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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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Commission file number 1-5486
COYOTE NETWORK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2448698
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4360 Park Terrace Drive, Westlake Village, CA 91361
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(Address of principal executive offices) (Zip Code)
(818) 735-7600
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(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 August 4, 1998, the Registrant had issued and outstanding an aggregate of
9,583,628 shares of its common stock.
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<PAGE>
COYOTE NETWORK SYSTEMS, INC.
AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets........................................ 2
Statement of Operations............................... 3
Statement of Cash Flows............................... 4
Notes to Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 10
Item 2. Changes in Securities and Use of Proceeds............. 10
Item 5. Other Information..................................... 10
Item 6. Exhibits and Reports on Form 8-K...................... 10
Signature ...................................................... 12
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
----------- ---------
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,014 $ 3,746
Marketable securities --- 16
Receivables 2,817 715
Inventories 1,726 2,122
Notes receivable - current 2,416 4,596
Other current assets 1,906 1,409
-------- --------
Total current assets 13,879 12,604
Property and equipment, net 2,944 2,391
Intangible assets, net 3,615 3,542
Net assets of discontinued operations 1,005 909
Notes receivable - non-current 830 1,170
Other assets 1,354 1,359
-------- --------
$ 23,627 $ 21,975
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,899 $ 1,920
Deferred revenue and customer deposits 2,210 1,900
Accrued loss reserve 1,960 2,200
Accrued professional fees and litigation costs 343 805
Other accrued liabilities 1,730 1,130
Notes payable 590 ---
Current portion of long-term debt 141 141
-------- --------
Total current liabilities $ 10,873 $ 8,096
Long-term debt 1,605 5,349
Other liabilities 461 470
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred stock - $.01 par value.
Authorized 5,000,000 shares; none issued --- ---
Common stock - $1 par value. Authorized 30,000,000 shares,
issued 10,292,320 and 9,151,920 shares 10,292 9,152
Additional paid-in capital 04,927 102,360
Accumulated deficit 98,774) (97,695)
Treasury stock at cost (5,757) (5,757)
--------- ---------
Total shareholders' equity 10,688 8,060
-------- --------
$ 23,627 $ 21,975
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
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COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
3 MONTHS ENDED
---------------------
June 30, June 30,
1998 1997
-------- ---------
<S> <C> <C>
Net sales $ 7,193 $ 944
Cost of goods sold 3,220 405
------- -------
Gross profit 3,973 539
------- -------
Selling and administrative expenses 2,940 3,536
Engineering, research and development 1,937 694
------- -------
Total operating expenses 4,877 4,230
------- -------
Operating loss (904) (3,691)
Interest expense (15) ---
Non-operating expense (159) ---
------- -------
Loss from continuing operations (1,078) (3,691)
Loss from discontinued operations --- ---
------- -------
Net loss $(1,078) $(3,691)
======== ========
Loss per common share (basic & diluted):
Continuing operations $ (.12) $ (.70)
Discontinued operations --- ---
------- -------
Net loss per common share (basic & diluted) $ (.12) $ (.70)
======= =======
Weighted average number of common
shares outstanding (basic & diluted) 9,016 5,298
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
3 MONTHS ENDED
----------------------
June 30, June 30,
1998 1997
-------- --------
Operating activities:
<S> <C> <C>
Net loss $(1,078) $(3,691)
Adjustments to reconcile loss to net cash
provided (used) by operating activities:
Depreciation and amortization 276 184
Loss (gain) on sales of marketable securities --- 280
Net change in discontinued operations --- 879
Changes in current assets and liabilities 1,703 2,033
------- -------
Net cash provided (used) by operating activities 901 (315)
------- -------
Investing activities:
Purchases of property and equipment (722) ---
Proceeds from sales of marketable securities 30 ---
Change in notes receivable 340 ---
Net change in discontinued operations (96) (315)
Other items 5 17
------- -------
Net cash provided (used) by investing activities (443) (298)
-------- -------
Financing activities:
Repayments of long-term debt (71) (71)
Common stock issued 300 ---
Change in note payable 590 250
Net change in discontinued operations --- 475
Other items (9) ---
-------- -------
Net cash provided by financing activities 810 654
------- -------
Increase (decrease) in cash and cash equivalents 1,268 41
Cash and cash equivalents:
At beginning of the period 3,746 81
------- -------
At end of the period $ 5,014 $ 122
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
June 30, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1999. 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,
1998.
The computation of loss per common share is determined by using the
weighted average number of shares of common stock outstanding during each
period.
NOTE 2 DISCONTINUED OPERATIONS
On November 20, 1996, the Board of Directors of Coyote Network Systems,
Inc. (the "Company") approved a restructuring plan (the "Restructuring") to
separate its telecom switching equipment business (the "CTL Business") performed
through its operating subsidiary Coyote Technologies, LLC ("CTL") from the
following businesses:
Segment Company
------- -------
Telecommunications equipment distribution C&L
Wire installation and service Valley
Wholesale distribution of meat and seafood Entree/APC
The Restructuring provided for a spin-off of the non-CTL businesses,
through a special dividend to the Company's shareholders. Consequently, the
Company reported the results of operations of the telecommunications equipment
distribution segment, the voice and data network wire installation and service
segment and the wholesale distribution of meat and seafood segment separately as
discontinued operations. Subsequently, the Company received a purchase offer for
a majority of the assets of APC. On February 3, 1997, the Board of Directors of
the Company approved the sale of a majority of the assets of APC to Colorado
Boxed Beef Company ("Colorado"). The sale closed on February 3, 1997.
As a result of the sale of APC's assets, the Company's Board of
Directors terminated the original Restructuring plan for a spin-off of the
non-CTL businesses. The Company adopted a revised Restructuring plan to sell C&L
and Valley. The revised Restructuring plan was approved by the Board of
Directors in February 1997. On November 20, 1997, the Company completed the sale
of its telecommunications equipment distributor subsidiary, C&L Communications,
Inc. ("C&L"), to the management of C&L.
In March 1998, the Company reached agreement on the sale of its 80%
owned wire installation and service subsidiary, Valley Communications Inc.
("Valley") to Technology Services Corporation ("TSC"). Under the terms of the
agreement, the Company received $2,300,000, which was paid in cash in June 1998,
and $811,000 paid by the assumption by TSC of the Company's entire liability
under certain promissory notes to and among the Company and other shareholders
of Valley dated August 1995.
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As of August 4, 1998, the Company had collected all cash related to the
sale of discontinued operations except $610,000 due under a note and the only
asset of discontinued operations was real estate with a net asset book value of
$983,000. The real estate is listed for sale.
NOTE 3 ACQUISITIONS
On April 16, 1998, the Company established Coyote Gateway, LLC, a
Colorado limited liability company ("CGL"). The Company owns 80% of CGL and
American Gateway Telecommunications, Inc., a Texas corporation ("AGT") owns 20%.
