As filed with the Securities and Exchange Commission
on July 15, 1999 Reg. No. 333-68333
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-3/A-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
--------------------------------
COYOTE NETWORK SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2448698
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4360 Park Terrace Drive, Westlake Village, CA 91361 (818) 735-7600
- ---------------------------------------------------- ----------------------
(Address, including Zip Code of (Telephone Number,
Registrant's Principal Executive Offices) Including Area Code)
James J. Fiedler, Chairman and CEO
COYOTE NETWORK SYSTEMS, INC.
4360 Park Terrace Drive, Westlake Village, CA 91361
Telephone: (818) 735-7600
Facsimile: (818) 735-7633
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent for Service)
Copies of all communications to:
SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP
551 Fifth Avenue, New York, NY 10176
Attn: Kenneth Koch, Esq.
Telephone: (212) 661-6500
Facsimile: (212) 697-6686
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------ --------------- --------------------- ---------------------- ----------------------
Proposed Proposed
Amount Maximum Maximum Amount
Title of Shares to be Aggregate Aggregate of
to be registered Registered (1) Price Per Share Offering Price Registration Fee
- ------------------ ---------------- ---------------------- ----------------------- -----------------------
Common Stock
<S> <C> <C> <C> <C>
$1.00 Par Value 5,414,789 $16.002 $86,636,624 (2) $25,558.00 (3)
- ------------------ ---------------- ---------------------- ----------------------- -----------------------
Common Stock 1,360,790 $5.1254 $ 6,974,049 (4) $1,938.79
$1.00 Par Value
- ------------------ ---------------- ---------------------- ----------------------- -----------------------
TOTAL 6,775,579 $93,610,673 $27,496.79
- ----------------------------------------------------------------------------------------------------------
<FN>
1 Represents: (a) 2,074,848 shares of Common Stock acquired by the selling
stockholders in connection with a private placement; (b) 4,679,910 shares
of Common Stock which may be issued upon exercise of warrants or upon
conversion of convertible preferred stock; and (c) 20,821 shares of
Common Stock issued in connection with an acquisition.
2 Calculated in accordance with Rule 457(c) based on the average of the high
and low sales prices of the Common Stock as reported on The Nasdaq National
Market on November 30, 1998 solely for the purpose of calculating the
amount of the registration fee.
3 A registration fee with respect to these shares was paid upon the filing of
Registrant's Registration Statement on Form S-3 (Registration Statement No.
333-68333).
4 Calculated in accordance with Rule 457(c) based on the average of the high
and low sales prices of the Common Stock as reported on The Nasdaq National
Market on July 9, 1999 solely for the purpose of calculating the amount of
the registration fee.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY __, 1999
PROSPECTUS
6,775,579 Shares
COYOTE NETWORK SYSTEMS, INC.
COMMON STOCK
The selling stockholders listed in this Prospectus are offering for sale up
to 6,775,579 shares of common stock of Coyote Network Systems, Inc. Because the
shares offered under this Prospectus will be sold by those stockholders, we will
not receive any proceeds from the sale of these shares by such stockholders. Of
such shares 2,074,848 were acquired by the selling stockholders in connection
with a private placement; 4,679,910 shares will be received by selling
stockholders when such stockholders exercise warrants owned by them or upon
conversion of convertible preferred stock; and 20,821 shares were to be issued
in connection with an acquisition.
The selling stockholders have not advised us of any specific plans they
have for the distribution of the shares covered by this Prospectus. We
anticipate that the shares will be sold from time to time primarily in
transactions (which may include block transactions) on The Nasdaq National
Market at the market price then prevailing. However, sales may also be made in
negotiated transactions or otherwise. The selling stockholders and the brokers
and dealers through whom sale of shares may be made may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, and
their commissions or discounts and other compensation may be regarded as
underwriters' compensation.
Shares of our common stock are traded on The Nasdaq National Market.
Trading Symbol on The Nasdaq National Market: CYOE
Last Sale Price on July 9, 1999: $5.125 per share
Before purchasing shares in this offering, you should carefully consider
the "Risk Factors" beginning on page 3 of this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this Prospectus is July __, 1999.
1
<PAGE>
SUMMARY
The following is a summary of the more detailed information contained
elsewhere in this Prospectus and in the documents that we incorporate by
reference. Because this is only a summary, it does not contain all of the
information that may be important to you. To understand this offering, you need
to review the entire prospectus, including the Risk Factors, and the financial
statements and other information incorporated in this Prospectus by reference.
The Company
Coyote Network Systems, Inc. ("Coyote" or the "Company," "us" or "we"), is
a Delaware corporation which was incorporated in 1961. We are engaged in the
telecommunications business. Specifically, through our various affiliated
entities, we sell scalable telecommunications switches and Internet
Protocol-based gateways to telecommunications service providers. Such switches
and systems are designed to route telephone calls in the most efficient,
cost-effective manner. We also sell wholesale international long distance
services to telecom carriers and market retail domestic and international long
distance services, primarily to affinity groups, which share a common
characteristic such as language or culture.
Our principal executive offices are located at 4360 Park Terrace Drive,
Westlake Village, California 91361, and our telephone number is (818) 735-7600.
Forward-looking Statements
We have made forward-looking statements in this document and in the
documents that we incorporate by reference that are subject to risks and
uncertainties. Without limitation, these forward-looking statements include
statements regarding new products to be introduced by us in the future,
statements about our business strategy and plans, statements about the adequacy
of our working capital and other financial resources, and in general statements
that are not of an historical nature. When we use words such as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should note that 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 our control, that
could cause actual results to differ materially from the statements. These
factors include those discussed under the caption "Risk Factors" in this
Prospectus. Please note that we disclaim any intention or obligation to update
or revise any forward-looking statements whether as a result of new information,
future events or otherwise.
2
<PAGE>
RISK FACTORS
Before purchasing our stock, you should carefully consider the following
risk factors and the other information contained in this Prospectus and in the
documents we incorporate by reference.
Limited Operating History; No Assurance of Profitability
We have a limited operating history and have not yet achieved consistent
sales of our products over any extended period. For the last four fiscal years,
we reported losses from continuing operations. Our net sales from continuing
operations from 1996 to 1999 -- $264,000 in the 1996 fiscal year, $7,154,000 in
the 1997 fiscal year, $5,387,000 in the 1998 fiscal year and $43,318,000 in the
1999 fiscal year -- did not offset our operating and other expenses in each of
these years. To achieve profitability we will need to increase the market
acceptance and sales of our products and services. However, we cannot assure you
that we will be successful in this effort or that we will become profitable.
