of Ariana for shares of Company common stock valued at $3,000,000. The Company has issued 714,786 shares of common stock related to this acquisition. The agreement also provides for up to an additional $3,000,000 of Company stock to be issued if certain earn-out events occur. Ariana provides long distance services, primary through prepaid calling cards, to targeted ethnic markets. Its core business is concentrated in the Los Angeles-San Diego corridor. In June 2000, the Company entered into a Stock Purchase Agreement to acquire 100% of the stock of Polylink Development, Ltd. for $250,000 cash and 150,000 shares of Company common stock valued at $900,000. Polylink Development, Ltd. is a Hong Kong based telecommunications provider. The agreement provides for 5 an additional payment of $250,000 cash if an earn-out event occurs. Additionally, the Company entered into an agreement to acquire 100% of the stock of Polylink Gateway International, Inc., an affiliate of Polylink Development, Ltd. for 108,064 shares of Company common stock valued at $648,384. These acquisitions were consummated on June 2, 2000. In connection with the above acquisitions, the Company recorded goodwill and other intangibles of approximately $5.6 million during the quarter ended June 30, 2000. NOTE 4 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"). As specified in the Purchase Agreement, the sale was effective on September 30, 1999 and AGTI established 100% control of the business as of that date. The revenue related to AGT for the quarter ended June 30, 1999 was approximately $800,000. The Company recognized a gain of $6.2 million from this sale in the second quarter of fiscal year 2000. NOTE 5 LIQUIDITY As of September 30, 2000, the Company had cash and cash equivalents of $865,000 and a negative working capital of $9.5 million. In October 2000, we received $6.8 million from a private placement of Company common stock and warrants. Additionally, in October 2000, we acquired HomeAccess. At closing, HomeAccess had approximately $1.5 million in cash. In conjunction with the HomeAccess acquisition, the Company loaned Mr. Jerry Conrad, a former principal of HomeAccess and Interim Chief Executive Officer, Chief Technology Officer and a director of the Company, $2.0 million. See Note 12 - Subsequent Events for further information on the private placement and the acquisition of HomeAccess. The Company also received proceeds associated with the note payable discussed in Note 6 of $600,000, net of expenses, during October 2000. In October 2000, the Company also issued convertible promissory notes in the aggregate principal amount of $5.5 million in connection with the cancellation of outstanding warrants and put rights. The Company continues to pursue sources of debt and equity funding in order to provide working capital necessary to run future operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." NOTE 6 DEBT OBLIGATIONS In September 2000, the Company obtained a new unsecured promissory note for $1,150,000. Borrowings under this note bear interest at a rate of 9.0% per annum and are convertible at any time through September 29, 2001 at the holder's option into shares of the Company's common stock at a price of $2.75 per share, subject to adjustment. Borrowings under this note are payable in monthly installments of $250,000, commencing in October 2000, until all principal and interest are paid in full. As of September 30, 2000, $460,000 was outstanding under this note. During October, the Company borrowed an additional $690,000 under this promissory note. In September 2000, the Company entered into a new capital lease obligation related to the purchase of telecommunication equipment for Ariana. The lease provides for 24 monthly payments of $42,370.00. In conjunction with this lease, the Company issued 12,295 shares of Company common stock, granted 122,961 warrants at an exercise price of $2.22 per share, and pledged 250,000 shares of Company common stock. 6 NOTE 7 STATEMENT OF CASH FLOWS Non-cash investing and financing activities, which are excluded from the consolidated statement of cash flows are as follows (in thousands):
6 Months Ended -------------- (Unaudited) Sept. 30, Sept. 30, 2000 2000 --------- --------- Details of Ariana and Polylink acquisitions: Fair value of assets acquired $ 1,610 $ -- Goodwill recorded 4,572 -- Liabilities assumed (1,439) -- Common stock issued (4,603) -- ------- ------- Net cash used in investing activities $ 140 $ -- ======= ======= Conversion of Class B Units to common stock $ -- $ 330 Gain on sale of AGT -- 6,209 Preference stock conversion inducement -- 200 Issuance of debt for GLD customer base 950 -- Stock and non-cash compensation related to issuance of warrants with debt 360 -- Issuance of common stock to former owners of INET in connection with earn out 1,175 -- Non-cash exercise of stock options 167 --
NOTE 8 LITIGATION SETTLEMENT The Company has reached definitive settlement arrangements in connection with litigation involving pending cases against the Company. In the first case, filed in Cook County Circuit Court, Chicago, Illinois, in October 1998, Superior Street Capital Advisors, LLC (Superior Street) seeks monetary damages and claims that the Company is in breach of a November 12, 1997 letter agreement pursuant to which Superior Street provided investment advice and financial consulting assistance to the Company. Superior Street filed a second complaint in Cook County Circuit Court, Chicago, Illinois, in December 1998, seeking injunctive relief to order the Company to include its warrants in a Form S-3 that had been filed by the Company with the SEC. In August 1999, Superior Street amended its complaint seeking monetary damages and claiming that the Company's alleged delay in including Superior Street's warrants in the Company's registration statement on Form S-3 damaged Superior Street. The third case against the Company and certain of its current and former directors was filed by Theodore Netzky (Netzky) and the Ronald N. Weiser Trust (Weiser Trust), in the United States District Court for the Northern District of Illinois in Chicago, Illinois, in July 2000. Netzky and the Weiser Trust seek monetary damages and allege that Mr. Fiedler, Quentra's former CEO and Chairman, advised Netzky and the Weiser Trust not to exercise their warrants, and based on Mr. Fiedler's advice, did not exercise their warrants, and were damaged based on Fiedler's advice. The settlement agreement documents are in the final stages of negotiation. The terms of the settlement provide for a cash payment of $150,000, issuance of shares of Company common stock, and discounts in the exercise price of the warrants currently held by the plaintiffs. During the quarter ended September 30, 2000, the Company recorded a reserve 7 (included in other liabilities) and a charge against income of $1.5 million to provide for the estimated liability associated with this pending settlement. NOTE 9 SHAREHOLDERS' EQUITY Common Stock and Convertible Preferred Stock At the Annual Stockholders Meeting on July 27, 2000, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of capital stock. The authorized number of shares was increased from 35,000,000 to 80,000,000, of which 70,000,000 were designated as Common Stock and 10,000,000 were designated as Preferred Stock. During the quarter ended September 30, 2000, the Company issued 52,143 shares of common stock to financial consulting entities in consideration for past services. The stock was issued on various dates during September 2000, based on the market value of the stock on the measurement date that the shares were granted. Additionally, on September 28, 2000, the Company issued 30,000 shares of common stock to an employee in connection with the termination of his employment. On September 6, 2000, the Company issued 277,647 shares to the former shareholders of Ariana in conjunction with the market price guarantee included in the acquisition agreement. Options and Warrants During the quarter ended September 30, 2000, the Board of Directors granted five-year options to purchase a total of 417,300 shares of the Company's common stock to certain employees. The per share exercise prices of these grants are equal to the closing market price of the Company's common stock on the grant date and range from $3.44 to $5.00. These options vest in one-third increments over three years. In addition, the Company issued 562,211 options and warrants to non-employees for past services, which resulted in a Black Scholes value of $700,000. These options or warrants vested immediately. The exercise prices of these grants are equal to market price on the date of grant except for 122,961 warrants issued with an exercise price of $2.22 per share. During the quarter ended September 30, 2000, a total of 59,619 vested options were exercised for $0.17 million in accordance with the terms of the Coyote Technologies Employees Non-Qualified Stock Option Plan and The 1986 Diana Corporation Option Plan. During the quarter ended September 30, 2000, a total of 558,125 vested warrants were exercised for $1.6 million in accordance with the terms of each respective warrant agreement. NOTE 10 RELATED PARTY TRANSACTIONS In June 2000, in consideration of additional services provided under the consulting agreement with KRJ, the Company's Board of Directors resolved to present for shareholder approval the issuance of 2,500,000 shares of common stock and the grant of warrants to purchase 2,400,000 shares of common stock at an exercise price per share of $7.00 to KRJ. The vesting of the shares and the exercisability of the warrants are dependent on the average bid price of our common stock for twenty consecutive trading days exceeding certain amounts that range from $12 to $30 per share. The Company will determine the charge to earnings, if any, if and when shareholder approval is obtained. In June 2000, the Board of Directors approved the grant of options under the Equity Plan to purchase an additional 750,000 shares of Common Stock to James McCullough, the Company's former CEO, at $7.00 per share. Mr. McCullough's employment with the Company terminated in November 2000 and all 750,000 shares became vested at that time. 8 NOTE 11 EARNINGS AND 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 with a loss from continuing operations. The effect of options and warrants would be antidilutive. 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 6 Months Ended ---------------------------- ------------------------------ (Unaudited) (Unaudited) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999 -------------- -------------- -------------- -------------- Net income (loss) $(11,947) $ 472 $ (17,470) $ (3,203) Preferred dividend (242) (75) (474) (154) -------- -------- ---------- -------- Net income (loss) applicable to common stock $(12,189) $ 397 $ (17,944) $ (3,357) ======== ======== ========== ========
NOTE 12 SUBSEQUENT EVENTS In addition to the subsequent events discussed elsewhere, the following events have occurred subsequent to September 30, 2000: In October 2000, the Company issued convertible promissory notes in the aggregate principal amount of $5.5 million. The notes bear interest at a rate equal to 8% per annum, with interest due and payable on a quarterly basis commencing on December 29, 2000. The holders may at any time convert all or part of the outstanding principal amount and accrued and unpaid interest on the notes into shares of the Company's common stock at a conversion price equal to $3.25 per share. The notes are due and payable on October 6, 2005, however, the holders of the notes may demand payment, in full or in part, at any time after October 6, 2001. The Company may prepay the notes at any time after the closing sales price of its common stock equals or exceeds $6.00 per share for 20 consecutive trading days and after providing 60 days notice of its desire to prepay the note. These notes were issued to the holders, and as consideration for the cancellation, of warrants to purchase 500,000 shares of the Company's common stock that were issued to First Venture Leasing in March 2000 in connection with the Financial Services Agreement with First Venture. These warrants were held by various transferees of First Venture. These warrants entitled the holders the right to sell the warrants back to the Company, or put right, for $5.5 million at any time between October 1, 2000 and December 31, 2000, if a registration statement registering the shares issuable upon conversion of the Company's Series B Preferred Stock was not declared effective on or prior to October 1, 2000. The Company agreed to issue the notes to the holders of the warrants in order to terminate such put rights. At March 31, 2000, the Company recorded a charge against income of $3.9 million associated with the 500,000 warrants. During the quarter ended September 30, 2000, the Company recorded a charge against