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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended March 31, 1998
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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
incorporation or organization) Identification No.)
4360 Park Terrace Drive, Westlake Village, California 91361
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 735-7600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $1.00 Par Value
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
Indicate by check mark if disclosure of delinquent files pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
On July 9, 1998, the aggregate market value of the voting stock of the
Registrant held by stockholders who were not affiliates of the Registrant was
$73,145,000, based on a closing sale price of $8.375 of the Registrant's common
stock on the NASD OTC Bulletin Board. At July 9, 1998, the Registrant had issued
and outstanding an aggregate of 9,583,628 shares of its common stock. For
purposes of this Report, the number of shares held by non-affiliates was
determined by aggregating the number of shares held by Officers and Directors of
Registrant, and by others who, to Registrant's knowledge, own more than 10% of
Registrant's common stock, and subtracting those shares from the total number of
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PART I
Forward-Looking Statements
All statements other than historical statements contained in this Report on
Form 10-K 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 sales and earnings estimates, backlog, the status of litigation, the
value of new contract signings, 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 herein (see
Item 7 - Risk Factors). 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.
ITEM 1. BUSINESS
A. General Development of Business
Coyote Network Systems, Inc. ("Company"), formerly The Diana Corporation,
is a Delaware corporation incorporated in 1961. The Company is engaged, through
Coyote Technologies, LLC ("CTL"), formerly Sattel Communications LLC, in the
provision of scalable telecommunications switches and Internet Protocol (IP)
based gateway systems to telecommunications service providers. The Company is
also engaged, through American Gateway Telecommunications, Inc., in wholesaling
international long distance services to telecom carriers.
In November 1996, the Company announced its strategic decision to dispose
of all of its non-telecommunications switch business segments (the
"Restructuring"). In February 1997, the Company completed the sale of a majority
of the assets of Atlanta Provision Company, Inc. ("APC"), the wholesale
distribution of meat and seafood segment. In November 1997, the Company
completed the sale of C&L Communications, Inc. ("C&L"), its telecommunications
equipment distribution segment, and in March 1998, the Company reached an
agreement on the sale of Valley Communications, Inc. ("Valley"), its wire
installation and service segment. The results of APC, C&L and Valley have been
reported separately as discontinued operations (see Note 2 to the Consolidated
Financial Statements). As part of the Restructuring, the Company's Board of
Directors approved plans to change the name of the Company. At the Company's
Annual Shareholders Meeting held in November 1997, shareholders approved
changing the Company's name from The Diana Corporation to Coyote Network
Systems, Inc. Subsequently, the name of the telecommunications switch
subsidiary, Sattel Communications LLC, was changed to Coyote Technologies, LLC.
CTL has granted subordinated equity participation interests, which amount to
approximately a 20% effective ownership interest in CTL, to certain employees of
the Company. These participation interest are convertible into shares of the
Company's common stock at the option of the holder.
In April 1998, the Company announced that Coyote Gateway, LLC ("CGL") had
acquired substantially all of the assets of privately held American Gateway
Telecommunications, Inc. (AGT), a provider of wholesale international long
distance services. In consideration of the asset transfer, AGT received a 20%
ownership interest in CGL. CGL continues to operate under the name of AGT. Based
in Houston, Texas, AGT provides wholesale international long distance services.
AGT operates an international network that consists of domestic switching
facilities. AGT has contracts for more than 31 million international minutes
monthly to 11 countries originating from its New York City-area gateway.
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AGT plans to leverage Coyote Technologies' scalable DSS Switches to process
international traffic using least cost routing, in some cases over the Internet.
The switching capacity will enable AGT to enter new expanding markets and
capture calls at a low per port, per minute cost creating a competitive
advantage over traditional wireline carriers. International simple resale,
refile services, voice over frame relay and voice over the Internet all
represent an opportunity for AGT to participate in telecom arbitrage. AGT plans
to build out carrier grade termination services via the Internet, intranets and
virtual private networks in Latin America and Southeast Asia.
B. Industry Segments
For the year ended March 31, 1998, the Company's business is reported for
the operating segment of telecommunications switches that are designed,
developed, manufactured, engineered, marketed and distributed by CTL and the
Company's corporate headquarters expense. Future segments will include IP
gateway systems provided by CTL and international based long distance services
provided by AGT. (See Note 12 to the Consolidated Financial Statements)
C. Narrative Description of Business
Principal Products
Primary products of CTL include telecommunications switches ("DSS
Switches") and Internet Protocol (IP) gateway systems ("SSA/IP Gateway
Systems"), designed to route voice traffic over the Public Switched Telephone
Network (PSTN), IP Networks, and the Internet. CTL's primary business is to
design, develop, manufacture, engineer, market and distribute telecommunications
switches and IP gateway systems. The DSS Switch is designed to provide
cost-effective and versatile access to the PSTN. Examples of specific
applications of DSS Switches include facilities-based domestic and international
long distance carriers that use DSS Switches to provide long distance services
with least-cost routing, calling card, 800 number in-bound translation as well
as equal and dedicated access services. DSS Switches enable telecom carriers to
provide local and long distance telecommunications services including calling
card, domestic and international 800, dedicated access and Signaling System 7
("SS7") capabilities. Basic features of the DSS Switch include:
DSS Switch
T1s (Min./Max)(1) 1-160
E1s (Min./Max)(1) 1-120
Lines/Ports (Max.)(1) 10,240
Busy Hour Call Attempts 375,000
Physical Size & Dimensions 2-10 Racks (Each Rack is 19"x 30"x 23")
(1) Actual maximum varies with mix of numbers of lines and T1/E1 trunks.
The SSA/IP Gateway System is a scalable, open standards-based Internet
Protocol solution designed to meet the needs of competitive local exchange
carriers (CLECs), domestic and international long distance carriers, Internet
Service Providers (ISPs), and Internet Telephony Service Providers (ITSPs), by
improving the efficiency of long distance trunks up to 75%. The SSA/IP Gateway
System seamlessly routes voice and fax traffic over IP and ATM networks, the
Internet, and the PSTN. The SSA/IP Gateway System routes voice and data traffic
from costly dedicated T1 links and combines the high bandwidth utilization of an
IP link with voice compression (8:1) and packetization for reducing bandwidth
requirements. When used in conjunction with the DSS Switch, the SSA/IP Gateway
System scales from 8 T1s to 80 T1s, supporting up to 1,920 compressed voice
channels. The SSA/IP Gateway System is standards-based and communicates with
virtually any Class 4 or 5 switch via inband E&M signaling.
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AGT is a provider of wholesale international long distance services. AGT
operates an international network that consists of domestic switching
facilities. AGT plans to deliver Voice over Internet (VoN) services, Fax over
Internet (FoN) services and other innovative services. AGT has contracts for
more than 31 million international minutes monthly to 11 countries originating
from its New York City-area gateway.
Industry Background
The Telecommunications Act of 1996 opened one of the last regulated areas
of the U.S. telecom industry to competition and has created a new paradigm for
the industry. According to industry analysts, the worldwide market for telecom
equipment and services is more than $700 billion. Evolving technologies,
pro-competitive legislation, privatization, the build out of new networks in
developing countries, new carrier services, and changing customer demands mark
today's telecom industry. As communications carriers expand into new markets
with new revenue-generating services, the Company believes that to be
successful, carriers need to differentiate with solutions for voice, data and
video services and provide "bundled" local, international and domestic long
distance, and Internet access.
Telecom Reform is one of the major trends in the information services
market in the last 50 years. Industry analysts believe that 20% of today's $100
billion domestic local market will go to CLECs over the next five years. Today,
industry analysts say that CLECs have approximately a 2% market share.
In the United States, due to regulatory restrictions, historical
monopolies, and limited access to the PSTN, the provision of telephone services
traditionally has been the domain of larger long distance or InterExchange
Carriers (IXCs) and Regional Bell Operating Companies (RBOCs) conducting
business in defined markets and providing defined services. Regulatory changes
enacted in the Telecommunications Act have fundamentally altered the PSTN
landscape by permitting companies other than Incumbent Local Exchange Carriers
(ILECs) such as the RBOCs, to provide customer access to the PSTN.
Internationally, deregulation, privatization, and the build-out of telecom
networks are creating opportunities for entrepreneurial companies that can move
quickly with new products, technologies, and services.
The Company believes that these changes have created an opportunity for
telecommunications companies to expand beyond their traditional markets. For
example, RBOCs are planning to expand beyond their traditional local markets to
compete with ILECs or establish international gateways in different geographic
markets. IXCs are planning to provide local exchange services. Similarly, RBOCs
or ISPs are providing additional services such as long distance service or
Internet access (in the case of an RBOC) or long distance and/or local exchange
service (in the case of an ISP). New entrants in international telecom markets,
such as Emerging International Carriers (EICs) are competing with existing local
and international service providers. Competitive Access Providers (CAPs), Cable
Television Companies, and Utility Companies are also competing to provide
telecom services.
The Company believes that these developments are creating a new paradigm, a
new market for emerging domestic and international long distance carriers and
CLECs. According to industry analysts, today's emerging international telephone
services market is $70 billion and is expected to grow in the mid-teen rate (in
terms of minutes of use) over the next several years.
These emerging carriers also have a need for small-to-medium sized scalable
telecommunications switches that are open and can add services quickly and
cost-effectively. These smaller, scalable switches can be cost-justified with
less than one million minutes of use per month and revenue-generating services
can be added quickly, enabling service providers to match their costs with their
revenue streams. Traditional larger, proprietary switches typically need more
than five million minutes per month to cost justify, and adding services can be
costly and take more than one year.
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As a player in the telecom industry, the Company is benefiting from the
Telecom Act of 1996 that substantially deregulated the domestic local exchange
industry and opened up markets for companies like Coyote Network Systems to
compete. The Company is committed to leading edge technologies, such as
compressed voice over IP. The Company is targeting specific market segments:
International long distance, telecom switching, IP gateway services and CLEC
services. The Company is authorized to provide CLEC services in the State of
California.
Business Strategy
The Company's vision is to be a customer intimate organization with
multiple core technologies, equipment, and network services that supports its
goal: To build a core set of communication companies that provide both the
equipment and the networks to enable and deliver voice, data, and video
solutions. The Company's business model is focused on leveraging its switch
technology and interconnecting emerging international long distance carriers
with CLECs in gateway cities to significantly reduce the costs of providing
telephone services. The Company plans to build, partner and/or acquire CLECs in
gateway cities.
The Company is targeting specific market segments including
telecommunications switches, IP gateway systems, international long distance,
and CLEC services in gateway cities. The Company will continue to develop
relationships, make investments, and contract with companies that have
complementary technologies, network facilities and services, support services,
value-added services, and established distribution channels that are
strategically aligned with the Company's goal to enable and deliver voice, data,
and video solutions.
The Company's growth strategy has five phases that it expects will fuel its
growth to reach critical mass.
1. Technology Expansion: The Company plans to continue to develop, acquire,
and/or contract with companies that have leading-edge technologies to serve
customers with total solutions. They include IP gateway systems and
alternative transmission, and packet and revenue generating applications.
For example, industry analysts believe that between 1998 and 2001, the
Internet Telephony market could be as much as $8 billion. Besides being
more efficient, new networks, such as IP, ATM and the Internet, typically
bypass conventional long distance carriers, who must pay local access
charges and taxes. Such fees make up approximately 40% of typical long
distance charges. Today, industry analysts say the average long distance
call in the U.S. costs about 13 cents per minute, while the average
international price is 89 cents per minute. The gap has little to do with
the extra cost of an international call, which is marginal. Rather, it
reflects the power of a small group of service providers.
2. Increase Market Share by Providing End-to-End Solutions: The Company plans
to bundle local, long distance, and data services in focused markets to
better serve its customers.
3. Acquisitions: The Company is pursuing an acquisition strategy and will
continue to target companies with complementary technologies, network
services, products, and value-added applications.
Acquisition Criteria: The Company will continue to look for companies that
are customer-oriented; currently profitable or profitable within 12 months;
and synergistic with existing Coyote Network Systems, Inc. ("CNS")
companies.
Acquisition Targets: The Company will continue to look for companies that
market to affinity groups, international gateway companies and/or data
network companies. The Company plans to acquire and/or build CLECs in
gateway cities. The Company also plans to target packet technology
companies and value-added application providers.
Planned Acquisitions: Near-term acquisition targets for the Company include
international long distance companies, and CLECs.
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4. Increase and Leverage Relationships: The Company plans to leverage
relationships that will increase market penetration and complete the total
system solution for the Company's customers.
5. Develop Brand Recognition: The Company plans to deploy technology and
leverage contracts to raise visibility, add value, and increase
profitability of core companies.
The Company's goals also include applying for and acceptance for listing on
the Nasdaq National Market System, and enhancing long-term shareholder value.
Sales and Marketing
To meet the needs of its customers, the Company sells its products and
network services through the coordinated efforts of its direct sales force,
independent agents, systems integrators, OEMs, resellers, and distributors.
CTL's direct sales force is principally focused on selling to domestic
carriers, e.g., ILECs, CLECs, switchless resellers, international gateway
providers and long distance providers. CTL also uses indirect distribution
channels such as systems integrators, VARs, OEMs and distributors to market its
products and services internationally.
AGT primarily markets its network services directly to carriers through
independent agents.
The Company will continue to develop relationships with, make investments
and/or acquire companies with complementary technologies, network facilities and
services, support services, value added services, and established distribution
channels that are strategically aligned with the Company's goal to enable and
deliver voice, data and video solutions to carriers.
Customer Service and Support
The Company services and provides technical support for its products and
services. The Company or an authorized third party provides customer training in
connection with the installation of its products and services. The Company has
entered into agreements with third parties, including certain suppliers of
equipment incorporated into its products, to provide support for CTL's products.
CTL services and provides technical support for its products. DSS Switches and
SSA/IP Gateway Systems may be sold with a service plan pursuant to which CTL
provides ongoing technical assistance and maintenance.
New Products
The SSA/IP Gateway System is a scalable, open standards-based Internet
Protocol solution designed to meet the needs of local exchange carriers,
domestic and international long distance carriers, ISPs, and Internet Telephony
Service Providers (ITSPs), by improving the efficiency of long distance trunks
up to 75%. The SSA/IP Gateway system routes voice and fax traffic over IP and
ATM networks, the Internet, and the PSTN. The SSA/IP Gateway System routes voice
and fax traffic from costly dedicated T1 links and combines the high bandwidth
utilization of an IP link with voice compression (8:1) and packetization for
reducing bandwidth requirements.
In March 1998, CTL announced a cooperative sales and marketing agreement
with Info Directions Inc. (IDI). The agreement also calls for the development of
an interface to allow single provisioning and rating from CTL's DSS Switch using
IDI's CostGuard(TM) customer care and billing system.
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The rapid growth in IP and ATM-based networks has opened opportunities for
CTL to integrate voice communications with data and video services. In May 1997,
CTL and Yurie Systems, Inc. ("Yurie") announced a Hybrid CO/ATM switch designed
to consolidate and concurrently switch "any-to-any" voice, data and video
traffic across public and private ATM networks. The CO/ATM switch pairs CTL's
DSS Switch with Yurie's LDR ATM access equipment. The Hybrid CO/ATM switch
illustrates the benefits of flattening the traditional PSTN, revealing new
opportunities for competitive telcos, ISPs, private network operators, cable
companies and new entrants to the increasingly competitive telecom industry. To
date there are no CTL customers using Yurie's ATM switch, however, the Company
recently announced that Rhinos International is using CTL's DSS Switch with
another vendor's ATM equipment to gain the efficiencies of combining voice, data
and video over ATM and IP networks.
AGT plans to leverage Coyote Technologies' scalable DSS Switches to process
international traffic using least cost routing, in some cases over the Internet.
The switching capacity will enable AGT to enter new expanding markets and
capture calls at a low per port, per minute cost creating a competitive
advantage over traditional wireline carriers. International simple resale,
refile services, voice over frame relay and voice over the Internet all
represent opportunities for AGT to participate in telecom arbitrage. AGT plans
to build out carrier grade termination services via the Internet, intranets and
virtual private networks in Latin America and Southeast Asia.
There can be no assurance that the development of saleable products which
will be beneficial to the future growth of the Company or that products and
services will be developed in a cost effective manner and be available for sale
within the time frame required to take advantage of the market opportunities.
The Company believes that the timely development of new products and
network services are essential for it to compete in the telecom equipment and
network services markets. The Company expects to continue to devote substantial
resources subject to its available liquidity (see Item 7 - Liquidity and Capital
Resources and Risk Factors) to research and development as well as to strategic
alliances in fiscal 1999.
Raw Materials
CTL designs, develops, manufactures, engineers, markets and distributes the
DSS Switch and the SSA/IP Gateway System, parts of which are subject to a patent
and patent pending. Certain software and hardware are licensed or procured from
other vendors under OEM arrangements, or are developed jointly with other
vendors pursuant to research and development joint ventures, partnerships, or
similar arrangements.
CTL utilizes certain general purpose hardware components in its switches
and IP gateway systems, which lowers costs and retains for CTL the option of
acquiring such components from more than one vendor. Other hardware and/or
software components such as subscriber and data line cards and core switch
software were developed by CTL or its contractors.
CTL performs certain systems integration and test functions in house. In
addition, CTL outsources some of its manufacturing and procurement of raw
materials used in manufacturing to outsource vendors, including Sanmina
Corporation ("Sanmina") and I-PAC Manufacturing, Inc. ("I-PAC"). CTL's outsource
vendors have facilities to provide a turnkey product which includes the
manufacturing or procurement of board, chassis, and system level assemblies for
CTL.
CTL's outsource manufacturers have from time-to-time experienced delays in
receipt of certain hardware components. A failure by a supplier to deliver
quality products on a timely basis, or the inability to develop additional
alternative sources if and as required, could result in delays which could
materially and adversely affect CTL. (See Item 7 Risk Factors -Dependence on
Outsource Manufacturers and Other Key Suppliers). Certain software and hardware
associated with adjunct and peripheral equipment used by CTL to provide certain
functions and features are licensed or procured under OEM arrangements, from
other vendors.
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Proprietary Rights
CTL uses a combination of patents, trade secrets, industry know-how,
confidentiality, non-compete agreements and tight control of its software to
protect the products and features that it believes give it competitive
advantages. (See Item 7 - Risk Factors-Limited Protection of Proprietary
Technology; Risk of Third-Party Claims of Infringement).
Customers and Customer Concentration
The Company believes that potential customers include, among others,
telecommunications carriers such as CLECs, international gateway providers,
switchless resellers, ILECs, international and domestic long distance providers,
wireless telephone companies, cable TV companies, virtual private network
providers, ISPs, and affinity groups. The Company markets its products and
services to targeted customer segments directly with its own sales force and
indirectly markets to other customers through independent agents, systems
integrators, OEMs, VARs and distributors. Revenues in fiscal 1998 were from
shipments to twelve customers, one of which accounted for approximately 40% of
the total revenues. Approximately 94% of CTL's revenues for fiscal 1997 were
derived from sales to Concentric Network Corporation ("CNC").
CTL's products are targeted at markets for small-to-medium sized telecom
switches and for IP gateway systems. CTL's direct sales force principally
focuses on smaller carriers, e.g., CLECs, ILECs, international gateway providers
and switchless resellers. CTL also uses indirect distribution channels such as
systems integrators, VARs, OEMs and distributors to market its products to
CLECs, IXCs, international telephone companies and smaller ISPs.
Among the companies that have taken delivery of the Company's switches to
date are Apollo Telecom, Cellular XL, Concentric Network Corporation, Dakota
Carrier Services, Lightcom International, Inc., Mony Travel Inc., Rhinos
International, Telesys S.A., Vancouver Telephone Company, and WorldWave
Communications, Inc.
Another component of the Company's long-term strategy is its expansion into
international markets. In order to effect this strategy, the Company is seeking
out strategic alliances with companies that have established international
distribution channels. In February 1998, CTL announced a three-year, $20 million
OEM agreement for DSS Switches with Tokyo-based Apollo KK, a company focused on
telecommunication infrastructures and real estate. Under terms of the agreement,
Apollo KK has exclusive rights to distribute DSS Switches in Japan and has
agreed to an annual minimum commitment of $4 million, $6 million, and $10
million respectively for the three years. Apollo KK agreed to place firm
purchase orders at the beginning of each year for not less than 25% of the total
annual commitment. Apollo KK also has non-exclusive rights to resell DSS
Switches in other parts of the world. Apollo Telecom, a U.S.-based subsidiary of
Apollo KK, and CTL will provide installation and support services.
AGT is an emerging international carrier (EIC) focused primarily on the
international long distance market. AGT offers highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. AGT provides international long distance service to
approximately 11 foreign countries through a flexible network comprised of
various foreign termination relationships, international gateway switches,
leased facilities and resale arrangements with long distance providers. AGT is
rapidly growing its revenues by capitalizing on the deregulation of
international telecommunications markets, combining sophisticated information
systems with flexible routing and leveraging management's industry expertise.
The Company anticipates that its results of operations in any given period
will continue to fluctuate and depend to a significant extent upon sales to a
small number of customers. There can be no assurance that the Company's
principal customers will continue to purchase product from the Company at
current levels, if at all. The Company is working diligently to broaden its
end-user customer base and to develop relationships with indirect channels of
distribution.
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Backlog
The Company only includes in its backlog written orders for products and
related services scheduled to be shipped within one year. The Company does not
believe that the level of, or changes in the levels of, its backlog are
necessarily a meaningful indicator of future results of operations.