Adverse Publicity and Related Suspension of Trading in Coyote Common Stock
On December 9, 1998, TheStreet.com, an Internet publication, published
articles questioning our reported equipment sale through Comdisco, Inc. to
Crescent Communications. The articles implied that Crescent Communications, Inc.
did not exist, leading to the conclusion that the sale was not valid. The
article also discussed the Form S-3 registration statement of which this
Prospectus is a part, indicating that numerous insiders were "poised to sell
huge chunks" of their holdings.
Immediately following the publication of these articles, the trading volume
in our common stock reached approximately 2.2 million shares, a number
significantly in excess of our historical trading level, and our common stock
price declined more than 50%. As a result of the articles and the significant
trading in our common stock, The Nasdaq National Market suspended trading in our
common stock on Thursday, December 10, 1998. After we issued two press releases
responding to the articles and further clarifying the transaction with Crescent
Communications, The Nasdaq National Market resumed trading in the stock on
Friday, December 11, 1998.
Since the publication of the articles referred to above, The Nasdaq
National Market and the Securities and Exchange Commission have asked us to
provide documents and other material about the Crescent Communications
transaction and other transactions. We are cooperating with both The Nasdaq
National Market and the Commission in connection with these requests. However,
because of the Commission's practice of keeping its investigations confidential,
we do not know whether the Commission is in fact investigating the matter and,
if so, the status of such matter. Investigations by the Commission and/or The
Nasdaq National Market may cause disruption in the trading of our common stock
and/or divert the attention of management. In addition, an adverse determination
in any such investigation could have a material adverse effect on us. The
Commission and The Nasdaq National Market could impose a variety of sanctions,
including fines, consent decrees and possibly de-listing. In addition, an
investigation by the Commission could substantially delay or postpone
indefinitely the effectiveness of any registration statement registering the
resale of shares of our common stock.
3
<PAGE>
Risks Associated with our Relationship with Crescent Communications
The public dialogue and investigations focused attention on Crescent
Communications and Gene Curcio, its president. On September 24, 1998, we
announced that we had signed a three-year equipment and service contract with
Crescent Communications valued at more than $37 million. As reported in our
December 10, 1998 press release, Comdisco purchased the initial $12 million of
equipment pursuant to Crescent's order and leased it to Crescent. We were paid
in full for that purchase by Comdisco.
While we remain committed to Crescent's development and to delivering the
approximately $16 million in equipment remaining under Crescent's network order,
plus $9 million in services once Crescent's network is operational, we wish to
further caution you that Crescent's development is not within our control and
that such future sales and deliveries may or may not occur. Crescent has
experienced delays in executing its business plan and to date has not generated
the minimum sales required under the services agreement. There can be no
assurance that Crescent will be successful or that we will receive any revenue
from the services portion of our services contract with Crescent. Our due
diligence in 1998 indicated that Crescent had letters of intent for more than 30
million minutes per month to international locations. Our future sales to
Crescent will depend upon Crescent's ability to successfully implement its
business plan, including its ability to make its system operational, to retain
such minutes and to obtain additional commitments and translate those minutes
and commitments into successful operations and cash flows. As with the initial
delivery to Crescent, we do not intend to make any additional equipment
deliveries without Crescent first obtaining third party financing, which has not
yet been obtained. Accordingly, you should not rely on the receipt of any
additional revenues from Crescent.
In responding to the December 1998 articles and follow-up questions from
The Street.com, and in an effort to defend Crescent's right as a private company
to refuse to discuss its business with the press, we made positive statements
regarding Crescent and its founder, Mr. Curcio, relating to Crescent's
entrepreneurial spirit and Mr. Curcio's 17 years of experience and beneficial
contacts in the telecommunications business. When we entered into the equipment
sale and services agreements with Comdisco and Crescent, we were aware that Mr.
Curcio was an entrepreneur who had been involved with start-up companies, not
all of which were ultimately successful. Our due diligence investigation
regarding Crescent focused on Crescent's ability to obtain minutes to
international locations and was not conducted for the purpose of evaluating Mr.
Curcio's business history or individual creditworthiness. We did not and cannot
warrant the individual business history of Crescent or its founder or that of
any end user of its products. Because we will be providing the operational
support for Crescent under a services contract, we did not and do not believe
that such information materially relates to the benefits we are seeking from our
relationship with Crescent.
Fluctuation in Quarterly Operations Results
Our quarterly operating results may fluctuate significantly because of a
number of factors, including:
- the budgeting and spending patterns of our customers and potential
customers in the telecommunications industry;
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<PAGE>
- fluctuations in the volume of calls, particularly in regions with
relatively high per-minute rates;
- the addition or loss of a major customer;
- the loss of economically beneficial routing options for our traffic;
- pricing pressure resulting from increased competition;
- market acceptance of new or advanced versions of our products;
- technical difficulties or failures with portions of our network;
- fluctuations in the rates charged by carriers for our traffic and in
other costs associated with obtaining rights to switching and other
transmission facilities; and
- changes in the staffing levels of our sales, marketing and technical
support and administrative personnel.
Changes in or difficulties experienced by our customers in fulfilling their
business plans, economic conditions and related financing have caused some of
our customers to not meet previously announced estimated purchase requirements.
In addition, some of our contracts contemplate the purchase of additional
equipment or the provision by us of maintenance and other services, which are
dependent on our customers installing their equipment, placing it into service
and otherwise fulfilling their business plans, which may not occur on a timely
basis or at all.
As a result, we believe that period-to-period comparisons of our operating
results may not be meaningful, especially as indicators of our future
performance. In addition, it is difficult for us to predict the occurrence of
any of the above factors. Because we base our expense levels in part on
expectations regarding future sales, we may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in sales. A significant
shortfall in demand relative to our expectations, or a material delay in
customer orders, could have a material adverse effect on us.
Reductions in Size and Diversification
As a part of our business plan, we have sold certain of our businesses to
concentrate on the telecommunications industry. As a result, although we believe
we are now more focused, we have in turn developed into a smaller and less
diversified company with a lower fixed asset and revenue base than we had prior
to this restructuring. Consequently, any decline in operating results after the
restructuring could more immediately and severely affect us.