The Company founded CGL with a capital contribution of $240,000 and has agreed
to make certain additional working capital contributions through April 15, 1999.
Total working capital contributed to CGL through June 30, 1998, was $795,000. In
consideration of its 20% ownership interest, AGT contributed assets to CGL,
consisting of customer contracts for the transmission of up to 31 million
minutes of international traffic monthly to 11 countries when fully deployed,
and vendor and carrier contracts to service those minutes. CGL has employed
AGT's operating and management personnel, and they are participating in stock
option and bonus plans tied to the success of the venture.
In April 1998, the Company announced that it intends to acquire
privately held INET Interactive Network Systems, Inc. ("INET"), a provider of
international long distance services. The acquisition is expected to be
completed in the second quarter of fiscal 1999.
NOTE 4 COMMITMENTS AND CONTINGENCIES
Coyote Network Systems, Inc. (The Diana Corporation) Securities
Litigation (Civ. No. 97-3186). This is a consolidation of what were originally
nine separate actions brought in the United States District Court for the
Central District of California on behalf of purchasers of the Company's common
stock during a class period that extended from December 6, 1994 through May 2,
1997. On July 23, 1997, the Court entered a stipulation and order consolidating
the nine actions for all purposes. On September 9, 1997, plaintiffs filed a
consolidated amended complaint (the "Consolidated Complaint") asserting claims
against the Company, certain of its present and former directors and officers,
and others under Section 10(b) of the Securities Exchange Act of 1934. The
Consolidated Complaint alleges essentially that the Company and other defendants
were engaged in a scheme to inflate the price of the Company's common stock
during the class period through false and misleading statements and manipulative
transactions. The Consolidated Complaint seeks unspecified damages, but
identifies the significant movement in the Company's stock price during the
putative class period (a swing of more than $115 per share) to imply that the
damages that will be claimed will exceed the Company's assets.
On December 15, 1997, the Court denied a motion by the Company and the
other defendants to dismiss the consolidated amended complaint. Since that time,
the parties have begun the early stages of discovery and have had preliminary
discussions concerning settlement. On April 20, 1998, the Plaintiffs filed a
motion to have the action certified as a class action. That motion is currently
scheduled to be heard by the Court on September 21, 1998. The Company intends to
defend the action vigorously, but is continuing discussions with Plaintiffs
concerning potential settlement.
On July 9, 1998, the respective counsel for the Plaintiffs and for the
Company executed a letter agreeing in principle, subject to various conditions
and contingencies, to settle the claims against the Company and its subsidiaries
in The Diana Securities Litigation. If consummated, the settlement will require
the Company to issue warrants to acquire 2,500,000 shares of the Company's
common stock. The warrants will be exercisable for three years from the date of
issuance and will have an exercise price of $9 per share in the first year, $10
per share in the second year and $11 per share in the third year, subject to
adjustment in certain events. If the Company lists its common stock on Nasdaq,
it will also use its best efforts to arrange for a listing of the warrants on
Nasdaq. Among the conditions to the settlement are that the Plaintiffs also
reach a settlement with the individual defendants in the litigation and their
6
<PAGE>
D&O insurance carriers and that, ultimately, the settlement receives court
approval. The Company regards this agreement in principle as a step toward the
resolution of this litigation, but cautions that, in view of the conditions and
contingencies associated with this preliminary agreement, the Company is unable
to predict with certainty the nature or timing of an actual settlement. The
Company recorded the fair market value of the warrants of $8,000,000 in the
financial statements for fiscal 1998.
The Company is also involved with other proceedings or threatened
actions incident to the operation of its businesses. It is management's opinion
that none of these matters will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
NOTE 5 SHAREHOLDERS' EQUITY
Common Stock and Convertible Notes
In December 1997, the Company received $4,635,000 upon the issuance of
$5,000,000 in 8% convertible notes. As of June 9, 1998, the full value of notes
and accrued interest to the date of conversion had been converted into Company
common stock, which was issued pursuant to the exemption provisions of
Regulation S of the Securities Act of 1933. Common stock totaling 1,404,825
shares was issued in connection with conversions of $5,133,000 of convertible
notes and accrued interest.
In May 1998, the Company received $300,000 upon the issuance of 71,650
shares of the Company common stock which was issued pursuant to the exemption
provisions of Regulation S of the Securities Act of 1933.
Common Stock Options
Since March 31, 1998, the Company's Board of Directors has granted to
certain executives, employees and non-employee directors options to purchase a
total of 1,004,000 shares of the company common stock.
NOTE 6 RELATED PARTY TRANSACTIONS
In January 1998, the Board of Directors of the Company approved an
interest-free loan to Daniel W. Latham for a maximum amount of $500,000 to be
used solely for the purpose of providing partial down payment monies on his
purchase of a residence in California. The funding is to be secured by the
residential property and is for a five-year term unless specifically extended by
the Board of Directors. Earlier repayment of the loan will be demanded in the
event of either (1) sale or refinancing of the property; (2) termination of Mr.
Latham's employment either voluntarily or for cause; or (3) sale by Mr. Latham
of all, or substantially all, of his stock in Coyote Network Systems, Inc. As of
March 31, 1998, $150,000 was funded under this agreement and a further amount of
$271,000 was funded in April 1998, for a total funding of $421,000 as of June
30, 1998.
In July 1998, the Company authorized an interest-free loan to Edward A.
Beeman in the amount of $75,000 to be used solely for the purpose of providing
partial down payment monies on his purchase of a residence in California. The
funding is for a five year term unless specifically extended by the Company.
Earlier repayment of the loan will be demanded in the event of termination of
Mr. Beeman's employment either voluntarily or for cause. This loan was funded in
July 1998.
NOTE 7 LINE OF CREDIT
In May 1998, CGL established a line of credit of $3,500,000 secured by
CGL trade receivables and by 708,692 treasury shares of the Company's common
stock. As of June 30, 1998, $590,000 had been drawn against this line of credit.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the first quarter of fiscal 1999 ended June 30, 1998, the Company's
revenues were $7,193,000, primarily from the sale of DSS Switches and associated
OEM equipment, compared to revenues of $944,000 in the corresponding quarter of
fiscal 1998. The increase is attributable to shipments under a major contract
which accounted for 90% of the revenue for the quarter.
The increased revenue generated an increase of $3,434,000 in gross
profit compared to the corresponding quarter of the prior fiscal year.
Selling and general administration expenses for the quarter were almost
$600,000 lower than the corresponding quarter of the prior fiscal year,
primarily due to a reduction in professional and legal fees.
Engineering, research and development expenses for the quarter of
$1,937,000 were $1,243,000 above the corresponding period expense for the prior
year as the Company continued to enhance product offerings. Specifically, the
Company is accelerating development of its client/server architecture as well as
the Company's roll out of voice over Internet Protocol (IP) and IP/ATM as an
enhancement to the current product line.
Non-operating expense for the quarter was $159,000, primarily due to
investment banking consulting expenses.
