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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 Period ended December 31, 1997
OR
|_| Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Commission file number 1-5486
COYOTE NETWORK SYSTEMS, INC.
Incorporated pursuant to the Laws of the State of Delaware
Internal Revenue Service - Employer Identification No. 36-2448698
4360 Park Terrace Drive, Westlake Village, CA 91361
(818) 735-7600
Former Address: 20625 Mureau Road, Calabasas, CA 91302
(818) 878-7711
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 February 13, 1998, the Registrant has issued and outstanding an aggregate of
8,260,463 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 Sheet.............................................. 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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 14
Item 2. Changes in Securities and Use of Proceeds................. 14
Item 4. Submission of Matters to a Vote of Security Holders....... 14
Item 6. Exhibits and Reports on Form 8-K.......................... 14
Signature ..................................................... 16
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
----------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 6,795 $ 81
Marketable securities 1,180 ---
Receivables 999 4,594
Inventories 3,298 2,937
Net assets of discontinued operations --- 893
Other current assets 913 1,716
-------- -------
Total current assets 13,185 10,221
Property and equipment 1,672 1,944
Intangible assets 3,595 3,755
Net assets of discontinued operations 3,123 7,308
Other assets 2,948 16
--------- ---------
$ 24,523 $ 23,244
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,635 $ 2,559
Accrued liabilities 1,227 1,360
Accrued common stock conversion expense 5,522 ---
Accrued common stock warrant expense 494 ---
Current portion of long-term debt 141 141
-------- -------
Total current liabilities 9,019 4,060
11.25% subordinated debentures, due 2002 1,676 1,817
8.0% convertible notes, due 2000 5,000 ---
Other liabilities 513 533
Shareholders' equity
Preferred stock - $.01 par value --- ---
Common stock - $1 par value 8,816 6,007
Additional paid-in capital 84,847 80,124
Accumulated deficit (79,411) (63,540)
Unrealized (loss) on marketable securities (180) ---
Treasury stock (5,757) (5,757)
--------- --------
Total Shareholders' equity 8,315 16,834
-------- ------
$ 24,523 $ 23,244
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
3 Months 12 Weeks 9 Months 40 Weeks
Ended Ended Ended Ended
Dec 31, 1997 Jan 4, 1997 Dec 31, 1997 Jan 4, 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 1,659 $ 2,552 $ 2,709 $ 7,059
Cost of sales 516 710 958 1,747
--------- -------- --------- --------
Gross profit 1,143 1,842 1,751 5,312
Selling and Administrative expenses 3,056 3,965 9,182 8,555
Engineering, Research and Development 1,395 1,798 2,692 3,035
-------- -------- -------- --------
Total operating expenses 4,451 5,763 11,874 11,590
-------- -------- -------- --------
Operating loss (3,308) (3,921) (10,123) (6,278)
Interest expense (150) (7) (273) (52)
Non-operating income (loss) 44 (626) 48 (281)
Non-operating expense --- --- (5,522) ---
Minority interest --- 55 --- 181
Income tax credit --- 836 --- 836
---------- -------- ----------- --------
Loss from continuing operations (3,414) (3,663) (15,870) (5,594)
Loss from discontinued operations --- (223) --- (625)
Estimated loss on disposal of
discontinued operations --- (2,050) --- (5,550)
---------- --------- ----------- ---------
Loss before extraordinary item (3,414) (5,936) (15,870) (11,769)
Extraordinary item --- --- -- (227)
---------- ---------- ----------- ----------
Net loss $ (3,414) $ (5,936) $ (15,870) $ (11,996)
======== ========= ========== =======
Loss per common share (basic & diluted):
Continuing operations $ (.44) $ (.69) $ (2.37) $ (1.06)
Discontinued operations --- (.04) --- (.12)
Estimated loss on disposal --- (.39) --- (1.06)
Extraordinary item --- --- --- (.04)
----------- ----------- ------------ ----------
Net loss per common share (basic & diluted) $ (.44) $ (1.12) $ (2.37) $ (2.28)
======= ======= ========= =========
Weighted average number of common
shares outstanding (basic & diluted) 7,844 5,294 6,685 5,263
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
9 Months 40 Weeks
Ended Ended
Dec 31, 1997 Jan 4, 1997
------------ -----------
<S> <C> <C>
Operating Activities:
Loss before extraordinary item $ (15,870) $ (11,769)
Reconciliation of loss to net cash provided by operating activities:
Losses on sales of marketable securities --- 736
Depreciation and amortization 565 346