Competition
The telecommunications switch and IP gateway systems markets are highly
competitive. CTL produces small-to-medium sized scalable telecom switches that
currently compete with few, if any, directly comparable products. CTL faces
potential competition in the data communications market segment from a number of
data communications equipment providers, such as Bay Networks, Cisco Systems,
Lucent Technologies, Newbridge Networks, and 3Com.
In addition, the manufacturers of large scale central office switches such
as Lucent Technologies, Northern Telecom, Digital Switch Corporation, Siemens
AG, Alcatel, LM Ericsson and others have the resources and expertise to compete
in the smaller-scale telecom switching equipment segment. It is also possible
that large communication carriers such as AT&T Corporation, MCI Communications,
Sprint and, when and if legally permitted to, the RBOCs, may enter the small to
mid-sized telecom switching equipment business. Many of these competitors
possess financial resources significantly greater than those of CTL and
accordingly could initiate and support prolonged price competition to gain
market share.
Additionally, the telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of competitive product and
service offerings, such as the utilization of IP and ATM networks, and the
Internet for voice and data communications. The Company is unable to predict
which technological development will challenge its competitive position or the
amount of expenditures that will be required to respond to a rapidly changing
technological environment.
The international telecommunications industry is intensely competitive and
subject to rapid change. AGT's competitors in the international wholesale long
distance market include large, facilities-based multinational corporations and
smaller facilities-based providers in the U.S. and overseas that have emerged as
a result of deregulation, switch-based resellers of international long distance
services and international joint ventures and alliances among such companies.
AGT also competes internationally with a number of dominant telecommunications
operators that previously held various monopolies established by law over the
telecommunications traffic in their countries. International wholesale service
providers compete on the basis of price, customer service, transmission quality,
breadth of service offerings and value-added services.
Further, the number of the Company's competitors is likely to increase as a
result of the competitive opportunities created by a new Basic
Telecommunications Agreement concluded by members of the World Trade
Organization (WTO) in April 1997. Under the terms of the WTO Agreement, starting
February 5, 1998, the United States and more than 65 countries have committed to
open their telecommunications markets to competition, foreign ownership and
adopt measures to protect against anti-competitive behavior. As a result, AGT
believes that competition will continue to increase, placing downward pressure
on prices. Such pressure could adversely affect AGT's gross margins if AGT is
not able to reduce its costs commensurate with such price reductions.
A majority of the U.S.-based international telecommunications services
revenue is currently generated by AT&T Corp. ("AT&T"), MCI Communications Corp.
("MCI") and Sprint Corporation ("Sprint"). AGT also competes with companies such
as WorldCom, Inc., Star Telecommunications, Inc., Pacific Gateway Exchange, Inc.
and other U.S.-based and foreign long distance providers, including the RBOCs,
which presently have FCC authority to resell and terminate international
telecommunications services. Many of these competitors have considerably greater
financial and other resources and more extensive domestic and international
communications networks than AGT. AGT's business would be materially adversely
affected to the extent that a significant number of such customers limit or
cease doing business with AGT for competitive or other reasons. Consolidation in
the telecommunications industry could not only create even larger competitors
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with greater financial and other resources, but could also adversely affect the
Company by reducing the number of potential customers for the Company's
services.
Research and Development
In fiscal 1998, the Company made a strategic decision to invest
approximately $5 million in engineering, research and development to provide new
and enhanced features to the DSS Switch and to develop the SSA/IP Gateway
System.
In virtually all cases, CTL owns the results of the research and
development performed by contract engineers and independent laboratories. In
some instances, however, the development activity requested by CTL involves a
specific customization of a contractor's proprietary software for integration
into CTL's products. In those instances, CTL establishes a licensing agreement
with the contractor.
When CTL subcontracts development work, the contractor designs and tests
the technology needed to fulfill the contract. CTL retains the responsibility to
integrate the contractor's work product with CTL's products.
The individual contract engineers assist with specific technological needs
of CTL. Each of the outside laboratories utilized by CTL has been selected based
on a specific organizational capability and expertise in one of the following
areas: automatic test systems, telecommunications and engineering processes,
UNIX software, operation administration maintenance & provisioning ("OAM&P"),
telecommunications signaling systems, telecommunications and data communications
software products and Internet software.
Employees
As of June 2, 1998, the Company had 78 employees. In addition the Company
retained, on a contract basis, additional people for specific projects. The
Company believes that its future growth and success will depend in large part
upon its ability to continue to attract and retain highly qualified people. The
Company has no collective bargaining agreement with its employees.
Environmental Regulation
Compliance with federal, state and local regulations relating to
environmental protection have not had a material effect upon capital
expenditures, operating results or the competitive position of the Company.
9
<PAGE>
Glossary
Advanced Call Processing - Features include Operator Services for busy line
verification and busy line interrupt, exchange service capability for service
provider Number Portability and Enhanced 911.
Affinity Groups - People or organizations that share a common bond.
ANI - Automatic number identification (the phone number of the phone calling
you).
Busy hour call attempts - number of call attempts during the busy hour, an
important concept in traffic engineering, i.e., figuring how much switching and
transmission capacities are needed.
C++ language - An object-oriented programming language.
Call Management System - a DSS Switch adjunct processor that handles call
authorizations, time-of-day routing decisions, and call record storage.
Class 4 office - The major switching center to which toll calls from Class 5
central office switches are sent.
Class 5 office - An end office. Connects subscribers to the public switched
telephone network (PSTN).
CAP - Competitive access provider. Alternative carrier: a company that competes
with telephone companies in carrying voice and data traffic. Usually these
companies construct a fiber ring in an urban area to attract businesses to use
their services in addition to or in place of the services of the local telephone
company.
CLEC - Competitive local exchange carrier. Competes with incumbent telephone
carriers for local, long distance and Internet access services.
DNIS - Dialed number identification service.
Enhanced 911 - Emergency call routing with calling number identification (ANI).
EIC - Emerging international carrier. New carriers that typically compete with
traditional carriers such as AT&T, MCI and Sprint for international long
distance services.
FoN - Fax over the Internet.
ILD - International long distance.
ILEC - Incumbent local exchange carrier. Typically a local Bell telephone
company.
IP - Internet Protocol.
ISDN - Integrated services digital network. There are two interfaces in ISDN:
PRI - Primary rate interface: The ISDN equivalent of a T1 or E1 circuit, and BRI
- - Basic rate interface: Consists of two bearer B-channels at 64 kilobits and a
data channel at 16 kilobits per second.
LD - Long distance services.
Number Portability - Allows telephone numbers to move with a customer between
carriers.
10
<PAGE>
OAM&P - Operation, administration, maintenance and provisioning.
Operator Services - A variety of services provided by an operator, i.e., collect
calls, third-party billed calls and person-to-person calls.
Ports - an entrance to or exit from a network.
Rack - an open metal structure onto which equipment is mounted.
Shelf unit - a unit that mounts in a rack and holds cards.
Switch Adjunct Server (SAS) - Enables customers to better manage DSS Switch
resources and increase processor usability in the switch. SAS leaves more CPU
power in the switch by moving translations to the SAS. The SAS has a graphical
user interface for point-and-click switch maintenance and it enables users to
monitor alarm messages from the switch.
SSA - Coyote Technologies' Switch Server Architecture.
Servers - Typically a computer that sits on a local area network that is used as
a repository or distributor of data.
Signaling System 7 ("SS7") - An international intelligent network signaling
system that significantly improves call processing. SS7 networks typically
process calls faster than other signaling systems since the call arrives
independently from the voice traffic. SS7 reduces network congestion and
deployment costs through greater port utilization and alternative routing
capabilities. SS7 also enables value-added services to be efficiently deployed.
Examples of these value-added services include credit and debit card validation,
and wireless applications.
T1/E1 circuits - A T1 circuit is a digital transmission link with a capacity of
1.544 megabits per second (North American standard). An E1 circuit is a digital
transmission link with a capacity of 2.048 megabits per second (European
standard).
Time-space-time switching - A fully electronic switch matrix design
architecture.
Trunks - A communication line between two switching systems.
Unix - A multi-tasking, multi-user operating system for running computers and
telephone systems that allow multiple programs to be run simultaneously and
multiple users to use a single computer.
VoN - Voice over the Internet.
Workstations - High-speed personal computers that are used for high-powered
processing tasks, i.e., CAD/CAM, engineering.
ITEM 2. PROPERTIES
CTL's and the Company's executive offices are located in approximately
23,000 square feet of office and warehouse space in Westlake Village, California
currently leased by the Company. The Company also leases office space in
Richardson, Texas to support its Research & Development Engineering
requirements. The Company owns a vacant parcel of land in Eldridge, Iowa that is
for sale. The Company owns a 91,000 square-foot building in Atlanta, Georgia
which was formerly used by APC. The Company has listed this property for sale.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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
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. See also
Note 6 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Shareholders was held on March 20, 1998 to approve
an amendment to the Company's Restated Certificate of Incorporation to increase
the number of authorized common stock from 15,000,000 to 30,000,000. The
proposal was approved with the following ballot results:
Votes for 7,310,012
Votes Against 199,109
Abstentions 8,236
------------
Total Votes Cast 7,517,357
Ninety-one percent (91%) of the shares outstanding were represented at the
meeting.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is included for quotations on the NASD OTC
Bulletin Board under the symbol CYOE. Prior to March 10, 1997, the Company's
common stock was traded on the New York Stock Exchange under the symbol DNA. The
table below sets forth by quarter the high and low sales prices of the Company's
common stock on the New York Stock Exchange Composite Tape prior to March 10,
1997, and the high and low bid prices per share for the Company's common stock
obtained from trading reports of the National Association of Securities Dealers
OTC Bulletin Board subsequent to March 7, 1997. The sales prices have been
adjusted to reflect the 5% stock dividend paid on October 2, 1996. Prices set
forth below from the NASD OTC Bulletin Board reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
FISCAL 1998 FISCAL 1997
Quarter High Low Quarter High Low
First $ 5.859 $1.297 First $114.286 $23.810
Second 10.250 2.813 Second 46.190 19.524
Third 8.688 4.766 Third 41.750 25.875
Fourth $ 6.750 $3.500 Fourth $ 26.875 $ 4.250
At June 19, 1998 the Company had 1,232 shareholders of record.
The Company has not declared any cash dividends during the last two fiscal
years. The Company has no plans to pay cash dividends in the foreseeable future.
The payment of cash dividends by the Company is restricted by the Company's
subordinated debentures which provide that the consolidated tangible net worth
of the Company cannot be reduced to less than an amount equal to the aggregate
principal amount of the subordinated debentures, or $1,254,000.
Sales and Issuance of Unregistered Securities
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. 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 Section 3(a)(9) 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. Of those
conversion shares, 336,075 were issued as of March 31, 1998, in connection with
conversions of $1,344,000 of convertible notes and accrued interest.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
COYOTE NETWORK SYSTEMS, INC.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
<TABLE>
As of and for the Years Ended
----------------------------------------------------------------
<CAPTION>
March 31, March 31, March 30, April 1, April 2,
1998 1997 1996 1995 1994 (4)
--------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales (1) $ 5,387 $ 7,154 $ 264 $ --- $ ---
======== ======== ======== ======== =======
Earnings (loss) from:
Continuing operations (1) (5) $(34,155) $(12,335) $ (2,746) $ (2,140) $ 1,364
Discontinued operations (2) --- (8,175) (619) 1,420 2,093
Extraordinary items --- (508) --- --- (266)
Accounting change --- --- --- --- 262
--------- --------- -------- -------- ----------
Net earnings (loss) $(34,155) $(21,018) $ (3,365) $ (720) $ 3,453
Earnings (loss) per common share:
Basic
Continuing operations $ (4.83) $(2.34) $(.62) $ (.51) $ .33
Discontinued operations --- (1.55) (.14) .34 .51
Extraordinary items --- (.10) --- --- (.06)
Accounting change --- --- --- --- .06
-------- ---------- -------- ------- ---------
Net earnings (loss) per
common share $ (4.83) $(3.99) $(.76) $ (.17) $ .84
======== ======= ======== ======= =========
Diluted
Continuing operations $ (4.83) $(2.34) $(.62) $ (.51) $ .32
Discontinued operations --- (1.55) (.14) .34 .49
Extraordinary items --- (.10) --- --- (.06)
Accounting change --- --- --- --- .06
-------- ---------- -------- -------- ---------
Net earnings (loss) per
common share. $ (4.83) $(3.99) $(.76) $ (.17) $ .81
======== ======= ======== ======== ========
Cash dividends per
common share $ --- $ --- --- $ --- $ ---
======== ========== ======== ======== ========
Total assets $ 21,975 $ 23,244 $ 29,092 $ 24,205 $ 28,522
Long-term debt (3) 5,490 1,958 2,099 2,240 2,501
Working capital 4,508 6,161 13,282 15,489 19,007
Shareholders' equity 8,060 16,834 24,686 19,729 18,852
<FN>
(1) Earnings (loss) from continuing operations includes the operating results
of CTL and the corporate office. CTL commenced operations in November 1994.
(See Item 1 Business). Included in the fiscal 1998 loss are the following:
a non-cash expense charges of $5,522,000 for the conversion into Company
common stock of certain Class A & B units owned by Directors and Employees
of the Company; legal, accounting and other professional fees of
$1,300,000; charges of $1,875,000 with respect to non-cash accounting
charges associated with the issuance of Company common stock upon
conversion of notes issued under Regulation S; an accrued charge of
$1,600,000 to defer recognition of profit on equipment sales to a leasing
company, pending future disposition and ownership of the equipment by the
end-user lessee ; a charge of $2,200,000 in connection with failed
acquisitions; and a non-cash warrant expense of $8,000,000 in connection
with securities litigation.
(2) The increase in the loss from discontinued operations in fiscal 1997 is due
to a provision of $7,550,000 recorded for restructure costs, severance and
the estimated loss on disposal of APC, C&L and Valley. See Note 2 to the
Consolidated Financial Statements.
(3) Includes current portion of long-term debt.
(4) The data in this column is unaudited.
(5) Earnings from continuing operations in fiscal 1994 included interest income
and gains on sales of marketable securities of $2,567,000.
</FN>
</TABLE>
14
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Fiscal Year Ended March 31, 1998 versus March 31, 1997
CTL had revenues of $5,387,000 in fiscal 1998, primarily from the sale of
DSS Switches, compared to revenues of $7,154,000 in fiscal 1997. Revenues in
fiscal 1998 included shipments to nine new customers. One of the sales
contracts, which accounted for approximately 40% of the total revenue for fiscal
1998, involved a company that is a potential acquisition of the Company. The
sale, which involved a third party lessor, occurred in March 1998. The Company
has deferred recognition of gross profit on this sale as if the potential
acquisition was an affiliate at the time of the sale. As a result of this
deferral, the gross margin for fiscal 1998 was reduced to 38% compared to 56% in
the prior year. During fiscal 1997, 94% of revenues were from sales under one
specific contract with Concentric Network Corporation (CNC) which was fulfilled
and completed in fiscal 1997.
Selling and administrative expenses included $1,300,000 for professional
audit and legal costs.
Engineering, research and development expenses of $5,022,000 in fiscal 1998
increased by almost 25% over the prior fiscal year as the Company continued to
enhance product offerings. An explanation of the Company's accounting policy for
these expenses is included in Note 1 to the Consolidated Financial Statements.
Operating expenses includes a charge of $5,522,000. This non-cash charge
pertains to the convertibility into Company common stock of the Class A & Class
B units owned by certain Directors and Employees of the Company which became
convertible into Company common stock on September 4, 1997, when the Board of
Directors eliminated the previous measurement requirement of certain minimum
pre-tax profits. (See also Note 11)
Interest expense of $2,334,000 included a non-cash charge of $1,875,000
related to the discount from market value of the Company's common stock issued
upon conversion of the 8% convertible notes, which were issued with principal
amounts of $2,500,000 and $5,000,000 in July 1997 and December 1997,
respectively. The details and terms of the notes are described in Note 7 to the
Consolidated Financial Statements.
Non-operating expense in fiscal 1998 includes a provision charge of
$2,200,000 with respect to losses in connection with failed acquisitions
including costs advanced, costs of due diligence expenses, consulting fees,
legal expenses and other professional services. The components of non-operating
income (expense) are shown in Note 9 to the Consolidated Financial Statements.
Subsequent to 1998 fiscal year end, negotiations concerning the securities
litigation (see Item 3), the Company has reached an agreement in principle to
settle the claims against the Company and its subsidiaries. Upon consummation of
the agreement, the Company anticipates issuing warrants for plaintiffs to
purchase 2.5 million shares of the Company common stock. The Company has
recorded a non-cash expense for the fair market value of the warrants of
$8,000,000 in the financial statements for the fiscal year ended March 31, 1998.
Details and terms of the warrants are described in Note 7 to the Consolidated
Financial Statements.
The increase in loss from continuing operations in fiscal 1998 is primarily
due to (i) an increase in general and administrative expense of $1,102,000
primarily related to legal and other expenses incurred in market development and
due diligence examination of potential acquisitions; (ii) an increase in
engineering, research & development expense of $962,000; (iii) an increase in
interest charges of $2,000,000 including a non-cash charge of $1,875,000 with
respect to the discount from market value of the Company's common stock issued
upon conversion of the 8% convertible notes described above; (iv) a non-cash
expense of $5,522,000 related to the Class A & B Units convertibility; (v)
expenses incurred in connection with the failed acquisition previously
described; and (vi) a non-cash expense of $8,000,000 for warrants anticipated to
be issued in connection with securities litigation.
15
<PAGE>
Results of Operations - Fiscal Year Ended March 31, 1997 versus March 30, 1996
The following discussion encompasses the results of operations of CTL
(formerly Sattel Communications LLC) and the Company's former Milwaukee
headquarters. CTL's 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 (see Notes 1 and 3 to the
Consolidated Financial Statements.)
CTL's revenues and expenses increased in fiscal 1997 as compared to fiscal
1996, primarily because CTL's operations in fiscal 1996 consisted of the
start-up and development of its business.
CTL had sales of $7,154,000 in fiscal 1997, primarily from sales of DSS
Switches compared to sales of $264,000 in fiscal 1996. CTL had sales of
$6,712,000, or 94% of fiscal 1997 sales, to CNC. In fiscal 1997, CTL's gross
profit was reduced by charges of $1,400,000 as allowance for inventory
obsolescence.
In fiscal 1997, selling and administrative expenses of $12,112,000
increased $8,463,000 over fiscal 1996. Selling and administrative expenses
increased in fiscal 1997 primarily because of the further development of CTL's
business, the settlement expense of $600,000 with a former employee, and to a
lesser extent due to increased corporate headquarters expenses. During fiscal
1996, CTL incurred significantly less selling and administrative expenses as
compared to fiscal 1997 because CTL was in the early stage of developing its
business and staff.
Engineering, research and development expenses of $4,060,000 were incurred
by CTL during fiscal 1997. An explanation of the increase in engineering,
research and development expenses and the Company's accounting policy for these
expenses is in Note 1 to the Consolidated Financial Statements.
The components of non-operating income (expense) are shown in Note 9 to the
Consolidated Financial Statements.
Minority interest in fiscal 1997 represents the minority partners' share of
CTL's loss. In fiscal 1996, the Company has included the results of SCC in its
statement of operations as though it had acquired its majority interest at the
beginning of fiscal 1996 and added back the minority partner's share of SCC's
loss as part of minority interest (see Note 1 to the Consolidated Financial
Statements).
In December 1996, the Company filed a federal income tax refund claim with
the Internal Revenue Service ("IRS") resulting from the carryback of certain
prior year deductions to fiscal 1985. In January 1997, the Company received a
payment from the IRS for the claim and recorded an income tax credit of
$836,000.
The loss from continuing operations in fiscal 1997 is primarily due to
losses incurred by CTL and costs related to the Company's corporate
headquarters. The increase in the loss from continuing operations in fiscal 1997
as compared to fiscal 1996 is primarily due to (i) an increase in CTL's
operating loss of $6,857,000 (see Note 12 to the Consolidated Financial
Statements), (ii) a settlement expense of $600,000 with a former employee, (iii)
a non-operating loss of $1,060,000 incurred by CTL for the write-down of its
investment in CNC preferred stock, (iv) an increase in the Company's corporate
headquarters operating expenses of $1,001,000 primarily due to an increase in
professional fees and directors and officers liability insurance expense and (v)
a loss of $736,000 incurred by the Company on the sale of its remaining
marketable securities. These expenses and losses were partially offset by an
income tax credit of $836,000.
16
<PAGE>
The summarized operating results of discontinued operations for fiscal 1997
and fiscal 1996, respectively, are shown in Note 2 to the Consolidated Financial
Statements. The operating results from discontinued operations reflected in
fiscal 1997 are through the measurement date of November 20, 1996. Operating
losses from discontinued operations subsequent to the measurement date are
reflected within the estimated loss on disposal. The operating results from
discontinued operations reflected in fiscal 1996 are for the entire fiscal year.
The estimated loss on disposal of discontinued operations is discussed in
Note 2 to the Consolidated Financial Statements.
The extraordinary items are discussed in Note 10 to the Consolidated
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 payments 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 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 Note 7 to the Consolidated Financial Statements for
additional information). With completion of the equity and debt financing and
the collection of $4,400,000 of previously delinquent customer receivables and
the receipt of $2,255,000 from the exercise of Company Employee Stock Options,
the Company had more than sufficient funds to finance its operating activities
in fiscal 1998 and ended the fiscal year with an operating cash balance of
$3,700,000.