The net loss for the quarter was $1,078,000 compared to a net loss of
$3,691,000 in the corresponding quarter of the prior year. This reduction in the
net loss was primarily due to the increase in gross profit generated by the
higher level of revenues.
Liquidity and Capital Resources
The Company generated an increase in cash of $1,268,000 during the
quarter ended June 30, 1998, and closed the quarter with a cash and cash
equivalents balance of $5,014,000.
Prompt collection of trade receivables from customers and collection of
cash due on short-term notes contributed to the cash increase.
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998, the Company's operations will need to be
funded during fiscal 1999 either with funds generated through operations or with
additional debt or equity financing. If the Company's operations do not provide
funds sufficient to fund its operations and the Company seeks outside financing,
there can be no assurance that the Company will be able to obtain such financing
when needed, on acceptable terms or at all. In addition, any future equity
financing or convertible debt financing would cause the Company's shareholders
to incur dilution in common stock holdings as a percentage of the total
outstanding shares.
Forward Looking Statements
All statements other than historical statements contained in this
Report on Form 10-Q constitute "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding new products to be
8
<PAGE>
introduced by the Company in the future, statements about the Company's business
strategy and plans, statements about the adequacy of the Company's working
capital and other financial resources, and in general statements herein that are
not of a historical nature. Any Form 10-K, Annual Report to Shareholders, Form
10-Q, Form 8-K or press release of the Company may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new contract signings, and industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: risks associated with recent
operating losses, no assurance of profitability, the need to increase sales,
liquidity deficiency and in general the other risk factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
The Company disclaims any intention or obligation to update or revise any
forward looking statements whether as a result of new information, future events
or otherwise.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see Note 4 to the Condensed Consolidated Financial Statements
herein and Note 6 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998,
for information on various legal proceedings. There are no material developments
to report at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Issuances of equity securities not registered under Securities Act of
1933 are described in Note 5 of the Condensed Consolidated Financial
Statements.
ITEM 5. OTHER INFORMATION
Mr. Sydney B. Lilly would have been the only director standing for
re-election in 1998 since the terms of the other directors expire in 1999 and
2000. Mr. Lilly has advised the Company that he wishes to retire from the Board
of Directors. Therefore, the Company has determined that, as there are no items
to propose for consideration by shareholders, a general meeting of shareholders
will not be held in respect to the fiscal year ended March 31, 1998. The Company
does intend to call a general meeting in respect of the fiscal year ending March
31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
3.01 Restated Certificate of Incorporation of the Company
incorporated herein by reference to Exhibit 3.1 of the
Company's Form 10-K for the year ended April 3, 1993
3.02 By-Laws of the Company incorporated herein by reference to
Exhibit 3.2 of the Company's Form 10-K for the year ended
March 31, 1997.
4.01 Restated Certificate of Incorporation of the Company (See
Note 3.01 above).
4.02 By-Laws of the Company (See Note 3.02 above).
10.01 Employment Agreement effectively dated April 1, 1998, by and
between Coyote Network Systems, Inc. and James J. Fiedler.
10.02 Employment Agreement effectively dated April 1, 1998, by and
between Coyote Network Systems, Inc. and Daniel W. Latham.
27 Financial Data Schedule
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b) A Form 8-K was filed by the Company on June 19, 1998, which covered:
Item 2. Acquisition or Disposition of Assets.
On June 4, 1998, the Company completed the sale of its 80%
interest in Valley Communications, Inc. pursuant to a stock
purchase agreement dated March 31, 1998.
Item 5. Other Events.
1. Formation of Coyote Gateway, LLC ("CGL"). On April
16, 1998, the Company established CGL. The Company
owns 80% and American Gateway Telecommunication, Inc.
owns 20% of CGL.
2. On June 1, 1998, the Company appointed Edward A.
Beeman as Executive Vice President and Chief
Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COYOTE NETWORK SYSTEMS, INC.
By: /s/ James J. Fiedler
-------------------------------------------
James J. Fiedler
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Edward A. Beeman
-------------------------------------------
Edward A. Beeman
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
DATE: August 14, 1998
12
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EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of April 1, 1998, by and between COYOTE NETWORK
SYSTEMS, INC., a Delaware corporation (the "Company"), and JAMES J. FIEDLER (the
"Executive").
R E C I T A L S
WHEREAS, Executive is willing to be employed by Company, and the Company is
willing to employ the Executive, upon the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in order to set forth the terms and conditions of
Executive's employment with 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 upon the conditions
hereinafter set forth, the Company hereby employs Executive as Chairman and
Chief Executive Officer. Executive accepts such employment and agrees to
devote his full time and use his best efforts to perform his duties
pursuant to this Agreement and to further the business of the Company.
Executive shall not, without the prior written consent of the Company as
authorized by the Company's Board of Directors ("Board of Directors"),
engage directly or indirectly in any other business or occupation during
his employment under this Agreement. Subject to the foregoing, Executive
shall be permitted to manage his own personal investments and, with the
consent of the Board of Directors, sit on the board of directors (or other
governing body) of other companies.
2. Term and Termination.
2.1 Term. Subject to Section 2.2 hereof, the employment of Executive under this
Agreement shall be deemed to have commenced on April 1, 1998 and will
continue until the occurrence of the first of the following:
(a) March 31, 2003 (i.e., a term of five years);
(b) Executive's death; or
(c) Executive's illness, physical or mental disability or other incapacity
resulting in Executive's inability to effectively perform the
essential functions of his job, with or without reasonable
accommodation, for a cumulative period of twenty-six (26) weeks during
any period of twenty-six (26) consecutive months.
The term of this Agreement may only be extended by the written agreement of
both the Company (as approved by the Board of Directors) and the Executive, as
provided in Section 11.1. The term of Executive's employment by the Company
under this Agreement is referred to herein as the "Term."
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2.2 Termination. The employment of Executive under this Agreement may also be
terminated at the option of the Board of Directors upon the occurrence of
any of the following:
(a) Executive's civil adjudication or criminal conviction of fraud or
Executive's dishonesty involving Company's business,
(b) Executive's chronic absence from work other than by reason of illness
or injury,
(c) Executive's conviction of any felony,
(d) Executive's conviction of any misdemeanor which is substantially
related to Executive's services hereunder,
(e) Executive's continuing 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 Executive's conviction of a crime
involving illegal drugs or other illegal substance,
(f) Executive's continuing abuse of alcohol (whether or not on the job)
after receiving a written notice from the Company to halt such usage
or Executive's conviction of a crime involving alcohol, which impairs
Executive's ability to perform Executive's duties under this Agreement
or has an adverse effect (other than an insignificant effect) on the
reputation of the Company or its relationship with any customer or
supplier of the Company,
(g) Executive's illegal conduct either within or outside the scope of
Executive's employment which has an adverse effect (other than an
insignificant effect) on the reputation of the Company or its
relationship with any customer or supplier of the Company,
(h) Executive's breach of his obligations under Sections 6, 7, 8 or 9
hereof, or
(i) Executive's breach of any other provision of this Agreement.