Risks Inherent in Acquisition Strategy
As part of our business strategy to grow and expand through acquisitions,
we regularly evaluate future acquisition opportunities. For instance, we
successfully completed the acquisition of American Gateway Telecommunications
("AGT") in April 1998, and we successfully completed the acquisition of INET
Interactive Network System, Inc. ("INET") in September 1998.
5
<PAGE>
Our operations and earnings will be affected by our ability to successfully
integrate the acquisition of any business. The process of integrating acquired
operations presents a significant challenge to our management and may result in
unanticipated costs or a diversion of management's attention from day-to-day
operations. The acquisitions of AGT and INET have placed significant demands on
our financial and management resources. We cannot assure you that we will be
able to successfully integrate AGT, INET or any other operations or businesses
that we may acquire in the future into our operating structure. We also cannot
assure you that our current or future acquisitions will be profitable or that we
will recoup our acquisition costs.
In addition, because the value of our common stock has not yet fully
recovered from its December 9, 1998 decline, we may encounter delays in
consummating any acquisition involving the use of our common stock as
consideration. We recently terminated a pending acquisition of Apollo Telecom,
Inc. due to its inability to satisfy all of the closing conditions. We currently
have pending one acquisition which may involve the issuance of shares of our
common stock.
We cannot assure you that the conditions to closing such acquisition will
be met. The timing of contemplated acquisitions may have a direct impact on our
performance.
Risks Related to our Dependence on the Telecommunications Industry
Because our customers are concentrated in the telecommunications and
Internet service industries, our future success depends upon such customers'
capital spending patterns and their demand for telecommunications switches ("DSS
Switches"), Internet Protocol (IP) gateways ("Carrier IP Gateways") and
international long distance services. We are initially targeting the market for
small to medium-sized telecom switches and IP gateways 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 the Carrier IP Gateway. Accordingly, we cannot assure
you that potential customers will purchase our switches.
It is also possible that telecommunications companies and other potential
customers will adopt alternative architectures or technologies that are
incompatible with the DSS Switch or the Carrier IP Gateway, which could have a
material adverse effect on our business. The demand for our technology may be
delayed or prevented by a variety of factors over which we have no control. Such
factors include costs, regulatory obstacles, the lack of the requisite
compatible infrastructure, the lack of consumer demand for advanced
telecommunications services and alternative approaches to service delivery.
In addition, the telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of competitive product and
service offerings, such as the use of the Internet for international voice and
data communications. We are unable to predict the effect of technological
changes on our operations, and such changes could have a material adverse effect
on us.
Competition in the Telecommunications Industry
The telecommunications switch and IP gateway markets are highly
competitive. We compete with telecommunications equipment providers, including
Nortel, Cisco Systems, Lucent Technologies, Newbridge Networks and Digital
Switch Corporation which have the resources and expertise to compete in the
smaller-scale telecommunications and IP gateway markets. In addition, it is
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<PAGE>
possible that large communication carriers with financial resources
significantly greater than ours may enter the small to mid-sized
telecommunications switch and IP gateway business. Some of these large carriers,
such as AT&T Corporation, MCI Worldcom Communications and Sprint, could initiate
and support prolonged price competition to gain market share.
The international telecommunications industry is also intensely competitive
and subject to rapid change. Our competitors in the international wholesale long
distance market and the retail international long distance market include:
- multinational corporations;
- service providers in the U.S. and overseas that have emerged as a
result of deregulation;
- switchless and switch-based resellers of international long distance
services;
- international joint ventures and alliances among such companies;
- dominant telecommunications operators that previously held various
monopolies established by law over the telecommunications traffic in
their countries; and
- U.S. based and foreign long-distance providers that have the authority
from the Federal Communications Commission (the "FCC") 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.
In addition, consolidation in the telecommunications industry could not only
create even larger competitors with greater financial and other resources, but
could also affect us by reducing the number of potential customers for our
services.
International competition also may 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 1998, the United States and more than 65
countries have committed to open their telecommunications markets to competition
and foreign ownership and to adopt measures to protect against anti-competitive
behavior.
Regulatory Risks
In general, the telecommunications industry is highly regulated by federal
laws and regulations issued and administered by various federal agencies,
including the FCC, and by comparable laws, regulations and agencies overseas. In
addition, the U.S. Congress and the FCC may adopt new laws, regulations and
policies that may directly or indirectly affect us in the future. We are unable
to predict the impact of regulations which may be adopted in the future.
7
<PAGE>
Risks Associated with Dependence on a Concentrated Product Line
In fiscal 1998 and fiscal 1999, we derived substantially all of our
revenues from the DSS Switch. As a result, any decrease in the overall level of
sales of, or the prices for, the DSS Switch could have a material adverse effect
on us.
Our success will depend, in part, upon our ability to enhance the
technology for the DSS Switch and to develop and introduce, on a timely basis,
new products, such as the Carrier IP Gateway, that keep pace with technological
developments and emerging industry standards and address changing customer
requirements in a cost-effective manner. We cannot guarantee that we will be
able to successfully develop, introduce and market new products, or that our new
products and product enhancements will achieve market acceptance. We have
experienced delays in completing development and introduction of new products
and features, and there can be no assurance that such delays will not reoccur in
the future. It is also possible that future technological advances in the
telecommunications industry will diminish market acceptance for our products,
which could have a material adverse effect on us.
Furthermore, the DSS Switch contains a significant amount of complex
software that may contain undetected or unresolved errors as products are
introduced or new versions are released. We have in the past discovered software
errors in certain DSS Switch installations. We cannot make any assurance that,
despite significant testing, software errors will not be found in new
enhancements of the DSS Switch and/or the Carrier IP Gateway. Such errors may
result in delays in or loss of market acceptance, either of which could have a
material adverse effect on us.
Risks Associated with Dependence on Manufacturers and Other Key Suppliers
Our suppliers have from time to time experienced delays in receipt of
various hardware components. Certain components, including microprocessors, are
available from either a single or a limited number of sources. An interruption
in our business with certain manufacturers and suppliers could have a material
adverse effect on us. Some single suppliers are companies which from time to
time allocate parts to telecommunications equipment manufacturers due to market
demand for telecommunications equipment. Many of our potential competitors for
such parts are much larger and may be able to obtain priority allocations from
these shared suppliers, thereby limiting our supply of these components.
Although we have established relationships with alternative suppliers and have
assembled product ourselves, a failure by a supplier to deliver quality products
on a timely basis, or the inability to develop additional alternative sources,
could have a material adverse effect on us.