income of $1.6 million related to the additional liability associated with these put rights. At September 30, 2000, a reserve of $1.6million related to this transaction was included in other liabilities. The Company has other warrants to purchase shares of its common stock with put rights still outstanding. The holders of warrants to purchase 50,000 shares have exercised their put right and requested that the Company pay them $550,000. The Company is negotiating with these holders and have requested that they agree to cancel their warrants and put rights in exchange for the Company's issuance of convertible promissory notes in the aggregate principal amount of $550,000, containing terms substantially similar to the notes described above. The Company is examining its alternatives to resolve this issue. At March 31, 2000, the Company recorded a charge against income of $930,000 associated with the warrants still outstanding with put rights. During the quarter ended September 30, 2000, the Company recorded a reserve (included in other 9 liabilities) and an additional charge against income of $390,000 related to the liability associated with the put rights. In October 2000, the Company acquired HomeAccess Microweb. As consideration for the acquisition, the Company issued DQE Enterprises 1,767,603 shares of its Series C Convertible Preferred Stock and Barbara Conrad 2,651,404 shares of its common stock. The holder of the Series C Preferred Stock is entitled to receive 6% cumulative dividends per year commencing on December 31, 2000. Such dividends are payable in shares of the Company's common stock or in cash, at the Company's option, on a quarterly basis. At its option, and at any time, the holder may convert any shares of Series C Preferred Stock into shares of common stock at a conversion price of $4.75 per share, subject to adjustment. Concurrently with the HomeAccess acquisition the Company completed a private placement with accredited investors and sold units at $11.00 per unit. Each unit is comprised of four shares of common stock and warrants to purchase one share of common stock. The Company issued 2,588,000 shares of its common stock and 647,843 warrants to purchase shares of its common stock at an exercise price of $2.75 per share. The Company received approximately $6.8 million, net of fees and expenses associated with the placement. The warrants are immediately exercisable and expire three years from the date of issuance. In connection with the HomeAccess acquisition, the Company entered into a personal services agreement with Jerry Conrad, a former principal of HomeAccess, pursuant to which he became the Company's Chief Technology Officer and a director. Under the terms of the personal services agreement, the Company loaned Mr. Conrad $2.0 million by issuing him a promissory note. Under the note, generally, if Mr. Conrad remains an employee of the Company, on the second, third and fourth anniversaries of the closing of the acquisition, the Company will forgive the principal and accrued interest under the note. In addition, under the personal services agreement the Company agreed to pay Mr. Conrad a bonus of $500,000 payable in twelve equal monthly installments and a bonus of $1.5 million payable at such time as the Company has received a $7.5 million license fee or similar payment from Albertson's Inc. In November 2000, the Company's Board appointed Mr. Conrad as our interim Chief Executive Officer, succeeding Mr. James McCullough. 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 was included in a reserve against net assets of discontinued operations at March 31, 2000. We recorded a charge for estimated loss on disposal of the switch business of approximately $11.0 million in the fourth quarter of fiscal 2000, which included an estimated $3.0 million of expected losses of the segment for the first two quarters of fiscal 2001. We disposed of this segment as of June 30, 2000. We recorded an additional charge of $77,000 for the six months ended September 30, 2000 for estimated loss on disposal. As of September 30, 2000, we determined there was no reserve required for future losses of this discontinued operation. 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. 10 Results of Operations The results for the three and six months ended September 30, 1999 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 three subsidiaries during the periods reported: American Gateway Telecommunications, or AGT, which was acquired in April 1998 and sold effective September 1999; INET, which was acquired in September 1998; and Ariana Telecommunications, Inc. (Ariana) which was acquired in June 2000. Three Months Ended September 30, 2000 versus Three Months Ended September 30, 1999 During the second quarter of fiscal year 2001, revenues were up $4.8 million, or 200%, to $7.2 million compared to $2.4 million during the second quarter of fiscal year 2000. This increase was due primarily to new wholesale customers in the Pacific Rim and the prepaid calling card services provided by Ariana. During the quarter ended September 30, 2000 we had revenue from international wholesale customers of $1.4 million; conversely, during the quarter ended September 30, 1999 we had no revenue from international wholesale customers. Revenue from prepaid calling card service was $3.6 million for the second quarter of fiscal year 2001; during the quarter ended September 30, 1999, we had no revenue from these services. Revenues from our retail long distance services were relatively the same between quarters. Due to the increase in wholesale and prepaid traffic, which had lower margins than retail traffic, gross profit decreased from 14% of revenues, or $348,000, for the second quarter of fiscal 2000 to 9%, or $619,000, during the second quarter of fiscal 2001. Although the actual cost of minutes has not increased, wholesale and prepaid traffic are sold at lower prices causing gross margins to be smaller than retail traffic. During the quarter ended September 30, 1999, we only provided retail long distance services. During the second quarter of fiscal year 2001, selling and administrative costs were $12.5 million compared to $3.2 million during the second quarter of fiscal year 2000. This increase is largely due to several large charges, many of which were non-cash transactions recorded during the second quarter. These charges include the following: $2.0 million related to estimated obligations associated with settlements related to put rights of certain outstanding warrants (See Note 12); $1.6 million for write-offs of investments in telecommunication companies; $1.5 million for a settlement of a litigation matter (See Note 8); $600,000 for stock and options issued for various settlements; and $600,000 related to an increase in reserve for bad debt, a major portion of which relates to one customer. Other factors contributing to the increase in selling and administrative costs during the quarter ended September 30, 2000, included legal fees of $600,000 associated with additional regulatory filings; goodwill amortization of $600,000; and engineering costs of $500,000. Additionally, the selling and administrative costs of Ariana are included in the quarter ended September 30, 2000, whereas no such costs are included in the prior year's quarter as Ariana was acquired in June 2000. For the second quarter of fiscal 2001 net interest expense was $196,000 compared to net interest expense of $328,000 for the second quarter of fiscal 2000. The decrease is due to interest income earned on cash and cash equivalents during the second quarter of 2001 and a slight decrease in outstanding debt. The loss from continuing operations was $12.1 million for the second quarter of fiscal year 2001 compared to income from continuing operations of $3.1 million for the second quarter of fiscal year 2000. This decline is due partially to the increase in selling and administrative costs described above. Additionally, during the quarter ended September 30, 2000, we had non-operating income of $6.2 million from the sale of AGT. 11 The income from discontinued operations for the second quarter of fiscal year 2001 was $100,000 compared to a loss of $2.6 million for the second quarter of fiscal 2000. The switch business was disposed of during June 2000, and any future loss had been provided for as of June 30, 2000. Overall, the net loss was $11.9 million for the second quarter of fiscal year 2001, compared to net income of $500,000 a year earlier. Six Months Ended September 30, 2000 versus Six Months Ended September 30, 1999 During the first six months of fiscal year 2001, revenues were up $8.0 million, or 186%, to $12.3 million compared to $4.3 million during the first six months of fiscal year 2000. This increase was due primarily to new wholesale customers in the Pacific Rim and the prepaid calling card services provided by Ariana. During the six months ended September 30, 2000 we had revenue from international wholesale customers of $2.3 million; during the six months ended September 30, 1999 we had no revenue from international wholesale customers. Revenue from prepaid calling card services was $4.7 million for the first six months of fiscal year 2001; during the six months ended September 30, 1999, we had no revenue from these services. Revenues from our retail long distance services increased approximately $1.0 million from the six months ended September 30, 1999 compared to the six months ended September 30, 2000. During the first six months of fiscal year 2001, selling and administrative costs were $18.6 million compared to $5.6 million during the second quarter of fiscal year 2000. This increase is primarily due to several large charges, many of which were non-cash transactions, recorded during the quarter ended September 30, 2000. These charges include the following: $2.0 million related to estimated obligations associated with settlement related to put rights of certain outstanding warrants (See Note 12); $1.6 million for write-offs of investments in telecommunication companies; $1.5 million for a settlement of a litigation matter (See Note 8); $600,000 for stock and options issued for various settlements; and $1.3 million related to increase in reserve for bad debt. Other factors contributing to the increase in selling and administrative costs for the six months ended September 30, 2000, were legal and accounting fees of $1.3 million associated with additional regulatory filings; goodwill amortization of $800,000; and engineering costs of $500,000. Additionally, the selling and administrative costs of Ariana are included in the six months ended September 30, 2000 whereas no cost was included in the prior year's period as Ariana was acquired in June 2000. For the six months ended September 30, 2000 there was net interest expense of $184,000 compared to net interest expense of $680,000 for the six months ended September 30, 2000. The decrease is due to interest income earned on cash and cash equivalents during the first six months of fiscal year 2001 and a decrease in outstanding debt. The loss from continuing operations was $17.4 million for the first six months of fiscal year 2001 compared to income from continuing operations of $900,000 for the first six months of fiscal year 2000. This decline is due partially to the increase in selling and administrative costs described above. Additionally, during the six months ended September 30, 1999, we had non-operating income of $6.4 million from the sale of AGT. The loss from discontinued operations for first six months of fiscal year 2001 was $0.1 million compared to a loss of $4.1 million for the first six months of fiscal 2000. The switch business was disposed of during June 2000, and any future loss had been provided for as of June 30, 2000. Overall, the net loss was $17.5 million for the second quarter of fiscal year 2001, compared to a net loss of $3.2 million a year earlier. 