If the Board of Directors terminates the employment of the Executive
without any such reason as aforesaid, which Executive agrees the Board of
Directors is entitled to do since Executive serves at the discretion of the
Board of Directors, then Executive shall nevertheless be entitled to the
Guaranteed Minimum Salary (defined below) hereunder until the date specified in
Section 2.1 and to deferred compensation for the duration of the Deferred Term
(defined below), and no more. In the case of any other termination of the
Executive's employment, the salary and benefits hereunder will terminate as of
the date of such termination, except as provided in Section 3.2. Reference is
made to Section 11.1 of this Agreement regarding the authority of the Board of
Directors to make determinations on behalf of the Company for purposes of this
Agreement.
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2.3 Effect of Termination. Executive's obligations in Sections 6, 7, 8, and 9
hereof, and the Company's obligations under Section 3.2, shall survive the
termination of Executive's employment hereunder for any reason.
3. Annual and Deferred Compensation.
3.1 Annual Compensation. The Company agrees to pay Executive for each full
fiscal year of the Term (a) a guaranteed minimum annual salary, payable not
less frequently than semi-monthly, at a rate of $300,000 (the "Guaranteed
Minimum Salary") or (b) the Variable Salary Amount (defined below),
whichever is greater, not to exceed fifteen times the Guaranteed Minimum
Salary. The Variable Salary Amount shall be: for the first year of the
Term, 10% of the first $6.0 million of pre-tax income of the Company and 5%
of pre-tax income in excess of $6.0 million; for the second year of the
Term, 7-1/2% of the first $6.0 million of pre-tax income of the Company and
5% of pre-tax income in excess of $6.0 million; and for the third, fourth
and fifth fiscal years of the Term, 5% of the pre-tax income of the
Company. The Company's pre-tax income shall be its consolidated income
after all expenses, adjustments and deductions except income taxes, but
shall not include the effects, if any, of extraordinary items and
accounting changes, as set forth in the Company's consolidated financial
statements as included in its annual report on Form 10-K for such fiscal
year as filed with the Securities and Exchange Commission (in the absence
of such filing, to be based on the Company's financial statements otherwise
prepared). Any amounts due Executive in excess of the Guaranteed Minimum
Salary shall be paid within fifteen days after the Company determines its
pre-tax income for the applicable fiscal year. All payments hereunder shall
be subject to withholding and other deductions by reason of federal or
state law.
Examples of the calculation of Executive's salary are set forth below:
Year Pre-Tax Income Calculation Annual Salary
1 0 10% x $0 = $0 $300,000
(minimum salary $300,000)
2 $7,000,000 7-1/2% x $6.0 million + $500,000
5% x $1.0 million =
$500,000
3 $12,000,000 5% x $12.0 million = $600,000
$600,000
4 $20,000,000 5% x $20.0 million = $1,000,000
$1,000,000
5 $100,000,000 5% x $100,000,000 = $4,500,000
$5,000,000
(maximum salary of 15 x $300,000)
3
<PAGE>
3.2 Deferred Compensation. As further compensation for the services to be
performed by Executive hereunder, for a period of five years (or such
shorter duration equal to the number of full years of the Term) following
the Term (the "Deferred Term"), the Company shall pay Deferred Compensation
to Executive as follows. The Deferred Compensation shall be: for the first
year of the Deferred Term, 10% of the pre-tax income of the Company for the
first year of the Term; for the second year of the Deferred Term, 7-1/2% of
pre-tax income of the Company for the second year of the Term; and for the
third, fourth and fifth years of the Deferred Term, 5% of pre-tax income of
the Company for the corresponding year of the Term; provided, however, the
Deferred Compensation for any year shall not exceed two times the
Guaranteed Minimum Salary for the corresponding year of the Term. The first
year of the Deferred Term shall correspond to the first year of the Term
and each subsequent year of the Deferred Term shall correspond to each
subsequent year of the Term. Such Deferred Compensation shall be payable in
equal installments, not less frequently than monthly, and shall be subject
to withholding and other deductions by reason of federal or state law. If
Executive should die during the Deferred Term, the Company shall continue
to make the payments required by this Section 3.2 for the balance of the
Deferred Term to such beneficiary as the Executive may designate for that
purpose in written notice given to the Secretary of the Company prior to
his death or, in the absence of such designation, to his personal
representatives.
Examples of the calculation of Deferred Compensation are set forth below:
<TABLE>
<CAPTION>
Corresponding
Deferred
Compensation
Year (starting Pre-Tax Deferred
Contract after the 5th Income During Compensation
Year Contract Year) Contract Year Calculation Amount
- -------- -------------- ------------- ------------------------------ ------------
<S> <C> <C> <C> <C>
1 1 $ 0 10% x 0 = $0 0
2 2 $ 4,000,000 7-1/2% x $4,000,000 = $300,000 $ 300,000
3 3 $ 6,000,000 5% x $6,000,000 = $300,000 $ 300,000
4 4 $ 10,000,000 5% x $10,000,000 = $500,000 $ 500,000
5 5 $ 20,000,000 5% x $20,000,000 = $1,000,000 $ 600,000
(maximum of double minimum
salary or 2 x $300,000)
</TABLE>
4. Reimbursement for Expenses. Company agrees to reimburse Executive 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.
5. Fringe Benefits. Executive shall be entitled to the following fringe
benefits during the term of his employment under this Agreement. The
Executive understands that he will recognize income to the extent provided
by law in respect of certain of the benefits hereunder, and that these
benefits shall be subject to withholding and other deductions by reason of
federal or state law.
4
<PAGE>
5.1 Vacation. Executive shall be allowed four (4) weeks of vacation per year,
with full pay and without loss of any other compensation or benefits,
during the term of this Agreement. Executive shall coordinate the schedule
of his vacations with other executives and the personnel of Company and its
affiliates so as to avoid any adverse effects on the Company's operations.
5.2 Stock Options. Executive shall be entitled to receive ten-year stock
options of the Company for 450,000 shares of stock, with vesting and
exercise prices set forth below:
Number of Shares Vesting (years) Exercise Price
---------------- --------------- --------------
90,000 1 $4.00
90,000 2 $8.00
90,000 3 $12.00
90,000 4 $16.00
90,000 5 $20.00
The options must be exercised within five (5) years after termination of
employment.
5.3 Medical Benefits. During the Term and the Deferred Term, the Company will
pay or reimburse Executive for all medical expenses for the Executive, his
spouse and unemancipated children, including physician, hospital, dental,
optometrical, nursing, nursing home and drug expenses.
5.4 Other Fringe Benefits. Executive may receive such other additional fringe
benefits, if any, as the Board of Directors may from time-to-time make
available to Executive at the Board of Directors' sole discretion.