Provision for common stock warrants issued 494 ---
Provision for CTL Class A/B Unit Convertibility 5,522 ---
Minority Interest --- (181)
Estimated loss on disposal of discontinued operations --- 5,550
Net change in discontinued operations 345 (2,808)
Other --- (70)
Changes in operating assets and liabilities 1,610 (5,544)
-------- ---------
Net cash provided (used) by operating activities (7,334) (13,740)
Investing activities:
Increase in promissory note (840) (5,600)
Sale of CNC common and preferred stock respectively 397 2,500
Additions to property and equipment (132) (1,977)
Proceeds of sales of marketable securities --- 1,227
Purchase of marketable securities (244) ---
Net change in discontinued operations (470) (792)
Proceeds of discontinued operations 2,861 ---
Other --- 284
---------- -------
Net cash provided (used) by investing activities 1,572 (4,358)
Financing activities:
Repayments of long-term debt (141) (141)
Change in note payable 250 ---
Payment of note payable (98) ---
Convertible note issued, net of expenses 4,635 ---
Common stock issued, net of expenses 7,601 13,918
Net change in discontinued operations 229 2,890
Extraordinary item --- (227)
Other --- (22)
---------- ---------
Net cash provided (used) by financing activities 12,476 16,418
------ ------
Increase (decrease) in cash and cash equivalents 6,714 (1,680)
Cash and cash equivalents at the beginning of the period 81 4,480
---------- --------
Cash and cash equivalents at the end of the period $ 6,795 $ 2,800
========= =========
Non-cash transactions:
Conversion of promissory note to CNC preferred stock --- $ 5,000
Acquisition of common stock held by minority shareholder --- 2,832
Issuance of common stock warrants to
investment banker and placement agent 494 ---
Note payable to related party 98 ---
Change in convertibility of CTL A/B Units 5,552 ---
Conversion of note payable to common stock 250 ---
Conversion of convertible notes and interest into common stock 2,545 ---
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
At the Annual Meeting of Shareholders held on November 20, 1997,
the Registrant's shareholders adopted and ratified a change of the Registrant's
name to Coyote Network Systems, Inc.
At a meeting of the members of the Registrant's subsidiary Sattel
Communications, LLC held on December 16, 1997, the members adopted and ratified
a change of the subsidiary's name to Coyote Technologies, LLC ("CTL").
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
December 31, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ended March 31, 1998. 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,
1997.
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 the Company approved a
restructuring plan (the "Restructuring") to separate its central office voice
and data switching equipment business (the "CTL Business" formerly the "Sattel
Business") from the following businesses:
SEGMENT COMPANY
Telecommunications equipment distribution C&L
Voice and data network 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 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.
Colorado purchased the following assets of APC for $13.5 million:
receivables, inventories, machinery and equipment, furniture and fixtures, and
certain other current assets. Colorado made a cash payment to APC of $6.9
million of which $712,000 was restricted pursuant to the terms of the Asset
Purchase Agreement. As of December 31, 1997, $100,000 was held in escrow and was
released on February 5, 1998 at which time all valid
<PAGE>
NOTE 2 Discontinued Operations (Continued)
claims against the escrow had been settled. Colorado also assumed accounts
payable and accrued liabilities of APC of $6.6 million. APC repaid $5.8 million
to its lender to extinguish all obligations under its revolving line of credit.
APC retained real estate with a net book value of $2.5 million. The
real estate is collateral for two mortgage notes that amounted to $754,000. The
real estate is listed for sale.
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 distributor subsidiary, C&L Communications, Inc. ("C&L"), to
the current management of C&L, including Michael Sonaco, James Olson and William
Cain. Prior to the sale, $645,000 of non-operating assets were dividended by C&L
to the Company, and under the terms of the agreement, the Company received
$2,750,000 in cash, and $1,000,000 secured promissory note due in monthly
installments and maturing on January 1, 2001 and non-voting, subordinated
preferred stock with a liquidation preference of $2,000,000. The note receivable
was recorded at face value of $1,000,000 and the preferred stock was recorded at
a value of $800,000.