Limited Protection of Proprietary Technology;
Risk of Third-Party Claims of Infringement
We rely on a combination of trade secrets, confidentiality and non-compete
agreements to protect the products and features that we believe give us a
competitive advantage. Nevertheless, we cannot guarantee that such protections
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to ours. In addition, the laws of many foreign countries
do not protect our intellectual property rights to the same extent as the laws
of the United States. Our failure to protect our proprietary information could
have a material adverse effect on us.
In addition, we may be subject to litigation that will require us to
defend against claimed infringements of the rights of others or to determine the
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scope and validity of the proprietary rights of others. In this connection, we
are currently involved in a litigation alleging that our use of the name
"Coyote" infringes on the rights of the plaintiff. There can be no assurance
that we will prevail in such litigation. Litigation also may be necessary to
enforce and protect trade secrets and other intellectual property rights that we
own. Any such litigation could be costly or cause diversion of management's
attention, either of which could have a material adverse effect on us.
Furthermore, an adverse determination in any such litigation could result in the
loss of proprietary rights, subject us to significant liabilities, require us to
seek licenses from third parties (which they may not be willing to grant) or
prevent us from manufacturing or selling our products.
Risks Associated with Customer Concentration
For fiscal 1999, we made shipments to sixteen customers, seven of which
accounted for approximately 93% of our total equipment revenues. In the 1998
fiscal year, we made shipments to 12 customers, one of which accounted for
approximately 40% of our total revenues. Furthermore, in the 1997 fiscal year,
we derived approximately 94% of our revenues from sales to Concentric Network.
We expect that our results of operations in any given period will continue to
depend to a significant extent upon sales to a limited number of customers. As a
consequence, the loss of one or more major customers could have a material
adverse effect on us.
Difficulties in Managing Growth
We have experienced growth in the number of our employees and the scope of
our operations. To manage potential future growth effectively, we must improve
our operational, financial and management information systems and hire, train,
motivate and manage our employees. Our future success also will depend on our
ability to attract and retain qualified technical, sales, marketing, network
operations and management personnel, for whom competition is intense. In some
instances, we have experienced delays in filling sales and engineering
positions. We cannot predict that we will effectively achieve or manage growth,
and our failure to do so could delay product development cycles or otherwise
have a material adverse effect on us.
No Dividends
We have not paid cash dividends to stockholders in the last six years, and
we do not anticipate paying cash dividends to stockholders for the foreseeable
future.
Risks Associated with International Operations
We plan to increase our expansion into international markets. Accordingly,
our business will be increasingly subject to certain risks inherent in
international operations. For example, we may encounter problems in obtaining
necessary permits and operation licenses in foreign jurisdictions. Other risks
include:
- unexpected changes in regulatory environments;
- changes in political and economic conditions;
- fluctuations in exchange rates; and
- difficulties in staffing and managing operations.
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We have not experienced any material adverse effects with respect to our
foreign operations arising from such factors. However, problems associated with
such risks could arise in the future. Finally, managing operations in multiple
jurisdictions could place further strain on our ability to manage our overall
growth.
Need for Additional Capital to Finance Growth and Capital Requirements
We anticipate that the net proceeds from our private placement offering,
together with available funds and cash flow from operations, will enable us to
meet our anticipated short-term working capital needs. We anticipate requiring
additional capital to carry out our immediate business plans and there can be no
guarantee that we will obtain such capital on favorable terms or at all.
Although we have entered into a definitive agreement with respect to a $10
million loan, such loan has not yet been received and is long overdue. Although
we are continuing our efforts to consummate the loan financing, there is no
assurance that such financing will be consummated on a timely basis, or at all.
Even if the loan is consummated we will need to raise additional capital from
the equity or debt capital markets to carry out our business plan and such needs
could be increased if:
- we find one or more additional attractive acquisition opportunities;
- our cash flow from operations does not meet our working capital and
capital expenditure requirements; or
- our growth exceeds current expectations.
We cannot guarantee that we will succeed in obtaining such capital on
favorable terms, or at all. If additional funds are raised by our issuing equity
securities, stockholders may experience dilution of their ownership interest and
such securities may have rights senior to those of the holders of our common
stock. If additional funds are raised by our issuing debt, we may be subject to
certain limitations on our operations, including limitations on the payment of
dividends.
If adequate funds are not available or not available on acceptable
terms, we may have to reduce the scope of our planned expansion of operations;
we also may be unable to take advantage of acquisition opportunities, develop or
enhance services or respond to competitive or business pressures, all of which
could have a material adverse effect on us. In addition, until we achieve higher
sales and more favorable operating results, our ability to obtain funding from
outside sources of capital could be restricted. Although our short-term
liquidity has improved recently, we cannot be certain that we will maintain
sufficient liquidity over an extended period of time to achieve our operating
goals or develop successful operations through acquisitions.
Dependence on Third Parties to Finance our Customers
Many of our customers are entrepreneurial telecommunications companies with
limited financial resources. Their ability to pay for our equipment and services
is often dependent on their ability to obtain financing. Although we have
arranged such financing in the past for certain customers, there can be no
assurance that we will be able to arrange such financing in the future. In
addition, to induce such third parties to make lease financing available to our
customers, in some cases we have issued warrants to buy our common stock and
made other financial considerations to the third party leasing companies, and we
may need to provide such inducements in the future.
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Volatility of Stock Price
The market price of our common stock has been volatile and may be affected
by several factors, including actual or anticipated fluctuations in our
operating results or the announcement of potential acquisitions. Other factors
include:
- changes in federal and international regulations;
- activities of the voice and data equipment vendors;
- domestic and international service providers;
- industry consolidation;
- 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; and
- general market conditions and other factors.
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. These broad market
fluctuations may adversely affect the market price of our common stock.
Existing Stockholders May be Able to Exercise Significant Control Over Us
As of June 3, 1999, our officers and directors, as a group, beneficially
owned 7.4% of our outstanding common stock. In addition, according to filed
Schedules 13D and 13G, as of the dates of such filings, Comdisco beneficially
owned 5.6% of our outstanding common stock. Alan J. Andreini beneficially owned
9.1% and the Kiskiminetas Springs School owned 8.1% of our common stock.