12 Liquidity and Capital Resources As of September 30, 2000, we had a negative working capital of $9.5 million and cash and cash equivalents of $865,000. In October 2000, we received $6.8 million, net of fees and expenses from a private placement of the Company common stock and warrants. Also in October 2000, we acquired HomeAccess, which had approximately $1.5 million of working capital at closing. In conjunction with the HomeAccess acquisition, the Company loaned Mr. Jerry Conrad $2.0 million. The Company also received proceeds from a note payable of $600,000 during October 2000. During the first six months of fiscal 2001 we used net cash for operating activities of $11.6 million compared to $10.8 million used by operating activities during the first six months of fiscal 2000. This decline in operating cash flow is due primarily to the increase in the losses incurred in our continuing long distance service operations. We used cash for investing activities of $2.8 million during the first six months of fiscal 2001 compared to $1.2 million generated from investing activities in the corresponding period of fiscal 2000. This increase is from capital expenditures on equipment purchases of $2.5 million during the first six months of fiscal 2000. Financing activities used cash of $1.1 million during the first six months of fiscal 2001 compared to $9.4 million provided during the first six months of fiscal 2000. During the first six months of fiscal year 2000 we received cash of $11.3 million from the issuance of common stock. We had capital lease obligations of $2.6 million at September 30, 2000, payable through 2004. We had a $2.2 million revolving line of credit secured against certain trade receivables. As at September 30, 2000 $423,000 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 (9.5% at September 30, 2000) plus 3%. The line of credit expired on August 31, 2000. As of November 6, 2000, the outstanding balance on the line was $143,000. We expect to pay off the line by the end of the third quarter of fiscal year 2001. We have a long-term obligation in the amount of $1.5 million at September 30, 2000 in connection with principal and interest due on subordinated debentures, which bear interest of 11.25% per year. The debentures mature in January 2002 and interest only is due until such time. We have a long-term obligation in the amount of $950,000 in connection with a promissory note issued in connection with the acquisition of the Matrix Base from Group Long Distance, which bears interest at 8% per annum. The promissory note provides for monthly interest only payments, with the entire principal balance due on April 30, 2002. In September 2000, we obtained a new unsecured promissory note that provides for borrowings up to $1.2 million. Borrowings under this note bear interest at a rate of 9.0% per annum and are convertible at any time through September 29, 2001 at the holder's option into shares of our common stock at a price of $2.75 per share, subject to adjustment. Borrowings under this note are payable in monthly installments of $250,000 commencing in October 2000 until all principal and interest are paid in full. As of September 30, 2000, $460,000 was outstanding under this note. During October, we borrowed an additional $690,000 under this promissory note. We believe that our cash on hand at September 30, 2000, the proceeds from our October 2000 private placement and cash received from the acquisition of HomeAccess will fund our debt obligations and ongoing operations through the third quarter of fiscal 2001. We are in the process of negotiating third-party lease funding in connection with previously purchased switch equipment. Additionally, we continue to pursue other sources of debt and equity funding in order to provide working capital necessary to run future operations. We believe that 13 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. If we are not able to obtain the necessary financing, it could have a significant adverse affect on our business including our ability to pay our outstanding indebtedness and other liabilities, and to operate our business as planned. We have been advised by our independent public accountants that, if prior to the completion of their audit of our financial statements for the year ending March 31, 2001 we are unable to demonstrate our ability to fund our operations for the next 12 months, their auditors' report on those financial statements will be modified for the contingency related to our ability to continue as a going concern. Recently Issued Accounting Standards In June 1998 and June 1999, the AICPA issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No., 137 which deferred the effective date of SFAS No. 133. We will adopt the standard in April 2001 and do not expect the adoption to have any material impact on our financial position or results of operations. 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. The Company's primary market risk exposure is interest rate risk related to borrowings under its 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 September 30 -------------------------------- (U.S. Dollars - Thousands) 2000 2001 2002 2003 ---- ------ ------ ------ Line of credit borrowings $423 $ -- $ -- $ -- Interest expense (A) 53 -- -- -- Interest expense (B) 57 -- -- -- Interest expense (C) 49 -- -- -- |X| The borrowings bear interest at the bank's prime rate plus 3% for the line of credit. |X| The interest expense shown for line (A) is based upon the actual bank's prime rate at September 30, 2000 of 9.5%. |X| The interest expense shown for line (B) is based upon a hypothetical increase of one percentage point in the bank's prime rate to 10.5%. 14 |X| The interest expense shown for line (C) is based upon a hypothetical decrease of one percentage point in the bank's prime rate to 8.5%. 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 expected to be introduced by the Company in the future, statements about the Company's business strategy and plans, statements about the status of litigation matters and other claims, 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 changes in the Company's business strategy and operations, recent acquisitions, 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, 2000. 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 1. LEGAL PROCEEDINGS We have reached definitive settlement arrangements in connection with litigation involving pending cases against us. In the first case, filed in Cook County Circuit Court, Chicago, Illinois in October 1998, Superior Street Capital Advisors, LLC (Superior Street) seeks monetary damages and claims that we are in breach of a November 12, 1997 letter agreement pursuant to which Superior Street provided investment advice and financial consulting assistance to us. Superior Street filed a second complaint in Cook County Circuit Court, Chicago, Illinois, in December 1998, seeking injunctive relief to order us to include its warrants in a Form S-3 that had been filed by us with the SEC. In August 1999, Superior Street amended its complaint seeking monetary damages and claiming that our alleged delay in including Superior Street's warrants in our registration statement on Form S-3 damaged Superior Street. The third case against us and certain of our current and former directors was filed by Theodore Netzky (Netzky) and the Ronald N. Weiser Trust (Weiser Trust), in the United States District Court for the Northern District of Illinois in Chicago, Illinois in July 2000. Netzky and the Weiser Trust seek monetary damages and allege that Mr. Fiedler, Quentra's former CEO and Chairman, advised Netzky and the Weiser Trust not to exercise their warrants, and based on Mr. Fiedler's advice, did not exercise their warrants, and were damaged based on Fiedler's advice. The settlement agreement documents are in the final stages of negotiation. The terms of the settlement provide for a cash payment of $150,000, issuance of shares of our common stock, and discounts in the exercise price of the warrants currently held by the plaintiffs. During the quarter ended September 30, 2000, we recorded a reserve (included in other liabilities) and a charge against income of $1.5 million to provide for the estimated liability associated with this pending settlement. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Information regarding issuances of securities not registered under the Securities Act of 1933 is incorporated by reference from Note 9 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of the Company's stockholders was held on July 27, 2000, in Los Angeles, California, for the purpose of electing a director, authorizing an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of capital stock from 35 million to 80 million, to approve the Company's 2000 Equity Incentive Plan, to amend the Company's Restated Certificate of Incorporation to change the name of the Company to Quentra Networks, Inc. and to ratify the Board of Directors' selection of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ended March 31, 2000. The following votes were cast by the Company's stockholders: Shares Voted Shares Voted Shares Voted Shares Voted Shares Voted ------------ ------------ ------------ ------------ ------------ For Against Withheld Abstain Broker Nonvotes ------- -------- ------- --------------- Election of Mr. Daniel Latham as a director: 16,204,606 52,990 0 0 0 Charter amendment to increase authorized share capital: 9,816,487 568,201 N/A 138,836 0 Approval of 2000 Equity Incentive Plan: 9,635,390 737,888 N/A 150,246 0 16 Charter amendment to change name: 16,451,960 118,503 N/A 137,133 0 Ratification of selection of auditors: 16,504,256 70,987 N/A 132,353 0 The other directors whose terms continued after the annual meeting were John M. Eger, J. Thomas Markley and James R. McCullough. Mr. Markley and Mr. McCullough resigned from the Board of Directors in August 2000 and November 2000 respectively. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit Number Description ------- ----------- 2.1 Stock Acquisition by Merger Agreement, dated as of September 30, 1998, among the Registrant, INET Acquisition, Inc., INET Interactive Network System, Inc., Claude Buchert, Helene Legendre and First Rock Trustees, Limited, a Gibraltar corporation, trustee of the Guimauve Trust, a Gibraltar trust dated September 1, 1994 (incorporated herein by reference to Exhibit 2.1 of Registrant's Form 8-K dated September 30, 1998 filed on October 15, 1998). 2.2 Amended and Restated Agreement and Plan of Merger dated October 5, 2000 by and among the Registrant, HomeAccess Microweb, Inc., DQE Enterprises, Inc., Barbara Conrad and Jerry Conrad (incorporated herein by reference to Exhibit 2.1 of Registrant's Form 8-K dated October 5, 2000, filed on October 10, 2000). 2.3 First Amendment to Stock Acquisition by Merger Agreement, dated as of June 2, 2000 among the Registrant, INET Acquisition, Inc., INET Interactive Network System, Inc., Claude Buchert, Helene Legendre and First Rock Trustees, Limited, a Gibraltar corporation, trustee of the Guimauve Trust, a Gibraltar trust dated September 1, 1994. 3.1 Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.01 of Registrant's Form 10-Q for the quarter ended September 30, 1998 filed on November 16, 1998). 3.2 Certificate of Correction of Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.02 of Registrant's Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000). 3.3 Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.03 of Registrant's Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000). 3.4 By-Laws of Registrant, as amended March 7, 1997 (incorporated herein by reference to Exhibit 3.2 of Registrant's Form 10-K for the fiscal year ended March 31, 1997). 3.5 Certificate of Designations, Preferences and Rights of Series B Preferred Stock (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K dated January 31, 2000 filed on February 14, 2000). 3.6 Certificate of Designations, Preferences and Rights of Series C Preferred Stock filed on October 19, 2000 (incorporated herein by reference to Exhibit 4.1 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 4.1 Form of Warrants dated October 19, 2000 issued to various investors to purchase up to 647,843 shares of common stock at $2.75 per share (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 4.2 Stock Purchase Agreement dated September 21, 2000, as amended on October 10, 2000, between the Registrant and various investors (incorporated herein by reference to Exhibit 4.3 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 17 Exhibit Number Description ------- ----------- 4.3 8% Convertible Promissory Note dated October 6, 2000 between the Registrant, as payor, and Omega Capital Partners, L.P., as payee, in the aggregate principal amount of $1,848,000 (Notes in the aggregate principal amount of $ 3,652,000 were issued to nine (9) other holders as set forth on Schedule A to this Exhibit) (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated October 5, 2000 filed October 10, 2000). 4.4 Warrant dated April 12, 2000 to purchase 50,000 shares of the common stock of the Registrant issued to First Venture Leasing LLC (incorporated by reference to Exhibit 4.2 of Registrant's Form 8-K dated October 5, 2000 filed October 10, 2000). 10.1 Form of Stock Option Agreement under 2000 Equity Incentive Plan. 10.2 Separation Agreement dated as of April 30, 2000 between the Registrant and Brian Robson. 10.3 Employment Agreement dated as of April 15, 2000 between the Registrant and Timothy Atkinson. 