In fiscal 1999, 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 used cash in operating activities of $8,475,000 during fiscal
1998 compared to using $17,859,000 for fiscal 1997. The change is primarily due
to lower inventory and the improvement in collection of trade receivables. CTL
trade receivables at March 31, 1998, were $715,000 compared to $4,594,000 for
the prior year.
Capital expenditures were $1,021,000 in fiscal 1998, a decrease from
$1,914,000 in fiscal 1997. Purchases were primarily for additional test
equipment and development hardware.
The Company liquidated its investment in CNC common stock in fiscal 1998.
Twenty-five percent of its holdings were sold in August 1997 and the remaining
75% was sold in February 1998. Total proceeds on the sales were $1,777,000. The
Company continues to own a warrant to purchase 36,765 shares of CNC Series D
Preferred Stock at an exercise price of $19.60 per share. The warrant is
exercisable immediately and expires on June 6, 1999.
In fiscal 1998, net cash proceeds of $2,861,000 were received in connection
with the sale of discontinued operations, (see Note 2 to Consolidated Financial
Statements), as the Company collected the balance due from the sale of APC and
in November 1997, completed the sale of C&L.
In March 1998, the Company completed an agreement for the sale of Valley
and in June 1998, received full payment of the cash proceeds in the amount of
$2,300,000. (See Note 2 to Consolidated Financial Statements).
17
<PAGE>
The following are included in investing activities (See Note 3 to
Consolidated Financial Statements): (i) during fiscal 1998, the company advanced
funds to NUKO Information Systems, Inc., a potential acquisition candidate. A
total of $1,800,000 was advanced under a secured promissory note. The
acquisition effort was terminated and subsequently, NUKO filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code; (ii) in March 1998, the
Company advanced $100,000 under a secured promissory note to INET Interactive
Systems, Inc. under an agreed intent to acquire INET. This acquisition is
expected to be completed during the second quarter of fiscal 1999; (iii) in
February and March 1998, the Company advanced a total of $190,000 in connection
with the acquisition of American Gateway Telecommunications, Inc. which was
completed in April 1998; and (iv) in January 1998, the Company advanced $450,000
to Systeam, S.p.A. in connection with an investment in convertible notes in that
company. The notes will be issued after completion of Italian legal process.
RISK FACTORS
The Company has been restructured to consist of the operations of CTL and
certain acquisitions in the related telecommunications network services market.
Stockholders of the Company should be aware that the Restructuring involves
risks which could adversely affect the value of their Company common stock. In
addition, certain characteristics and dynamics of the Company's business and of
financial markets generally create risks to the Company's long-term success and
to predictable quarterly results. No representation as to the future value of
Company common stock is made hereby, nor is any person authorized by the Company
to make any such representation. The Company is aware of the following risks,
each of which should be considered carefully:
Recent Operating Losses; No Assurance of Profitability
The Company has reported losses from continuing operations for the last
four fiscal years. There can be no assurance that the Company will return to
profitability.
Need to Increase Sales
CTL has a limited operating history and has not yet achieved consistent
sales of its products over an extended period. Net sales of the continuing
operations of the Company were $264,000 in the 1996 fiscal year, $7,154,000 in
the 1997 fiscal year and $5,387,000 in the 1998 fiscal year. These sales were
not sufficient to offset the operating and other expenses incurred by the
Company. If the Company is to achieve profitability, it will need to increase
the market acceptance and sales of its products to levels commensurate with the
expense levels of the Company. No assurances can be given that the Company will
be successful in this effort.
Liquidity Deficiency
Recent events have improved the Company's short-term liquidity. The Company
nevertheless considers that its capital situation, over the longer term, will be
dependent on its operating results and its ability to obtain additional capital
required to acquire and develop successful operations with acquisitions. The
Company could remain relatively constrained and its ability to access outside
sources of capital could be restricted until such time as the Company is able to
demonstrate higher levels of sales and more favorable operating results. No
assurances can be given that the Company will be able to maintain its liquidity
over an extended period of time as required for the Company to achieve its
operating goals. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
18
<PAGE>
The Company's sales are subject to quarterly and annual fluctuations due to
a number of factors. The Company expects to experience fluctuations in sales
from quarter-to-quarter due in large part to the capital budgeting and spending
patterns of potential customers in the telecommunications industry. The
Company's ability to affect and judge the timing of individual customer orders
is, by its nature, limited. The Company's sales for a given quarter may depend
to a significant degree upon a limited number of customers, often related to
specific customer orders.
The Company's revenues, costs and expenses have fluctuated significantly in
the past and may continue to fluctuate significantly in the future as a result
of numerous factors. The Company's revenues in any given period can vary due to
factors such as call volume fluctuations, particularly in regions with
relatively high per-minute rates; the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for the termination of the Company's
traffic; financial difficulties of major customers; pricing pressure resulting
from increased competition; and technical difficulties with or failures of
portions of the Company's network that impact the Company's ability to provide
service or to bill its customers.
The Company's cost of services and operating expenses in any given period
can vary due to factors such as fluctuations in rates charged by carriers to
terminate the Company's traffic; increases in bad debt expense and reserves; the
timing of capital expenditures, and other costs associated with acquiring or
obtaining other rights to switching and other transmission facilities; changes
in the Company's sales incentive plans; and costs associated with changes in
staffing levels of sales, marketing, technical support and administrative
personnel.
Delays or lost sales can be caused by other factors beyond the Company's
control, including changes in implementation priorities and slower than
anticipated growth in demand for products and services. Delayed sales have
occurred in the past and may occur in the future. In addition, the Company has,
on occasion, experienced delays as a result of the need to modify its products
to comply with unique customer specifications. These and similar delays or lost
sales could have a material adverse effect on its business.
Operating results may also fluctuate due to factors such as the timing of
new product enhancements and introductions by the Company, its major customers
or its existing or potential competitors, delays in new product introductions,
market acceptance of new or enhanced versions of the Company's products and
services, changes in the product or customer mix of sales, changes in the level
of operating expenses, competitive pricing pressures, the gain or loss of
significant customers, increased research and development and sales and
marketing expenses associated with new product enhancements and introductions,
and general economic conditions. All of the above factors are difficult for the
Company to forecast, and these or other factors could have a material adverse
effect on the Company's business for one quarter or a series of quarters. The
Company's expense levels are based in part on its expectations regarding future
sales and are fixed in the short term to a large extent. Therefore, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in sales. Any significant decline in demand relative to the
Company's expectations or any material delay of customer orders could have a
material adverse effect on the Company's business. It is possible that in the
future, the Company's operating results may experience such problems, which
could have a material adverse effect on the price of the Company's common stock.
Reductions in Size and Diversification
While now considered more focused, the Company is a smaller and less
diversified company and has a lower fixed asset and revenue base than prior to
the Restructuring. Consequently, the effect of any decline in operating results
after the Restructuring could more immediately and severely affect the Company's
business.
Risks Inherent in Acquisition Strategy
An important component to the Company's strategy is to grow and expand
through acquisitions. This growth strategy is dependent on the continued
availability of suitable acquisition candidates and subjects the Company to a
number of risks. In April 1998, the Company completed one acquisition, AGT. This
acquisition has placed significant demands on the Company's financial and
management resources, as the process for integrating acquired operations
19
<PAGE>
presents a significant challenge to the Company's management and may lead to
unanticipated costs or a diversion of management's attention from day-to-day
operations. There can be no assurance that the Company will be able to
successfully integrate this acquisition or any other acquisitions made by the
Company in the future into Company operations. Integrating acquisitions may
require integration of financial and information systems, network and other
physical facilities and personnel. Difficulties in integrating these and other
acquisitions can cause system degradation, added costs and loss of personnel or
customers. Additionally, the Company may incur unknown liabilities despite
management's efforts to investigate the operations of the acquired business. The
impact of these risks, and other risks arising as a result of the Company's
acquisition strategy, could adversely affect the Company's business.
Dependence on Telecommunications Industry; Telecom Switch Market, IP Gateway
System Market, and the International Long Distance Service Market
After the Restructuring, the Company's customers are concentrated in the
telecommunications and Internet service industries. Accordingly, the Company's
future success depends upon the capital spending patterns of such customers and
the demand by such customers for the DSS Switch, IP Gateway System and wholesale
international long distance services. CTL is initially targeting the market for
small- to medium-sized telecom switches and IP gateway systems in the United
States, Mexico, South America, and the Far East. Historically, there has been
little, if any, demand for telecommunications switches similar in functionality,
type and size to the DSS Switch and, accordingly, there can be no assurance that
potential customers will consider the near term value of the DSS Switch
sufficient to influence their purchasing decisions or that they will pursue
strategic business alternatives that would benefit from a less expensive
small-to-medium sized telecommunications switch. Furthermore, there can be no
assurance that telecommunications companies and other potential customers will
not adopt alternative architectures or technologies that are incompatible with
the DSS Switch, which could have a material adverse effect on the Company's
business. Infrastructure improvements requiring the Company's or similar
technology may be delayed or prevented by a variety of factors, including cost,
regulatory obstacles, the lack of consumer demand for advanced
telecommunications services and alternative approaches to service delivery.
The telecommunications switch and IP gateway markets are highly
competitive. CTL produces small-to-medium sized scalable telecom switches that
currently compete with few, if any, directly comparable products. CTL faces
potential competition in the data communications market segment from a number of
data communications equipment providers, such as Bay Networks, Cisco Systems,
Lucent Technologies, Newbridge Networks, and 3Com.
In addition, the manufacturers of large scale central office switches such
as Lucent Technologies, Northern Telecom, Digital Switch Corporation, Siemens
AG, Alcatel, LM Ericsson and others have the resources and expertise to compete
in the smaller-scale central office switching equipment segment It is also
possible that large communication carriers such as AT&T Corporation, MCI
Communications, Sprint and, when and if legally permitted to, the RBOCs, may
enter the small to mid-sized central office switching equipment business. Many
of these competitors possess financial resources significantly greater than
those of CTL and accordingly could initiate and support prolonged price
competition to gain market share.
Additionally, the telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of competitive product and
service offerings, such as the utilization of the Internet for international
voice and data communications. The Company is unable to predict which
technological development will challenge its competitive position or the amount
of expenditures that will be required to respond to a rapidly changing
technological environment.
AGT is expected to generate a substantial majority of its revenues by
providing international telecommunications services to its customers on a
wholesale basis. The international nature of the Company's operations involves
certain risks, such as changes in U.S. and foreign government regulations and
telecommunications standards, dependence on foreign partners, tariffs, taxes and
other trade barriers, the potential for nationalization and economic downturns
and political instability in foreign countries. In addition, the Company's
20
<PAGE>
business could be adversely affected by a reversal in the current trend toward
deregulation of telecommunications carriers. The Company will be increasingly
subject to these risks to the extent that the Company proceeds with the planned
expansion of its international operations.
The international telecommunications industry is intensely competitive and
subject to rapid change. AGT's competitors in the international wholesale long
distance market includes large, facilities-based multinational corporations and
smaller facilities-based providers in the U.S. and overseas that have emerged as
a result of deregulation, switch-based resellers of international long distance
services and international joint ventures and alliances among such companies.
AGT also competes abroad with a number of dominant telecommunications operators
that previously held various monopolies established by law over the
telecommunications traffic in their countries. International service providers
compete on the basis of price, customer service, transmission quality, breadth
of service offerings and value-added services.
Further, the number of AGT competitors is likely to increase as a result of
the competitive opportunities created by a new Basic Telecommunications
Agreement concluded by members of the World Trade Organization (WTO) in April
1997. Under the terms of the WTO Agreement, starting February 5, 1998, the
United States and over 65 countries have committed to open their
telecommunications markets to competition, foreign ownership and adopt measures
to protect against anti-competitive behavior. As a result, AGT believes that
competition will continue to increase, placing downward pressure on prices. Such
pressure could adversely affect AGT's gross margin if AGT is not able to reduce
its costs commensurate with such price reductions.
A majority of the U.S.-based international telecommunications services
revenue is currently generated by AT&T Corp. ("AT&T"), MCI Communications Corp.
("MCI") and Sprint Corporation ("Sprint"). AGT also competes with companies such
as WorldCom, Inc., Star Telecommunications, Inc., Pacific Gateway Exchange, Inc.
and other U.S.-based and foreign long distance providers, including the RBOCs,
which presently have FCC authority to resell and terminate international
telecommunication services. Many of these competitors have considerably greater
financial and other resources and more extensive domestic and international
communications networks than the Company. AGT's business would be materially
adversely affected to the extent that a significant number of such customers
limit or cease doing business with AGT for competitive or other reasons.
Consolidation in the telecommunications industry could not only create even
larger competitors with greater financial and other resources, but could also
adversely affect AGT by reducing the number of potential customers for the
Company's services.
Concentrated Product Line; New Product Delays
In fiscal 1998, CTL derived substantially all of its revenues from the DSS
Switch. As a result, any decrease in the overall level of sales of, or the
prices for, the DSS Switch due to product issues or any other reason could have
a material adverse effect on the Company's business. The Company may consider
the acquisition of other similar companies or technologies provided they are
complementary to its core business.
The telecommunications equipment market, in general, is characterized by
rapidly changing technology, evolving industry standards, changes in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or the emergence of new
industry standards will be a continuing factor in the market. CTL's success will
depend, in part, upon its ability to enhance the technology for the DSS Switch
and to develop and introduce, on a timely basis, new products, such as the
SSA/IP Gateway System, that keep pace with technological developments and
emerging industry standards and address changing customer requirements in a
cost-effective manner. There can be no assurance that CTL will be successful in
identifying, developing, manufacturing, and marketing product enhancements or
new products that respond to technological change or evolving industry
standards. There also can be no assurance that CTL will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance.
21
<PAGE>
Furthermore, from time to time, CTL or its competitors may announce new
products or product enhancements, services or technologies that have the
potential to replace or shorten the life cycle of the CTL's products and that
may cause customers to defer purchases. There can be no assurance that future
technological advances in the telecommunications industry will not diminish any
market acceptance of the CTL's products which could have a material adverse
effect on the Company's business, financial condition and results of operations.
CTL has experienced delays in completing development and introduction of
new products and features, and there can be no assurance that such delays will
not recur in the future. Furthermore, the DSS Switch contains a significant
amount of complex software that may contain undetected or unresolved errors as
products are introduced or as new versions are released. CTL has in the past
discovered software errors in certain DSS Switch installations. There can be no
assurance that, despite significant testing by CTL software errors will not be
found in new enhancements of the DSS Switch after commencement of shipments,
resulting in delays in or loss of market acceptance, either of which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Outsource Manufacturers and Other Key Suppliers
CTL's outsource manufacturers have from time to time experienced delays in
receipt of certain hardware components. Certain components, including crystals
and microprocessors, are presently single-sourced or are available from a
limited number of sources. An interruption in business between CTL and its
outsource manufacturers could have a material adverse effect on the Company. CTL
has established relationships with alternate suppliers such as Sanmina and I-PAC
and has assembled product itself. Some sole-source suppliers are companies which
from time to time allocate parts to telecommunications equipment manufacturers
due to market demand for telecommunications equipment. Many of CTL's potential
competitors for such parts are much larger and may be able to obtain priority
allocations from these shared suppliers, thereby limiting or making unreliable
the sources of supply for these components. There can be no assurance that
shortages in component parts will not occur in the future or will not result in
CTL having to pay a higher price for components. A failure by a supplier to
deliver quality products on a timely basis, or the inability to develop
additional alternative sources if and as required, could result in delays which
could have a material adverse effect on the Company's business.
Limited Protection of Proprietary Technology; Risk of Third-Party Claims of
Infringement
CTL uses a combination of patents, trade secrets, confidentiality and
non-compete agreements and tight control of its software to protect the products
and features that it believes give it competitive advantages. In particular, CTL
relies on contractual restrictions to establish and protect its rights to the
technology developed by outside contractors used to assist in the development of
CTL's products. CTL's success and ability to compete is dependent in part upon
its technology.
There can be no assurance that the steps taken by CTL will be adequate to
prevent misappropriation of its technology or that CTL's competitors will not
independently develop technologies that are substantially equivalent or superior
to CTL's technology. In addition, the laws of many foreign countries do not
protect CTL's intellectual property rights to the same extent as the laws of the
United States. The failure of CTL to protect its proprietary information could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The increased dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. The Company may be
subject to litigation to defend against claimed infringements of the rights of
others or to determine the scope and validity of the proprietary rights of
others. Litigation also may be necessary to enforce and protect trade secrets
and other intellectual property rights owned by the Company. Any such litigation
could be costly and cause diversion of management's attention, either of which
could have a material adverse effect on the Company's business. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties, or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
22
<PAGE>
operations. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms.
Customer Concentration
Revenues in fiscal 1998 were from shipments to twelve customers, one of
which accounted for approximately 40% of the total revenues. Approximately 94%
of CTL's revenues for fiscal 1997 were derived from sales to CNC. The Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon sales to a limited number of customers.
There can be no assurance that the Company's principal customers will continue
to purchase product from the Company at current levels, if at all. The loss of
one or more major customers in any segment could have a material adverse effect
on the Company's business, financial condition and results of operations.
Difficulties in Managing Growth
The Company has experienced growth in the number of its employees and the
scope of its operations. To manage potential future growth effectively, the
Company must improve its operational, financial and management information
systems and must hire, train, motivate and manage its employees. The future
success of the Company also will depend on its ability to increase its customer
support capability and to attract and retain qualified technical, sales, network
operations, marketing and management personnel, for whom competition is intense.
The Company is currently hiring a number of sales and engineering personnel and,
in some instances, has experienced delays in filling such positions. There can
be no assurance that the Company will be able to effectively achieve or manage
such growth, and failure to do so could delay product development cycles or
otherwise have a material adverse effect on the Company's business, financial
condition and results of operations.
Introduction of Switch Server Architecture into the Telecommunications Market
In January 1997, CTL announced the new Switch Server Architecture (SSA).
SSA encompasses a client/server approach to low, medium and high speed
communications. There can be no assurance of its successful acceptance by the
telecommunications market in general.
Competition to DSS Switch and SSA/IP Gateway System Market
The telecommunications market and Internet markets are extremely
competitive. CTL uses a combination of patents, trade secrets, confidentiality
agreements and non-compete agreements to protect the product and features that
it believes give it competitive advantages. There can be no assurance, however,
that other competitors, some of whom have much greater access to resources and
funding, cannot functionally replicate CTL's critical products and features.
Likewise, there is no guarantee that competitors cannot develop features which
equal or exceed CTL's offerings.
Outsourced Manufacturing; Capacity Constraints
CTL performs certain manufacturing functions in house. In addition, CTL
outsources some of its manufacturing to Sanmina, I-PAC and other non-affiliated
contract manufacturers and expects to continue to outsource some, or all, of its
manufacturing. The Company's ability to increase capacity may be constrained and
it may have less control over manufacturing than it would if it performed all
the manufacturing functions in house. There can be no assurance, in the event of
substantial increases in demand, that CTL can successfully deliver its products
in a timely fashion and/or without additional expense which would result in a
deterioration of product margins.
International Risks
The Company's business strategy includes greater expansion into
international markets. There can be no assurance that the Company will obtain
the permits and operating licenses required for it to operate, to hire and train
employees or to market, sell and deliver high quality products and services
23
<PAGE>
internationally. In addition to the uncertainty as to the Company's ability to
expand its international presence, there are certain risks inherent to doing
business on an international level, such as unexpected changes in regulatory
requirements, trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in current exchange rates, seasonal
reductions in business activity, and potentially adverse tax consequences, which
could adversely impact the success of the Company's international operations. In
many countries, the Company may need to enter into a joint venture or other
strategic relationship with one or more third parties in order to successfully
market its products and services and to conduct its operations. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, financial condition and results of operations.
No Dividends
The Company has not paid cash dividends to its stockholders in the last six
years. The Company does not anticipate paying cash dividends to stockholders for
the foreseeable future.
Need For Additional Capital To Finance Growth And Capital Requirements
The Company believes that it must continue to enhance and expand its
products and services. The Company's ability to grow depends, in part, on its
ability to expand its product and service offerings, which requires significant
capital expenditures, that are often incurred prior to the Company's receipt of
the related revenue.
If the Company's growth exceeds current expectations, or if the Company
obtains one or more attractive opportunities to purchase the business or assets
of another company, or if the Company's cash flow from operations after the end
of such period is insufficient to meet its working capital and capital
expenditure requirements, the Company will need to raise additional capital from
equity or debt sources. There can be no assurance that the Company will be able
to raise such capital on favorable terms or at all. If the Company is unable to
obtain such additional capital, the Company may be required to reduce the scope
of its anticipated expansion, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Volatility of Stock Price
The market price of the shares of the Company's Common Stock has been
volatile and may be affected by factors such as actual or anticipated
fluctuations in the Company's operating results, the announcement of potential
acquisitions by the Company, changes in federal and international regulations,
activities of the larger voice and data equipment providers, domestic and
international service providers, industry consolidation and mergers, conditions
and trends in the international telecommunications market, adoption of new
accounting standards affecting the telecommunications industry, changes in
recommendations and estimates by securities analysts, general market conditions
and other factors. Other factors affecting the share price include the
increasing number of shares of the Company's common stock outstanding, or
committed for issuance pursuant to options or warrants, as the Company has
consummated a number of financings in recent periods, as well as the
availability of stock for sale, or actual sales of stock, by substantial
shareholders in the Company. These factors have affected the share price for the
Company's common stock in the past and may be expected to continue to affect the
share price in the future.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the shares of emerging growth companies like the Company. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
24
<PAGE>
Accounting Pronouncement
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards and additional quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.