Additionally, Richard Haydon beneficially owned 11.7 % of our common stock and
Ardent Research Partners beneficially owned 4.6% of our common stock. Such
stockholders may have significant influence on us, including influence over the
outcome of any matter submitted to a vote of the stockholders, including the
election of directors and the approval of significant corporate transactions.
Recently Issued Accounting Standards
In June 1998, the AICPA issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company will adopt the standard in
January 2000 and does not expect the adoption to have any material impact on the
Company's financial position or results of operations.
Year 2000 Compliance
We have completed a comprehensive assessment of our DSS Switch and Carrier
IP Gateway operating systems and our internal computer systems and applications
to identify those that might be affected by computer programs using two digits
rather than four to define the applicable year, including the related leap year
11
<PAGE>
concern (the "Year 2000 issue"). We have used primarily internal personnel to
identify those systems and applications that are affected by the Year 2000
issue.
Specifically, we tested the current versions of the DSS Switch,
Administrative and Maintenance Terminal ("AMT") and Call Management System
("CMS"), which are the customer products most susceptible to the Year 2000
issue. Those tests were conducted by internal personnel and outside consultants
who are involved with specific product development and maintenance.
Additionally, we tested our internal computer systems and applications using
internal personnel. Those systems include corporate finance, internal
communications and production. The testing also includes working with key third
party vendors to insure that the products they sell to us are Year 2000
compliant.
The results of the testing program to date, including key vendor responses,
indicate that our customer products and internal systems are Year 2000
compliant. Responses have been received from a majority of vendors, but not all
vendors have assured us that they will be Year 2000 compliant in time. As a
contingency, we are creating an alternative list of third party vendors in case
a critical third party does not achieve compliance.
Our internal systems rely primarily on widely recognized "mass market"
software and hardware that vendors have represented to be Year 2000 compliant.
Because of the fluid nature of this issue, Year 2000 due diligence and
compliance testing is ongoing and by necessity must include any new, adjunct, or
upgraded products implemented with the external or internal user.
To date, the costs associated with the Year 2000 have not been material to
us.
Based upon the status of our Year 2000 compliance assessment to date, we do
not have a formal contingency plan in the event that an area of our operation
does not become Year 2000 compliant. We will adopt a formal plan if it becomes
evident that there will be an area of non-compliance in our systems or those of
a critical third party.
Although we expect to achieve Year 2000 compliance, there are potential
risks if we do not become or are late in becoming compliant. Such risks might
include the impairment of our ability to process and deliver customer orders,
manufacture compliant equipment and perform other critical business functions
that could have a material impact on our financial performance. Those risks
would include potential claims against us for the non-compliance of our
products. The costs of defending and settling such claims could have a material
impact on our financial statements.
The information presented is based on management's estimates that were made
using assumptions of future events. Uncontrollable factors such as the
compliance of the systems of third parties and the availability of resources
could materially increase the cost or delay the date of our Year 2000
compliance.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
stockholders. We will, however, receive the exercise price from the exercise of
any warrants held by the selling stockholders. We cannot predict the amount of
such proceeds or the time when it would receive any such proceeds. Accordingly,
we will use all funds received upon exercise of warrants for general working
capital purposes.
12
<PAGE>
SELLING STOCKHOLDERS
The 6,775,579 shares of the Company's common stock (the "Shares") offered
for sale by the stockholders listed below (the "Selling Stockholders") pursuant
to this Prospectus include: (i) outstanding shares owned by the Selling
Stockholders; (ii) shares which may be issued upon exercise of outstanding
warrants; and (iii) shares issued in connection with an acquisition, all as set
forth in the table below:
<TABLE>
<CAPTION>
Shares of Common Shares Shares to be
Stock Owned Prior Offered for Owned After
to Offering Sale Hereby the Offering*
------------------------------------
Number Percent
- ---------------------------------------- --------------- ----------------- -------------------- --------------
<S> <C> <C> <C> <C>
Ardent Research 578,375 236,250(1) 342,125 2.0%
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Chesed Congregation 157,500 78,750(1) 78,750 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Emerald International 73,500 36,750(1) 36,750 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Europa International, Inc. 52,500 52,500(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Michael Fantetti 207,600 118,125(1) 89,475 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
James J. Fiedler 736,788 183,750(2) 553,038 3.2%
- ---------------------------------------- --------------- ----------------- -------------------- --------------
John Fife 159,850 157,500(1) 2,350 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Maxwell H. Gluck Foundation 157,500 78,750(1) 78,750 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Stuart Isen 105,000 105,000(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Ruth Ellen Keiser 50,050 13,125(1) 36,925 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Aurel E. Mircea 63,000 31,500(24) 31,500 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Montpellier International Ltd. 156,500 88,250(1) 68,250 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Steve Nassau 25,200 14,500(1) 10,700 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Theodore Netzky 52,500 52,500(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Michelle Portner 1,313 1,313(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Stephen Portner 47,250 10,500(1)(3) 36,750 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Praxis II Partners Inv. II 82,500 52,500(1) 30,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
George Salameh 10,700 3,350(1) 7,350 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
William J. Smith 68,250 34,125(1) 34,125 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
South Ferry #2 94,500 52,500(1) 42,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Anthony D. Squeglia 52,150 15,750(1)(4) 36,400 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Fred Stein 198,900 78,750(1) 120,150 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Strategic Restructuring Fund 52,500 26,250(1) 26,250 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Strategic Restructuring Partnership, LP 595,000 332,500(5) 262,500 1.5%
- ---------------------------------------- --------------- ----------------- -------------------- --------------
U.S. Equity Portfolio, LP 105,000 52,500(1) 52,500 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Valor Capital Management 52,500 52,500(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Ronald N. Weiser Trust 105,000 105,000(1) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Comdisco, Inc. 708,400 192,990(6) 515,410 3.0%
- ---------------------------------------- --------------- ----------------- -------------------- --------------
First Bermuda Securities Ltd. 89,931 89,931(7) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Donald L. Hawley 105,000 105,000(8) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Systeam, S.p.A. 52,500 52,500(9) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
JNC Opportunity Fund 1,561,250 1,561,250(10) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Gary Shemano 34,125 34,125(11) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Mitchell & Kristen Levine TTEE 17,063 17,063(12) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