27.0 Financial Data Schedule b) Reports on Form 8-K: None. 18 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. QUENTRA NETWORKS, INC. DATE: November 14, 2000 By: /s/Jerry Conrad --------------------------------- Jerry Conrad Interim Chief Executive Officer (Principal Executive Officer) DATE: November 14 2000 By: /s/Cheryl Johnson --------------------------------- Cheryl Johnson Chief Financial Officer (Principal Financial and Accounting Officer) 19 Exhibit Index Exhibit Number Description ------- ----------- 2.1 Stock Acquisition by Merger Agreement, dated as of September 30, 1998, among the Registrant, INET Acquisition, Inc., INET Interactive Network System, Inc., Claude Buchert, Helene Legendre and First Rock Trustees, Limited, a Gibraltar corporation, trustee of the Guimauve Trust, a Gibraltar trust dated September 1, 1994 (incorporated herein by reference to Exhibit 2.1 of Registrant's Form 8-K dated September 30, 1998 filed on October 15, 1998). 2.2 Amended and Restated Agreement and Plan of Merger dated October 5, 2000 by and among the Registrant, HomeAccess Microweb, Inc., DQE Enterprises, Inc., Barbara Conrad and Jerry Conrad (incorporated herein by reference to Exhibit 2.1 of Registrant's Form 8-K dated October 5, 2000, filed on October 10, 2000). 2.3 First Amendment to Stock Acquisition by Merger Agreement, dated as of June 2, 2000 among the Registrant, INET Acquisition, Inc., INET Interactive Network System, Inc., Claude Buchert, Helene Legendre and First Rock Trustees, Limited, a Gibraltar corporation, trustee of the Guimauve Trust, a Gibraltar trust dated September 1, 1994. 3.1 Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.01 of Registrant's Form 10-Q for the quarter ended September 30, 1998 filed on November 16, 1998). 3.2 Certificate of Correction of Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.02 of Registrant's Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000). 3.3 Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.03 of Registrant's Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000). 3.4 By-Laws of Registrant, as amended March 7, 1997 (incorporated herein by reference to Exhibit 3.2 of Registrant's Form 10-K for the fiscal year ended March 31, 1997). 3.5 Certificate of Designations, Preferences and Rights of Series B Preferred Stock (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K dated January 31, 2000 filed on February 14, 2000). 3.6 Certificate of Designations, Preferences and Rights of Series C Preferred Stock filed on October 19, 2000 (incorporated herein by reference to Exhibit 4.1 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 4.1 Form of Warrants dated October 19, 2000 issued to various investors to purchase up to 647,843 shares of common stock at $2.75 per share (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 4.2 Stock Purchase Agreement dated September 21, 2000, as amended on October 10, 2000, between the Registrant and various investors (incorporated herein by reference to Exhibit 4.3 of Registrant's Form 8-K dated October 19, 2000 filed on October 25, 2000). 4.3 8% Convertible Promissory Note dated October 6, 2000 between the Registrant, as payor, and Omega Capital Partners, L.P., as payee, in the aggregate principal amount of $1,848,000 (Notes in the aggregate principal amount of $ 3,652,000 were issued to nine (9) other holders as set forth on Schedule A to this Exhibit) (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated October 5, 2000 filed October 10, 2000). 4.4 Warrant dated April 12, 2000 to purchase 50,000 shares of the common stock of the Registrant issued to First Venture Leasing LLC (incorporated by reference to Exhibit 4.2 of Registrant's Form 8-K dated October 5, 2000 filed October 10, 2000). 10.1 Form of Stock Option Agreement under 2000 Equity Incentive Plan. 10.2 Separation Agreement dated as of April 30, 2000 between the Registrant and Brian Robson. 20 10.3 Employment Agreement dated as of April 15, 2000 between the Registrant and Timothy Atkinson. 27.0 Financial Data Schedule 21 EX-2.3 2 ex2-3_24042.txt FIRST AMENDMENT TO STOCK ACQUISITION FIRST AMENDMENT TO STOCK ACQUISITION BY MERGER AGREEMENT THIS FIRST AMENDMENT TO STOCK ACQUISITION BY MERGER AGREEMENT, dated as of June 2, 2000, amends and supplements that certain Stock Acquisition by Merger Agreement, dated as of September 30, 1998 (the "Merger Agreement"), by and among COYOTE NETWORK SYSTEMS, INC., a Delaware corporation ("Coyote"), INET INTERACTIVE NETWORK SYSTEM, INC., a California corporation ("INET"), CLAUDE BUCHERT ("Buchert"), HELENE LEGENDRE ("Legendre") and FIRST ROCK TRUSTEES, LIMITED, a Gibraltar corporation, TRUSTEE OF THE GUIMAUVE TRUST, a Gibraltar Trust ("GT"). (Buchert, Legendre and GT are collectively referred to herein as the "Shareholders.") RECITAL Coyote, INET, Buchert, Legendre and GT desire to amend and supplement the Merger Agreement as provided below. AGREEMENTS In consideration of the promises and agreements set forth herein, the parties agree as follows: 1. Definitions and References. Capitalized terms not otherwise defined herein have the meanings assigned in the Merger Agreement. All references to the Merger Agreement contained in any instrument, document or agreement between the parties shall mean the Merger Agreement as amended by this Amendment. 2. Section 2.2.3 of the Merger Agreement. Coyote agrees that pursuant to Section 2.2.3 and Exhibit B of the Merger Agreement that the Shareholders have earned an additional 170,000 shares of unregistered Coyote Common Stock (the "Earn Out Shares") which shall be issued to the Shareholders as soon as possible after June 2, 2000, to be allocated according to the percentage ownership interests set forth in Section 2.2.5. The Shareholders hereby acknowledge that Coyote must amend its Certificate of Incorporation (the "Charter Amendment") to authorize the issuance of a sufficient number of additional shares of stock in order to issue the Earn Out Shares to the Shareholders. Coyote shall use reasonable efforts to obtain the approval of its stockholders and shall take such other actions as are necessary to effect the Charter Amendment. In the event that the Earn Out Shares have not been issued to the Shareholders by December 31, 2000, Coyote shall pay the Shareholders an aggregate of $5,000 per month until such time as the shares are issued. The obligation to issue the Earn Out Shares is fixed on the part of Coyote and not contingent on any further action of the Shareholders and the Earn Out Shares shall be deemed to have been issued as of May 15, 1999 pursuant to section E.1(b) of Exhibit B to the Merger Agreement. Coyote shall cause to be delivered to the Shareholders the Earn Out Shares required under this Amendment. All Earn Out Shares required to be delivered hereunder will at the time of such delivery be duly authorized and validly issued, fully paid and nonassessable, with all requisite Federal, state and local transfer taxes fully paid, free and clear of all liens, pledges, encumbrances, claims, equities and conditions enforceable by third parties (except to the extent, if any, that the Investment Letter, referred to in the Merger Agreement, constitutes such a condition). Coyote further warrants that, to the extent necessary to allow Shareholders to sell their Earn Out Shares or the other shares issued pursuant to the Merger Agreement under Rule 144, Coyote will remain current in its Securities filings. 3. Registration Rights. If, at any time while the Earn Out Shares are not tradable pursuant to the provisions of Rule 144 under the Securities Act of 1933, as amended, Coyote decides to register any of its securities for its own account or for the account of others (including, without limitation, registrations contemplated in connection with the Class B Preferred Stock of Coyote (the "Class B Preferred"), but 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), Coyote will promptly give the Shareholders written notice thereof and will (subject only to obtaining any required consents of shareholders of the Class B Preferred, which Coyote will use its best efforts to obtain) include in such registration all of the Earn Out Shares if requested by the Shareholders (excluding any Earn Out Shares previously included in a Registration Statement) at no cost or expense to the Shareholders, who shall only be obligated to pay underwriting discounts or commissions. The Shareholders' request for registration must be given to Coyote in writing within twenty (20) days after receipt of the notice from Coyote. If the registration for which Coyote gives notice is a public offering involving a firm commitment underwriting, Coyote will so advise the Shareholders as part of the above-described written notice. In such event, if the managing underwriter(s) of the public offering impose a limitation in writing on the number of shares of Coyote Common Stock which may be included in the registration statement 2 because, in such underwriter(s)' judgment, such limitation would be necessary to effect an orderly public distribution, then Coyote will be obligated to include only such limited portion, if any, of the shares requested by the Shareholders which the managing underwriter(s) deems appropriate giving first preference to the shares to be sold by Coyote; provided, however, that the number of shares requested by the Shareholders to be included in such underwriting shall not be so limited unless all other securities proposed to be included therein (other than those owned by Coyote) are also so limited on a pari passu basis. 4. Buchert Promissory Note. Buchert acknowledges and agrees that the entire outstanding balance of principal and accrued interest of the Promissory Note dated September 30, 1998 from Buchert payable to the order of Coyote shall remain outstanding notwithstanding any terms or conditions to the contrary set forth therein or in any other agreement (including, without limitation, the Principal and Interest Reduction section in such Promissory Note) and Buchert hereby agrees that all $100,000 of the outstanding principal and all accrued interest shall be paid in full to Coyote on or before September 30, 2000; provided, however, that to the extent that the Earn Out Shares are not issued to the Shareholders on or before September 30, 2000 and such shares are not registered under, or tradable pursuant to the provisions of Rule 144 under, the Securities Act of 1933, as amended, the entire outstanding balance of principal and interest under such Promissory Note shall be forgiven. 5. Mutual Release. Coyote, INET and the Shareholders each hereby release, acquit and forever discharge the other party, and each and every past and present subsidiary, affiliate, stockholder, officer, director, agent, servant, employee, representative and attorney of such party (each a "Released Party"), from any and all claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and other expenses (including attorneys' fees) of any kind, character or nature whatsoever, known or unknown, fixed or contingent, which the releasing party may have or claim to have now or which may hereafter arise out of or be connected with any act or omission of any Released Party existing or occurring prior to the date of this Agreement, including, without limitation, any claims, liabilities or obligations arising with respect to the Merger Agreement or any instrument, document or agreement related thereto other than the obligations of the parties arising out of or referred to in this Amendment, the Buchert Employment Agreement or the Termination, Waiver and Release Agreement with Legendre, and Coyote, INET and the Shareholders each hereby waive any and all of such claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses. The provisions of this section 5 shall be 3 binding upon each of the parties hereto and their respective successors, assigns, heirs and personal representatives and shall inure to the benefit of each Released Party and shall survive termination of this Amendment. Coyote, INET and the Shareholders further expressly waive and relinquish all rights and benefits afforded by section 1542 of the Civil code of the State of California. Coyote, INET and the Shareholders understand and acknowledge the significance of such specific waiver of section 1542. Section 1542 of the Civil Code of the State of California states as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Thus, notwithstanding the provision of section 1542, and for the purpose of implementing a full and complete release and discharge of the released Parties under this Agreement, Coyote, INET and the Shareholders expressly acknowledge that this Agreement is intended to include in its effect, without limitation, all claims that they do not know or suspect to exist in their favor at the time of signing this Agreement. 