The Company anticipates the sale of Valley will be completed prior to
March 31, 1998. The Company believes that the reserve for loss on disposal
recorded at December 31, 1997 of $1,807,000 is sufficient to cover all estimated
expenses and net losses of the remaining discontinued operations to be incurred
with respect to its revised Restructuring Plan.
Discontinued operations include management's best estimates of the
amounts expected to be realized on the sale of these businesses and assets. The
estimates are based on valuations by independent appraisers. The amounts the
Company will ultimately realize could differ materially in the near term from
the amounts assumed in arriving at the estimated loss on disposal of the
discontinued operations.
NOTE 3 Notes Payable
In December 1997, the Company received $4,635,000 upon the issuance of
$5,000,000 in 8% convertible notes. Fees and expenses amounted to $365,000. The
notes are convertible into the Company's common stock which will be issued
pursuant to the exemption provisions of Regulation S of the Securities Act of
1933. The conversion price is the lessor of $7.00 or 80% of the 5 day average
closing bid price on a conversion date with a conversion floor price (the
"Conversion Floor Price") of $4.00 per share, provided that if the average
closing bid price for any 20 consecutive trading days prior to a conversion date
is less than $4.00 per share, the Conversion Floor Price will be adjusted to 80%
of such 20 day average closing bid price. A further restriction on conversion
provides that in no event shall the holder be entitled to convert any portion of
the note in excess of that portion of the note upon conversion of which the sum
of (1) the number of shares of common stock beneficially owned by the holder and
its affiliates (other than shares of common stock which may be deemed
beneficially owned through the ownership of the unconverted portion of this note
as defined in the Subscription Agreement) and (2) the number of shares issuable
upon the conversion of the portion of the note with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.9% of the outstanding
common stock of the Company. The note
<PAGE>
NOTE 3 Notes Payable (Continued)
can be converted equally beginning 45, 75 and 105 days following December 22,
1997. Interest is payable semi-annually in arrears in the form of Company common
stock based on the above-described conversion price.
After one year, the Company may, by written notice to the holders, prepay the
notes in whole or in part. The notice shall be given at least ten (10) days
prior to the payment date and on such date the Company shall pay the outstanding
principal and all accrued interest on the note, unless prior to such payment
date the holder has delivered a notice of conversion. Any unconverted principal
amount and accrued interest thereon shall at the maturity date be paid, at the
option of the Company, in either (a) cash or (b) common stock valued at a price
equal to the average closing bid price of the common stock for the five (5)
trading days immediately preceding the maturity date. The fair value of the
"in-the-money" portion of the notes at the date of issuance will be recorded as
a debt discount and amortized prospectively as interest expense.
The 8% convertible notes contain certain event of default provisions.
If an event of default occurs and is not waived by the holders of a majority of
all notes, the Company must redeem the notes at 125% of the outstanding
principal amount due. Significant event of default provisions include among
other things: proceedings for relief under bankruptcy law, insolvency, money
judgment or writ of attachment in excess of $500,000 filed against the Company
and the delisting of the Company's common stock from an exchange.
Through February 13, 1998, 153,310 shares of common stock have been
issued in connection with conversions of $613,000 of convertible notes and
accrued interest. Of those conversion shares, none were issued as of December
31, 1997.
In addition, warrants to purchase 48,611 of common stock at an exercise
price of $7.20 per share were issued to the escrow agent for the Regulation S
offering. These warrants are exercisable immediately and expire on December 31,
2002. Upon exercise of the warrants, the Company's common stock will be issued
pursuant to the exemption provisions of Regulation S of the Securities Act of
1933. The fair value of the warrants of $128,000 was estimated using the
Black-Scholes Option Pricing Model and was recorded as interest expense in the
third quarter of fiscal 1998.
NOTE 4 Commitments and Contingencies
Please see 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,
1997 for information on various legal proceedings. With respect to the case
captioned In Re The Diana Corporation Securities Litigation, as described in
such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal
year ended March 31, 1997, a motion to dismiss the consolidated amended
complaint filed by the Company was denied on December 15, 1997. There are no
other material developments to report at this time.
NOTE 5 Other Assets
On December 11, 1997, the Company entered into a letter of intent
regarding a merger between the Company and NUKO Information Systems, Inc.