William & Mary Corbett 17,063 17,063(12) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Jesup & Lamont Securities Corporation 70,000 70,000(13) 0 +
13
<PAGE>
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Charles Chandler 191,800 175,000(14) 16,800 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Sydney B. Lilly 212,196 50,000(15) 162,196 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Superior Street Capital Advisors, L.L.C. 340,200 340,200(16) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
RFC Capital Corporation 20,821 20,821(17) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Balmore Funds S.A. 338,167 338,167(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Austost Anstalt Schaan 166,666 166,666(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
William J. Harlow Trust DTD 2/27/90 296,800 149,800(18) 147,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Foxhound Fund Limited Partnership 100,000 100,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Robert L. Swisher, Jr. 100,000 100,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Bedford Oak Partners, L.P. 100,000 100,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Summer Hill Partners, L.P. 152,000 100,000(18) 52,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Howard Milstein 66,666 66,666(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Craddock Asset Management 50,000 50,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Triple Equity Investments, Ltd. 48,335 48,335(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Jeffrey Thorp 43,017 43,017(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Michael G. Jesselson 90,000 (23) 45,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Benjamin J. Jesselson Trust DTD 8/21/74 45,000 45,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Jonathan Brooks 43,016 43,016(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Penn Footwear 50,000 50,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
George Karfunkel 30,000 30,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Joseph E. Sheehan 28,333(25) 25,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Warren H. Haber 25,000 25,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Marcuard Cook & CIE, S.A. 25,000 25,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Delta Enhanced Equity Fund, L.P. 25,000 25,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Erinch Ozada IRA 16,667 16,667(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
AGR HALIFAX FUND LTD 16,666 16,666(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Amy Newmark 15,000 15,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Mirala Investments Ltd. 10,000 10,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Steven M. Oliveira 10,000 10,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
David Schwartz 10,000 10,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Stephanie Hofman 8,000 8,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Lori Sherman 19,175 5,000(18) 14,175 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Lucille Deter 4,500 4,000(18) 500 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Ray Rivers 4,000 4,000(18) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Joel H. Baer 3,050 2,000(18) 1,050 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Alan Swerdloff I.R.A. 2,800 2,800(19) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Preston Tsao 7,200 7,200(19) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Derek Caldwell 177,704 67,704(20) 110,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
D. Dwight Miller 25,000 5,000(19) 20,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Marc Seelenfreund 25,000 25,000(19) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Sunrise Foundation Trust 326,289 76,289(21) 250,000 1.4%
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Nathan Low Roth I.R.A. 86,700 86,700(19) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Paul Scharfer 5,000 5,000(19) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Richard Stone 23,322 23,322(22) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
John Gallagher 25,000 5,000(19) 20,000 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
Dawn Faktor 500 500(21) 0 +
- ---------------------------------------- --------------- ----------------- -------------------- --------------
J. Sheehan & Co. 3,333 3,333(21) 0 +
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
+ Percentage of ownership is less than 1%.
14
<PAGE>
(1) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of outstanding warrants issued to the Selling
Stockholder on or about June 30, 1997. The warrants are exercisable at
$2.86 per share.
(2) Mr. Fiedler has been the Company's Chairman of the Board and Chief
Executive Officer since November 1996 and Chairman and Chief Executive
Officer of Coyote Technologies, LLC since September 1995.
(3) Mr. Portner has been a Director of the Company since September 1997.
(4) Mr. Squeglia has been the Company's Director of Corporate Communications
since June 1996.
(5) Represents 262,500 shares of common stock which will be received by the
Selling Stockholder upon exercise of outstanding warrants issued to the
Selling Stockholder on or about June 30, 1997. The warrants are exercisable
at $2.86 per share. In addition, represents 70,000 shares of common stock
received in connection with the Company's private placement completed in
May 1999.
(6) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of outstanding warrants issued to the Selling
Stockholder on March 26, 1998, June 26, 1998 and September 30, 1998. The
warrants issued on March 26, 1998 entitle the Selling Stockholder to
purchase 40,750 shares at an exercise price of $3.81 per share, the
warrants issued on June 26, 1998 entitle the Selling Stockholder to
purchase 78,750 shares at an exercise price of $8.33 per share and the
warrants issued on September 30, 1998 entitle the Selling Stockholder to
purchase 73,500 shares at an exercise price of $8.10 per share. The Company
has entered into a general sale agreement with Comdisco, Inc., a
third-party leasing company, who in turn leases the equipment to the
Company's end-user customers. On January 12, 1999, Comdisco filed with the
Commission a Schedule 13G disclosing beneficial ownership of 708,400 shares
of the Company common stock including shares purchased on the open market
as well as the shares underlying the above warrants.
(7) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of outstanding warrants issued to the Selling
Stockholder on July 17, 1997 and December 22, 1997. The warrants issued on
July 17, 1997 entitle the Selling Stockholder to purchase 38,889 shares at
an exercise price of $6.43 per share. The warrants issued on December 22,
1997 entitle the Selling Stockholder to purchase 51,042 shares at an
exercise price of $6.86 per share. First Bermuda Securities Ltd. provided
services as an agent in connection with the Company's issuance of
convertible notes in July and December 1997.
(8) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of an outstanding warrant issued to the Selling
Stockholder on May 29, 1998. The warrant entitles the Selling Stockholder
to purchase 105,000 shares at an exercise price of $2.86 per share. Mr.
Donald L. Hawley provided consulting services to the Company in connection
with its sale of certain of its subsidiaries.
(9) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of an outstanding warrant issued to the Selling
Stockholder on September 4, 1998. The warrant entitles the Selling
15
<PAGE>
Stockholder to purchase 52,500 shares at an exercise price of $3.99 per
share. In May 1998, Systeam, S.p.A. invested $300,000 in Coyote Network
Systems, Inc. and the Company issued 71,650 shares of the Company's common
stock to Systeam, S.p.A. Mr. James J. Fiedler, Chairman and Chief Executive
Officer of Coyote Network Systems, Inc., is an advisor to the board of
directors of Systeam, S.p.A. Subsequently, the Company invested $300,000 in
equity and $450,000 in a convertible note that Systeam, S.p.A. issued to
the Company. The convertible notes were exercised and the Company currently
owns 8.485% of Systeam, S.p.A. on a fully diluted basis. The Company may
acquire additional interests in Systeam, S.p.A. and may issued additional
shares in connection with such acquisition.
(10) Represents shares of common stock issuable to JNC Opportunity Fund Ltd.