Impact of Inflation
Inflation has not had a significant impact on net sales or loss from
continuing operations for the three most recent fiscal years.
Year 2000 Compliance
The Company believes that its CTL switching product operating systems and
its internal computer systems are Year 2000 compliant and does not anticipate
that it will incur significant expenditures to ensure that such systems will
function properly with respect to dates in the Year 2000 and beyond. The Company
is in the early stages of conducting a review of its significant suppliers and
other third parties to ensure that those parties have appropriate plans to
remedy Year 2000 issues where their systems interface with the Company's systems
or otherwise impact its operations. There can be no assurance that a failure of
the CTL switching product operating systems or that the systems of third parties
on which the Company's systems and operations rely to be Year 2000 compliant
will not have a material adverse affect on the Company's business, financial
condition or operating results.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
PAGE
Report of Arthur Andersen LLP, Independent Public Accountants............... 27
Report of Price Waterhouse LLP, Independent Accountants..................... 28
Consolidated Balance Sheets................................................. 29
Consolidated Statements of Operations....................................... 30
Consolidated Statements of Changes in Shareholders' Equity.................. 31
Consolidated Statements of Cash Flows....................................... 32
Notes to Consolidated Financial Statements.................................. 33
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Coyote Network Systems, Inc.
We have audited the accompanying consolidated balance sheet of Coyote Network
Systems, Inc. (formerly, The Diana Corporation) and subsidiaries as of March 31,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Notes 1 and 2 of the notes to the consolidated financial
statements, the Company has substantially completed its major restructuring plan
which has resulted in Coyote Technologies, LLC becoming the primary operating
company. As further discussed in Note 6, the Company is the defendant in various
lawsuits asserting claims under Section 10(b) of the Securities Exchange Act of
1934. 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 to issue warrants to
acquire 2,500,000 shares of the Company's common stock. The estimated value of
the warrants ($8,000,000) has been provided for in the financial statements as
of March 31, 1998.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coyote Network Systems, inc.
and subsidiaries as of March 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 13, 1998
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Diana Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) of this report present fairly, in all
material respects, the financial position of The Diana Corporation and its
subsidiaries (the "Company") at March 31, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
initiated a restructuring plan during fiscal 1997 which resulted in Sattel
Communications LLC ("Sattel") becoming the sole operating company comprising the
Company's continuing operations. Sattel has a limited operating history and has
not yet achieved significant sales of its products. The Company's other
operating companies were sold or are held for sale as of March 31, 1997. As
discussed in Note 14, management believes the Company will have sufficient cash
resources, including proceeds from those net assets held for sale, to fund its
operations for the fiscal year ending March 31, 1998. However, any material
delay during fiscal 1998 in the timing of disposal and the ultimate receipt of
cash proceeds by the Company with respect to the net assets held for sale could
have a material adverse effect on the Company. In addition, the Company's
viability is further dependent on Sattel achieving sales levels and operating
results sufficient to fund the Company's operations. Finally, as discussed in
Note 6, the Company is subject to uncertainties relating to class action
litigation asserted against the Company and other potential claims by investors,
the ultimate effects of which on the Company's financial position, results of
operations and cash flows cannot presently be determined.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
September 22, 1997
28
<PAGE>
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars In Thousands)
<TABLE>
March 31, March 31,
1998 1997
--------- --------
<CAPTION>
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,746 $ 81
Marketable securities 16 ---
Receivables 715 4,594
Inventories 2,122 2,937
Notes receivable - current 4,596 ---
Net assets of discontinued operations --- 893
Other current assets 1,409 1,716
-------- ---------
Total current assets 12,604 10,221
Property and equipment, net 2,391 1,944
Intangible assets, net 3,542 3,755
Net assets of discontinued operations 909 7,308
Notes receivable - non-current 1,170 ---
Other assets 1,359 16
------- ---------
$ 21,975 $ 23,244
======== =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,920 $ 2,559
Deferred revenue and customer deposits 1,900 362
Accrued loss reserve (Note 9) 2,200 ---
Accrued professional fees and litigation costs 805 319
Other accrued liabilities 1,130 679
Current portion of long-term debt 141 141
-------- ---------
Total current liabilities 8,096 4,060
Long-term debt 5,349 1,817
Other liabilities 470 533
Commitments and contingencies (Note 6)
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 9,151,920 and 6,007,175 shares 9,152 6,007
Additional paid-in capital 102,360 80,124
Accumulated deficit (97,695) (63,540)
Treasury stock at cost (5,757) (5,757)
--------- ---------
Total shareholders' equity 8,060 16,834
--------- ---------
$ 21,975 $ 23,244
========= =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
<TABLE>
Fiscal Year Ended
-----------------------------------
<CAPTION>
March 31, March 31, March 30,
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Net sales $ 5,387 $ 7,154 $ 264
Cost of goods sold 3,363 3,132 129
------- -------- --------
Gross profit 2,024 4,022 135
------- -------- --------
Selling and administrative expenses 13,214 12,112 3,649
Engineering, research and development 5,022 4,060 178
A & B unit conversion expense 5,522 --- ---
------- -------- --------
Total operating expenses 23,758 16,172 3,827
------- -------- --------
Operating loss (21,734) (12,150) (3,692)
Interest expense (2,334) (52) (106)
Non-operating income (expense) (2,087) (1,337) 465
Securities litigation warrant expense (8,000) --- ---
Minority interest --- 368 587
Income tax credit --- 836 ---
------- -------- --------
Loss from continuing operations (34,155) (12,335) (2,746)
Loss from discontinued operations --- (625) (619)
Estimated loss on disposal of discontinued operations --- (7,550) ---
------- -------- --------
Loss before extraordinary items (34,155) (20,510) (3,365)
Extraordinary items --- (508) ---
------- -------- --------
Net loss $(34,155) $(21,018) $ (3,365)
======== ========= =========
Loss per common share (basic & diluted):
Continuing operations $ (4.83) (2.34) $ (.62)
Discontinued operations --- (1.55) (.14)
Extraordinary items --- (.10) ---
------- ---------- ---------
Net loss per common share (basic & diluted) $ (4.83) $ (3.99) $ (.76)
========= ========== =========
Weighted average number of common shares
outstanding (basic & diluted) 7,070 5,271 4,401
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ---------------
Additional Unrealized Loss Total
Number of Par Paid in Accumulated on Marketable Number of Shareholders'
Shares Value Capital Deficit Securities Shares Cost Equity
---------- ------ ---------- ----------- --------------- -------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 4,810,353 $4,810 $48,548 $(28,178) $(713) 895,516 $(4,738) $19,729
Net loss --- --- --- (3,365) --- --- (3,365)
5% stock dividend 195,929 196 3,022 (3,233) --- --- --- (15)
Exercise of stock options --- --- (39) --- --- 12,300) 65 26
Change in unrealized loss on securities --- --- --- --- (163) --- --- (163)
Acquisition of SCC minority interest 350,000 350 4,594 --- --- --- --- 4,944
Issuance of common stock 170,000 170 3,315 --- --- --- --- 3,485
Other --- --- 16 --- --- (5,524) 29 45
---------- ------ ------- -------- ------ ------- ------ --------
Balance at March 30, 1996 5,526,282 5,526 59,456 (34,776) (876) 877,692 (4,644) 24,686
Net loss --- --- --- (21,018) --- --- --- (21,018)
5% stock dividend 250,893 251 7,474 (7,746) --- --- --- (21)
Realized loss on securities --- --- --- --- 876 --- --- 876
Acquisition of SCC minority interest, net --- --- 385 --- --- 35,000 (2,203) (1,818)
Issuance of common stock 230,000 230 12,630 --- --- (200,000) 1,058 13,918
Other --- --- 179 --- --- (4,000) 32 211
---------- ------ ------- -------- ------ ------- ------- --------
Balance at March 31, 1997 6,007,175 6,007 80,124 (63,540) --- 708,692 (5,757) 16,834
Net loss --- --- --- (34,155) --- --- --- (34,155)
Exercise of stock options 442,956 443 1,812 --- --- --- --- 2,255
Amendment of A & B units convertible
to common stock --- --- 5,522 --- --- --- --- 5,522
Issuance of common stock, net 1,880,750 1,881 1,481 --- --- --- --- 3,362
Common stock issued on debt
conversion (7/97) 484,964 485 1,815 --- --- --- --- 2,300
Common stock issued on debt
conversion (12/97) 336,075 336 919 --- --- --- --- 1,255
Non-cash expense --- --- 626 --- --- --- --- 626
Non-cash warrant expense --- --- 10,061 --- --- --- --- 10,061
---------- ------ -------- -------- ------ ------- ------- -------
Balance at March 31, 1998 9,151,920 $9,152 $102,360 $(97,695) $ --- 708,692 $(5,757) $ 8,060
========= ====== ======== ========= ====== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
Fiscal Year Ended
---------------------------------------------
<CAPTION>
March 31, March 31, March 30,
1998 1997 1996
-------------- ------------ ---------
<S> <C> <C> <C>
Operating activities:
Loss before extraordinary items $ (34,155) $ (20,510) $ (3,365)
Adjustments to reconcile loss to net cash
Provided (used) by operating activities:
Depreciation and amortization 787 478 121
Loss (gain) on sales of marketable securities (155) 736 (26)
Write-down of CNC preferred stock --- 1,060 ---
Minority interest --- (368) (587)
Expense related to amendments to A & B units 5,522 --- ---
Estimated loss on disposal of
discontinued operations --- 7,550 ---
Net change in discontinued operations 145 (3,862) 5,583
Changes in current assets and liabilities 8,489 (3,164) (371)
Other - Non-cash financing and warrant expense (in 1998) 10,582 221 354
-------- ------- --------
Net cash provided (used) by operating activities (8,475) (17,859) 1,709
--------- -------- --------
Investing activities:
Purchases of property and equipment (1,021) (1,914) (161)
Purchases of marketable securities (736) --- (475)
Proceeds from sales of marketable securities 1,777 1,353 5,380
Change in notes receivable (2,466) (5,000) 138
Proceeds from sale of CNC preferred stock --- 2,500 ---
Affiliate advances and acquisitions, net of cash acquired --- --- (1,495)
Net proceeds from the sale of APC and C&L assets 2,861 640 ---
Net change in discontinued operations (401) (985) (3,444)
Other items --- 283 47
-------- ------- --------
Net cash provided (used) by investing activities 14 (3,123) (10)
-------- -------- ---------
Financing activities:
Repayments of long-term debt (141) (141) (141)
Common stock issued 5,366 13,918 3,485
Convertible debt issued 6,474 --- ---
Net change in discontinued operations 275 3,314 (888)
Other items 152 (508) ---
-------- -------- -------
Net cash provided by financing activities 12,126 16,583 2,456
-------- ------- --------
Increase (decrease) in cash and cash equivalents 3,665 (4,399) 4,155
Cash and cash equivalents:
At beginning of year 81 4,480 325
-------- ------- --------
At end of year $ 3,746 $ 81 $ 4,480
======== ======= =========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated group (hereafter referred to as the "Company") included
the following companies during the past three years:
Coyote Network Systems, Inc. ("CNS"), formerly The Diana Corporation - CNS
and its wholly-owned non-operating subsidiaries are included in the consolidated
group for all three fiscal years. CNS's activities historically consisted
primarily of corporate administration and investing activities.
Coyote Technologies, LLC ("CTL"), formerly Sattel Communications LLC - CNS
had a 50% ownership interest in Sattel Communications Company which was
subsequently converted into Sattel Communications Corp. ("SCC"). CNS accounted
for this investment using the equity method of accounting from November 1994 to
December 1995. In January 1996, CNS increased its ownership interest in SCC from
50% to 80% and at the same time SCC also acquired the intellectual property
rights and technology rights to the DSS switch. In fiscal 1997, the Company
increased its ownership interest in SCC from 80% to 100% (see Note 3). The
Company included the results of SCC in its statement of operations for fiscal
1996 as though it had acquired its majority interest at the beginning of fiscal
1996 and added back the minority partner's share of SCC's loss as part of
minority interest. SCC, through its subsidiary CTL, is a provider of
telecommunication switches and IP gateway systems. In April 1996, SCC
transferred its assets and liabilities to CTL, a newly-formed limited liability
company. SCC has an ownership interest in CTL of approximately 80% and certain
additional preferential rights (see Note 3).
Discontinued Operations - The operations of C&L Communications, Inc.
("C&L"), Valley Communications, Inc. ("Valley"), Atlanta Provision Company, Inc.
("APC") and Entree Corporation ("Entree") were classified as discontinued
operations in fiscal 1997. C&L was a wholly-owned subsidiary of CNS. C&L was
sold in November 1997 (see Note 2). Valley was an 80%-owned subsidiary of CNS.
Valley was sold in March 1998 (see Note 2). Entree is an 81.25%-owned subsidiary
of CNS. APC is a wholly-owned subsidiary of Entree. The majority of APC's assets
were sold in February 1997 (see Note 2).
Investments in 20%-50% owned subsidiaries in which management has the
ability to exercise significant influence are accounted for using the equity
method of accounting. Accounts and transactions between members of the
consolidated group are eliminated in the consolidated financial statements.
Certain prior year balances have been reclassified in order to conform to
current year presentation.
Business Risk
As discussed in Note 2 below, the Company has substantially completed a
major restructuring that resulted in the disposition of several operations. The
Company's primary operations are now involved in the production of scalable
telecommunication switches and Internet Protocol based gateway systems to
telecommunication service providers. The telecommunications equipment market, in
general, is characterized by rapidly changing technology, evolving standards,
changes in end-user requirements and frequent new product introductions and
enhancements. The Company is also engaged, through American Gateway
Telecommunications (see Note 3) in the wholesaling of long distance service.
After the restructuring, the Company operations are similar to those of an
early-stage enterprise and is subject to all the risks associated therewith.
33
<PAGE>
These risks include, among others, uncertainty of markets, ability to develop,
produce and sell profitably its products and the ability to finance operations.
Management believes that it has made significant progress on its business plan
in fiscal 1998 and to date in fiscal 1999. Significant actions in this progress
include substantially completing the sale of its discontinued operations,
increasing sales in the first quarter of 1999, acquiring American Gateway
Telecommunications, reaching an agreement in principle (see Note 6) towards
resolving the class action lawsuit and currently discussing additional equity
investments with various parties. As discussed above, recent events have
improved the Company's short-term liquidity. However, the Company could remain
constrained in its ability to access outside sources of capital until such time
as the Company is able to demonstrate higher levels of sales and more favorable
operating results. Management believes that it will be able to continue to make
progress on its business plan and mitigate the risks associated with its
business and industry.
Financial Instruments
The carrying values of cash and cash equivalents, marketable securities,
receivables, accounts payable and borrowings at March 31, 1998 and March 31,
1997 approximate fair value.
Marketable Securities
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
non-operating income (expense). Marketable equity securities and debt securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value (based on published
market values), with the unrealized gains and losses reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in non-operating income (expense). Realized gains
and losses, interest income and dividends are included in non-operating income
(expense). For purposes of determining the gain or loss on a sale, the cost of
securities sold is determined using the average cost of all shares of each such
security held at the dates of sale.
Non-Marketable Securities
Non-marketable securities are accounted for on a lower of cost or market
basis. A write-down to market is recognized on the determination that a
permanent impairment of value has occurred.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. Inventories consist of the following (in
thousands):
March 31, 1998 March 31, 1997
Raw materials and work-in-process $2,376 $2,728
Finished goods 152 323
Consigned and with customers 994 1,286
Allowance for excess and obsolete inventory (1,400) (1,400)
------- -------
$2,122 $2,937
====== ======
34
<PAGE>
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation are
computed on the straight-line method for financial reporting purposes over the
estimated useful lives of the assets which range from three to five years.
Depreciation for income tax purposes is computed on accelerated cost recovery
methods. Expenditures which substantially increase value or extend asset lives
are capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred.
Property and equipment consist of the following (in thousands):
March 31, 1998 March 31, 1997
-------------- --------------
Land $ 50 $ 50
Fixtures and equipment 3,151 2,204
------ ------
3,201 2,254
Less accumulated depreciation (810) (310)
------- ------
$2,391 $1,944
====== ======
Intangible Assets
Intangible assets consist of the following (in thousands):
March 31, 1998 March 31, 1997
-------------- --------------
Intellectual property rights $3,519 $3,721
Other 23 34
------ ------
$3,542 $3,755
====== ======
The Company amortizes the intellectual property rights for the DSS Switch
over a 20 year period on a straight line basis. Accumulated amortization was
$472,000 and $354,000 at March 31, 1998 and March 31, 1997, respectively.
In fiscal 1997, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The adoption of this
standard did not have a material effect on its consolidated results of
operations or financial position.
Pursuant to SFAS No. 121, long-lived assets and intangible assets are
reviewed for impairment whenever events or circumstances provide evidence that
suggest that the carrying amount of the asset may not be recoverable. Impairment
is generally determined by using estimated undiscounted cash flows over the
remaining amortization period. If the estimates of future undiscounted cash
flows do not support recoverability of the carrying value of the asset, a loss
is recognized for the difference between the fair value and carrying value of
the asset.
The Company obtained an independent appraisal in support of the
recoverability of the net book value of property and equipment and the DSS
Switch intellectual property rights at March 31, 1997.
Revenue Recognition
Revenue from product sales is recognized upon shipment to a credit-worthy
customer, based on a firm agreement whereby all risks and rewards of ownership
have been transferred, in exchange for cash or a receivable which is liquid and
collectible. The transaction must be complete in all significant aspects as of
the date of revenue recognition and free from any significant uncertainties or
future obligations and restrictions.
35
<PAGE>
Credit and Other Concentration
For the year ended March 31, 1998, a third party lessor was involved in
approximately 40% of net sales and Apollo Inc. accounted for approximately 19%
of net sales (see Note 3). For the year ended March 31, 1997, Concentric Network
Corporation accounted for approximately 94% of net sales and 92 % of
receivables. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral other than, in
certain instances, a perfected security interest in the related equipment. In
addition, approximately 11% and 86% of inventories purchased during the years
ended March 31, 1998 and March 31, 1997, were supplied by Sattel Technologies,
Inc. ("STI"). However, the Company has established relationships with alternate
suppliers such as Sanmina Corporation and I-PAC Manufacturing, Inc. and has
assembled product itself in order to significantly reduce its dependency on STI.
Product Warranty
Product warranty costs are charged to operations based upon the estimated
warranty cost per unit sold. Warranty costs to date have been insignificant.
Research and Development Costs
Engineering, research and development costs include all engineering charges
related to new products and the DSS Switch, and are charged to operations when
incurred. Software development costs incurred in the development of switching
products are required to be capitalized once technological feasibility is
established in accordance with SFAS No. 86. Technological feasibility is
established upon the successful testing of a prototype or beta-test model based
upon CTL's product development process. Software development costs incurred
during the period between completion of a fully-tested model and general market
release have not been significant, and, accordingly, have not been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes".
Loss Per Common Share
The basic loss per common share is determined by using the weighted average
number of shares of common stock outstanding during each period. On a diluted
basis, the loss per common share is anti-dilutive and therefore not applicable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less at the
date of purchase to be cash equivalents.
36
<PAGE>
NOTE 2 DISCONTINUED OPERATIONS
On November 20, 1996, the Board of Directors of the Company approved a
restructuring plan (the "Restructuring") to separate its telecom switching
equipment business (the "CTL Business") from the following businesses:
Segment Company
Telecommunications equipment distribution C&L
Wire installation and service Valley
Wholesale distribution of meat and seafood Entree/APC
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.
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. The amount of $100,000 was held in escrow; which was
released and paid in full to APC in February 1998. 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's only remaining asset consists of real estate with a net book value of
$2.6 million. The real estate is collateral for two mortgage notes that amount
to $740,000. APC entered into a lease with Colorado that terminated on January
15, 1998. 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 equipment distributor subsidiary, C&L Communications, Inc.
("C&L"), to the management of C&L. 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, a $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.
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.