("NUKO"). NUKO is a manufacturer of compression and transmission technology for
a variety of video applications. The proposed merger could provide both a
complement and synergy with the Company's telecommunications products and be a
strategic step in the Company's plan to provide comprehensive systems solutions
in the emerging telecommunications markets.
<PAGE>
NOTE 5 Other Assets (Continued)
The proposed merger is to be effected by an exchange of one share of the
Company's common stock plus warrants for the purchase of one and one-half shares
of the Company's common stock at an exercise price of $5.00 per share, for every
10 shares of NUKO common stock. The proposed merger is contingent upon a number
of factors including NUKO's financial status and satisfactory completion of a
due diligence exercise currently being performed. Pending conclusion of the due
diligence activity, the Company has provided funds to NUKO under a secured
promissory note executed by NUKO in favor of the Company. As of December 31,
1997, funds in the amount of $840,000 have been advanced by the Company to NUKO
under the promissory note agreement. As of February 10, 1998, a further $675,000
has been advanced by the Company bringing the total value payable under the note
by NUKO to $1,515,000.
NOTE 6 Shareholders' Equity
In July 1997, the Company received $2,235,000 upon the issuance of
$2,500,000 in 8% convertible notes. As of December 31, 1997, the full value of
notes and accrued interest to the date of conversion had been converted into the
Company's common stock which was issued pursuant to the exemption provisions on
Regulation S of the Securities Act of 1933. Common stock totaling 484,964 shares
was issued in connection with conversions of $2,545,000 of convertible notes and
accrued interest at a weighted average conversion price of $5.25 per share. In
addition, warrants to purchase 37,037 shares of common stock at an exercise
price of $6.75 per share were issued in July 1997 to the escrow agent for the
Regulation S offering. These warrants are exercisable after 41 days of issuance
and expire on July 17, 2000. Upon exercise of the warrants, the Company's common
stock will be issued pursuant to the exemption provisions of Regulation S of the
Securities Act of 1933. The fair value of the warrants of $86,000 was estimated
using the Black-Sholes Option Pricing Model and was recorded as expense in the
second quarter of fiscal 1998. Through February 14, 1998, none of the 37,037
warrants had been exercised.
In July 1997, the Company issued 1,880,750 shares of its common stock
at $2.00 per share in a private placement under Regulation D of the Securities
Act of 1933. The Company received $3,362,000 from the private placement, net of
fees of $400,000. In addition, warrants to purchase 1,880,750 shares of the
Company's common stock at $3.00 per share were issued to the Regulation D
participants. The warrants are exercisable immediately and expire 5 years from
issuance. Mr. Fiedler, the Company's Chairman and Chief Executive Officer,
participated in the private placement and purchased 175,000 shares of common
stock and received warrants to purchase 175,000 shares of the Company's common
stock. In addition, Mr. Stephen W. Portner, a Director, and his daughter
collectively participated in the private placement and purchased 11,250 shares
of common stock and received warrants to purchase 11,250 shares of the Company's
common stock. The common stock and common stock warrants issued in the private
placement are subject to registration rights.
On May 13, 1997, the Company issued warrants to Superior Street
Capital, its investment banking firm, in connection with the equity financing
discussed. The warrants are for the purchase of 324,000 shares of the Company's
common stock at $2.25 per share. A warrant to purchase 273,000 shares of common
stock is exercisable immediately and expires five years from issue. A warrant to
purchase 51,000 shares of common stock was exercisable on November 13, 1997 and
expires on November 13, 2002. Registration rights were provided to the owner of
the warrants. During the first quarter of fiscal 1998, the Company recorded a
charge of $280,000 for the fair value of these warrants which was estimated
using the Black-Scholes Option Pricing Model.
<PAGE>
NOTE 6 Shareholders' Equity (Continued)
In June 1997, the Company's Board of Directors authorized the following
items with respect to the Company's two non-qualified stock option plans:
a) Stock options to purchase 46,897 shares of the Company's common
stock were granted to certain employees of CTL. In addition, the
Board of Directors authorized the issuance of an additional
100,000 stock options pursuant to the Company's plan to CTL
employees.
b) All current employees that have been granted stock options will be
eligible to exchange existing stock options for new options that
have an exercise price of $3.00 per share. The new options vest
equally over a three year period commencing June 1, 1997.
c) Stock options to purchase 5,000 shares of the Company's common
stock were granted to each of two outside members of the Board of
Directors that joined the Board in fiscal 1997, namely Bruce
Borchardt and Michael Camp. These options have an exercise price
of $3.00 per share.
d) The expiration date of stock options owned by outside members of
the Board of Directors as of June 5, 1997 was extended from
December 31, 1997 to December 31, 2000. This extension established
a new measurement date for accounting purposes, the effects of
which were to record compensation expense of $7,000, in the first
quarter of fiscal 1998.