6. Attorney's Fees. In the event suit is brought to enforce or interpret any part of this Amendment or the rights or obligations of any party to this Amendment, the prevailing party shall be entitled to recover as an element of such party's cost of suit, and not as damages, a reasonable attorney's fee to be fixed by the court. The prevailing party shall be the party who is entitled to recover his costs of suit whether or not the suit proceeds to final judgment. A party not entitled to recover his costs shall not recover attorney's fees. No sum for attorney's fees shall be counted in calculating the amount of the judgment for purposes of determining whether a party is entitled to recover his costs or attorney's fees. 7. Entire Agreement. This Amendment constitutes and contains the entire and only agreement between the parties concerning the subject matter hereof and supersedes and cancels any and all pre-existing agreements and understandings between the parties relating to the subject matter hereof. 8. Notices. Any notice, request or other document to be given hereunder to a Party shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, addressed to such Party as follows: 4 If to Shareholders: Claude Buchert INET Interactive Network System, Inc. 1640 S. Sepulveda Blvd. Suite 222 Los Angeles, CA 90025 and Helene Legendre 1810 Palisades Dr. Pacific Palisades, CA 90272 and First Rock Trustee, Limited Trustee of The Guimauve Trust P.O. Box 743 Victoria House Main Street Gibraltar Copy to: Edward Shirley, Esq. 1810 Palisades Dr. Pacific Palisades, CA 90272 or to such other address as Shareholders or INET, as the case may be, may from time to time designate by written notice to Coyote. If to Coyote: Daniel W. Latham, President Coyote Network Systems, Inc. 1640 S. Sepulveda Blvd. Suite 222 Los Angeles, CA 90025 5 Copy to: Timothy G. Atkinson, Esq. Coyote Network Systems, Inc. 1640 S. Sepulveda Blvd. Suite 222 Los Angeles, CA 90025 or such other address as Coyote may from time to time designate by written notice to Shareholders. 9. Board of Director Approval. Unless the Shareholders have received written notice from the Secretary of Coyote certifying on or before June 30, 2000, that the Board of Directors of Coyote has ratified, adopted and approved this First Amendment in form and substance as executed by the parties hereto, this First Amendment shall be null and void ab initio without further act by any of the parties hereto and each of the parties shall be returned to the legal position they were in prior to executing this First Amendment. By executing this First Amendment, management of Coyote agrees to use their best efforts to cause the Board of Directors to ratify, adopt and approve this First Amendment. 10. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of California. COYOTE NETWORK SYSTEMS, INC. BY_______________________________ Its___________________________ INET INTERACTIVE NETWORK SYSTEM, INC. BY_______________________________ Its___________________________ --------------------------------- CLAUDE BUCHERT 6 --------------------------------- HELENE LEGENDRE FIRST ROCK TRUSTEES, LIMITED, TRUSTEE OF THE GUIMAUVE TRUST BY_______________________________ Its___________________________ 7 EX-10.1 3 ex10-1_24042.txt 2000 EQUITY INCENTIVE PLAN [LOGO] QUENTRA NETWORKS, INC. 2000 EQUITY INCENTIVE PLAN NOTICE OF STOCK OPTION AWARD Participant's Name and Address: -------------------------------------- -------------------------------------- -------------------------------------- You have been granted an award, subject to the terms and conditions of this Notice of Stock Option Award (the "Notice"), the Quentra Networks, Inc. 2000 Equity Incentive Plan, as amended from time to time (the "Plan") and the Stock Option Award Agreement (the "Award Agreement") attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice. Award Number: -------------------------------------- Date of Award: Vesting Commencement Date: Exercise Price per Share: Total Number of Shares Subject to the Option: Total Exercise Price: Type of Option: |X| Nonstatutory Stock Option |_| Incentive Stock Option Expiration Date: Post-Termination Exercise Period: Three (3) Months Vesting Schedule: Subject to Participant's employment or service and other limitations set forth in this Notice, the Plan and the Award Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule: 33% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and an additional 33% of the Shares subject to the Option shall vest on each yearly anniversary of the Vesting Commencement Date thereafter. During any authorized leave of absence, the vesting of the Option as provided in this schedule shall cease after the leave of absence exceeds a period of ninety (90) days. Vesting of the Option shall resume upon the Participant's termination of the leave of absence and return to service to the Company or a subsidiary. In the event of the Participant's change in status from employee to consultant or from an employee whose customary employment is 20 hours or more per week to an employee 1 whose customary employment is fewer than 20 hours per week, vesting of the Option shall continue only to the extent determined by the Committee as of such change in status. In the event of termination of the Participant's employment or service for cause, the Participant's right to exercise the Option shall terminate concurrently with the termination of the Participant's employment or service. IN WITNESS WHEREOF, the Company and the Participant have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Award Agreement. Quentra Networks, Inc., a Delaware corporation By: -------------------------------- Title: ----------------------------- THE PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE PARTICIPANT'S EMPLOYMENT OR SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AWARD AGREEMENT, OR THE PLAN SHALL CONFER UPON THE PARTICIPANT ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF PARTICIPANT'S EMPLOYMENT OR SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE PARTICIPANT'S RIGHT OR THE RIGHT OF THE PARTICIPANT'S EMPLOYER TO TERMINATE PARTICIPANT'S EMPLOYMENT OR SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE PARTICIPANT ACKNOWLEDGES THAT UNLESS THE PARTICIPANT HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, PARTICIPANT'S STATUS IS AT WILL. The Participant acknowledges receipt of a copy of the Plan and the Award Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Participant has reviewed this Notice, the Plan, and the Award Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Award Agreement. The Participant hereby agrees that all disputes arising out of or relating to this Notice, the Plan and the Award Agreement shall be resolved in accordance with Section 13 of the Award Agreement. The Participant further agrees to notify the Company upon any change in the residence address indicated in this Notice. Dated: Signed: ---------------------- ----------------------------- Participant 2 Award Number: ------------ QUENTRA NETWORKS, INC. 2000 EQUITY INCENTIVE PLAN STOCK OPTION AWARD AGREEMENT 1. Grant of Option. Quentra Networks, Inc., a Delaware corporation (the "Company"), hereby grants to the Participant (the "Participant") named in the Notice of Stock Option Award (the "Notice"), an option (the "Option") to purchase the Total Number of Shares of Common Stock subject to the Option (the "Shares") set forth in the Notice, at the Exercise Price per Share set forth in the Notice (the "Exercise Price") subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the "Award Agreement") and the Company's 2000 Equity Incentive Plan, as amended from time to time (the "Plan"), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Award Agreement. If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Participant during any calendar year (under all plans of the Company or any parent or subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Nonstatutory Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded. 2. Exercise of Option. (a) Right to Exercise. The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Award Agreement. No partial exercise of the Option may be for less than the lesser of five percent (5%) of the total number of Shares subject to the Option or the remaining number of Shares subject to the Option. In no event shall the Company issue fractional Shares. (b) Method of Exercise. The Option shall be exercisable only by delivery of an Exercise Notice (attached as Exhibit A) which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Committee. The Exercise Notice shall be signed by the Participant and shall be delivered in person, by certified mail, or by such other method as determined from time to time by the Committee to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below. 1 (c) Acceleration. Notwithstanding Section 7(g) of the Plan, upon a Change in Control, the right to exercise the Option shall not be accelerated. (d) Taxes. The Company and its subsidiaries are authorized to withhold from any Option granted or to be settled, any payment relating to an Option under the Plan, including from a distribution of Shares, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Option, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. 3. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, as determined by the Committee; provided, however, that such exercise method does not then violate any applicable federal and state laws, rules and regulations; and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (a) cash; (b) check; (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Committee may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price); or (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Participant (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. 4. Restrictions on Exercise. The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any applicable federal and states laws, rules and regulations. In addition, the Option, if an Incentive Stock Option, may not be exercised until such time as the Plan has been approved by the stockholders of the Company. 5. Termination or Change of Employment or Service. In the event the Participant's employment or service terminates, other than for cause, the Participant may, to 2 the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise the Option during the Post-Termination Exercise Period. In the event of termination of the Participant's employment or service for cause, the Participant's right to exercise the Option shall, except as otherwise determined by the Committee, terminate concurrently with the termination of the Participant's employment or service. In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Participant's change in status from employee, director or consultant to any other status of employee, director or consultant, the Option shall remain in effect and, except to the extent otherwise determined by the Committee, continue to vest; provided, however, that with respect to any Incentive Stock Option that shall remain in effect after a change in status from employee to director or consultant, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following such change in status. Except as provided in Sections 6 and 7 below, to the extent that the Participant is not entitled to exercise the Option on the Termination Date, or if the Participant does not exercise the Option within the Post-Termination Exercise Period, the Option shall terminate. 6. Disability of Participant. In the event the Participant's employment or service terminates as a result of his or her disability, the Participant may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the Option to the extent he or she was otherwise entitled to exercise it on the Termination Date; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Participant is not entitled to exercise the Option on the Termination Date, or if the Participant does not exercise the Option to the extent so entitled within the time specified herein, the Option shall terminate. 7. Death of Participant. In the event of the termination of the Participant's employment or service as a result of his or her death, or in the event of the Participant's death during the Post-Termination Exercise Period or during the twelve (12) month period following the Participant's termination of employment or service as a result of his or her disability, the Participant's estate, or a person who acquired the right to exercise the Option by bequest or inheritance, may exercise the Option, but only to the extent the Participant could exercise the Option at the date of termination, within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Participant is not entitled to exercise the Option on the date of death, or if the Option is not exercised to the extent so entitled within the time specified herein, the Option shall terminate. 8. Transferability of Option. Except as otherwise provided by the Committee, Options and other rights of Participants under the Plan may not be transferred to third parties, pledged, mortgaged, hypothecated, or otherwise encumbered, and may note subject to claims of creditors, except as designated by the Participant by will or by the laws of descent and distribution (or pursuant to a Beneficiary designation). 3 9. Term of Option. The Option may be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. 