5.5 Other Benefits. The Board may, in its sole discretion, award additional
compensation to Executive, by way of increased salary, bonus, options or
otherwise, as a result of the Company's operating performance or other
factors.
5.6 Change of Control. In the event of a Change of Control, the stock options
for all 450,000 shares of stock referred to in Section 5.2 shall
immediately vest, the Company shall pay to Executive in a lump sum all
accrued but unpaid Deferred Compensation under Section 3.2 and the Company
shall pay to Executive in a lump sum the Guaranteed Minimum Salary that
would be earned over the remainder of the Term (in each case net of
applicable withholding and other taxes). In addition, any subsequently
earned Variable Salary Amount and Deferred Compensation shall be paid to
Executive within fifteen days after the Company determines its pre-tax
income for the applicable year of the Term. In the event that Employee
ceases to be an employee of the Company for any reason following such
Change of Control, whether upon voluntary resignation, involuntary
termination or otherwise (except if such employment is terminated by the
Company pursuant to Section 2.2), then Executive shall be entitled to
receive Deferred Compensation and Variable Salary Amount prorated and
5
<PAGE>
calculated through the end of the fiscal quarter of such termination, and
all medical benefits set forth in Section 5.3 shall continue to be provided
for the remainder of the originally-scheduled Term and the full five year
originally-scheduled Deferred Term. As used herein, a Change of Control
means any transaction in which substantially all 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. Nothing herein shall limit Executive's damages in the event
Executive is terminated without cause following a Change of Control or
otherwise.
6. Definitions.
As used in this Agreement, the following words have the meanings specified:
(a) "Proprietary Ideas" means ideas, suggestions, inventions and work
relating in any way to the business and activities of Company which
may be subjects of protection under applicable laws, including common
law, including patents, copyrights, trade secrets, trademarks, service
marks or other intellectual property rights.
(b) "Inventions" means inventions, designs, discoveries, improvements and
ideas, whether or not patentable, including without limitation, 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 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 Executive for
Company.
(c) "Confidential Information" means Proprietary Ideas and also
information related to Company's business, whether or not in written
or printed form, not generally known in the trade or industry of which
Executive 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 usages 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 Executive.
(d) As used in Sections 6, 7, 8, and 9 only, the term "Company" shall
include all entities affiliated with the Company.
7. Disclosure and Assignment of Inventions. Executive agrees to disclose to
the Company (and, if requested to do so, to provide a written description
thereof to the Company), and hereby assigns to Company all of Executive's
rights in and to, any Inventions conceived or reduced to practice at any
time during Executive's employment by Company, either solely or jointly
with others and whether or not developed on Executive's own time or with
6
<PAGE>
Company's resources. Executive agrees that Inventions first reduced to
practice within one (1) year after termination of Executive's employment by
Company shall be treated as if conceived during such employment unless
Executive can establish specific events giving rise to the conception which
occurred after such employment. Further, Executive disclaims and will not
assert any rights in Inventions as having been made, conceived or acquired
prior to employment by Company except such as are specifically listed at
the conclusion of this Agreement. Executive shall cooperate with Company
and shall execute and deliver such documents and do such other acts and
things as Company may request, at Company's expense, to obtain and maintain
letters patent or registrations covering any Inventions and to vest in
Company all rights therein free of all encumbrances and adverse claims.
8. Confidential Information. Except as required by law or regulatory agencies,
Executive shall not disclose to Company or induce Company to use any secret
or confidential information belonging to persons not affiliated with
Company, including any former employer of Executive. In addition to all
duties of loyalty imposed on Executive by law, Executive 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
Company, directly or indirectly, use or disclose to others any Confidential
Information, or use it for the benefit of any person or entity (including
Executive) other than Company, without the prior written consent of any
duly authorized officer of Company (except for disclosures to persons
acting on Company's behalf with a need to know such information). Executive
shall carefully preserve any documents, records and tangible data relating
to Inventions or Confidential Information coming into Executive's
possession and shall deliver the same and any copies thereof to Company
upon request and, in any event, upon termination of Executive's employment
by Company.
9. Non-Competition.
(a) At all times during Executive's employment by the Company (whether
pursuant to this Agreement or otherwise) and, to the fullest extent
permitted by applicable law, for a period of twelve (12) months
following the termination of such employment, Executive will not, in
any capacity whatsoever, in any state in the United States or in any
other country, directly or indirectly, participate in or assist in the
ownership, management, operation or control of, or have any beneficial
interest in, or provide employment, consulting or other services for,
any corporation, partnership, association or other person or entity
("Competitive Business") which is engaged in the development,
manufacture, marketing, distribution, service and/or sale of voice or
data switching equipment, and which directly competes or is planning
to directly compete with the Company's products or services (including
products and services under development). If the business is
multi-faceted, this restriction shall apply to only that part of the
business which is competitive to Company.
(b) In furtherance of the foregoing, but as an independent obligation of
Executive, Executive agrees that he will not, to the fullest extent
permitted by applicable law, during the one-year period following
termination of his employment with Company, be connected in any way
with the solicitation of any then current or potential customers or
suppliers of Company if such solicitation is likely to result in a
loss of business for Company.
7
<PAGE>
(c) In furtherance of the foregoing, but as an independent obligation of
the Executive, Executive agrees that, to the fullest extent permitted
by applicable law, during the one year following termination of his
employment with the Company, he will not solicit for employment,
employ or engage as a consultant any person who had been an employee
of the Company at any time in the one-year period prior to termination
of Executive's employment with Company.
(d) 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. Government Laws, Regulations and Contracts. Executive agrees to comply, and
to do all things necessary for Company to comply, with all federal, state,
local and foreign laws and regulations and government contracts which may
be applicable to the business and operations of Company.
11. Miscellaneous.
11.1 Amendment and Modification. Company (by action of its Board of Directors)
and Executive may amend, modify and supplement this Agreement only in such
manner as may be agreed upon by Company and Executive in writing. This
provision shall be applicable to any extension of the term of this
Agreement as provided in Section 2.1. All determinations, waivers,
consents, approvals or other acts on the part of the Company that are
permitted or required by this Agreement shall similarly require the
approval of the Board of Directors.
11.2 Entire Agreement. This instrument embodies the entire agreement between the
parties hereto with respect to the employment relationship created hereby
and supersedes and discharges any prior agreements pertaining to employment
between Executive 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.
11.3 Assignment. This Agreement shall not be assigned by either party without
the written consent of the other party. Inasmuch as this Agreement
contemplates the provision of personal services by the Executive,
ordinarily this Agreement shall not be assignable by the Executive. This
Agreement shall not be assigned by the Company except with the prior
written consent of the Executive, which he shall not unreasonably withhold.
Any attempted assignment without such written consent shall be null and
void and without legal effect.
11.4 Binding Effect; Specific Performance. Subject to Section 11.3 hereof, this
Agreement shall be binding upon and inure 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 the
fullest extent permitted by applicable law in enforcing the provisions of
this Agreement.