During the three months ended December 31, 1997, certain former
executive officers of the Company exercised stock options. A total of 398,956
shares of common stock were issued at an aggregate exercise price of $2,067,000
with respect to these transactions.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's historical results of operations reflect the operations
of APC, C&L and Valley as discontinued operations. The following discussion
encompasses the results of operations of Coyote Technologies, LLC ("CTL") and of
the Company's corporate office. CTL operations were conducted through Sattel
Communications Corp. ("SCC") prior to CTL's formation in April 1996. SCC
commenced operations in November 1994 as a 50/50 joint venture between the
Company and Sattel Technologies, Inc. In January 1996, the Company increased its
ownership interest in SCC from 50% to 80% and SCC acquired the intellectual
property and technology rights of the DSS Switch. SCC is included in the
consolidated financial statements since the beginning of fiscal 1996.
For the quarter ended December 31, 1997, CTL revenue growth and
business development continued to be constrained by the negative impact that the
class action suits and the liquidity deficiency experienced prior to August 1997
have had on customer perception. Revenues for the quarter of $1,659,000,
consisting primarily of the sale of four DSS Switch Systems, were, however,
significantly higher than the $106,000 achieved in the prior quarter of the
current fiscal year. Revenues for the corresponding period in the prior year
were $2,552,000 consisting primarily of the shipments of DSS Switches under a
specific contract with Concentric Network Corporation. This contract was
completed in the fiscal year ended March 31, 1997. CTL's fiscal year to date
sales were $2,709,000 compared to $7,059,000 for the corresponding period in
fiscal 1997.
Gross profit of $1,143,000 for the quarter ended December 31, 1997, was
$699,000 lower than the corresponding period for the prior year due to its lower
revenue.
Selling and Administration expense for the quarter ended December 31,
1997 was $3,056,000 compared to $2,590,000 for the prior quarter ended September
30, 1997 and $3,965,000 for the corresponding quarter in the prior year.
Engineering, Research and Development costs include all charges related
to new products and the DSS Switch and are charged to operations when incurred.
Engineering, Research and Development costs for the quarter ended December 31,
1997 were $1,395,000 compared to $603,000 for the prior quarter ended September
30, 1997 and $1,798,000 for the corresponding quarter ended January 4, 1997.
The increases from the prior quarter in operating expense spending were
primarily related to the recovery from the liquidity deficiency which the
Company experienced in late fiscal 1997 and in early fiscal 1998. Management
anticipates the spending levels for Engineering, Research and Development will
continue to increase in the future in order to further develop the Company's
product line and business expansion.
In regard to the business growth, CTL has received orders for shipments
to Japan, South America, and the United States to provide local, long distance
and international gateway services. Subsequent to December 31, 1997, the Company
has received a three year OEM Supply Contract from Apollo KK, Tokyo, Japan, with
a stated minimum value of $20,000,000. The contract provides Apollo KK exclusive
distribution rights, within certain defined parameters, to distribute CTL DSS
Switches in Japan. In addition, Apollo KK has non-exclusive rights to distribute
CTL products in a number of other countries. The Company is also in discussions
involving strategic alliances, joint ventures and potential acquisitions with
entities that have complementary technologies, services and/or established sales
and marketing channels and that are strategically aligned with its core
business.
<PAGE>
Results of Operations (Continued)
Non-operating expense for the nine months ended December 31, 1997,
comprised a one time charge of $5,522,000 in respect of an accrued expense
recorded in the prior quarter ended September 30, 1997 relating to the amendment
of certain Class A and B Units as authorized by the Board of Directors on
September 4, 1997.
The loss from continuing operations for the quarter ended December 31,
1997 and the increase in loss from continuing operations over the corresponding
period in fiscal 1997 is due to the lower revenue and to the incidence of the
one-time charge in respect of the Class A and B Units (see Note 6 to the
Financial Statements).