10. Tax Consequences. Set forth below is a brief summary as of the date of this Award Agreement of some of the federal tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Incentive Stock Option. If the Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as income for purposes of the alternative minimum tax for federal tax purposes and may subject the Participant to the alternative minimum tax in the year of exercise. (b) Exercise of Incentive Stock Option Following Disability. If the Participant's employment or service terminates as a result of disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Participant must exercise an Incentive Stock Option within three (3) months of such termination for the Incentive Stock Option to be qualified as an Incentive Stock Option. (c) Exercise of Nonstatuory Stock Option. On exercise of a Nonstatutory Stock Option , the Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If the Participant is an employee or a former employee, the Company will be required to withhold from the Participant's compensation or collect from the Participant and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of a Nonstatutory Stock Option, if Shares are held for more than one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes and subject to tax at a maximum rate of 20%. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for more than one year after receipt of the Shares and are disposed more than two years after the Date of Award, any gain realized on disposition of the Shares also will be treated as capital gain for federal income tax purposes and subject to the same tax rates and holding periods that apply to Shares acquired upon exercise of a Nonstatutory Stock Option . If Shares purchased under an Incentive Stock Option are disposed of prior to the expiration of such one-year or two-year periods, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. 4 11. Entire Agreement; Amendment; Governing Law. The Notice, the Plan and this Award Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant's interest except by means of a writing signed by the Company and the Participant. Notwithstanding the foregoing, the Board may make any such amendment to cause the Plan or an Option to qualify for an exemption under Rule 16b-3 without the consent of a Participant. Nothing in the Notice, the Plan and this Award Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Award Agreement are to be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Award Agreement be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 12. Headings. The captions used in the Notice and this Award Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. 13. Dispute Resolution The provisions of this Section 13 shall be the exclusive means of resolving disputes arising out of or relating to the Notice, the Plan and this Award Agreement. The Company, the Participant, and the Participant's assignees pursuant to Section 8 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Notice, the Plan and this Award Agreement by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Award Agreement shall be brought in the United States District Court for the Central District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the county of Los Angeles, California) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 13 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 14. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United 5 States mail by certified mail (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice), with postage and fees prepaid, addressed to the other party at its address as shown beneath its signature in the Notice, or to such other address as such party may designate in writing from time to time to the other party. 6 EXHIBIT A QUENTRA NETWORKS, INC. 2000 EQUITY INCENTIVE PLAN EXERCISE NOTICE Quentra Networks, Inc. 1640 S. Sepulveda Blvd., Suite 222 Los Angeles, California 90025 Attention: Corporate Secretary 1. Exercise of Option. Effective as of today, ______________, ___ the undersigned (the "Participant") hereby elects to exercise the Participant's option to purchase ___________ shares of the Common Stock (the "Shares") of Quentra Networks, Inc. (the "Company") under and pursuant to the Company's 2000 Equity Incentive Plan, as amended from time to time (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Award Agreement (the "Award Agreement") and Notice of Stock Option Award (the "Notice") dated ______________, ________. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Exercise Notice. 2. Representations of the Participant. The Participant acknowledges that the Participant has received, read and understood the Notice, the Plan, and the Award Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 4 of the Plan. 4. Delivery of Payment. The Participant herewith delivers to the Company the full Exercise Price for the Shares, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d) of the Award Agreement. 5. Tax Consultation. The Participant understands that the Participant may suffer adverse tax consequences as a result of the Participant's purchase or disposition of the Shares. The Participant represents that the Participant has consulted with any tax consultants the Participant deems advisable in connection with the purchase or disposition of the Shares and that the Participant is not relying on the Company for any tax advice. 6. Taxes. The Participant agrees to satisfy all applicable federal, state and local income and employment tax withholding obligations and herewith delivers to the Company 1 the full amount of such obligations or has made arrangements acceptable to the Company to satisfy such obligations. In the case of an Incentive Stock Option, the Participant also agrees, as partial consideration for the designation of the Option as an Incentive Stock Option, to notify the Company in writing within thirty (30) days of any disposition of any shares acquired by exercise of the Option if such disposition occurs within two (2) years from the Date of Award or within one (1) year from the date the Shares were transferred to the Participant. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such an early disposition, the Participant agrees to satisfy the amount of such withholding in a manner that the Committee prescribes. 7. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this agreement shall inure to the benefit of the successors and assigns of the Company. This Exercise Notice shall be binding upon the Participant and his or her heirs, executors, administrators, successors and assigns. 8. Headings. The captions used in this Exercise Notice are inserted for convenience and shall not be deemed a part of this agreement for construction or interpretation. 9. Dispute Resolution. The provisions of Section 13 of the Award Agreement shall be the exclusive means of resolving disputes arising out of or relating to this Exercise Notice. 10. Governing Law; Severability. This Exercise Notice is to be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice) with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 13. Entire Agreement. The Notice, the Plan, and the Award Agreement are incorporated herein by reference, and together with this Exercise Notice constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant's interest except by means of a writing signed by the Company and the Participant. 2 Notwithstanding the foregoing, the Board may make any such amendment to cause the Plan or an Option to qualify for an exemption under Rule 16b-3 without the consent of a Participant. Nothing in the Notice, the Plan, the Award Agreement and this Exercise Notice (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. Submitted by: Accepted by: PARTICIPANT: QUENTRA NETWORKS, INC. By: Title: - ------------------------------------ ------------------------------- (Signature) Address: Address: - ------- ------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- 3 EX-10.2 4 ex10-2_24042.txt SEPARATION AGREEMENT SEPARATION AGREEMENT THIS AGREEMENT, effective as of April 30, 2000 (the "Effective Date"), is by and between COYOTE NETWORK SYSTEMS, INC., a Delaware corporation ("Coyote"), and BRIAN A. ROBSON. RECITALS A. Mr. Robson has been employed by Coyote since 1996 and has served as Executive Vice President, Chief Financial Officer and Secretary since December 1998. B. Pursuant to the terms and conditions hereof, Mr. Robson is hereby retiring as Coyote's Executive Vice President, Chief Financial Officer and Secretary. C. In recognition of his many years of leadership and service, it is the desire of Coyote to provide to Mr. Robson certain severance and other benefits, on the terms and conditions as set out herein. D. It is the desire of the parties to resolve any and all issues between them with respect to Mr. Robson's employment and retirement. AGREEMENTS In consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Mr. Robson's employment as Coyote's Executive Vice President, Chief Financial Officer and Secretary shall terminate effective April 30, 2000. 2. Coyote shall pay to Mr. Robson severance pay from May 1, 2000 through October 31, 2000 at a rate equal to $15,000 per month. In addition, Coyote will immediately accelerate the vesting of all non-vested stock options for the purchase of Coyote common stock previously granted to Mr. Robson and grant to Mr. Robson an additional 50,000 immediately vested options to purchase Coyote common stock for $5.00/share. All such severance payments shall be subject to all applicable deductions and withholdings. In connection with the stock options discussed above, Mr. Robson acknowledges that they will not be available for exercise until such time as the Company's shareholders approve and authorize the issuance of a sufficient number of shares of common stock to permit exercise of such options and an increase in the number of shares in the Company's Nonqualified Employee Stock Option Plan (the "Plan") sufficient to cover all such options under the Plan. The Company agrees to use all commercially reasonable efforts to obtain such authorizations from the Company's shareholders. Following those acts, the Company will use all commercially reasonable efforts to register such shares added to the Plan. 3. Coyote shall continue to provide medical/dental and life insurance benefits to Mr. Robson through August 31, 2001 consistent with and at the same level of benefits as provided by Coyote to Mr. Robson as of the date hereof. After such date, Coyote shall make available to Mr. Robson standard COBRA coverage. 4. Upon submission of appropriate documentation, Coyote shall continue to reimburse Mr. Robson for his relocation expenses pursuant to the original agreement between Mr. Robson and Coyote, of which the primary remaining expense is the payment of Mr. Robson's real estate agent's fees relating to the sale of his home in New Jersey. 5. In support of the services to be provided pursuant to paragraph 9 below, Coyote shall continue to provide to Mr. Robson the laptop computer currently provided by Coyote and Coyote agrees to reimburse Mr. Robson for all reasonable out-of-pocket expenses incurred in connection with Mr. Robson's consulting services performed pursuant to paragraph 9 below. 6. Mr. Robson shall be subject to the normal non-employee black-out provisions with respect to all Coyote options held by Mr. Robson. 7. As a former officer of Coyote, Mr. Robson shall continue to be indemnified by Coyote, to the fullest extent permitted under the General Corporation Laws of Delaware and covered under any director and officer's liability insurance coverage of Coyote in place from time to time. 8. Coyote and Mr. Robson agree that neither party shall make any disparaging statements concerning the other or his or its business activities. 9. Mr. Robson shall, upon reasonable request by Coyote, make himself reasonably available and otherwise fully cooperate with Coyote regarding questions or information which is known or may be known by Mr. Robson. In addition, in consideration of the severance payments and other benefits to be provided by Coyote to Mr. Robson hereunder, Mr. Robson hereby agrees to perform consulting services as Coyote may reasonably request from time to time, and to undertake to confer with representatives of Coyote at Coyote's offices in Westlake Village, California, as Coyote may reasonably request from time to time, from the date hereof through August 31, 2000 relating to assisting Coyote in the 2 preparation and submission of financial reporting and SEC filings under the direction of Coyote's General Counsel. 