("JNC") upon conversion in full of 600 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") and exercise in full of warrants to
purchase 561,250 shares of the Company's common stock. The Certificate of
Designation governing the Preferred Stock prohibits JNC from converting
shares of the Preferred Stock (or receiving shares of common stock as
payment of dividends thereunder) to the extent that such conversion would
result in JNC beneficially owning in excess of 4.999% of the outstanding
shares of the Company's common stock following such conversion. Such
restriction may be waived by JNC upon not less than 75 days' notice to the
Company. The number of shares of common stock listed in this table as
beneficially owned by JNC represents the number of shares of common stock
issuable to JNC.
(11) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of an outstanding warrant issued to the Selling
Stockholder on August 31, 1998. The warrant entitles the Selling
Stockholder to purchase 34,125 shares of the Company's common stock at an
exercise price of $8.03 per share. The Selling Stockholder received the
warrant described above in consideration of financial consulting services
rendered to the Company in connection with the Company's offering of the
Preferred Stock to JNC.
(12) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of an outstanding warrant issued to the Selling
Stockholder on August 31, 1998. The warrant entitles the Selling
Stockholder to purchase 17,063 shares of the Company's common stock at an
exercise price of $8.03 per share. The Selling Stockholder received the
warrant in consideration of financial consulting services rendered to the
Company in connection with the Company's offering of the Preferred Stock to
JNC.
(13) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of an outstanding warrant issued to the Selling
Stockholder on August 31, 1998. The warrant entitles the Selling
Stockholder to purchase 70,000 shares of the Company's common stock at an
exercise price of $8.03 per share. The Selling Stockholder received the
warrant in consideration of financial consulting services rendered to the
Company in connection with the Company's offering of the Preferred Stock to
JNC.
(14) Represents shares of common stock issuable to Mr. Chandler upon conversion
of 350 Class A Units of Coyote Technologies, LLC, an affiliate of the
Company, which were issued to Mr. Chandler on October 2, 1996.
(15) Represents shares of common stock issuable to Mr. Lilly upon conversion of
100 Class A Units of Coyote Technologies, LLC, an affiliate of the Company,
which were issued to Mr. Lilly on October 2, 1996. Mr. Lilly was a director
of the Company from 1988 to September 1998 and was Executive Vice President
of the Company from April 1995 to November 1996.
16
<PAGE>
(16) Represents shares of common stock which will be received by the Selling
Stockholder upon exercise of outstanding warrants issued to the Selling
Stockholder on May 13, 1997 and November 13, 1997. The warrants entitle the
Selling Stockholder to purchase 340,200 shares at an exercise price of
$2.14 per share. The Selling Stockholder provided consulting services to
Coyote in connection with investment advisory services.
(17) Represents shares of common stock received in connection with the Company's
acquisition of INET Interactive Network System, Inc.
(18) Represents shares of common stock received in connection with the Company's
private placement completed in May 1999.
(19) Represents shares underlying warrants received as a designee of the
placement agent in the Company's 1999 private placement.
(20) Represents 40,204 shares of common stock received as a commission and
27,500 shares underlying warrants received as a designee of the placement
agent in the Company's 1999 private placement.
(21) Represents shares received as a commission as a designee of the placement
agent in the Company's 1999 private placement.
(22) Represents 10,822 shares of common stock received as a commission and
12,500 shares underlying warrants received as a designee of the placement
agent in the Company's 1999 private placement.
(23) Represents 45,000 shares owned by Benjamin J. Jesselson Trust DTD 8/21/74,
of which the Selling Stockholder is a trustee and which are also offered
for sale pursuant to this Prospectus.
(24) Represents shares of common stock received by the Selling Stockholder upon
exercise of warrants issued to the Selling Stockholder on or about June 30,
1997.
(25) Represents 3,333 shares owned by J. Sheehan & Co., of which the selling
stockholder is an owner and which are also offered for sale pursuant to
this Prospectus.
</FN>
</TABLE>
17
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, donees, transferees and
successors-in-interest may, without limitation and from time to time, sell all
or a portion of the Shares on The Nasdaq National Market or on any stock
exchange, market or trading facility on which the Shares are traded, at market
prices prevailing at the time of sale, fixed prices or at negotiated prices. The
Shares may, without limitation, be sold by the Selling Stockholders by one or
more of the following methods:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer engaged by the Selling
Stockholder will attempt to sell the Shares as agent for the Selling
Stockholder but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- in accordance with Rule 144 promulgated under the Securities Act of
1933, as amended, rather than pursuant to this Prospectus;
- a combination of any such methods of sale; or
- any other method permitted pursuant to applicable law.
From time to time a Selling Stockholder may pledge his or its Shares
pursuant to the margin provisions of the Selling Stockholder's customer
agreements with his or its brokers. Upon a default by such a Selling
Stockholder, the broker may, from time to time, offer and sell the pledged
Shares.
In effecting sales, brokers-dealers engaged by the Selling Stockholders may
arrange for other brokers-dealers to participate in such sales. Brokers-dealers
may receive commissions or discounts from the Selling Stockholders (or, if any
such broker-dealer acts as agent for the purchase of such Shares, from such
purchaser) in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with
the Selling Stockholders to sell a specified number of Shares at a stipulated
price per share, and, to the extent such broker-dealer is unable to do so acting
as agent for a Selling Stockholder, to purchase as principal any unsold Shares
at the price required to fulfill the broker-dealer commitment to the Selling
Stockholder.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
18
<PAGE>
The Company is required to pay all fees and expenses incident to the
registration of the Shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities in connection with this Prospectus.
EXPERTS
The consolidated financial statements and schedules incorporated by
reference in this prospectus and elsewhere in the registration statement for the
years ended March 31, 1999 and 1998 have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements for the year ended March 31, 1997
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-K for the year ended March 31, 1999, have been so incorporated in
reliance on the report (which contains an explanatory paragraph relating to
certain uncertainties as described in Notes 7 and 15 to the financial
statements) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the Shares of common stock offered hereby will be passed
upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth
Avenue, New York, New York 10176.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company files reports, proxy statements and other information with the
Commission. You may read and copy any reports, proxy statements or other
information we file at the Commission's public reference room at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 or at its public reference rooms
in New York, New York, or Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. You can
also obtain copies of our Commission filings by writing to the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, many of our Commission filings are available at the Commission's site
on the World Wide Web at "http://www.sec.gov".