Liquidity and Capital Resources
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997, the Company encountered a liquidity
deficiency during the end of fiscal 1997 and in early fiscal 1998, primarily
because (i) certain customers of CTL were past due on receivables, (ii) CTL
granted certain customers extended payment terms, (iii) CTL's revenue growth has
been lower than expected and (iv) the Company made payments of $2,349,000 in
connection with the Restructuring, as discussed in Note 2 to the Condensed
Consolidated Financial Statements.
As a result of the liquidity deficiency, the Company had become
delinquent on certain of its working capital obligations. In July 1997 and
December 1997, the Company raised $5,597,000 and $4,635,000 respectively,
through equity and debt financing (see Notes 3 and 6 to the Condensed
Consolidated Financial Statements for additional information). After completion
of the equity and debt financing, collection of $4.4 million from CNC in August
1997, the sale of C&L (Note 2) and the anticipated sales of Valley and APC's
real estate, management believes that it will have sufficient resources to
provide adequate liquidity to meet the Company's planned capital and operating
requirements through March 31, 1998 and for the foreseeable future. Thereafter,
the Company's operations will need to be funded 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.
The Company is currently negotiating with prospective buyers for
Valley. The Company believes that this business and APC's real estate will be
sold prior to March 31, 1998. It is anticipated that the proceeds of the sales
of this business and assets will be used primarily toward funding potential
acquisitions and the Company's capital and operating requirements in fiscal
1998.
During the three months ended December 31, 1997, certain former
executive officers of the Company exercised stock options. A total of 398,956
shares of common stock were issued at an aggregate exercise price of $2,067,000
with respect to these transactions.
The Company used cash in operating activities of $7,334,000 during the
first three quarters of fiscal 1998 as compared to $13,740,000 for the first
three quarters of fiscal 1997. The decrease in the use of cash is primarily
attributable to the collection of accounts receivable by CTL and the liquidity
deficiency which the Company experienced. In addition, cash generated by
discontinued operations provided some capital for operations in fiscal 1998
while discontinued operations used $2,808,000 in cash during fiscal 1997, the
majority of which was funded through the increase in various lines of credit.
<PAGE>
Liquidity and Capital Resources (Continued)
The decrease in receivables at December 31, 1997 is due primarily to
the collection of $4.3 million of receivables that were outstanding at March 31,
1997, of which $4.2 million was the result of the judgment discussed in the next
paragraph.
In April 1997, CTL commenced legal proceedings against CNC for, among
other things, breach of contract relating to payment of $4.2 million of accounts
receivable. In July 1997, CTL received a court ordered judgment in its favor
whereby, among other things, CTL executed upon a judgment of $4.4 million
against CNC on August 15, 1997. In addition, CNC repurchased from CTL 25% of CNC
Preferred Stock owned by CTL at $12.00 per share or $396,000 on August 2, 1997.
The increase in inventory is primarily attributable to purchases of raw
materials for DSS switches.
Capital expenditures of $132,000 during the first three quarters of
fiscal 1998 compared to capital expenditures of $1,974,000 in the first three
quarters of fiscal 1997. The decrease in capital expenditures is primarily due
to the liquidity deficiency which the Company experienced. The Company
anticipates that CTL's fiscal 1998 capital expenditure requirements will
approximate $0.8 million primarily for test equipment and development hardware.
In February 1997, the Company sold a majority of APC's assets (see Note
2 to the Consolidated Financial Statements). The Company has received preferred
stock dividends of $797,000 from APC subsequent to the sale of its assets.
Further preferred stock dividends will be available when cash held in escrow is
released or when APC's building is sold as a result of preferred stock dividends
currently in arrears. APC had restricted cash of $100,000 that is held in an
escrow account as of December 31, 1997, for reimbursement of indemnification
claims by the Buyer. The escrow account restriction was lifted on February 3,
1998, and the escrow funds were paid to APC. APC entered into a lease with the
Buyer of APC for the building that terminated in February, 1998. APC has listed
the building for sale. The real estate is collateral for two mortgages that
amount to $754,000 at December 31, 1997.
In the fourth quarter of fiscal 1996 and in the first quarter of fiscal
1997, the Company raised approximately $17.4 million, after commissions and
expenses, through the sale of 600,000 shares of common stock.