8
<PAGE>
11.5 Arbitration. Any dispute, controversy or claim arising out of or relating
to this Agreement, or the breach hereof, or the employment relationship
hereunder, shall be settled by binding arbitration in Los Angeles,
California administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
11.6 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.
11.7 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 actually delivered to the recipient
or when mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
If to Executive, to: James J. Fiedler
4360 Park Terrace Drive
Westlake Village, CA 91361
If to Company, to: Coyote Network Systems, Inc.
Attn: Board of Directors
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.
11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE
CHOICE OF LAW PRINCIPLES THEREOF.
EXECUTIVE 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 EXECUTIVE'S ENTIRE AGREEMENT WITH
COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS,
REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF
ITS OFFICIALS OR REPRESENTATIVES.
9
<PAGE>
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 Executive'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
Executive for the Company.
NOTWITHSTANDING THE FORGOING PROVISIONS OF SECTION 7, EXECUTIVE IS HEREBY
NOTIFIED BY THE COMPANY THAT SUCH PROVISIONS DO NOT APPLY TO ANY INVENTION
THAT QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE. BY HIS SIGNATURE BELOW, EXECUTIVE HEREBY ACKNOWLEDGES RECEIPT
OF SUCH NOTIFICATION.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and effective as of the day and year first above written.
COYOTE NETWORK SYSTEMS, INC. ("Company")
By: /s/ Jack E. Donnelly
-----------------------
Jack E. Donnelly
JAMES J. FIEDLER ("Executive")
By: /s/ James J. Fiedler
-----------------------
James J. Fiedler
List of Inventions Excepted From Section 7 Above:
None
MW1-123210-6
10
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of April 1, 1998, by and between COYOTE NETWORK
SYSTEMS, INC., a Delaware corporation (the "Company"), and DANIEL W. LATHAM (the
"Executive").
R E C I T A L S
WHEREAS, Executive is willing to be employed by Company, and the Company is
willing to employ the Executive, upon the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in order to set forth the terms and conditions of
Executive's employment with 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 upon the conditions
hereinafter set forth, the Company hereby employs Executive as President
and Chief Operating Officer. Executive accepts such employment and agrees
to devote his full time and use his best efforts to perform his duties
pursuant to this Agreement and to further the business of the Company.
Executive shall not, without the prior written consent of the Company as
authorized by the Company's Board of Directors ("Board of Directors"),
engage directly or indirectly in any other business or occupation during
his employment under this Agreement. Subject to the foregoing, Executive
shall be permitted to manage his own personal investments and, with the
consent of the Board of Directors, sit on the board of directors (or other
governing body) of other companies.
2. Term and Termination.
2.1 Term. Subject to Section 2.2 hereof, the employment of Executive under this
Agreement shall be deemed to have commenced on April 1, 1998 and will
continue until the occurrence of the first of the following:
(a) March 31, 2003 (i.e., a term of five years);
(b) Executive's death; or
(c) Executive's illness, physical or mental disability or other incapacity
resulting in Executive's inability to effectively perform the
essential functions of his job, with or without reasonable
accommodation, for a cumulative period of twenty-six (26) weeks during
any period of twenty-six (26) consecutive months.
The term of this Agreement may only be extended by the written agreement of
both the Company (as approved by the Board of Directors) and the Executive, as
provided in Section 11.1. The term of Executive's employment by the Company
under this Agreement is referred to herein as the "Term."
1
<PAGE>
2.2 Termination. The employment of Executive under this Agreement may also be
terminated at the option of the Board of Directors upon the occurrence of
any of the following:
(a) Executive's civil adjudication or criminal conviction of fraud or
Executive's dishonesty involving Company's business,
(b) Executive's chronic absence from work other than by reason of illness
or injury,
(c) Executive's conviction of any felony,
(d) Executive's conviction of any misdemeanor which is substantially
related to Executive's services hereunder,
(e) Executive's continuing 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 Executive's conviction of a crime
involving illegal drugs or other illegal substance,
(f) Executive's continuing abuse of alcohol (whether or not on the job)
after receiving a written notice from the Company to halt such usage
or Executive's conviction of a crime involving alcohol, which impairs
Executive's ability to perform Executive's duties under this Agreement
or has an adverse effect (other than an insignificant effect) on the
reputation of the Company or its relationship with any customer or
supplier of the Company,
(g) Executive's illegal conduct either within or outside the scope of
Executive's employment which has an adverse effect (other than an
insignificant effect) on the reputation of the Company or its
relationship with any customer or supplier of the Company,
(h) Executive's breach of his obligations under Sections 6, 7, 8 or 9
hereof, or
(i) Executive's breach of any other provision of this Agreement.
If the Board of Directors terminates the employment of the Executive
without any such reason as aforesaid, which Executive agrees the Board of
Directors is entitled to do since Executive serves at the discretion of the
Board of Directors, then Executive shall nevertheless be entitled to the
Guaranteed Minimum Salary (defined below) hereunder until the date specified in
Section 2.1 and to deferred compensation for the duration of the Deferred Term
(defined below), and no more. In the case of any other termination of the
Executive's employment, the salary and benefits hereunder will terminate as of
the date of such termination, except as provided in Section 3.2. Reference is
made to Section 11.1 of this Agreement regarding the authority of the Board of
Directors to make determinations on behalf of the Company for purposes of this
Agreement.
2
<PAGE>
2.3 Effect of Termination. Executive's obligations in Sections 6, 7, 8, and 9
hereof, and the Company's obligations under Section 3.2, shall survive the
termination of Executive's employment hereunder for any reason.
3. Annual and Deferred Compensation.
3.1 Annual Compensation. The Company agrees to pay Executive for each full
fiscal year of the Term (a) a guaranteed minimum annual salary, payable not
less frequently than semi-monthly, at a rate of $300,000 (the "Guaranteed
Minimum Salary") or (b) the Variable Salary Amount (defined below),
whichever is greater, not to exceed fifteen times the Guaranteed Minimum
Salary. The Variable Salary Amount shall be: for the first year of the
Term, 10% of the first $6.0 million of pre-tax income of the Company and 5%
of pre-tax income in excess of $6.0 million; for the second year of the
Term, 7-1/2% of the first $6.0 million of pre-tax income of the Company and
5% of pre-tax income in excess of $6.0 million; and for the third, fourth
and fifth fiscal years of the Term, 5% of the pre-tax income of the
Company. The Company's pre-tax income shall be its consolidated income
after all expenses, adjustments and deductions except income taxes, but
shall not include the effects, if any, of extraordinary items and
accounting changes, as set forth in the Company's consolidated financial
statements as included in its annual report on Form 10-K for such fiscal
year as filed with the Securities and Exchange Commission (in the absence
of such filing, to be based on the Company's financial statements otherwise
prepared). Any amounts due Executive in excess of the Guaranteed Minimum
Salary shall be paid within fifteen days after the Company determines its
pre-tax income for the applicable fiscal year. All payments hereunder shall
be subject to withholding and other deductions by reason of federal or
state law.