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") to register with the Commission the Company's common
stock offered for sale by the Selling Stockholders. This Prospectus is part of
that Registration Statement. As allowed by Commission rules, this Prospectus
does not contain all the information you can find in the Registration Statement
or the exhibits to the Registration Statement, which are incorporated herein by
reference. Statements contained herein concerning the provisions of documents
are necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
19
<PAGE>
The Commission allows us to "incorporate by reference" information in this
Prospectus, which means we can disclose important information to you by
referring you to another document filed separately with the Commission. The
information that we incorporate by reference is deemed to be part of this
Prospectus, except for any information superseded by information in this
Prospectus. These documents contain important information about the Company and
its finances. This Prospectus incorporates by reference the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
We are also incorporating by reference all additional documents that we
file with the Commission between the date of this Prospectus and the termination
of the offering.
The Company will, without charge, provide you with copies of any of the
documents which are incorporated in this Prospectus by reference (other than
exhibits to such documents unless we have specifically incorporated those
exhibits by reference into this Prospectus). To obtain copies, please write
Brian A. Robson, Coyote Network Systems, Inc., 4360 Park Terrace Drive, Westlake
Village, California 91361, or call him at (818) 735-7600.
20
<PAGE>
- ------------------------------------------- -----------------------------------
We have not authorized any dealer,
salesperson or other person to give any
information or represent anything not
contained in this Prospectus. You must 6,775,579 Shares
not rely on any unauthorized information.
This Prospectus does not offer to sell or
buy any shares in any jurisdiction where
it is unlawful. This information in this
Prospectus is current as of July ___, 1999.
COYOTE NETWORK SYSTEMS, INC.
TABLE OF CONTENTS Page
SUMMARY............................... 2
COMMON STOCK
RISK FACTORS.......................... 3
PROSPECTUS
USE OF PROCEEDS....................... 12 ----------
SELLING STOCKHOLDERS.................. 13
EXPERTS............................... 19
LEGAL MATTERS......................... 19
INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE............ 19
July __, 1999
- ------------------------------------------- -----------------------------------
21
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses relating to the registration of the Shares of common stock
being offered hereby, other than underwriting discounts and commissions, will be
borne by the Company. Such expenses are estimated to be as follows:
Item Amount
Securities and Exchange Commission Registration Fee $28,500
Nasdaq Listing Fees 17,500
Legal Fees and Expenses 15,000
Accounting Fees and Expenses 10,000
Miscellaneous Expenses 5,000
---------
Total $76,000
Item 15. Indemnification of Directors and Officers
Consistent with section 145 of the Delaware General Corporation Law
("Delaware Law"), Article IX of the Company's By-Laws provides that the Company
shall indemnify any person in connection with legal proceedings threatened or
brought against him by reason of his present or past status as an officer or
director of the Company or present or past status as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise if he is serving in such capacity at the request of the
Company, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person,
provided that the person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The Company shall also indemnify any such person in
connection with any action by or in the right of the Company provided the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company; except in such cases as involve
gross negligence or willful misconduct in the performance of his duties. In
addition, to the extent that any officer or director is successful in the
defense of any such legal proceeding, the Company is required to indemnify him
against expenses, including attorneys' fees, that are actually and reasonably
incurred by him in connection therewith. The By-Laws also contain a
nonexclusivity clause which provides in substance that the indemnification
rights under the By-Laws shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any agreement with the
Company, any By-Law, any vote of stockholders or disinterested directors of the
Company or otherwise.
Consistent with section 102(b) of the Delaware Law, Article IX of the
Company's Restated Certificate of Incorporation provides that a director of the
Company shall not be liable to the Company or its stockholders for damages for
breach of fiduciary duties as a director, subject to certain limitations.
Article IX does not eliminate or limit the liability of a director for (a) any
22
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breach of the director's duty of loyalty to the Company or its stockholders; (b)
any acts or omissions not in good faith or which involved intentional misconduct
or a knowing violation of law; (c) any conduct that is the subject of section
174 of the Delaware Law; or (d) any transaction from which the director derived
an improper personal benefit.
The Company maintains directors' and officers' liability insurance for
its directors and officers.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
Item 16. Exhibits
Exhibit Description
Number
------- ----------------------------------------------------------------
4.1 Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 4.1
of the Company's Registration Statement on Form
S-8, filed September 8, 1998).
4.2 By-Laws of the Company (incorporated herein by reference
to Exhibit 3.2 of the Company's Form 10-K for the year ended
March 31, 1997).
5.1 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, PC*
5.2 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP **
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
(included in Exhibit 5.1).*
23.4 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
(included in Exhibit 5.2). **
24 Power of Attorney.*
-----------------------
* Previously filed
** To be filed by amendment.
23
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Item 17. Undertakings
The undersigned Registrant undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(A) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(B) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs 1(a) and (b) will not apply if the
information required to be included in a post effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or 15(d) of the Exchange Act and
which are incorporated by reference in this Registration Statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
4. That, for purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan annual report pursuant
to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
5. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
24
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Westlake Village, State of California, on the 15th
day of July, 1999.
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 Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ James J. Fiedler Chairman of the Board and July 15, 1999
---------------------- Chief Executive Officer
James J. Fiedler (Principal Executive Officer)
/s/ Daniel W. Latham President, Chief Operating Officer July 15, 1999
---------------------- and Director
Daniel W. Latham
/s/ Brian A. Robson Executive Vice President, July 15, 1999
- ---------------------- Chief Financial Officer and Secretary
Brian A. Robson (Principal Financial and Accounting Officer)
/s/ Jack E. Donnelly Director
- ----------------------
Jack E. Donnelly July 15, 1999
/s/ Stephen W. Portner Director July 15, 1999
----------------------
Stephen W. Portner
25
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EXHIBIT INDEX
Exhibit Page
Number Description Number
- -------- ------------------- ------
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 27
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants 28
26
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EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference in this registration of our report dated July 13,
1999, included in the Coyote Network Systems, Inc. Form 10-K for the year ended
March 31,1999, and to all references to our Firm included in this registration
statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 13, 1999
27
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EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in this Pre-Effective
Amendment No. 1 to Registration Statement on Form S-3 of Coyote Network Systems,
Inc. (File No. 333-68333) of our report dated September 22, 1997, except as to
the last paragraph of Note 8, which is as of November 4, 1998, relating to the
consolidated financial statements and financial statement schedule of The Diana
Corporation for the year ended March 31, 1997, which appears in Coyote Network
Systems, Inc.'s Annual Report on Form 10-K for the year ended March 31, 1999. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
July 14, 1999
28
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