Forward-Looking Statements
All statements other than historical statements contained in this
Report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding new products to be
introduced by the Company in the future, statements about the Company's business
strategy and plans, statements about the adequacy of the Company's working
capital and other financial resources, and in general statements herein that are
not of a historical nature. Any Form 10-K, Annual 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 Forward-Looking
Statements (Continued)
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, 1997. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Please see 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,
1997 for information on various legal proceedings. With respect to the case
captioned In Re The Diana Corporation Securities Litigation, as described in
such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal
year ended March 31, 1997, a motion to dismiss the consolidated amended
complaint filed by the Company was denied on December 15, 1997. There are no
other material developments to report at this time.
ITEM 2. Changes in Securities and Use of Proceeds
c) Issuances of equity securities not registered under the Securities Act
of 1933 are described in Notes 3 and 6 of the Condensed Consolidated
Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
a) Annual Meeting of Shareholders held November 20, 1997.
b) Matters voted upon:
Proposal #1 Votes Cast
Election of Directors For Against
James J. Fiedler 5,982,242 45,042
Stephen W. Portner 5,983,192 44,092
Proposal #2
Amendment to the Certificate of Incorporation to change the
name of The Diana Corporation to Coyote Network Systems, Inc.
Votes Cast: For Against Abstained
5,788,700 201,646 36,938
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
(1) A Form 8-K was filed by the Company on October 23, 1997 which covered:
Item 4, "Changes in Registrant's Certifying Accountant". On
October 15, 1997, Price Waterhouse LLP confirmed that the
client - auditor relationship between The Diana Corporation
and Price Waterhouse LLP had ceased.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K (Continued)
(2) A Form 8-K/A (Amendment #1) was filed by the Company on
October 28, 1997 to include a letter from Price Waterhouse LLP
which was not available for the original Form 8-K filing on
October 23, 1997.
(3) A Form 8-K/A (Amendment #2) was filed by the Company on
November 5, 1997 at the request of the Securities and Exchange
Commission which covered Item 4, "Changes in Registrant's
Certifying Accountant" and Item 7, "Financial Statements and
Exhibits."
(4) A Form 8-K was filed by the Company on December 5, 1997 which covered:
Item 2, "Acquisition or Disposition of Assets" and Item 7,
"Financial Statements or Exhibits". On November 20, 1997, the
Company completed the sale of its telecommunications
distributor subsidiary C&L Communications, Inc. to the current
management of C&L.
Item 5, "Change of Name" At the Annual Meeting held on
November 20, 1997, the Registrant's shareholders adopted and
ratified a change of the Registrant's name to Coyote Network
Systems, Inc.
(5) A Form 8-K was filed by the Company on December 11, 1997 which covered:
Item 4, "Changes in Registrant's Certifying Accountants". The
Registrant engaged Arthur Andersen LLP as its new independent
accountants as of December 9, 1997.
(6) A Form 8-K was filed by the Company on January 5, 1998 which covered:
Item 7, "Financial Statements and Exhibits" and Item 9, "Sales
of Equity Securities Pursuant to Regulations S". On December
22, 1997, the Company sold $5,000,000 in 8% Convertible Notes
due December 22, 2000.
<PAGE>
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
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Brian A. Robson
Vice President, Controller
and Secretary (Principal
Financial and Accounting
Officer)
DATE: February 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COYOTE NETWORK SYSTEMS, INC. AS OF AND FOR
THE 9 MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFEREENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 6795
<SECURITIES> 1180
<RECEIVABLES> 999
<ALLOWANCES> 0
<INVENTORY> 3298
<CURRENT-ASSETS> 13185
<PP&E> 1672
<DEPRECIATION> 0
<TOTAL-ASSETS> 24523
<CURRENT-LIABILITIES> 9019
<BONDS> 6676
0
0
<COMMON> 8816
<OTHER-SE> (501)
<TOTAL-LIABILITY-AND-EQUITY> 24523
<SALES> 2709
<TOTAL-REVENUES> 2709
<CGS> 958
<TOTAL-COSTS> 958
<OTHER-EXPENSES> 11874
<LOSS-PROVISION> 5522
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> (15870)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15870)
<EPS-PRIMARY> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