37
<PAGE>
The components of net assets and liabilities of discontinued operations are
as follows (in thousands):
<TABLE>
March 31, 1998
-------------------------------------------------
<CAPTION>
Telecommu- Wire
Meat and nications Installation
Seafood Equipment and Service Total
<S> <C> <C> <C> <C>
Other current assets $ 7 $ --- $ --- $ 7
Property and equipment, net 2,572 --- --- 2,572
Long term debt (740) --- --- (740)
-------- ------- ------ -------
Net non-current assets of discontinued operations $ 1,839 $ --- $ --- $ 1,839
======= ======= ======
Reserve for loss on disposal (930)
-------
Net assets of discontinued operations $ 909
=======
March 31, 1997
-------------------------------------------------
Telecommu- Wire
Meat and nications Installation
Seafood Equipment and Service Total
Receivables $ --- $ 4,720 $ 3,387 $ 8,107
Inventories --- 5,429 176 5,605
Other current assets 939 452 348 1,739
Accounts payable (98) (3,584) (1,280) (4,962)
Revolving lines of credit --- (4,164) (1,100) (5,264)
Other current liabilities (112) (179) (1,014) (1,305)
------- ------- ------- -------
$ 729 $ 2,674 $ 517 $ 3,920
====== ======= =======
Reserve for loss on disposal (3,027)
-------
Net current assets of discontinued operations $ 893
=======
Property and equipment, net $ 2,572 $ 280 $ 571 $ 3,423
Intangible assets, net --- 2,317 2,892 5,209
Other assets --- 312 88 400
Long term debt (781) --- (667) (1,448)
Other liabilities --- --- (276) (276)
-------- ------- ------- -------
Net non-current assets of
discontinued operations $ 1,791 $ 2,909 $ 2,608 $ 7,308
======= ======= ======= =======
</TABLE>
The estimated loss on disposal of discontinued operations consists of the
following (in thousands):
Estimated operating losses for the disposal period
and loss on disposal of C&L and Valley $ 2,054
Operating losses for the disposal period and loss on
the disposal of APC 2,550
Investment banking fees, including the fair value
of a warrant to purchase common stock 1,100
Professional fees incurred in connection with the spin-off 854
Severance payments to Messrs. Fischer, Runge
and Lilly (see Note 11) 508
Charge due to acceleration of deferred compensation
payments (see Note 11) to Messrs. Fischer and Runge 137
Other 347
-------
$ 7,550
=======
38
<PAGE>
The company believes that the net assets of discontinued operations are
recorded at approximate net realizable value at March 31, 1998.
Operating results, net of minority interest, relating to the discontinued
operations for fiscal year 1996 and for fiscal year 1997 through the measurement
date of November 20, 1996 are as follows (in thousands):
<TABLE>
Fiscal Year Ending March 31, 1997
----------------------------------------------------
<CAPTION>
Telecom- Wire
Meat and munications Installation
Seafood Equipment and Service Total
<S> <C> <C> <C> <C>
Net sales $ 188,853 $ 19,750 $ 11,540 $ 220,143
========= ======== ======== =========
Earnings (loss) from discontinued operations $ (584) $ (51) $ 10 $ (625)
========== ========= ======== =========
Fiscal Year Ending March 30, 1996
Telecom- Wire
Meat and munications Installation
Seafood Equipment and Service Total
Net sale $ 236,108 $ 25,350 $ 6,144 $ 267,602
========= ======== ======== =========
Earnings (loss) from discontinued operations $ (1,067) $ 55 $ 393 $ (619)
========== ======== ======== =========
</TABLE>
In fiscal 1996, state income taxes of $83,000 were allocated to
discontinued operations. No income taxes have been allocated to discontinued
operations for fiscal 1997.
In reclassifying the Company's financial statements for presentation of
discontinued operations, the Company reflected all of APC's interest expense
that was paid to the Company under an intercompany loan to discontinued
operations. Interest expense paid by APC to the Company was $0 and $159,000 in
fiscal 1997 and 1996, respectively. The Company reflected the corresponding
interest income in non-operating income (expense) (see Note 9). All other
intercompany interest has been eliminated in consolidation. There was no other
allocation of interest to discontinued operations.
As of July 9, 1998, the Company had collected all cash related to the sale
of discontinued operations except $760,000 due under a note and the only asset
of discontinued operations was real estate with a net asset book value of
$909,000. The real estate is listed for sale.
NOTE 3 Acquisitions
In November 1994, the Company and STI entered into a general partnership
agreement to establish Sattel Communications Company, which was subsequently
converted into SCC. The Company and STI each received a 50% interest in the
venture.
Profits and losses were allocated equally among the two partners. Under the
terms of this agreement, initial contributions to the partnership to be made by
the Company were operating capital and the cost of a marketing study which in
the aggregate would not exceed $200,000. In addition, the Company agreed to
prepare a business plan and a marketing plan for SCC. STI agreed to develop,
design and test a telecommunications switch, manufacture three units, provide
administrative services and provide the use of its facilities to SCC until
permanent facilities were determined. In addition, STI agreed to license SCC to
use its proprietary telecommunications switch (the "DSS Switch"). On January 16,
1996, the Company and STI entered into an Exchange Agreement by which the
Company acquired an additional 30% ownership interest in SCC, which brought its
total ownership interest in SCC to 80%. The acquisition was accounted for as a
purchase of a minority interest. The acquisition occurred as part of a
transaction in which the Company contributed additional cash, bringing its total
cash contributions to $2.5 million, and $1.425 million in loans to SCC to
39
<PAGE>
further develop the DSS Switch. In lieu of contributing its proportionate share
of the additional funding to SCC, STI assigned all of its right, title and
interest in the DSS Switch and related technologies to SCC. In connection with
this transaction, the Company issued 350,000 shares of its common stock, par
value $1.00 per share, (the "CNS Shares") to STI. The Company's Shares were
valued at $4,944,000, or $14.125 per share, based on the average closing market
price of the Company's common stock from January 12, 1996 through January 18,
1996.
On May 3, 1996, the Company and STI entered into a Supplemental Agreement
by which the Company acquired an additional 15% ownership interest in SCC. The
acquisition occurred as part of a transaction in which the Company contributed
an additional $10 million in cash to SCC. In lieu of contributing its
proportionate share of the additional funding to SCC, and in exchange for a
release from its obligation related to certain product development efforts, STI
agreed to convey to the Company 15% of SCC, together with 50,000 shares of the
CNS Shares it had acquired pursuant to the Exchange Agreement. This transaction
resulted in a net reduction of approximately $1,825,000 of intangible assets
recorded at March 30, 1996. On October 14, 1996, the Company acquired from STI
its remaining 5% ownership interest in SCC for 15,000 shares of the Company's
common stock. At this time SCC became a wholly-owned subsidiary of the Company.
In April 1996, SCC transferred its assets and liabilities to a newly-formed
limited liability company, Coyote Technologies, LLC ("CTL"). In addition, during
fiscal 1997 CTL granted subordinated equity participation interests, which
amount to approximately a 20% effective ownership interest (before consideration
of the subordination provisions) in CTL, to certain employees of the Company.
The Company's effective ownership of CTL is approximately 80% as a result of
these transactions. CTL is a California Limited Liability Company owned by
members (the "Members") owning either of two classes of interests, the "Class A
Units" and the "Class B Units" (collectively, the "Units"). SCC holds 8,000
Class A Units. Additional Class A Units are held by Charles Chandler, a former
employee, and Sydney Lilly, a current director and former Executive Vice
President of the Company. Mr. Chandler and Mr. Lilly hold 350 and 100 Class A
Units, respectively. Aggregate capital contributed to CTL related to these Class
A Units totaled $242,000. Initially, 1,550 Class B Units were issued to
employees of CTL in connection with their continued employment, without capital
contribution therefor. Certain current and former employees of CTL continue to
collectively own 1,507 Class B Units, representing all of the Class B Units
currently outstanding.
The following table reflects the current ownership of the Class B Units by
the management of CTL and others as of June 30, 1998:
Name Class B Units
James J. Fiedler 350
Daniel W. Latham 250
David Held 250
Bruce Thomas 250
Others 407
-----
1,507
=====
No compensation expense was recognized in fiscal 1997 upon the granting of
the Class B Units to the employees. The estimated fair value of such units at
the date of grant was considered immaterial to the financial statements based on
the subordinated nature of the interests resulting from the priority
distributions payable to holders of Class A Units. Compensation expense will be
recognized prospectively when it becomes probable that a conversion or other
defined triggering event will occur. If the Company exercises its option to
repurchase equity interests previously granted to employees, total compensation
cost will be equal to the cash paid upon the repurchase.
Prior to an amendment in September 1997, described in a succeeding
paragraph of this note, the terms of a conversion were that if in the future CTL
achieves cumulative pre-tax profits of at least $15 million over the four most
recent quarters, the members holding Class B Units not subject to the Board of
Directors' authorization discussed below would have the right and obligation
(the "Conversion Rights") to convert their Class B Units into Company common
stock on the basis of 500 shares of Company common stock for each Class B Unit,
subject to adjustment for stock dividends, stock splits, merger, consolidation
or stock exchange. The Conversion Rights are included in Class B Agreements
40
<PAGE>
amended in November 1996 in lieu of provisions of the April 1, 1996 agreement
that provided members holding Class B Units might require CTL to conduct an
initial public offering, upon the achievement of the same cumulative pre-tax
profit measure discussed above, in which the Class B holders would have the
right to convert Class B Units into securities being offered, and would have the
right to have those securities registered under the Securities Act of 1933 (the
"Registration Rights"). If a majority of the Class B Units are redeemed or
purchased by CTL or an affiliate, or if a triggering event (including the
conversion of a majority of the Class B Units) occurs, the individual Class A
holders are entitled to have their Units redeemed, purchased or to participate
on the same terms as the Class B Units, except with an upward adjustment in
price to reflect the priority of distribution associated with the Class A Units.
Pursuant to agreements regarding Class A Units, the holders of Class A Units
other than SCC also have the right, but not the obligation, to require the
Company to purchase all, but not less than all, of such holder's Class A Units
at a price equal to the agreed-upon or appraised fair market value at any time
after April 1, 1999.
As a result of the Company's Restructuring, its continuing operations are
only those of CTL. The Conversion Rights discussed above provided the Class B
Unit holders with an approximately comparable ownership interest in the Company
as they have in CTL.
In September 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of CNS and CTL at June
30, 1997, to provide for the elimination of the minimum pre-tax profits measure
requirement discussed above and the conversion into Company common stock at the
option of the holder. Consequently, there is a compensation charge of $4,016,000
recorded in the second quarter of fiscal 1998. This charge is based on the value
at September 4, 1997 of 630,000 shares of Company common stock at $6.375 per
share that will be issuable to Class B Unit Holders. Assuming that Class A
Units, other than those held by SCC, are convertible on the same basis as a
result of the Board of Directors' authorization discussed above, an additional
charge of $1,506,000 is also recorded in the second quarter of fiscal 1998 based
on 236,250 shares of Company common stock and a per share price of $6.375.
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. 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. In March 1998, the Company
entered into a transaction involving INET and a third party leasing firm. The
transaction involved the sale of DSS Switches for use in INET's business.
Because of the impending acquisition of INET, the Company has deferred the gross
profit on the transaction of $1,600,000 as if INET was an affiliate. In
connection with this transaction, the Company has issued a $702,000 stand-by
letter of credit in favor of the leasing company.
In December 1997, the Company entered into a letter of intent regarding a
merger with NUKO Information Systems, Inc. ("NUKO"). NUKO is a manufacturer of
compression and transmission technology for a variety of video applications. The
Company subsequently was unable to reach agreement with NUKO on the transaction
and withdrew its offer in March 1998. During negotiations and in accordance with
the terms of the letter of intent, the Company advanced funds to support NUKO's
ongoing activity. The total funding advanced to NUKO and now owed to the Company
of $1,800,000 which is secured by a pledge to the Company of shares of stock
owned by NUKO in Internext Compression, Inc. In April 1998, NUKO filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. See also Note 9
- - Non-Operating Expense - in connection with provisions recorded.
41
<PAGE>
NOTE 4 Marketable Securities
Marketable securities at March 31, 1998 consist of the following (in
thousands):
Available-for-Sale Marketable Securities
March 31, 1998
----------------------------------------
Gross Estimated
Realized Fair
Cost Losses Value
Equity securities $210 $194 $16
Gains on sales of available-for-sale securities totaled $242,000, $0, and
$31,000 in fiscal 1998, 1997 and 1996, respectively, and losses totaled
$397,000, $736,000, and $5,000 in fiscal 1998, 1997 and 1996, respectively.
NOTE 5 LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 31, March 31,
1998 1997
--------- ---------
Subordinated debentures due January
2002 and capitalized interest $1,817 $1,958
8% Convertible loan due December 2000 3,673 ---
Less current maturities (141) (141)
------ ------
$5,349 $1,817
====== ======
The subordinated debentures consist of principal of $1,254,000 and
capitalized interest of $562,000 at 11.25%. These debentures, which were issued
in January 1992, are unsecured. The payment of cash dividends by the Company is
restricted by the subordinated debentures which provide that the consolidated
tangible net worth of the Company cannot be reduced to less than an amount equal
to the aggregate principal amount of the subordinated debentures, or $1,254,000.
Approximate annual amounts payable by the Company on long-term debt are as
follows (in thousands):
1999............................. $ 141
2000............................. 141
2001............................. 141
2002............................. 1,394
-----
$1,817
======
The 8% convertible loan is represented by notes which were issued in
December 1997 and is convertible into common stock of the Company. Details of
the terms of the conversion are described in Note 7 - Shareholders' Equity. As
of June 9, 1998, the full value of notes and accrued interest had been converted
into the Company's common stock which was issued pursuant to the exemption
provisions of Regulation S of the Securities Act of 1933 (see Note 7).
42
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES
The Company and CTL lease their facilities and various equipment under
non-cancelable lease arrangements for varying periods. Leases that expire
generally are expected to be renewed or replaced by other leases. Total rental
expense under operating leases in fiscal 1998, 1997 and 1996 was $310,000,
$279,000 and $63,000, respectively.
Future minimum payments under non-cancelable operating leases with initial
terms of one year or more for fiscal years subsequent to March 31, 1998 are as
follows (in thousands):
1999............................. $ 735
2000............................. 717
2001............................. 719
2002............................. 748
2003............................. 704
------
$ 3,623
=======
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
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 (see also Note 7).
43
<PAGE>
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 7 SHAREHOLDERS' EQUITY
Options
The Company has two non-qualified employee stock option plans under which
options to acquire up to 1,339,389 shares of the Company's common stock may be
granted to directors, officers and certain employees of the Company and its
subsidiaries. At March 31, 1998, options for 422,459 shares were available for
grant under both plans. Both plans are administered by the Company's Board of
Directors, which is authorized, among other things, to determine which persons
receive options under each plan, the number of shares for which an option may be
granted, and the exercise price and expiration date for each option. The term of
options granted shall not exceed 11 years from the date of grant of the option
or from the date of any extension of the option term.
The following table summarizes the transactions for both stock option plans
for the last three fiscal years:
Option Price
Options Per Share
------- ----------------
Outstanding at April 1, 1995 566,976 $ 1.95 - 5.55
5% stock dividend 31,482 ---
Options granted 385,000 5.90 - 19.05
Options exercised (12,300) 2.15
--------
Outstanding at March 30, 1996 971,158 $ 1.95 - 19.05
5% stock dividend 53,119 ---
Options granted 135,024 5.00 - 27.00
Options canceled (320,941) 19.05
---------
Outstanding at March 31, 1997 838,360 $ 1.95 - 27.00
Options revalued - canceled (81,838) 19.05 - 27.00
Options revalued - granted 81,838 3.00
Options granted 254,250 3.00 - 7.72
Option exercised (442,956) 1.95 - 5.55
Options canceled (175,680) 5.53 - 27.00
---------
Outstanding at March 31, 1998 473,974 $ 1.95 - 19.05
=======
Exercisable at March 31, 1998 152,886 $ 1.95 - 19.05
=======
Weighted
Weighted Average Weighted
Average Remaining Average
Option Price Outstanding Exercise Contractual Exercisable Exercise
Per Share Options Price Life (Years) Options Price
- -------------- ----------- --------- ------------ ----------- --------
$ 1.95 24,310 $ 1.95 2.75 24,310 $ 1.95
3.00 - 7.72 439,164 4.83 3.84 118,076 5.75
19.05 10,500 19.05 1.94 10,500 19.05
-------- --------
473,974 $ 5.00 3.65 152,886 $ 6.06
======= =======
44
<PAGE>
In February 1998, the Company's Board of Directors approved and adopted the
establishment of Non-Employee Director Stock Option Plan and granted stock
options to purchase 10,000 shares of the Company's common stock to each of the
three non-employee directors. These options have a five-year term, are fully
vested and have an exercise price of $4.625 per share.
The Company accounts for these plans under APB Opinion No. 25, under which
the total compensation expense recognized is equal to the difference between the
option exercise price and the underlying market price of the stock at the
measurement date. The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
The following pro forma net loss and net loss per common share information
assumes that compensation cost was recognized for the vested portion of the
awards granted in those years, based on the estimated fair value at the grant
date consistent with the provisions of SFAS No. 123 (in thousands, except per
share amounts):
1998 1997 1996
---- ---- ----
Net loss - as reported $(26,155) $(21,018) $ (3,365)
- proforma (26,439) (21,500) (3,592)
Net loss per share - as reported $ (3.70) $ (3.99) $ (.76)
- proforma (3.74) (4.08) (.82)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 1996, 1997 and 1998:
1998 1997 1996
---- ---- ----
Expected stock price volatility 130.90% 93.3% 72.9%
Risk free interest rate 5.95% 6.2% 6.8%
Expected life of options 5.0 years 4.8 years 4.9 years
The weighted average exercise prices per share for options outstanding
and exercisable at March 31, 1998 are $5.00 and $6.06, respectively. The
weighted average exercise prices per share for options outstanding and
exercisable at March 31, 1997 are $7.79 and $5.72, respectively. The weighted
average fair value of options granted during fiscal 1996, 1997 and 1998 is
$3.65, $17.65 and $3.95 per share, respectively.
In fiscal 1997, the Company recognized compensation expense of $125,000 in
connection with the issuance of restricted stock and the amendment of certain
previously issued stock options.
Common Stock and Convertible Notes
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 five 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.
45
<PAGE>
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 which
represented a conversion price of 80% of the average closing bid price on the
conversion date in accordance with the terms of the notes. A finance charge of
$625,000 was recorded in the fourth quarter of fiscal 1998 in respect of this
discount value.
In December 1997, the Company received $4,635,000 upon the issuance of
$5,000,000 in 8% convertible notes. 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 initial conversion price is the
lessor of $7.00 or 80% of the five-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.
Effective April 7, 1998, in agreement with note holders, the conversion
terms were modified so that the conversion price discount factors be determined
with reference to the closing transaction price of the common stock for the 15
consecutive days prior to a conversion date and the applicable discount factor
be applied to the average closing transaction price of the stock for the five
consecutive trading days prior to the conversion date in order to determine the
conversion price. The applicable discount factors were agreed as follows:
15 Day Average Applicable
Closing Transaction Price Discount
Below $3.00 0%
Between $3.00 - $3.75 10%
$3.75 - $4.25 15%
$4.25 - $4.85 20%
$4.85 - $6.00 25%
Amounts in excess of $6.00 20%
A finance charge of $1,250,000 was recorded in the fourth fiscal quarter
ended March 31, 1998, in respect of the maximum beneficial value available to
the investors based upon the estimated potential discount from market value upon
conversion. The note 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.
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
Exchange 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. Of those conversion shares, 336,075 were issued as of March 31, 1998,
in connection with conversions of $1,344,000 of convertible notes and accrued
interest.
Warrants
In connection with the issuance of the convertible notes in July and
December 1997, the Company paid fees and expenses of $630,000 and issued 85,648
warrants at an estimated fair market value of $384,000. These costs were
originally capitalized in other assets and amortized over the term of the debt
as non-cash interest expense. Upon conversion, the unamortized portion is
credited to additional paid in capital. At March 31, 1998, the Company had
$401,000 in other current assets related to these items.
46
<PAGE>
The fair market value of the above warrants was estimated using the
Black-Scholes Option Pricing Model applying the following criteria:
Expiration Date July 17, 2000 December 31, 2002
Expected Life 3 years 5 years
Exercise Price $6.75 $7.20
Total Options 37,037 48,611
Expected Price Volatility 151.88% 141.79%
Risk Free Interest Rate 6.15% 5.95%
During fiscal 1998, the Company issued two warrants to an investment banker
for services provided in connection with the Restructuring to purchase a total
of 324,000 shares of the Company's common stock at $2.25 per share. The warrants
can be exercised at any time through May 2002, in respect of 273,000 shares and
November 2002, in respect of 51,000 shares. The Company recorded the fair value
of the warrants of $503,000 as an expense in fiscal 1998. The fair value of the
warrants of $503,000 was estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Expected price volatility 127.38%
Risk free interest rate 6.36%
Expected life of options 5 years
In March 1998, the Company issued a warrant to a leasing company for
services provided in connection with customer financing to purchase 38,800
shares of the Company's common stock at $4.00 per share. The warrants can be
exercised any time through March 2003. The Company recorded a fair value of the
warrants as an expense in the fourth quarter ended March 31, 1998, of $123,000
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Expected price volatility 130.87%
Risk free interest rate 5.95%
Expected life of options 5 years
During fiscal 1997, the Company made a commitment to issue a warrant to an
investment banker for services provided in connection with the Restructuring to
purchase 100,000 shares of the Company's common stock at $22.63 per share (see
Note 2). The warrant can be exercised at any time through February 2000. The
Company recorded the fair value of the warrant within discontinued operations
(see Note 2). The fair value of the warrant of $800,000 was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected stock price volatility 135.91%
Risk free interest rate 5.89%
Expected life of options 3 years
Through June 19, 1998, none of the above warrants have been exercised.
At March 31, 1998, the Company had 3,195,448 shares of common stock
reserved and available for warrants and for the conversion of Class A and B
Units as described in Note 11 - Related Party Transactions.
As described in Note 6 above, an agreement in principle has been reached,
subject to various conditions and contingencies, to settle the claims against
the Company and its subsidiaries in The Diana Securities Litigation. Under the
proposed terms of the agreement, the Company anticipates that it will issue
warrants for 2,500,000 shares of the Company common stock with an expected life
of 3 years from date of issuance. Such warrants will have an exercise price of
$9.00 per share if exercised during the first year from date of issue and an
exercise price of $10.00 per share or $11.00 per share if exercised during the
second year or third year, respectively. The Company recorded the fair value of
47
<PAGE>
the warrants of $8,000,000 as an expense in fiscal 1998. The fair value of
$8,000,000 was estimated using the Black-Scholes option pricing model.