10. Mr. Robson acknowledges that in the course of his employment with Coyote he received confidential information concerning Coyote and its business. Mr. Robson shall keep such information confidential and further agrees not to disclose such information to third parties without the prior written consent of Coyote. Mr. Robson represents that has returned to Coyote all such information in his possession of which he has knowledge and he has not taken or retained any such information in any form other than any such information directly related to the activities he has agreed to perform under paragraph 9 above. Mr. Robson further represents that he has returned all other Coyote property in his possession. Mr. Robson also agrees not to contact or solicit any information regarding Coyote's business from employees, customers or suppliers other than in relation to the activities described in paragraph 9 above. 11. This Agreement shall bind and benefit the heirs, personal representatives, administrators, successors, and assigns of the parties hereto. 12. This Agreement shall constitute the entire agreement between the parties and supersedes all prior representations, understandings, and agreements of the parties with respect thereto. Any waiver or amendment of any provision of this Agreement shall be effective only if in writing and signed by the parties hereto. 13. Except for the payments and obligations expressed or adopted in this Agreement, each party waives and fully releases the other from any claims, demands, or causes of action, known or unknown, arising prior to the date hereof. 14. This Agreement shall be governed by the laws of the State of California. COYOTE NETWORK SYSTEMS, INC. BY /s/ Daniel W. Latham ---------------------------------- Its President ----------------------------- /s/ Brian A. Robson ---------------------------------- Brian A. Robson 3 EX-10.3 5 ex10-3_24042.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of this ____ day of March, 2000, is by and between COYOTE NETWORK SYSTEMS, INC., a Delaware corporation (the "Company"), and TIMOTHY G. ATKINSON (the "Employee"). RECITALS WHEREAS, the Employee is willing to be employed by the Company upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in order to set forth the terms and conditions of the Employee's employment with the Company and in consideration of the covenants and agreements of the parties herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT SERVICES Subject to the terms and conditions hereinafter set forth, the Company hereby employees the Employee as General Counsel and Vice President of Business Development commencing on April 15, 2000 and ending on the last day of the Term (as defined below). The Employee accepts such employment and agrees to perform all duties in a conscientious, reasonable and competent manner and to devote his reasonable best efforts to perform his duties pursuant to this Agreement and to further the business of the Company, as directed by the Board of Directors. Without further action of the Company, the Employee may engage in other business, consulting, financial and other activities during the employment hereunder subject to fulfilling his duties hereunder. The Employee has disclosed in Schedule 1 attached hereto the names of his other business affiliations as of the date hereof and agrees to promptly notify the Company of any additional affiliations. 2. TERM AND TERMINATION 2.1 TERM Subject to section 2.2 hereof, the employment of the Employee under this Agreement will commence on April 15, 2000 (the "Effective Date") and continue until the occurrence of the first of the following (the "Termination Date"): (a) October 15, 2001 (i.e., a term of eighteen months); (b) The Employee's death; or (c) The Employee's illness, physical or mental disability or other incapacity resulting in the Employee's inability to effectively perform his duties under this Agreement for an aggregate of thirty (30) days during any period of six (6) consecutive months. The period beginning on the Effective Date and ending on the Termination Date is referred to herein as the "Term." 2.2 TERMINATION The Employee may be terminated prior to the expiration of the Term with or without "Cause" at the sole discretion of the Board of Directors. "Cause" shall include any of the following occurrences: (a) The Employee's conduct involving fraud or moral turpitude or the Employee's dishonesty involving the Company's business; (b) The Employee's chronic absence from work other than by reason of illness, injury, vacation or business- related travel, which continues after the Employee has received a written notice from the Company to halt such chronic absence; (c) Conviction of any felony; (d) The Employee's conviction of any misdemeanor which is substantially related to the Employee's services hereunder; (e) The Employee's abuse of alcohol (whether or not on the job) after receiving a written notice from the Company to halt such usage or the Employee's conviction of a crime involving alcohol; (f) The Employee's use of illegal drugs or other illegal substance (whether or not on the job) after receiving a written notice from the Company to halt such usage or the Employee's conviction of a crime involving illegal drugs or other illegal substance, which impairs the Employee's ability to perform his duties under this Agreement or has an adverse effect (other than an insignificant effect) on the Company, its business or its relationship with any customer or supplier of the Company; 2 (g) A breach by the Employee of his obligations under sections 7, 8 or 9 hereof; and (h) A material breach of any other provision of this Agreement by the Employee, following written notice and failure to cure within a reasonable time (which cure period shall be no less than five days after Employee's receipt of such notice). The Employee may resign and terminate this Agreement on five days prior written notice to the Company for no reason or any reason ("Voluntary Termination"). In addition, the Employee may terminate this Agreement if the Company has materially breached any provision of this Agreement and the Company has not cured such breach within a reasonable time (but no less than five days) after receipt of written notice of such breach ("Termination for Good Cause"). 2.3 EFFECT OF TERMINATION If the Employee is terminated for "Cause" as defined above, or the Employee effects a Voluntary Termination, then this Agreement shall terminate and the Employee shall not be entitled to any unearned compensation or benefits under this Agreement as of the date of termination and any unvested options as of the date of termination granted pursuant to section 3.2 shall be void and cancelled. If the Employee is terminated without "Cause" as defined above, or the Employee effects a Termination for Good Cause, then this Agreement shall terminate and the Employee shall nevertheless be entitled to six months of semi-monthly salary installments as set forth in section 3.1 and the stock options and vesting schedule of section 3.2 shall remain in effect. The Employee's obligations in sections 6, 7, 8, 9 and 10 hereof shall survive the termination of employment hereunder for any reason. 3. COMPENSATION 3.1 SALARY The Company agrees to pay the Employee for each full fiscal year of the term of this Agreement an annual salary, payable in 24 equal semi-monthly payments, at a rate equal to $180,000 per year. 3.2 STOCK OPTIONS The Employee shall be entitled to receive five-year stock options of the Company for 100,000 shares of the Company's common stock at 3 an exercise price of $7.00/share and 150,000 five-year options at an exercise price of $9.00/share (collectively the "Options"), with vesting as set forth below: Number of Options/Shares Vesting 33,334 $7.00 options on October 15, 2000 33,333 $7.00 options on April 15, 2001. 33,333 $7.00 options on October 15, 2001. 50,000 $9.00 options on October 15, 2000. 50,000 $9.00 options on April 15, 2001. 50,000 $9.00 options on October 15, 2001 All Options must be exercised on or before the earlier of (i) -April 15, 2006 or (ii) the date which is three (3) years after termination of the Employee's employment with the Company for any reason. Notwithstanding the foregoing, all stock options granted to the Employee above shall immediately vest in the event of any transaction in which substantially all of the assets of the Company are acquired or 50% or more of the issued and outstanding common stock of the Company is acquired by a single person, entity or group of such persons or entities. The Employee hereby acknowledges that the stock options set forth above and the shares underlying such stock options have not been registered or qualified for sale under the Securities Act of 1933, as amended (the "Act"), or any state securities law and may not be sold, hypothecated, pledged, assigned or otherwise transferred, nor will any assignee, vendee or other transferee be recognized as having an interest in such stock options or shares of stock, unless a registration statement under the Act and any applicable state securities laws is then in effect with respect to such stock options or shares of stock or the availability of an exemption from such registration is established to the satisfaction of the Company. The Employee further acknowledges that the Company must amend its Certificate of Incorporation (the "Charter Amendment") to authorize the shares underlying such Options to permit the Employee to exercise any such Options. The Company will use all 4 commercially reasonable efforts to obtain the approval of its stockholders and take such other actions as are necessary to effect the Charter Amendment. Subject to the effectiveness of the Charter Amendment, the Company shall at all times prior to by which all such options must be exercised reserve and keep available, solely for issuance and delivery upon the exercise of such Options, a number of authorized shares of common stock equal to the number of shares of common stock which may be purchased upon exercise of such Options. 3.3 SIGNING BONUS As a signing bonus, on the effective date, the Company shall pay employee a cash payment of $50,000 and 25,000 shares of the Company's common stock 3.4 ACKNOWLEDGEMENT The Company acknowledges (i) that the Options being granted hereunder are granted to the Employee in his individual capacity and not in payment of the Employee providing any finder, broker, dealer, placement agent or other investment banking or advisory services and (ii) the Options as awarded and vested are in no way dependent on the Employee introducing or causing any particular person or entity to invest in the Company or effect any given transaction with the Company. 4. REIMBURSEMENT FOR EXPENSES The Company agrees to reimburse the Employee for all reasonable business expenses incurred by him in connection with the performance of his obligations under this Agreement, subject to established reimbursement policies of the Company in effect from time-to-time regarding expense reimbursement, including, without limitation, reasonable travel, entertainment, cell phone, long distance charges and other customary expenses the Employee incurs in the performance of his duties hereunder, and to further reimburse the Employee for any reasonable legal or accounting fees incurred by Employee in connection with his entry into this Agreement or the performance of his duties up through the date hereof. 5. BENEFITS The Employee shall be entitled to the following benefits during the term of his employment under this Agreement, and shall be offered any additional 5 benefits typically offered or provided any other executive officers of the Company. 5.1 VACATION The Employee shall be allowed three (3) weeks of vacation per year during the term of this Agreement, with full pay and without loss of any other compensation of benefits, in accordance with established Company policies. The Employee shall coordinate the schedule of his vacations with other executives and the personnel of the Company at its affiliates so as to provide sufficient managerial and executive coverage for the Company's operations. 5.2 OFFICEALLOWANCE Because Employee will not be permanently relocating to the Company's offices in California, the Company and Employee acknowledge that Employee will incur certain expenses in establishing a remote office. Said expenses shall be submitted in writing and reimbursement agreed to by and between the Company and the Employee. Employee will make himself available in the Company Headquarters as needed. 5.3 OTHER BENEFITS The Employee may receive such other benefits, if any, as the Board of Directors may from time-to-time make available to the Employee in the Board of Directors' sole discretion; provided, however, the Employee shall be eligible for any benefits offered to any other member of the Company's senior executive team on terms no less favorable that those offered to other members of the senior executive team. 5.4 PAYMENTS All cash payments due to the Employee hereunder shall be paid promptly (no later than two business days after the due date) in immediately available funds to the account specified by the Employee or by check made payable to the order of the Employee. 