Examples of the calculation of Executive's salary are set forth below:
Year Pre-Tax Income Calculation Annual Salary
---- -------------- ------------------------- -------------
1 0 10% x $0 = $0 $300,000
(minimum salary $300,000)
2 $7,000,000 7-1/2% x $6.0 million + $500,000
5% x $1.0 million =
$500,000
3 $12,000,000 5% x $12.0 million = $600,000
$600,000
4 $20,000,000 5% x $20.0 million = $1,000,000
$1,000,000
5 $100,000,000 5% x $100,000,000 = $4,500,000
$5,000,000
(maximum salary of 15 x $300,000)
3
<PAGE>
3.2. Deferred Compensation. As further compensation for the services to be
performed by Executive hereunder, for a period of five years (or such
shorter duration equal to the number of full years of the Term) following
the Term (the "Deferred Term"), the Company shall pay Deferred Compensation
to Executive as follows. The Deferred Compensation shall be: for the first
year of the Deferred Term, 10% of the pre-tax income of the Company for the
first year of the Term; for the second year of the Deferred Term, 7-1/2% of
pre-tax income of the Company for the second year of the Term; and for the
third, fourth and fifth years of the Deferred Term, 5% of pre-tax income of
the Company for the corresponding year of the Term; provided, however, the
Deferred Compensation for any year shall not exceed two times the
Guaranteed Minimum Salary for the corresponding year of the Term. The first
year of the Deferred Term shall correspond to the first year of the Term
and each subsequent year of the Deferred Term shall correspond to each
subsequent year of the Term. Such Deferred Compensation shall be payable in
equal installments, not less frequently than monthly, and shall be subject
to withholding and other deductions by reason of federal or state law. If
Executive should die during the Deferred Term, the Company shall continue
to make the payments required by this Section 3.2 for the balance of the
Deferred Term to such beneficiary as the Executive may designate for that
purpose in written notice given to the Secretary of the Company prior to
his death or, in the absence of such designation, to his personal
representatives.
Examples of the calculation of Deferred Compensation are set forth below:
<TABLE>
<CAPTION>
Corresponding
Deferred
Compensation
Year (starting Pre-Tax Deferred
Contract after the 5th Income During Compensation
Year Contract Year Contract Year Calculation Amount
-------- -------------- ------------- ---------------------------- ------------
<S> <C> <C> <C> <C>
1 1 $ 0 10% x 0 = $0 0
2 2 $ 4,000,000 7-1/2% x $4,000,000 = $300,000 $ 300,000
3 3 $ 6,000,000 5% x $6,000,000 = $300,000 $ 300,000
4 4 $ 10,000,000 5% x $10,000,000 = $500,000 $ 500,000
5 5 $ 20,000,000 5% x $20,000,000 = $1,000,000 $ 600,000
(maximum of double minimum
salary or 2 x $300,000)
</TABLE>
4. Reimbursement for Expenses. Company agrees to reimburse Executive 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.
5. Fringe Benefits. Executive shall be entitled to the following fringe
benefits during the term of his employment under this Agreement. The
Executive understands that he will recognize income to the extent provided
by law in respect of certain of the benefits hereunder, and that these
benefits shall be subject to withholding and other deductions by reason of
federal or state law.
4
<PAGE>
5.1 Vacation. Executive shall be allowed four (4) weeks of vacation per year,
with full pay and without loss of any other compensation or benefits,
during the term of this Agreement. Executive shall coordinate the schedule
of his vacations with other executives and the personnel of Company and its
affiliates so as to avoid any adverse effects on the Company's operations.
5.2 Stock Options. Executive shall be entitled to receive ten-year stock
options of the Company for 450,000 shares of stock, with vesting and
exercise prices set forth below:
Number of Shares Vesting (years) Exercise Price
90,000 1 $4.00
90,000 2 $8.00
90,000 3 $12.00
90,000 4 $16.00
90,000 5 $20.00
The options must be exercised within five (5) years after termination of
employment.
5.3 Medical Benefits. During the Term and the Deferred Term, the Company will
pay or reimburse Executive for all medical expenses for the Executive, his
spouse and unemancipated children, including physician, hospital, dental,
optometrical, nursing, nursing home and drug expenses.
5.4 Other Fringe Benefits. Executive may receive such other additional fringe
benefits, if any, as the Board of Directors may from time-to-time make
available to Executive at the Board of Directors' sole discretion.
5.5 Other Benefits. The Board may, in its sole discretion, award additional
compensation to Executive, by way of increased salary, bonus, options or
otherwise, as a result of the Company's operating performance or other
factors.
5.6 Change of Control. In the event of a Change of Control, the stock options
for all 450,000 shares of stock referred to in Section 5.2 shall
immediately vest, the Company shall pay to Executive in a lump sum all
accrued but unpaid Deferred Compensation under Section 3.2 and the Company
shall pay to Executive in a lump sum the Guaranteed Minimum Salary that
would be earned over the remainder of the Term (in each case net of
applicable withholding and other taxes). In addition, any subsequently
earned Variable Salary Amount and Deferred Compensation shall be paid to
Executive within fifteen days after the Company determines its pre-tax
income for the applicable year of the Term. In the event that Employee
ceases to be an employee of the Company for any reason following such
Change of Control, whether upon voluntary resignation, involuntary
termination or otherwise (except if such employment is terminated by the
Company pursuant to Section 2.2), then Executive shall be entitled to
receive Deferred Compensation and Variable Salary Amount prorated and
calculated through the end of the fiscal quarter of such termination, and
all medical benefits set forth in Section 5.3 shall continue to be provided
5
<PAGE>
for the remainder of the originally-scheduled Term and the full five year
originally-scheduled Deferred Term. As used herein, a Change of Control
means any transaction in which substantially all 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. Nothing herein shall limit Executive's damages in the event
Executive is terminated without cause following a Change of Control or
otherwise.
6. Definitions.
As used in this Agreement, the following words have the meanings specified:
(a) "Proprietary Ideas" means ideas, suggestions, inventions and work
relating in any way to the business and activities of Company which
may be subjects of protection under applicable laws, including common
law, including patents, copyrights, trade secrets, trademarks, service
marks or other intellectual property rights.
(b) "Inventions" means inventions, designs, discoveries, improvements and
ideas, whether or not patentable, including without limitation, 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 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 Executive for
Company.
(c) "Confidential Information" means Proprietary Ideas and also
information related to Company's business, whether or not in written
or printed form, not generally known in the trade or industry of which
Executive 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 usages 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 Executive.
(d) As used in Sections 6, 7, 8, and 9 only, the term "Company" shall
include all entities affiliated with the Company.