NOTE 8 INCOME TAXES
A reconciliation of the income tax credit and the amount computed by
applying the statutory federal income tax rate (34%) to loss from continuing
operations before extraordinary items, minority interest and income tax credit
for the last three fiscal years is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Credit at statutory rate $(11,613) $ (4,604) $(1,108)
Settlements of liabilities of unconsolidated subsidiary (10) (5) (156)
Tax effect of net operating loss not benefited 11,600 4,500 1,276
Refund of federal income taxes paid in a prior year --- (836) ---
Other, net 23 109 (12)
-------- -------- -------
Income tax credit $ --- $ (836) $ ---
======== ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. The components of the Company's deferred tax
assets and liabilities of continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- --------
<S> <C> <C>
Federal net operating loss carryforwards $17,814 $11,950
State net operating loss carryforwards 1,367 1,835
Reserve for loss on discontinued operations 745 953
Federal capital loss carryforward 646 659
Excess and obsolete inventory reserve 560 560
Capitalized interest on CNS debentures 225 281
General business credit carryforwards 145 145
Deferred compensation --- ---
All others 261 686
------- --------
Total deferred tax assets 21,763 17,069
Valuation allowance for deferred tax assets (19,396) (15,234)
------- --------
Net deferred tax assets 2,367 1,835
Intangible assets (net) 1,407 1,489
All others 960 346
------- --------
Total deferred tax liabilities 2,367 1,835
Net deferred taxes $ --- $ ---
======= ========
</TABLE>
The Company has approximately $52,000,000 in both federal and state net
operating loss carryforwards. These carryforwards expire at various dates
through fiscal 2013. The Tax Reform Act of 1986 imposed substantial restrictions
on the utilization of net operating losses in the event of an "ownership change"
as defined in Section 382 of the Internal Revenue Code of 1986. Subsequent to
March 31, 1998, due to the Company's continuing financing efforts, there may be
ownership changes which would significantly limit the Company's ability to
immediately utilize its net operation loss carryforwards.
48
<PAGE>
NOTE 9 NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) consists of the following for the last three
fiscal years (in thousands):
1998 1997 1996
---- ---- ----
Write-down of CNC preferred stock $ --- $(1,060) $ ---
Provision for losses (2,200) --- ---
Net gains (losses) on sales of
marketable securities (155) (736) 26
Interest income 141 427 457
Gain on settlements of lawsuits 77 --- ---
Other 50 32 (18)
------- ------- ------
$(2,087) $(1,337) $ 465
======= ======= ======
In June 1996, Concentric Network Corporation ("CNC") executed a Promissory
Note for $5,000,000 in favor of CTL for a bridge loan. CNC granted to CTL a
warrant to purchase a split adjusted 36,765 shares of CNC Series D Preferred
Stock ("CNC Preferred Stock") at a split adjusted exercise price of $20.40 per
share (equal to the par value of such shares) as additional consideration for
the bridge loan to CNC. The warrant is exercisable immediately and expires on
June 6, 1999. In August 1996, the Promissory Note and accrued interest
receivable were converted into 3,729,110 shares of CNC Preferred Stock. In
September 1996, CTL sold to StreamLogic Corporation 1,838,234 shares, or 49% of
its CNC Preferred Stock for $2.5 million. No gain or loss was recognized in
connection with this sale.
In August 1997, CNC completed its Initial Public Offering at an offering
price of $12.00 per share. The CNC Preferred Stock owned by CTL was
automatically converted into CNC common stock immediately prior to the closing
of the IPO. The value of CTL's investment in CNC Preferred Stock, after giving
effect to a reverse 1 for 15 stock split and based on a $12.00 per share
offering price, is approximately $1,512,000. The Company deemed this value to be
the maximum fair market value of its holding on an if-converted basis at March
31, 1997 and in addition, concluded the value of that investment was permanently
impaired. Consequently, the Company recorded a non-operating loss of $1,060,000
in fiscal 1997 related to the impairment of its investment. The Company was
prohibited from selling 75% of its CNC common stock for six months following
CNC's IPO. CTL sold 25% of its CNC common stock in August 1997 at $12.00 per
share and received $396,000 and sold the remaining 75% in the fourth quarter of
fiscal 1998 receiving $1,358,000 and recorded a gain on these sales of $242,000
in fiscal 1998. (See Note 4). The Company continues to own the warrant from CNC
which is now for CNC common stock as a result of the conversion discussed above.
In September 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of the Company at June
30, 1997, to provide for the elimination of the minimum pre-tax profits measure
requirement and the conversion into Company common stock at the option of the
holder. An accrued expense charge of approximately $5,522,000 was recorded in
the second quarter of fiscal 1998. This charge is based on the value at
September 4, 1997 of 866,250 shares of Company common stock at $6.375 per share
that will be issuable to the Class A and Class B Unit Holders.
Provisions of $2,200,000 were accrued as a non-operating expense in fiscal
1998 for losses in connection with failed acquisitions including funds advanced,
costs of professional services, due diligence expenses and financial consulting
fees.
49
<PAGE>
NOTE 10 EXTRAORDINARY ITEMS
On October 4, 1996, APC refinanced its revolving line of credit with a new
lender. In connection with the refinancing, APC incurred expenses of $227,000
which are reflected in the fiscal 1997 Consolidated Statement of Operations as
an extraordinary item pursuant to SFAS No. 4.
In February 1997, APC sold a majority of its assets and used part of the
proceeds to repay its revolving line of credit (see Note 2). APC incurred
expenses of $281,000 in connection with the early repayment which are reflected
in the fiscal 1997 Consolidated Statement of Operations as an extraordinary item
pursuant to SFAS No. 4.
NOTE 11 RELATED PARTY TRANSACTIONS
On November 11, 1996 the Company loaned $300,000 to each of James J.
Fiedler and Daniel W. Latham. Mr. Fiedler is the Company's Chairman and Chief
Executive Officer and Mr. Latham is the Company's President and Chief Operating
Officer. Messrs. Fiedler and Latham both executed unsecured Promissory Notes due
November 1, 1999 which provide interest at 6.07% per annum compounded on the
anniversary date and payable on November 1, 1999. In addition, each person
agreed to surrender previously awarded options they each held to purchase
150,000 shares of the Company's common stock.
The Promissory Notes provide for full repayment prior to November 1, 1999
in the event of the following: (a) upon any transfer of Messrs. Fiedler's or
Latham's Class B Units in CTL (other than to a Permitted Transferee, as defined
in the Agreement Regarding Award of Class B Units (the "Award Agreement")), or
by any such Permitted Transferee (including without limitation certain transfers
contemplated by the Award Agreement) or (b) upon any exchange or conversion of
Class B Units for or into securities registered under the Securities Exchange
Act of 1934, as amended, in accordance with the Award Agreement. In connection
with the employment agreements with Messrs. Fiedler and Latham entered into on
September 4, 1997, the Company's Board of Directors agreed to forgive the notes.
Under the employment agreements, equal one third portions of the notes was
forgiven at September 4, 1997 and, if their respective employments are renewed,
at each of the next two anniversaries of the date of the employment agreements,
provided that each individual remains as an employee of the Company at each such
forgiveness date.
Messrs. Fiedler and Latham used the proceeds of the loan to each purchase
100 non-forfeitable Class B Units of CTL from Mark Jacques, a former officer of
CTL, for an aggregate purchase price of $600,000. On November 12, 1996, CTL
entered into a settlement agreement with Mr. Jacques whereby Mr. Jacques (i)
agreed to the assignment to the Company of the employment agreement between him
and CTL and (ii) retained his remaining 250 Class B Units of CTL. Mr. Jacques
was terminated as an employee of the Company in January 1997. The Company has
accounted for the loans to Messrs. Fiedler and Latham and their purchase of
Class B Units from Mr. Jacques as a settlement with Mr. Jacques and recorded an
expense of $600,000 during the third quarter of fiscal 1997.
The Company entered into Separation Agreements, dated November 20, 1996
(the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B. Lilly
and Donald E. Runge (the "Departing Officers") that provide for termination of
employment and resignation from all offices and directorships in the Company and
its subsidiaries by the Departing Officers, except for Mr. Lilly's directorship
of the Company. The Separation Agreements provide for payment by the Company, as
of November 29, 1996, of $186,000 and $749,000, respectively, to Mr. Runge and
Mr. Fisher, in settlement of deferred compensation previously earned and
payments of $343,000 to Mr. Fisher and $83,000 to each of Mr. Runge and Mr.
Lilly as severance settlements resulting in total payments to the Departing
Officers of $1,444,000. In accordance with provisions of the Amended and
Restated Employment Agreements entered into by the Company and each of the
Departing Officers on April 2, 1995, each Departing Officer shall be entitled to
have all medical, dental, hospital, optometrical, nursing, nursing home and drug
expenses for themselves and their spouses paid by the Company for life, or in
the case of Mr. Lilly, until March 31, 2000. The Separation Agreement for Mr.
Fisher provides that he shall repay in full a promissory note dated April 11,
1988, in the amount of $42,469. The Separation Agreements further provide that
all stock options of the Departing Officers shall remain exercisable until
December 31, 1997 (April 2, 2000 with respect to 82,688 options granted to Mr.
Lilly on April 2, 1995) and amends existing Stock Option Agreements with Messrs.
50
<PAGE>
Fisher, Lilly and Runge to provide for, among other things, the Company to
maintain the effectiveness of the Form S-8 Registration Statement currently in
effect covering the exercise of the stock options. The Company has made all
required payments under the Separation Agreements.
Certain of the Company's non-employee directors have provided services to
the Company and/or its subsidiaries for which they were compensated. Amounts
accrued or paid to all directors for these services during fiscal 1998, 1997 and
1996 are $50,000, $4,000 and $13,000, respectively.
In February 1997, APC conveyed its 50% ownership interest in Fieldstone
Meats of Alabama, Inc. to a former officer and director of APC in consideration
for past services as a director and officer of APC for his assistance in the
sale of the APC business.
Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the
Company $250,000 in June 1997. The principal amount of the loan was converted to
common stock in conjunction with Mr. Fiedler's purchase of Company common stock
pursuant to the Regulation D private placement in July 1997. Mr. Latham, the
Company's President and Chief Operating officer, loaned the Company $98,000
subsequent to March 31, 1997. This loan was repaid in July 1997. Mr. Portner, a
Director, purchased Company common stock pursuant to the Regulation D private
placement.
On September 4, 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of CNS and CTL at June
30, 1997. (See Note 3).
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.
51
<PAGE>
NOTE 12 BUSINESS SEGMENT INFORMATION
In fiscal 1998, the Company operated worldwide in the telecom switching
equipment business segment. This segment consists solely of the operations of
CTL. In fiscal 1998, CTL had sales to two domestic customers that comprised 66%
of net sales. In fiscal 1997, CTL had sales to one domestic customer that
comprised 94% of net sales. In fiscal 1996, CTL had sales to two customers that
comprised 68% and 32% of net sales. Information by industry segment is as
follows (in thousands):
<TABLE>
Fiscal Year Ended
<CAPTION>
-------------------------------------
March 31, March 31, March 30,
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net Sales:
Switching equipment $ 5,387 $ 7,154 $ 264
======== ======== ========
Operating loss:
Switching equipment (11,267) (8,740) (1,883)
Corporate (10,467) (3,410) (1,809)
--------- -------- ---------
(21,734) (12,150) (3,692)
========= ======== =========
Depreciation and amortization:
Switching equipment 787 467 111
Corporate --- 11 10
-------- -------- --------
787 478 121
======== ======== ========
Capital expenditures:
Switching equipment. 1,021 1,902 136
Corporate --- 12 25
-------- -------- --------
1,021 1,914 161
======== ======== ========
Identifiable assets:
Switching equipment 11,528 14,811 8,359
Discontinued operations 909 8,201 15,569
Corporate 9,538 232 5,164
-------- -------- --------
$ 21,975 $ 23,244 $ 29,092
======== ======== ========
</TABLE>
NOTE 13 STATEMENTS OF CASH FLOWS
Supplemental cash flow information relating to continuing operations for
the last three fiscal years is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Change in current assets and liabilities:
Trade receivables $ 3,879 $(4,540) $ 173
Inventories 815 (1,850) (1,005)
Other current assets (735) 294 108
Accounts payable (640) 2,076 338
Other current liabilities 5,170 856 15
------- ------- -------
$ 8,489 $(3,164) $ (371)
======= ======= =======
Non-cash transactions:
Expense charge on conversion of A & B units $ 5,522 $ --- $ ---
Convertible debt expense associated with conversion
to common stock below market price 1,875 --- ---
Purchase of minority interest with common stock --- 1,818 4,944
Conversion of promissory note and
accrued interest into CNC preferred stock --- 5,072 ---
Reduction of net liabilities of unconsolidated subsidiary --- --- 219
Securities litigation warrant expense 8,000 --- ---
</TABLE>
52
<PAGE>
NOTE 14 LIQUIDITY AND CAPITAL RESOURCES
As discussed below, 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 payments 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 a result of the liquidity deficiency, the Company had become delinquent
on certain of its working capital obligations. In July and December 1997, the
Company raised $5,597,000 and $4,635,000 respectively, through equity and debt
financing (see Note 7). With completion of the equity and debt financing and the
collection of $4,400,000 of previously delinquent customer receivables and the
receipt of $2,254,000 from the exercise of Company Employee Stock Options, the
Company had more than sufficient funds to finance its operating activities in
fiscal 1998 and ended the fiscal year with an operating cash balance of
$3,700,000.
The Company has now divested the majority of its discontinued operations
(APC, C&L, Valley) and is actively seeking buyers for the remaining land and
building which were formerly part of the APC operations in Atlanta.
In order to fund the current and future operating, acquisition and
investment activities, the Company will need to generate cash from its present
and recently acquired operations and, in addition, will require and is currently
seeking further outside investment. As of July 1, 1998, the Company had an
operating cash balance of approximately $5,000,000.
Fiscal 1997 - Year Ended March 31, 1997
The Company encountered a liquidity deficiency in fiscal 1997 and
subsequently, primarily because (i) certain customers of CTL were past due on
receivables, (ii) CTL has 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 a result of the liquidity deficiency, the Company had become delinquent
on certain of its working capital obligations. In July 1997, the Company raised
$5,597,000 through equity and debt. After completion of the equity and debt
financings, collection of $4.4 million from CNC, pursuant to the final court
agreement secured by CTL against this customer, and the anticipated sales of
C&L, Valley and APC's real estate discussed further below, 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.
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.
The Company is seeking buyers for C&L and Valley. It is anticipated that
the proceeds of the sales of these businesses and assets will be used to fund a
portion of the Company's capital and operating requirements in fiscal 1998.
Restrictions in the revolving lines of credit of C&L and Valley prevent the
Company from presently accessing funds from these subsidiaries. Such
restrictions in C&L's revolving line of credit may also initially limit the
Company's access to the total proceeds from a sale of Valley prior to any
ultimate sale of C&L given the existing ownership structure of Valley.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
53
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Identification of Directors
The Board of Directors is divided into three classes of directors
consisting of two classes of two members and one class of three members or seven
members in the aggregate. However, the Board currently includes only five
members. The election of directors is staggered so that the term of only one
class of directors expires each year. Generally, the term of each class is three
years. Presently, the Board of Directors has two vacant positions. The Board of
Directors consists of the following members:
Director With Term Expiring in 1998
Sydney B. Lilly, age 69, has been a director of the Company since 1988. He
was Executive Vice President of the Company from April 1995 to November 1996 and
a consultant from 1984 to 1995. He was a director of Entree Corporation from
1991 to 1996.
Directors With Term Expiring in 1999
Jack E. Donnelly, age 63, has been a director of the Company since November
1991. Since 1986, he has been a principal of Bailey & Donnelly Associates, Inc.,
an investment company.
Daniel W. Latham, age 49, has been a director of the Company since November
1996. He has been President and Chief Operating Officer of the Company since
November 1996 and President and Chief Operating Officer of CTL since September
1995. Prior to his association with CTL, Mr. Latham was the President of
Frontier Long Distance, a U.S. long distance company. Mr. Latham also served as
a Senior Vice President at Racal Datacom where he was responsible for world-wide
sales. Prior to Racal, Mr. Latham held executive positions at Digital Equipment
Corporation, the Bell System and IBM. He has been a director of Entree
Corporation since November 1996.
Directors With Terms Expiring in 2000
James J. Fiedler, age 51, has been a director of the Company since August
1996. He has been Chairman and Chief Executive Officer of the Company since
November 1996 and Chairman and Chief Executive Officer of CTL, since September
1995. Previously, Mr. Fiedler was a principal in the consulting firm of Johnson
& Fiedler. From November 1992 to September 1994, Mr. Fiedler was Vice President
of Sales and Marketing and subsequently President and director of Summa Four,
Inc., a telecom switching company. From June 1989 to July 1992, Mr. Fiedler was
Executive Vice President and Chief Operating Officer of Timeplex, a subsidiary
of Unisys engaged in the business of manufacturing data and telecommunications
equipment. Prior to June 1989, Mr. Fiedler held executive positions with Unisys
Corporation and Sperry Corporation (subsequently acquired by Unisys
Corporation). He has been a director of Entree Corporation since November 1996.
Stephen W. Portner, age 46, was appointed a director of the Company on
August 29, 1997. He is the Managing Director of North America for JMJ
Associates, a global management consulting company, and has served in various
capacities from January 1994 to May 1997 at JMJ Associates. From December 1991
to January 1994, Mr. Portner held positions in plant and project management as
well as Director of Quality for Air Products Incorporated.
Directors receive an annual fee of $15,000, paid on a monthly basis.
Directors are also reimbursed for travel expenses. In addition, Directors
receive $1,250 per meeting for service on the Audit Committee of the Board of
Directors.
54
<PAGE>
In February 1998, stock options to purchase 5,000 shares of the Company's
common stock were granted to Mr. Portner, an outside member of the Board of
Directors, who joined the Board in fiscal 1998. These options have an exercise
price of $4.625 per share.
In February 1998, the Board of Directors approved and adopted the
Non-Employee Director Stock Option Plan and reserved 150,000 shares for grants
of the common stock of the Company under the plan.
In February 1998, stock options to purchase 10,000 shares of the Company's
common stock were granted to each of the non-employee members of the board of
directors. These options have an exercise price of $4.625 per share.
Identification of Executive Officers
The following individuals are the Executive Officers of the Company:
Name Age Position
James J. Fiedler 51 Chief Executive Officer
Daniel W. Latham 49 President and Chief Operating Officer
Edward A. Beeman 48 Executive Vice President,
Chief Financial Officer and Secretary
Brian A. Robson 61 Vice President and Controller
The following information is furnished with respect to each executive
officer who is not also a Director of the Company:
Mr. Beeman was Chief Financial Officer of Western Water Company from 1996
to 1997 and Vice President and Chief Financial Officer of Bird Medical
Technologies, Inc. from 1994 to 1996.
Mr. Robson was Vice President of Finance and Chief Financial Officer of
Ascom Timeplex from 1989-1996.
55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid or
accrued by the Company for the account of the executive officers of the Company
serving as such at March 31, 1998 and for one former executive officer:
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------------------- ----------------------------------------------
<CAPTION>
Other Annual Restricted Securities
Name and Compensation Stock Underlying All Other
Principal Position Year Salary ($) Bonus ($) ($) (7) Awards Options (#) Compensation ($)
---- ---------- --------- ------------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
James J. Fiedler (1) 1998 200,000 19,746 15,000 0 0 7,200 (12)
Chairman, CEO and 1997 200,000 0 3,750 0 0 0
Director 1996 111,538 (4) 0 0 2.5% (8) 150,000 (10) 19,612 (11)
Daniel W. Latham (2) 1998 175,000 19,746 15,000 0 0 7,200 (12)
President, COO and 1997 175,000 0 3,750 0 0 170,197 (11)
Director 1996 90,865 (5) 0 0 1.5% (9) 150,000 (10) 26,416 (11)
Brian A. Robson 1998 139,907 0 0 0 2,000 21,921 (11)
Vice President and 1997 56,250 (6) 0 0 0 10,500 13,041 (11)
Controller
R. Scott Miswald (3) 1998 148,733 0 0 0 0 0
Vice President and 1997 125,000 0 0 52,500 0 0
Treasurer 1996 110,000 11,614 0 0 10,000 0
</TABLE>
56
<PAGE>
(1) On November 29, 1996 Mr. Fiedler was appointed Chairman and CEO of the
Company. Mr. Fiedler also remained as Chairman and CEO of CTL (see
Employment and Severance Agreements).
(2) On November 29, 1996 Mr. Latham was appointed President and COO of the
Company. Mr. Latham also remained as President and COO of CTL (see
Employment and Severance Agreements).
(3) Mr. Miswald resigned from the Company as an executive officer and director
on September 30, 1997.
(4) Represents part-year compensation from start of employment as CEO of CTL on
September 11, 1995 to end of fiscal year, based on annualized salary of
$200,000.
(5) Represents part-year compensation from start of employment as President and
COO of CTL on September 25, 1995 to end of fiscal year, based on annualized
salary of $175,000.
(6) Started employment on October 31, 1996. Current annualized salary:
$147,150.