6. DEFINITIONS (a) As used in this Agreement, the following words have the meanings specified: 6 (b) "Proprietary Ideas" means ideas, suggestions, inventions and work relating in any way to the business and activities of the Company which may be subjects of protection under applicable laws, including common law, respective patents, copyrights, trade secrets, trademarks, service marks or other intellectual property rights. (c) "Invention" means inventions, designs, discoveries, improvements and ideas, whether or not patentable, including without limitation, upon the generality of the foregoing, novel or improved products, processes, machines, software, promotional and advertising materials, business data processing programs and systems, and other manufacturing and sales techniques, which either (a) relate to (i) the business of the Company as conducted from time-to-time or (ii) the Company's actual or demonstrably anticipated research or development, or (b) result from any work performed by the Employee for the Company. (d) "Confidential Information" means Proprietary Ideas and also information related to the Company's business, whether or not in written or printed form, not generally known in the trade or industry of which the Employee has or will become informed during the period of employment by the Company, which may include but is not limited to product specifications, manufacturing procedures, methods, equipment, compositions, technology, formulas, trade secrets, know-how, research and development programs, sales methods, customer lists, mailing lists, customer usage and requirements, software and other confidential technical or business information and data; provided, however, that Confidential Information shall not include any information which is in the public domain by means other than disclosure by the Employee or which the Employee must disclose by operation of law or legal or administrative process. (e) As used in sections 7, 8, 9 and 10 only, the term "the Company" shall include all entities affiliated with the Company. 7. DISCLOSURE AND ASSIGNMENT OF INVENTIONS The Employee agrees to disclose to the Company, and hereby assigns to the Company all of the Employee's rights in and, if requested to do so, provide a written description of, any Inventions conceived or reduced to practice at any time during the Employee's employment by the Company, either solely or jointly with others and whether or not developed on the Employee's own 7 time or with the Company's resources. The Employee agrees that Inventions first reduced to practice within one (1) year after termination of the Employee's employment by the Company shall be treated as if conceived during such employment unless the Employee can establish specific events giving rise to the conception which occurred after such employment. Further, the Employee disclaims and will not assert any rights in Inventions as having been made, conceived or acquired prior to employment by the Company except such as are specifically listed at the conclusion of this Agreement. The Employee shall cooperate with the Company and shall execute and deliver such documents and do such other acts and things as the Company may request, at the Company's expense, to obtain and maintain letters patent or registrations covering any Inventions and to vest in the Company all rights therein free of all encumbrances and adverse claims. 8. CONFIDENTIAL INFORMATION The Employee shall not disclose to the Company or induce the Company to use any secret or confidential information belonging to persons not affiliated with the Company, including any former employer of the Employee. In addition to all duties of loyalty imposed on the Employee by law, the Employee shall maintain Confidential Information in strict confidence and secrecy and shall not at any time, during or at any time after termination of employment with the Company, directly or indirectly, use or disclose to others any Confidential Information, or use it for the benefit of any person or entity (including the Employee) other than the Company, without the prior written consent of any authorized officer of the Company (except for disclosures to persons acting on the Company's behalf with a need to know such information). The Employee shall carefully preserve any documents, records, tangible data relating to Inventions or Confidential Information coming into the Employee's possession and shall deliver the same and any copies thereof to the Company upon request and, in any event, upon termination of the Employee's employment by the Company. 9. NON-SOLICITATION (a) The Employee agrees that he will not, during the one-year period following termination of his employment with the Company, be connected in any way with the solicitation of any then current or potential (defined as persons or companies with pending quotes to or from the Company) customers or suppliers of the Company if such solicitation is likely to result in a loss of business for the Company. 8 (b) The Employee agrees that he will not, during the one year period following termination of his employment with the Company, solicit for employment, employ or engage as a consultant any person who had been an employee of the Company at any time in the two year period prior to the Employee's termination of employment with the Company. (c) In the event the covenants set forth in this section 9 are found to be unenforceable or invalid by reason of being overly broad, the parties hereto intend that such covenants shall be limited to such scope, geographic area and duration as shall make such covenants valid and enforceable. 10. ENFORCEMENT OF SECTION 7, 8 AND 9 Recognizing that compliance with the provisions of sections 7, 8 and 9 of this Agreement is necessary to protect the goodwill and other proprietary interests of the Company, and that breach of the Employee's agreements thereunder will result in irreparable and continuing damages to the Company for which there will be no adequate remedy at law, the Employee hereby agrees that in the event of any breach of such agreements, the Company shall be entitled to seek injunctive relief and such other and further relief, including damages, as may be proper. 11. LAWS, REGULATIONS AND CONTRACTS The Employee agrees to comply, and to do all things necessary for the Company to comply, with all federal, state, local and foreign laws and regulations which may be applicable to the business and operations of the Company, and with any contractual obligations, including, without limitation, confidentiality obligations, which may be applicable to the Company or Executive under any contracts between the Company and its customers, suppliers or third parties. 12. MISCELLANEOUS 12.1 AMENDMENT AND MODIFICATION The Company (by action of the Board of Directors) and the Employee may amend, modify and supplement this Agreement only in such manner as may be agreed upon by the Company and the Employee in writing. 9 12.2 ENTIRE AGREEMENT This instrument embodies the entire agreement between the parties hereto with respect to the employment relationship created hereby and supersedes and replaces any prior agreements pertaining to employment between the Employee and the Company. There have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein relating to such employment relationship. 12.3 ASSIGNMENT This Agreement shall not be assigned by the Employee without the written consent of the Company. Any attempted assignment without such written consent shall be null and void and without legal effect; provided, however, nothing herein shall prevent the Employee from assigning and of his rights to payment hereunder to any third company in full compliance with all state and federal laws. This Agreement may be assigned by the Company to a successor corporation or a good-faith purchaser of the Company's stock or assets only in connection with a sale of all or substantially all of the Company's assets or as a result of a merger or other business combination involving the Company and any such assignment shall not terminate or modify this Agreement, except that the employing party to which the Employee shall have been transferred shall, for the purposes of this Agreement, be construed as standing in the same place and stead as the Company as of the date of the assignment. 12.4 BINDING Subject to section 12.3 hereof, this Agreement shall be binding upon and insure to the benefit of the respective parties hereto and their successors, assigns, heirs, executors, administrators and personal representatives. The parties hereto shall be entitled, at their option, to the remedy of specific performance to enforce any of the provisions of this Agreement. 12.5 ARBITRATION Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by binding arbitration in Los Angeles, California administered by the American Arbitration Association under its Employment Dispute Resolution, 10 and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 12.6 AGREEMENT SEVERABLE; WAIVER This is a severable Agreement and in the event that any part of this Agreement shall be held to be unenforceable, all other parts of this Agreement shall remain valid and fully enforceable as if the unenforceable part or parts had not been included herein. No waiver of any provision of this Agreement shall be binding unless executed in writing by the party to be bound hereby. No waiver of a breach of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of a breach of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver of such breach unless otherwise expressly provided. No failure or delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 12.7 NOTICES For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to EMPLOYEE, to: Timothy G. Atkinson 6267 South Coventry Ln. Littleton, CO 80123 If to COMPANY, to: Coyote Network Systems, Inc. Attn: President 4360 Park Terrace Drive Westlake Village, CA 91361 or to such other address as either party may have furnished to the other in writing in accordance herewith except that notices of a change of address shall be effective only upon receipt. 11 12.8 GOVERNING LAW This Agreement shall be governed and construed under the laws of the State of California. 12.9 INDEMNIFICATION; INSURANCE The Company represents and warrants to the Employee that it has and will maintain adequate directors and officers' liability insurance coverage and that it will indemnify the Employee to the full extent permitted by the General Corporation Law of the State of Delaware, as provided in the Certificate of Incorporation of the Company. 12.10 CORPORATE AUTHORITY; ENFORCEABILITY The Company represents and warrants to the Employee that it is a corporation duly organized and validly existing under the laws of the State of Delaware and that the execution and delivery of this Agreement, and the performance by the Company of its obligations hereunder, have been duly authorized by proper corporate action on the part of the Company. This Agreement is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. THE EMPLOYEE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A COPY OF THIS AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND AGREES THAT, WITH RESPECT TO THE SUBJECT MATTER HEREOF, IT CONSTITUTES THE EMPLOYEE'S ENTIRE AGREEMENT WITH THE COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS, REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF ITS OFFICIALS OR REPRESENTATIVES. Notwithstanding anything to the contrary in section 7 hereof, this Agreement does not apply to an Invention for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on the Employee's own time, unless (a) the Invention relates (i) to the business of the Company as conducted from time-to-time or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by the Employee for the Company. 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. COYOTE NETWORK SYSTEMS, INC. BY ---------------------------------- Name ----------------------------- Its ------------------------------ ---------------------------------- TIMOTHY G. ATKINSON 13 SCHEDULE 1 AFFILIATIONS OF TIMOTHY G. ATKINSON IN OTHER BUSINESS VENTURES A. Ownership Interests: Name of Business Ownership Interest ---------------- ------------------ Zoom Kitchen, LLC 7% I:Comm, LLC 2% B. Directorships: C&L Communications, Inc. C. Officer Positions in other Companies: None other than various positions with the entities listed in section A above, an Of-Counsel position with Reinhart, Boerner, Van Deuren, Norris & Rieselbach, S.C. and various other non-profit organizations. EX-27 6 ex-27_24042.txt FINANCIAL DATA SCHEDULE
5 THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF QUENTRA NETWORKS, INC. AS OF AND FOR THE QUARTER ENDED SEPTEMBER 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS MAR-31-2001 JUL-01-2000 SEP-30-2000 865 0 5970 (1919) 0 6803 9673 (2516) 23491 16317 1460 0 28908 18897 (48307) 23491 7214 7214 6595 6595 12482 0 196 (11947) 0 (12059) 112 0 0 (11947) (.63) (.63)
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