7. Disclosure and Assignment of Inventions. Executive agrees to disclose to
the Company (and, if requested to do so, to provide a written description
thereof to the Company), and hereby assigns to Company all of Executive's
rights in and to, any Inventions conceived or reduced to practice at any
time during Executive's employment by Company, either solely or jointly
with others and whether or not developed on Executive's own time or with
Company's resources. Executive agrees that Inventions first reduced to
6
<PAGE>
practice within one (1) year after termination of Executive's employment by
Company shall be treated as if conceived during such employment unless
Executive can establish specific events giving rise to the conception which
occurred after such employment. Further, Executive disclaims and will not
assert any rights in Inventions as having been made, conceived or acquired
prior to employment by Company except such as are specifically listed at
the conclusion of this Agreement. Executive shall cooperate with Company
and shall execute and deliver such documents and do such other acts and
things as Company may request, at Company's expense, to obtain and maintain
letters patent or registrations covering any Inventions and to vest in
Company all rights therein free of all encumbrances and adverse claims.
8. Confidential Information. Except as required by law or regulatory agencies,
Executive shall not disclose to Company or induce Company to use any secret
or confidential information belonging to persons not affiliated with
Company, including any former employer of Executive. In addition to all
duties of loyalty imposed on Executive by law, Executive 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
Company, directly or indirectly, use or disclose to others any Confidential
Information, or use it for the benefit of any person or entity (including
Executive) other than Company, without the prior written consent of any
duly authorized officer of Company (except for disclosures to persons
acting on Company's behalf with a need to know such information). Executive
shall carefully preserve any documents, records and tangible data relating
to Inventions or Confidential Information coming into Executive's
possession and shall deliver the same and any copies thereof to Company
upon request and, in any event, upon termination of Executive's employment
by Company.
9. Non-Competition.
(a) At all times during Executive's employment by the Company (whether
pursuant to this Agreement or otherwise) and, to the fullest extent
permitted by applicable law, for a period of twelve (12) months
following the termination of such employment, Executive will not, in
any capacity whatsoever, in any state in the United States or in any
other country, directly or indirectly, participate in or assist in the
ownership, management, operation or control of, or have any beneficial
interest in, or provide employment, consulting or other services for,
any corporation, partnership, association or other person or entity
("Competitive Business") which is engaged in the development,
manufacture, marketing, distribution, service and/or sale of voice or
data switching equipment, and which directly competes or is planning
to directly compete with the Company's products or services (including
products and services under development). If the business is
multi-faceted, this restriction shall apply to only that part of the
business which is competitive to Company.
(b) In furtherance of the foregoing, but as an independent obligation of
Executive, Executive agrees that he will not, to the fullest extent
permitted by applicable law, during the one-year period following
termination of his employment with Company, be connected in any way
with the solicitation of any then current or potential customers or
suppliers of Company if such solicitation is likely to result in a
loss of business for Company.
7
<PAGE>
(c) In furtherance of the foregoing, but as an independent obligation of
the Executive, Executive agrees that, to the fullest extent permitted
by applicable law, during the one year following termination of his
employment with the Company, he will not solicit for employment,
employ or engage as a consultant any person who had been an employee
of the Company at any time in the one-year period prior to termination
of Executive's employment with Company.
(d) 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. Government Laws, Regulations and Contracts. Executive agrees to comply, and
to do all things necessary for Company to comply, with all federal, state,
local and foreign laws and regulations and government contracts which may
be applicable to the business and operations of Company.
11. Miscellaneous.
11.1 Amendment and Modification. Company (by action of its Board of Directors)
and Executive may amend, modify and supplement this Agreement only in such
manner as may be agreed upon by Company and Executive in writing. This
provision shall be applicable to any extension of the term of this
Agreement as provided in Section 2.1. All determinations, waivers,
consents, approvals or other acts on the part of the Company that are
permitted or required by this Agreement shall similarly require the
approval of the Board of Directors.
11.2 Entire Agreement. This instrument embodies the entire agreement between the
parties hereto with respect to the employment relationship created hereby
and supersedes and discharges any prior agreements pertaining to employment
between Executive 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.
11.3 Assignment. This Agreement shall not be assigned by either party without
the written consent of the other party. Inasmuch as this Agreement
contemplates the provision of personal services by the Executive,
ordinarily this Agreement shall not be assignable by the Executive. This
Agreement shall not be assigned by the Company except with the prior
written consent of the Executive, which he shall not unreasonably withhold.
Any attempted assignment without such written consent shall be null and
void and without legal effect.
11.4 Binding Effect; Specific Performance. Subject to Section 11.3 hereof, this
Agreement shall be binding upon and inure 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 the
fullest extent permitted by applicable law in enforcing the provisions of
this Agreement.
8
<PAGE>
11.5 Arbitration. Any dispute, controversy or claim arising out of or relating
to this Agreement, or the breach hereof, or the employment relationship
hereunder, shall be settled by binding arbitration in Los Angeles,
California administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
11.6 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.
11.7 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 actually delivered to the recipient
or when mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
If to Executive, to: James J. Fiedler
4360 Park Terrace Drive
Westlake Village, CA 91361
If to Company, to: Coyote Network Systems, Inc.
Attn: Board of Directors
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.
11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE
CHOICE OF LAW PRINCIPLES THEREOF.
EXECUTIVE 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 EXECUTIVE'S ENTIRE AGREEMENT WITH
COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS,
REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF
ITS OFFICIALS OR REPRESENTATIVES.
9
<PAGE>
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 Executive'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
Executive for the Company.
NOTWITHSTANDING THE FORGOING PROVISIONS OF SECTION 7, EXECUTIVE IS HEREBY
NOTIFIED BY THE COMPANY THAT SUCH PROVISIONS DO NOT APPLY TO ANY INVENTION
THAT QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE. BY HIS SIGNATURE BELOW, EXECUTIVE HEREBY ACKNOWLEDGES RECEIPT
OF SUCH NOTIFICATION.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and effective as of the day and year first above written.
COYOTE NETWORK SYSTEMS, INC. ("Company")
By: /s/ Jack E. Donnelly
-------------------------
Jack E. Donnelly
DANIEL W. LATHAM ("Executive")
By: /s/ Daniel W. Latham
-------------------------
Daniel W. Latham
List of Inventions Excepted From Section 7 Above:
None
MW1-130274-3
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF COYOTE NETWORKS SYSTEMS, INC. AS
OF AND FOR THE QUARTER ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5014
<SECURITIES> 0
<RECEIVABLES> 2817
<ALLOWANCES> 0
<INVENTORY> 1726
<CURRENT-ASSETS> 13879
<PP&E> 3974
<DEPRECIATION> (1030)
<TOTAL-ASSETS> 23627
<CURRENT-LIABILITIES> 10873
<BONDS> 1605
0
0
<COMMON> 10292
<OTHER-SE> 396
<TOTAL-LIABILITY-AND-EQUITY> 23627
<SALES> 7193
<TOTAL-REVENUES> 7193
<CGS> 3220
<TOTAL-COSTS> 3220
<OTHER-EXPENSES> 4877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (1078)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1078)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1078)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