(7) Director's fees paid to officers.
(8) Mr. Fiedler was granted 250 Class B Units in CTL (equivalent to a 2.5%
ownership interest).
(9) Mr. Latham was granted 150 Class B Units in CTL (equivalent to a 1.5%
ownership interest.
(10) Performance-based options for the indicated number of shares of Company
common stock surrendered on November 11, 1996 in connection with loans (see
Certain Relationships and Related Transactions).
(11) Represents relocation assistance paid by the Company on behalf of the
various individuals. Also includes $98,000 paid to Mr. Latham to cover his
loss on a personal residence and the related real estate commissions and
selling expenses.
(12) Represents automobile allowance.
The table below provides information regarding stock options granted during
fiscal 1998 to the persons named in the Summary Compensation Tables:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------
Number of % of Total
Shares Options
Underlying Granted to
Options Employee in Exercise Expiration
Granted (1) Fiscal Year Price Date
----------- ----------- ----------- ----------
James J. Fiedler 0 --- $ --- $ ---
Daniel W. Latham 0 --- --- ---
Brian A. Robson 2,000 (2) 0.7% 3.005 8/20/02
R. Scott Miswald 0 --- --- ---
Potential Realizable Value at Assumed Annual Rate
of Stock Price Appreciation For Option Term (3)
-----------------------------------------------------
5% 10%
--------- ------
James J. Fiedler $ --- $ ---
Daniel W. Latham --- ---
Brian A. Robson 1,660 3,669
R. Scott Miswald --- ---
(1) The options granted under the CTL 1996 Stock Option Plan are non-qualified
stock options. The exercise price per share is 100% of the fair market
value of a share of common stock on the date of the grant. In June 1997,
current employees owning stock options, including Mr. Robson, were granted
the right 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.
(2) The options vest as follows: June 1, 1998 - 666; June 1, 1999 - 666; June
1, 2000 - 667.
(3) The option term is five years. The dollar amounts under these columns are
the results of calculations at the 5% and 10% rates set by the Securities
and Exchange Commission. The potential realizable values are not intended
to forecast possible future appreciation, if any, in the market price of
the common stock.
57
<PAGE>
The table below provides information regarding the value of in-the-money
stock options held by named executive officers at March 31, 1997. Named
executive officers did not exercise any stock options during the fiscal year.
UNEXERCISED COMPANY STOCK OPTIONS
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at March 31, 1998 at March 31, 1998 (1)
-------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
James J. Fiedler 0 0 $ 0 $ 0
Daniel W. Latham 0 0 0 0
Brian A. Robson 0 12,500 0 38,875
R. Scott Miswald 10,000 0 8,343 0
(1) Value based on the closing price of $6.11 of the common stock on the NASD
OTC Bulletin Board on March 31, 1998, less the option exercise price.
Employment and Severance Agreements
The Company has employment agreements with certain executive officers.
Messrs. Fiedler and Latham were employed by CTL until December 31, 1996
pursuant to contracts that provided for salary of $200,000 and $175,000,
respectively, per year with a year-end bonus equal to 10% and 5%, respectively,
of CTL's pre-tax earnings for the calendar year, up to the salary for the year,
and such fringe benefits as CTL's executive committee should make available.
From January 1, 1997 to September 3, 1997, Messrs. Fiedler and Latham continued
their employment at the same salary without a contract.
On September 4, 1997, Messrs. Fiedler and Latham entered into new
employment agreements with the Company covering the 1998 fiscal year and
providing for salaries of $200,000 and $175,000, respectively, per year. Such
employment agreements provide for customary fringe benefits, including a car
allowance for each Executive of $600 per month. The Executives may become
entitled to bonuses based on the Company's pre-tax profits for each half year in
the fiscal year covered by the employment agreements, equal to 10% of such
pre-tax profits in the case of Mr. Fiedler and 5% in the case of Mr. Latham, but
not to exceed 100% of the Executive's annual salary in the case of Mr. Fiedler
and 75% in the case of Mr. Latham. Additionally, the Executives are entitled to
an incentive bonus equal to one-half percent of the sales revenues of CTL for
each month during the term of the agreement, subject to certain limitations, and
in any event not to exceed 100% of the Executive's annual salary. As disclosed
elsewhere herein, each of the Executives has a $300,000 note payable to the
Company. Under the employment agreements, equal one third portions of such notes
will be forgiven at the date of the employment agreement, and, if their
respective employments are renewed, at each of the next two anniversaries of the
date of the employment agreements, provided that such Executive remains as an
employee of the Company at each such forgiveness date. These employment
agreements also contemplate that the Class A and Class B units of CTL, including
the units held by the Executives, will become convertible into the Company's
common stock, at the rate of 500 shares of the Company's common stock for each
such unit, immediately and without the requirements that CTL achieve cumulative
pre-tax profits of at least $15 million over four consecutive quarters. The
Company has also granted certain registration rights with respect to the shares
of common stock issuable upon such conversion. Copies of the employment
agreements are filed as exhibits to this Annual Report on Form 10-K, and this
description is qualified by reference to such exhibits. Since April 1, 1998,
Messrs. Fiedler and Latham have continued their employment at the same salary
level without a contract.
58
<PAGE>
Compensation Committee Interlocks and Insider Participation
As noted above, the Board of Directors does not have a compensation
committee, because executive compensation decisions are made by the full Board.
Recommendations on executive compensation in respect of Messrs. Fiedler and
Latham are prepared by the outside non-employee directors when requested by the
full board. All directors participate in the deliberations.
Mr. Fiedler is the Company's Chairman and Chief Executive Officer. Mr.
Latham is the Company's President and Chief Operating Officer. Messrs. Fiedler's
and Latham's fiscal 1997 compensation and employment contracts were previously
described above.
In December 1991, Mr. Donnelly entered into a consulting agreement with the
Company to serve as chairman and consultant to C&L Communications, Inc. ("C&L"),
one of the Company's subsidiaries. The agreement, which was subsequently
amended, terminated on March 31, 1998. In addition, Mr. Donnelly was paid
$50,000 per year in accordance with the agreement.
59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 10, 1998 with
respect to the common stock ownership of each director, the Chief Executive
Officer, the other executive officers of the Company and identified in the
Summary Compensation Table (collectively with the Chief Executive Officer, the
"named executive officers"), all directors and executive officers as a group and
each person or group of persons known by the Company to own beneficially more
than 5% of the common stock of the Company.
<TABLE>
Amount and Nature of Beneficial Ownership (1)(2)
---------------------------------------------------------- -------------------------- ---------------------
<CAPTION>
Shares Issuable Upon
Exercise of
--------------------------
Shares Issuable Upon
Number of Percent Stock Warrants Conversion of Class A
Name of Beneficial Owner Shares of Class Options(3) (3) or B Units (4)
------------------------------ --------------- ----------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Jack E. Donnelly 30,234 * 22,155 0 0
------------------------------ --------------- ----------- ------------- ----------- ---------------------
James J. Fiedler 535,000 5.4 0 175,000 175,000
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Daniel W. Latham 125,000 1.3 0 0 125,000
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Sydney B. Lilly 203,995 (5) 2.1 135,231 0 50,000
------------------------------ --------------- ----------- ------------- ----------- ---------------------
R. Scott Miswald 10,500 * 10,500 0 0
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Brian A. Robson 4,166 * 4,166 0 0
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Stephen W. Portner 37,500 * 15,000 11,250 0
------------------------------ --------------- ----------- ------------- ----------- ---------------------
All Directors and
Executives as a Group 946,395 9.2 157,386 186,250 350,000
(6 individuals)
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Richard L. Haydon
1114 Avenue of the Americas 1,263,000 (6) 12.4 0 625,000 0
New York, NY 10036
------------------------------ --------------- ----------- ------------- ----------- ---------------------
Ardent Research Partners 540,000 (7) 5.5 0 225,000 0
200 Park Avenue, 39th Floor
New York, NY 10166
------------------------------ --------------- ----------- ------------- ----------- ---------------------
* The amount shown is less than 1% of the outstanding shares of common
stock.
<FN>
(1) Except as otherwise noted, all persons have sole voting and investment
power over the shares listed.
(2) Includes shares of common stock issuable upon the exercise of stock options
and warrants exercisable within 60 days of the May 31, 1998; and shares
issuable upon the conversion of Coyote Technologies, LLC Class A or B
Units.
(3) Only includes stock options or warrants exercisable within 60 days of May
31, 1998.
(4) Mr. Fiedler and Mr. Latham own 350 and 250 Class B Units of Coyote
Technologies, LLC ("Technologies"), respectively. Mr. Lily owns 100 Class A
Units of Technologies. Mr. Fiedler's and Mr. Latham's Class B Units are
convertible into 175,000 and 125,000 shares, respectively, of the Company
common stock. Mr. Lilly's Class A Units are convertible into 50,000 shares
of the Company common stock.
60
<PAGE>
(5) Mr. Lily also owns 30,000 shares (less than 1%) of the common stock of
Entree Corporation ("Entree"), an 81.25%-owned subsidiary of the Company.
All directors and executive officers as a group beneficially own 30,000
shares (less than 1%) of Entree common stock.
(6) Based on his Schedule 13D filed July 28, 1997, Mr. Haydon has sole voting
and dispositive power over 1,263,000 shares.
(7) Based upon Schedule 13D filed August 19, 1997, and information supplied by
this investor, Ardent Research Partners has sole voting and dispositive
power over 540,000 shares.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Lieberman, a former director of the Company, was paid an aggregate of
$4,000 during fiscal 1997 for consulting services.
Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the
Company $250,000 in June 1997. The principal amount of the loan was converted to
common stock in conjunction with Mr. Fiedler's purchase of Company common stock
pursuant to the Regulation D private placement in July 1997. Mr. Latham, the
Company's President and Chief Operating officer, loaned the Company $98,000
subsequent to March 31, 1997. This loan was repaid in July 1997. Mr. Portner, a
Director, purchased Company common stock pursuant to the Regulation D private
placement.
On November 11, 1996 the Company loaned $300,000 to each of Messrs. Fiedler
and Latham. Messrs. Fiedler and Latham both executed unsecured Promissory Notes
due November 1, 1999 which provide interest at 6.07% per annum compounded on the
anniversary date and payable on November 1, 1999. In addition, each person
agreed to surrender previously awarded options they each held to purchase
150,000 shares of the Company's common stock. The largest amount outstanding to
the Company under each promissory note during the fiscal year ended March 31,
1997 was $300,000.
The Promissory Notes provide for full repayment prior to November 1, 1999
in the event of the following: (a) upon any transfer of Messrs. Fiedler's or
Latham's Class B Units in CTL (other than to a Permitted Transferee, as defined
in the Agreement Regarding Award of Class B Units [the "Award Agreement"]), or
by any such Permitted Transferee (including without limitation certain transfers
contemplated by the Award Agreement) or (b) upon any exchange or conversion of
Class B Units for or into securities registered under the Securities Exchange
Act of 1934, as amended, in accordance with the Award Agreement. In connection
with the employment agreements with Messrs. Fiedler and Latham entered into on
September 4, 1997, the Company's Board of Directors agreed to forgive the notes.
Under the employment agreements, equal one third portions of the notes was
forgiven at September 4, 1997 and, if their respective employments are renewed,
at each of the next two anniversaries of the date of the employment agreements,
provided that each individual remains as an employee of the Company at each such
forgiveness date.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Form 10-K
(a) Financial Statements and Financial Statement Schedules Page Number
(1) The following consolidated financial statements of
Coyote Network Systems, Inc.(formerly The Diana
Corporation)and its subsidiaries are included in Item 8:
Report of Arthur Andersen LLP, Independent Public Accountants 27
Report of Price Waterhouse LLP, Independent Accountants 28
Consolidated Balance Sheets - March 31, 1998 29
and March 31, 1997
Consolidated Statements of Operations - Fiscal 30
Years Ended March 31, 1998, March 31, 1997 and
March 30, 1996
Consolidated Statements of Changes in Shareholders' 31
Equity - Fiscal Years Ended March 31, 1998,
March 31, 1997 and March 30, 1996
Consolidated Statements of Cash Flows - 32
Fiscal Years Ended March 31, 1998,
March 31, 1997 and March 30, 1996
Notes to Consolidated Financial Statements 33
(2) The following consolidated financial statement
schedule of Coyote Network Systems, Inc is included
in Item 14(d):
Schedule I - Condensed Financial Information of Registrant 68
All other schedules are omitted because the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required is
included in the consolidated financial statements or the notes
thereto.
(b) Reports on Form 8-K:
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, 1998,
the Company sold $5,000,000 in 8% Convertible Notes due December 22,
2000.
62
<PAGE>
(c) Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation, as amended September 1, 1992
(incorporated herein by reference to Exhibit 3.1 of Registrant's Form
10-K for the year ended April 3, 1993).
3.2 By-Laws of Registrant, as amended March 7, 1997.
4.1 Loan and Security Agreement between C&L Communications, Inc. and Sanwa
Business Credit dated January 2, 1996 (incorporated herein by reference
to Exhibit 10.1 of Registrant's Registration Statement on Form S-3 Reg.
No. 333-1055).
4.2 First Amendment to Loan and Security Agreement and Waiver Agreement
between C&L Communications, Inc. and Sanwa Business Credit Corporation
dated June 27, 1996 (incorporated herein by reference to Exhibit 4.2 of
Registrant's Form 10-K/A for the year ended March 30, 1996).
4.3 Loan and Security Agreement by and between Valley Communications, Inc.
and Sanwa Business Credit Corporation dated March 14, 1996 (incorporated
herein by reference to Exhibit 4.1 of Registrant's Form 10-Q for the
period ended July 20, 1996).
4.4 Certain other long-term debt as described in Note 5 of Notes to
Consolidated Financial Statements which do not exceed 10% of the
Registrant's total assets on a consolidated basis. The Registrant agrees
to furnish to the Commission, upon request, copies of any instruments
defining the rights of holders of any such long-term debt.
4.5 Second Amendment to Loan and Security Agreement and Waiver Agreement
between C&L Communications, Inc. and Sanwa Business Credit Corporation
dated July 10, 1997.
4.6 First Amendment to Loan and Security Agreement by and between Valley
Communications, Inc. and Sanwa Business Credit Corporation dated May 29,
1997.
4.7 Form of Subscription Agreement (incorporated herein by reference to
Exhibit 4.1 of Registrant's Form 8-K filed on July 31, 1997).
4.8 Form of Note (incorporated herein by reference to Exhibit 4.2 of
Registrant's Form 8-K filed on July 31, 1997).
4.9 Form of Registration Rights Agreement (incorporated herein by reference
to Exhibit 4.3 of Registrant's Form 8-K filed on July 31, 1997).
4.10 Form of Offshore Warrant Subscription Agreement (incorporated herein by
reference to Exhibit 4.4 of Registrant's Form 8-K filed on July 31,
1997).
4.11 Waiver of Events of Default for Sanwa Business Credit Corporation to C&L
Communications, Inc. dated September 1, 1997.
63
<PAGE>
Exhibit
Number Description
4.12 Second Amendment to Loan and Security Agreement by and between Valley
Communications, Inc. and Sanwa Business Credit Corporation dated
September 16, 1997.
4.13 Stock and Warrant Purchase Agreement dated June 6, 1997 by and between
Coyote Network Systems, Inc. and James J. Fiedler.
4.14 Warrant issued to James J. Fiedler dated June 6, 1997 to purchase shares
of common stock of Coyote Network Systems, Inc..
4.15 Registration Rights Agreement dated June 6, 1997 by and among The Diana
Corporation and James J. Fiedler.
10.1 Consulting Agreement dated December 23, 1991 and ending December 23, 1996
between C&L Acquisition Corporation and Jack E. Donnelly (incorporated
herein by reference to Exhibit 10.11 of Registrant's Form 10-K for the
year ended April 3, 1993).
10.2 Amendment to Consulting Agreement between C&L Acquisition Corporation and
Jack E. Donnelly dated March 7, 1995 (incorporated herein by reference to
Exhibit 10.7 of Registrant's Form 10-K for the year ended April 1, 1995).
10.3 1986 Nonqualified Stock Option Plan of as amended (incorporated herein by
reference to Exhibit 10.13 of Registrant's Form 10-K for the year ended
April 3, 1993).
10.4 1993 Nonqualified Stock Option Plan of Entree Corporation (incorporated
herein by reference to Exhibit 10.12 of Registrant's Form 10-K for the
year ended April 2, 1994).
10.5 Purchase Agreement dated August 14, 1995 by and between C&L Acquisition
Corporation and Henry Mutz, Chris O'Connor and Ken Hurst (incorporated
herein by reference to Exhibit 2.1 of Registrant's Form 8-K/A filed
February 1, 1996).
10.6 First Amendment to Purchase Agreement dated November 20, 1995 by and
between C&L Acquisition Corporation and Henry Mutz, Chris O'Connor and
Ken Hurst (incorporated herein by reference to Exhibit 2.2 of
Registrant's Form 8-K/A filed February 1, 1996).
10.7 Exchange Agreement dated January 16, 1996 by and among The Diana
Corporation and CTL Technologies, Inc. (incorporated herein by reference
to Exhibit 10.2 of Registrant's Registration Statement on Form S-3 Reg.
No. 333-1055).
10.8 1996 Sattel Communications LLC Employees Nonqualified Stock Option Plan
(incorporated herein by reference to Exhibit 10.13 of Registrant's Form
10-K for the year ended March 30, 1996).
10.9 Memorandum of Understanding between Coyote Network Systems, Inc., Sattel
Communications Corp. and Sattel Technologies, Inc. dated May 3, 1996
(incorporated herein by reference to Exhibit 10.15 of Registrant's Form
10-K for the year ended March 30, 1996).
64
<PAGE>
Exhibit
Number Description
10.10 Second Supplemental Agreement Relating to Joint Venture and Exchange
Agreement Reformation between Coyote Network Systems, Inc., Sattel
Technologies, Inc. and D.O.N. Communications Corp. dated May 3, 1996
(incorporated herein by reference to Exhibit 10.16 of Registrant's Form
10-K for the year ended March 30, 1996).
10.11 Third Supplemental Agreement Relating to Joint Venture between The Diana
Corporation and Sattel Technologies, Inc. dated October 14, 1996
(incorporated herein by reference to Exhibit 10.3 of Registrant's
Amendment No. 2 to Form S-3 filed October 21, 1996).
10.12 Operating Agreement of Sattel Communications, LLC (incorporated herein by
reference to Exhibit 10.17 of Registrant's Form 10-K/A for the year ended
March 30, 1996).
10.13 Amendment to the Operating Agreement of Sattel Communications LLC
(incorporated herein by reference to Exhibit 10.18 of Registrant's Form
10-K/A for the year ended March 30, 1996).
10.14 Second Amendment to the Operating Agreement of Sattel Communications LLC
(incorporated herein by reference to Exhibit 10.19 of Registrant's Form
10-K/A for the year ended March 30, 1996).
10.15 Asset Purchase Agreement dated January 31, 1997 by and among Atlanta
Provision Company, Inc. and Colorado Boxed Beef Company (incorporated
herein by reference to Exhibit 10.1 of Registrant's Form 8-K filed March
3, 1997).
10.16 Agreement Regarding Class A Units dated October 2, 1996 by and between
Sydney B. Lilly and Sattel Communications LLC (incorporated herein by
reference to Exhibit 10.2 of Registrant's Form 8-K filed March 3, 1997).
10.17 Amended and Restated Agreement Regarding Award of Class B Units dated
November 11, 1996 by and between James J. Fiedler and CTL Communications
LLC (incorporated herein by reference to Exhibit 10.3 of Registrant's
Form 8-K filed March 3, 1997).
10.18 Amended and Restated Agreement Regarding Award of Class B Units dated
November 11, 1996 by and between Daniel W. Latham and Sattel
Communications LLC (incorporated herein by reference to Exhibit 10.4 of
Registrant's Form 8-K filed March 3, 1997).
10.19 Amendment to Stock Option Agreements dated November 20, 1996 by and
between Coyote Network Systems, Inc. and Richard Y. Fisher (incorporated
herein by reference to Exhibit 10.5 of Registrant's Form 8-K filed March
3, 1997).
10.20 Separation Agreement dated November 20, 1996 by and between The Diana
Corporation and Richard Y. Fisher (incorporated herein by reference to
Exhibit 10.6 of Registrant's Form 8-K filed March 3, 1997).
10.21 Amendment to Stock Option Agreements dated November 20, 1996 by and
between Coyote Network Systems, Inc. and Sydney B. Lilly (incorporated
herein by reference to Exhibit 10.7 of Registrant's Form 8-K filed March
3, 1997).
65
<PAGE>
Exhibit
Number Description
10.22 Separation Agreement dated November 20, 1996 by and between The Diana
Corporation and Sydney B. Lilly (incorporated herein by reference to
Exhibit 10.8 of Registrant's Form 8-K filed March 3, 1997).
10.23 Amendment to Stock Option Agreements dated November 20, 1996 by and
between Coyote Network Systems, Inc. and Donald E. Runge (incorporated
herein by reference to Exhibit 10.9 of Registrant's Form 8-K filed March
3, 1997).
10.24 Separation Agreement dated November 20, 1996 by and between The Diana
Corporation and Donald E. Runge (incorporated herein by reference to
Exhibit 10.10 of Registrant's Form 8-K filed March 3, 1997).
10.25 Employment Agreement dated November 27, 1996 by and between The Diana
Corporation and R. Scott Miswald (incorporated herein by reference to
Exhibit 10.11 of Registrant's Form 8-K filed March 3, 1997).
10.26 Form of Indemnification Agreement dated November 26, 1996 or November 27,
1996 between Coyote Network Systems, Inc. and (i) Bruce C. Borchardt,
(ii) Jack E. Donnelly, (iii) James J. Fiedler, (iv) Jay M. Lieberman and
(v) R. Scott Miswald (incorporated herein by reference to Exhibit 10.12
of Registrant's Form 8-K filed March 3, 1997).
10.27 Loan Agreement and Promissory Note dated November 11, 1996 by and between
Coyote Network Systems, Inc. and James J. Fiedler (incorporated herein by
reference to Exhibit 10.13 of Registrant's Form 8-K filed March 3, 1997).
10.28 Loan Agreement and Promissory Note dated November 11, 1996 by and between
Coyote Network Systems, Inc. and Daniel W. Latham (incorporated herein by
reference to Exhibit 10.14 of Registrant's Form 8-K filed March 3, 1997).
10.29 Employment Agreement dated September 4, 1997 by and between Coyote
Network Systems, Inc. and James J. Fiedler.(incorporated herein by
reference to Exhibit 10.29 to Registrant's Form 10-K filed September 23,
1997).
10.30 Employment Agreement dated September 4, 1997 by and between Coyote
Network Systems, Inc. and Daniel W. Latham.(incorporated herein by
reference to Exhibit 10.29 to Registrant's Form 10-K filed September 23,
1997).
10.31 Agreement dated November 17, 1995 between Valley Communications, Inc. and
Communications Workers of America Local 9412 (incorporated herein by
reference to Exhibit 10.1 of Registrant's Form 10-Q for the period ended
July 20, 1996).
10.32 Limited Liability Company Agreement of SatLogic LLC dated as of September
12, 1996 (incorporated herein by reference to Exhibit 10.3 of
Registrant's Form 10-Q/A for the period ended July 20, 1996).
10.33 Stockholder Protection Rights Agreement dated as of September 10, 1996
between Coyote Network Systems, Inc. and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (incorporated herein by reference to
Exhibit 1 of Registrant's Form 8-A filed September 11, 1996).
10.34 1998 Non-Employee Director Stock Option Plan dated February 19, 1998.
66
<PAGE>
Exhibit
Number Description
10.35 Merger Agreement dated November 19, 1997, by and among Coyote Network
Systems, Inc.; Soncainol, Inc.; and Michael N. Sonaco, James G. Olson and
William H. Cain (incorporated herein by reference to Exhibit 10.1 of
Registrant's Form 8-K filed December 5, 1997).
10.36 Stock Purchase Agreement dated March 31, 1998, between C&L Acquisitions,
Inc. and Technology Services Corporation (incorporated herein by
reference to Exhibit 99.1 of Registrant's Form 8-K filed June 19, 1998).
21 Subsidiaries of Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
67
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheet
(In Thousands)
<TABLE>
<CAPTION>
March 31,
1997
----------
Assets
<S> <C>
Current assets:
Cash and cash equivalents. $ 28
Marketable securities ---
Other current assets 106
--------
Total current assets 134
Land and equipment (net) 83
Investments in and advances to unconsolidated subsidiaries 19,904
$ 20,121
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 283
Accrued liabilities 513
Current portion of long-term debt 141
-------
Total current liabilities 937
Long-term debt 1,817
Other liabilities 533
Shareholders' equity:
Common stock. 6,007
Additional paid-in capital. 80,124
Accumulated deficit (63,540)
Treasury stock (5,757)
-------
Total shareholders' equity 16,834
-------
$ 20,121
========
</TABLE>
See notes to condensed financial information and
notes to consolidated financial statements.
68
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Schedule I - Condensed Financial Information of Registrant (Continued)
Statements of Operations
(In Thousands, Except Per Share Amounts)
<TABLE>
Fiscal Year Ended
-------------------------
<CAPTION>
March 31, March 30,
1997 1996
---------- ----------
<S> <C> <C>
Administrative expenses $ (3,410) $ (1,809)
Interest expense (52) (106)
Non-operating income (expense) (326) 474
Income tax credit 836 ---
Equity in loss of unconsolidated subsidiaries (9,383) (1,305)
---------- ---------
Loss from continuing operations (12,335) (2,746)
Earnings (loss) from discontinued operations (8,175) (619)
---------- ---------
Loss before extraordinary items (20,510) (3,365)
Extraordinary items (508) ---
---------- ---------
Net loss $ (21,018) $ (3,365)
========== =========
Loss per common share (basic & diluted):
Continuing operations $ (2.34) $ (.62)
Discontinued operations (1.55) (.14)
Extraordinary items (.10) ---
---------- --------
Net loss per common share $ (3.99) $ (.76)
========== ========
Weighted average number of common shares outstanding 5,271 4,401
========= ========
</TABLE>
See notes to condensed financial information and
notes to consolidated financial statements.
69
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Schedule I - Condensed Financial Information of Registrant (Continued)
Statements of Cash Flows
(In Thousands)
<TABLE>
Fiscal Year Ended
------------------------
<CAPTION>
March 31, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Loss before extraordinary items $(20,510) $(3,365)
Adjustments to reconcile loss to
net cash used by operating activities:
Equity in (earnings) loss of unconsolidated subsidiaries 17,558 1,924
Other (595) (427)
Changes in current assets and liabilities 1,231 115
-------- -------
Net cash used by operating activities (2,316) (1,753)
Investing activities:
Purchases of marketable securities --- (475)
Proceeds from sales of marketable securities 1,353 5,380
Changes in investments in and advances to
unconsolidated subsidiaries (15,945) (3,229)
Other 100 (25)
-------- --------
Net cash provided (used) by investing activities (14,492) 1,651
Financing activities:
Repayments of long-term debt (141) (141)
Common stock and convertible debt funding 13,918 3,485
Extraordinary items (508) ---
--------- -------
Net cash provided by financing activities 13,269 3,344
-------- -------
Increase (decrease) in cash (3,539) 3,242
Increase in cash resulting from merger with subsidiary --- 325
Cash at the beginning of the year 3,567 ---
-------- -------
Cash at the end of the year $ 28 $ 3,567
======== =======
Non-cash transactions:
Purchase of minority interest with common stock 1,818 4,944
Reduction of net liabilities of unconsolidated subsidiary --- 219
</TABLE>
See notes to condensed financial information and
notes to consolidated financial statements.
70
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Schedule I - Condensed Financial Information of Registrant (Continued)
Notes to Condensed Financial Information
NOTE 1 BASIS OF PRESENTATION
The condensed financial information of the includes the accounts of the
parent company. In fiscal 1996, the parent's wholly-owned subsidiary, D.O.N.,
Incorporated was merged into the parent.
Substantially all investments in and advances to unconsolidated
subsidiaries are eliminated in the consolidated financial statements. In fiscal
1997 and 1996, other income includes interest income of $69,000 and $193,000,
respectively, that is eliminated in the consolidated financial statements.
Intercompany profits between related parties are eliminated in these financial
statements.
NOTE 2 LONG-TERM OBLIGATIONS
Annual amounts due on long-term obligations (debentures issued in January
1992) for the five years subsequent to March 31, 1997 are (in thousands):
1998............................. $ 141
1999............................. 141
2000............................. 141
2001............................. 141
2002............................. 1,394
---------
$ 1,958
=========
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 this 14th day of July,
1998.
COYOTE NETWORK SYSTEMS, INC.
By /s/ James J. Fiedler
-------------------------------------
James J. Fiedler, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of and the in
the capacities and on the dates indicated.
Signature Title Date
/s/ James J. Fiedler Chairman of the Board and July 14, 1998
- ------------------------- Chief Executive Officer
James J. Fiedler (Principal Executive Officer)
/s/ Edward A. Beeman Executive Vice President, July 14, 1998
- ------------------------- Chief Financial Officer
Edward A. Beeman and Secretary
(Principal Financial and Accounting Officer)
/s/ Jack E. Donnelly Director July 14, 1998
- -------------------------
Jack E. Donnelly
/s/ Daniel W. Latham Director, President and July 14, 1998
- ------------------------- Chief Operating Officer
Daniel W. Latham
/s/ Sydney B. Lilly Director July 14, 1998
- -------------------------
Sydney B. Lilly
/s/ Stephen W. Portner Director July 14, 1998
- -------------------------
Stephen W. Portner
72
<PAGE>
COYOTE NETWORK SYSTEMS, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of the 1998 Non-Employee Director Stock Option Plan (the
"Plan") is to enable Coyote Network Systems, Inc. (the "Company") to attract and
retain outside directors and to strengthen the mutuality of interests between
such directors and the Company's stockholders.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms shall have the following
meanings:
2.1 "Board" shall mean the Board of Directors of the Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
rules and regulations under the Internal Revenue Code of 1986, as
amended.
2.3 "Common Stock" shall mean the Common Stock, par value $1.00 per share,
of the Company.
2.4 "Eligible Director" shall mean any member of the Board who, on the
date on which Options are to be granted, is not an officer or employee
of the Company or any of the Company's subsidiaries.
2.5 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.6 "Fair Market Value" for purposes of the Plan, unless otherwise
required by the Code, shall mean, as of any date, the closing sales
prices of a share of Common Stock as reported on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading, or, if not listed or traded on any such exchange,
on the Nasdaq Stock Market, or, if not so listed or traded, the fair
market value as determined by the Board, which determination shall be
conclusive.
2.7 "Optionee" shall mean an individual to whom a Stock Option has been
granted under the Plan.
2.8 "Stock Option" or "Option" shall mean any option to purchase shares of
Common Stock granted pursuant to Article VI.
<PAGE>
ARTICLE III
ADMINISTRATION
3.1 Administration. The Plan shall be administered and interpreted by the
Board.
3.2 Guidelines. Subject to Article VII, the Board shall have the authority
to: (a) interpret the Plan; (b) establish such rules and regulations
as it deems necessary for the proper operations and administration of
the Plan; (c) select Eligible Directors to receive Options under the
Plan; (d) determine the number of shares subject to any Option and all
the terms, conditions, restrictions and/or limitations, if any, of any
Option, including the time and conditions of exercise or vesting, and
the terms of any form of Option; (e) determine the performance goals,
if any, which will be applicable to the Option; (f) grant waivers of
Plan terms, conditions, restrictions, and limitations; (g) accelerate
the vesting or exercise of an Option or the performance period of an
Option; and (h) take any and all other action it deems necessary or
advisable for the proper operation or administration of the Plan. The
Board may correct any defect, supply any omission, conform the Plan to
any change in law or regulation, or reconcile any inconsistency or
ambiguity in the Plan or in any Option in the manner and to the extent
it shall deem necessary to carry the Plan into effect. Notwithstanding
the foregoing, no action of the Board under this Section 3.2 shall
impair the rights of any Optionee without such person's consent,
unless otherwise required by law.
3.3 Decisions Final. Any decision, interpretation or other action made or
taken in good faith by the Board in accordance with the Plan shall be
final, binding and conclusive on the Company, all members of the Board
and their respective heirs, executors, administrators, successors and
assigns.
3.4 Delegation. The Board may delegate any or all of its administrative
responsibilities under the Plan to officers or employees of the
Company.
ARTICLE IV
SHARE LIMITATION
4.1 Shares. The maximum aggregate number of shares of Common Stock that
may be issued under the Plan shall be 150,000 shares of Common Stock
(subject to any increase or decrease pursuant to Section 4.2), which
may be either authorized and unissued shares of Common Stock or issued
shares of Common Stock that have been reacquired by the Company. If
any Option granted under the Plan shall expire, terminate or be
canceled for any reason without having been exercised in full, the
number of unpurchased shares shall again be available for the purposes
of the Plan.
<PAGE>
4.2 Changes. If there is any change in the number of outstanding shares of
Common Stock through the declaration of stock dividends, stock splits
or the like, the number of shares available for Options, the share
subject to any Option and the exercise prices of Options shall be
automatically adjusted. If there is any change in the number of
outstanding shares of Common Stock through any change in the capital
of the Company, or through any other transaction referred to in
Section 424(a) of the Code, the Committee shall make appropriate
adjustments in the maximum number of shares of Common Stock which may
be issued under the Plan and any adjustments and/or modifications to
outstanding Options as it deems appropriate. In the event of any other
change in the capital structure or in the Common Stock of the Company,
or in the event of a merger, consolidation, combination or exchange of
shares, or the like, as a result of which Common Stock is changed into
another class, or securities of another person, cash or other
property, the exercise price, consideration to be received, and other
terms of an Option shall be adjusted as deemed equitable by the Board,
in its sole discretion. The Board shall have authority to provide for,
in appropriate cases upon the effectiveness of the transaction, (a)
waiver, in whole or in part, of remaining restrictions for vesting or
earning, and (b) the conversion of outstanding Options into cash or
other property to be received in the transactions immediately or over
the periods the Option would have vested or been earned. Any
adjustment, waiver, conversion or the like carried out by the Board
under this Section shall be conclusive and binding for all purposes of
the Plan.
ARTICLE V
ELIGIBILITY
5.1 Eligible Directors. Only Eligible Directors shall be granted Options
under the Plan.
ARTICLE VI
STOCK OPTIONS
6.1 Options. All Stock Options granted under the Plan shall be
non-qualified stock options (i.e., options that do not qualify as
incentive stock options under Section 422 of the Code).
6.2 Grants. All grants of Options to Eligible Directors shall be
determined by the Board. The Board may establish a formula by which
Options under the Plan shall be automatically granted to Eligible
Directors from time to time.
6.3 Terms of Options. Options granted under the Plan shall be subject to
the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as
the Board shall, in its discretion, determine:
(a) Stock Option Certificate. Each Stock Option shall be evidenced
by, and subject to the terms of, a Stock Option Certificate
executed by the Company. The Stock Option Certificate shall
specify the number of shares of Common Stock subject to the Stock
Option, the option price, the option term, and the other terms
and conditions applicable to the Stock Option.
<PAGE>
(b) Option Price. The option price per share of Common Stock
purchasable upon exercise of a Stock Option shall be no less than
50% of the Fair Market Value of a share of Common Stock on the
date the Option is granted.
(c) Additional Terms and Conditions. The Board may, by way of the
Stock Option Certificate or otherwise, establish such other
terms, conditions, restrictions and/or limitations, if any, of
any Stock Option provided they are not inconsistent with the
Plan.
(d) Exercise Payment. At the option of the Board, upon exercise, the
option price of a Stock Option may be paid in cash, shares of
Common Stock, a combination of the foregoing, or such other
consideration as the Board may deem appropriate. The Board shall
establish appropriate methods for accepting Common Stock and may
impose such conditions as it deems appropriate on the use of such
Common Stock to exercise a Stock Option.
(e) Non-transferability of Option. Unless determined by the Board, no
Stock Option shall be transferable by an Optionee otherwise than
by will or by the laws of descent and distribution, to the extent
consistent with the terms of the Plan and the Option, and all
Stock Options shall be exercisable, during an Optionee's
lifetime, only by the Optionee.
ARTICLE VII
TERMINATION OR AMENDMENT
7.1 Termination or Amendment of the Plan. The Board may at any time amend,
discontinue or terminate the Plan in whole or in part; provided,
however, that, unless otherwise required by law, the rights of an
Optionee with respect to Options granted prior to such amendment,
discontinuance or termination, may not be materially impaired without
the consent of such Optionee.
7.2 Amendment of Options. The Board may amend the terms of any Stock
Options, prospectively or retroactively, but, subject to Article IV,
no such amendment or other action by the Board shall materially impair
the rights of an Optionee without the Optionee's consent.
ARTICLE VIII
UNFUNDED PLAN
8.1 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any
payment not yet made to an Optionee by the Company, nothing contained
herein shall give any such individual any rights that are greater than
those of a general creditor of the Company.
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 Nonassignment. Except as otherwise provided in the Plan or determined
by the Board, Options granted hereunder and the rights and privileges
conferred thereby shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise),
and shall not be subject to execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of such Option, right or privilege contrary to the provisions
hereof, or upon the levy of any attachment or similar process thereon,
such Option and the rights and privileges conferred thereby shall
immediately terminate and the Option shall immediately be forfeited to
the Company.
9.2 Legend. The Board may require each person purchasing shares upon
exercise of an Option to represent to the Company in writing that the
Optionee is acquiring the shares for investment only and not for
resale or with a view to distribution and to make such other
representations as the Board may require. The stock certificates
representing such shares may include any legend which the Board deems
appropriate to reflect any restrictions on transfer.
All certificates representing shares of Common Stock delivered under
the Plan shall be subject to such stock transfer orders and other
restrictions as the Board may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common Stock is then
listed or traded or the Nasdaq Stock Market, any applicable Federal or
state securities law, and any applicable corporate law, and the Board
may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
9.3 Other Plans. Nothing contained in the Plan shall prevent the Board
from adopting other or additional compensation arrangements; and such
arrangements may be either generally applicable or applicable only in
specific cases.
9.4 No Right to Continue Relationship. Neither the Plan nor the grant of
an Option under the Plan shall confer upon any person any right to
continue as a director of the Company or obligate the Company to
nominate any director for reelection by the Company's stockholders.
9.5 Other Conditions.
(a) If at any time counsel to the Company shall be of the opinion
that any sale or delivery of shares of Common Stock upon exercise
of an Option is or may in the circumstances be unlawful or result
in the imposition of a material amount of excise taxes under the
statutes, rules or regulations of any applicable jurisdiction,
the Company shall have no obligation to make such sale or
delivery, or to make any application or to effect or to maintain
any qualification or registration under the Securities Act of
1933, as amended, or state securities laws, or otherwise with
respect to shares of Common Stock, and the right to exercise any
Option shall be suspended until, in the opinion of such counsel,
such sale or delivery shall be lawful or shall not result in the
imposition of a material amount of excise taxes.
<PAGE>
(b) Upon termination of any period of suspension under this Section
9.5, any Option affected by such suspension which shall not then
have expired or terminated shall be reinstated as to all shares
available before such suspension and as to shares which would
otherwise have become available during the period of such
suspension, but no such suspension shall extend the term of any
Option.
9.6 Governing Law. The Plan and actions taken in connection herewith shall
be governed and construed in accordance with the laws of the State of
California.
9.7 Construction. Wherever any words are used in the Plan in the masculine
gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever
any words are used herein in the singular form they shall be construed
as though they were also used in the plural form in all cases where
they would so apply.
9.8 Liability of the Board. No member of the board nor any employee of the
Company or any of its subsidiaries shall be liable for any act or
action hereunder, whether of omission or commission, by any other
member of the Board or employee or by any agent to whom duties in
connection with the administration of the Plan have been delegated or,
except in circumstances involving bad faith, gross negligence or
fraud, for anything done or omitted to be done by himself.
9.9 Costs. The Company shall bear all expenses incurred in administering
the Plan, including expenses of issuing Common Stock upon the exercise
of Options.
9.10 Severability. If any part of the Plan shall be determined to be
invalid or void in any respect, such determination shall not affect,
impair, invalidate or nullify the remaining provisions of the Plan
which shall continue in full force and effect.
9.11 Successors. The Plan shall be binding upon and inure to the benefit of
any successor or successors of the Company.
9.12 Heading. Article and section headings contained in the Plan are
included for convenience only and are not to be used in construing or
interpreting the Plan.
ARTICLE X
TERM OF PLAN
10.1 Effective Date. The Plan shall be effective as of February 19, 1998.
10.2 Termination. The Plan shall continue until terminated by the Board.
Termination of the Plan shall not affect Options granted before such
date, which shall continue to be exercisable, in accordance with the
terms of the Plan, after the Plan terminates.
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
All significant subsidiaries of the Registrant have been listed.
Indentations indicate indirectly owned subsidiaries which are owned by the named
subsidiary.
State of
Subsidiaries of the Registrant Incorporation
- ------------------------------ -------------
Coyote Gateway, LLC Colorado
Entree Corporation Delaware
Atlanta Provision Company, Inc. Georgia
Sattel Communications Corp. Nevada
Coyote Technologies, LLC California
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 and in the
Registration Statement on Form S-8 listed below of Coyote Network Systems, Inc.,
formerly The Diana Corporation, of our report dated September 22, 1997, on the
financial statements of The Diana Corporation included in this Annual Report on
Form 10-K.
1. Registration Statement on Form S-3
(Registration No. 33-88392)
2. Registration Statement on Form S-8
(Registration No. 33-67188)
3. Registration Statement on Form S-3
(Registration No. 333-1055)
PricewaterhouseCoopers LLP
Los Angeles, California
July 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 YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3746
<SECURITIES> 16
<RECEIVABLES> 715
<ALLOWANCES> 0
<INVENTORY> 2122
<CURRENT-ASSETS> 12604
<PP&E> 3201
<DEPRECIATION> (810)
<TOTAL-ASSETS> 21975
<CURRENT-LIABILITIES> 8096
<BONDS> 5349
0
0
<COMMON> 9152
<OTHER-SE> (1092)
<TOTAL-LIABILITY-AND-EQUITY> 21975
<SALES> 5387
<TOTAL-REVENUES> 5387
<CGS> 3363
<TOTAL-COSTS> 3363
<OTHER-EXPENSES> 23758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2334
<INCOME-PRETAX> (34155)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34155)
<EPS-PRIMARY> (4.83)
<EPS-DILUTED> (4.83)
</TABLE>
