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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.
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(Exact name of registrant as specified
in its charter)
Delaware 36-2448698
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4360 Park Terrace Drive, Westlake Village, CA 91361
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(Address of principal executive offices) (Zip Code)
(818) 735-7600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| YES |_| NO
At November 9, 1999, the Registrant had issued and outstanding an aggregate of
13,094,049 shares of its common stock.
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<PAGE>
COYOTE NETWORK SYSTEMS, INC.
AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets.............................................. 2
Statement of Operations..................................... 3
Statement of Cash Flows..................................... 4
Notes to Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 2. Changes in Securities and Use of Proceeds................... 11
Item 3. Defaults upon Senior Securities............................. 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 5. Other Information........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
Signatures ............................................................ 13
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
Sept. 30, 1999 March 31, 1999
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,036 $ 1,225
Receivables (including deferred profit of $10,550 at 9/30/99), net of
allowance of $522 at September 30, 1999 and $402 at March 31, 1999 19,447 10,092
Inventories 2,392 2,130
Notes receivable - current 352 2,367
Other current assets 1,548 4,323
--------- ---------
Total current assets 24,775 20,137
Property and equipment, net 6,939 8,192
Capitalized software development 2,008 1,604
Intangible assets, net 5,259 5,620
Net assets of discontinued operations --- 234
Notes receivable - non-current 928 871
Investments 1,550 1,550
Other assets 2,729 2,820
--------- ---------
$ 44,188 $ 41,028
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 1,008 $ 1,133
Accounts payable 7,551 8,161
Deferred revenue and customer deposits 13,702 5,611
Accrued professional fees and litigation costs 211 676
Other accrued liabilities 4,699 3,900
Current portion of long-term debt and capital lease obligations 1,004 1,315
--------- ---------
Total current liabilities $ 27,975 $ 20,796
Notes payable --- 8,183
Long-term debt 1,464 1,534
Capital lease obligations 1,634 1,830
Customer deposits and other liabilities 2,628 2,628
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.01 par value: authorized 5,000,000 shares;
issued 600 and 700 shares, liquidation preference of $10,000 per share 6,000 7,255
Common stock - $1 par value: authorized 30,000,000 shares,
issued 13,677,496 and 11,167,456 shares 13,678 11,167
Additional paid-in capital 115,925 109,394
Accumulated deficit (119,359) (116,002)
Treasury stock at cost (5,757) (5,757)
---------- ----------
Total shareholders' equity 10,487 6,057
--------- ---------
$ 44,188 $ 41,028
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales - product $ 5,069 $14,444 $13,615 $21,508
- long distance services 2,449 720 4,308 849
------- ------- ------- -------
Total 7,518 15,164 17,923 22,357
------- ------- ------- -------
Cost of sales - product 4,285 8,419 10,174 11,477
- long distance services 2,099 890 3,512 1,052
------- ------- ------- -------
Total 6,384 9,309 13,686 12,529
------- ------- ------- -------
Gross profit (loss) - product 784 6,025 3,441 10,031
- long distance services 350 (170) 796 (203)
------- -------- ------- --------
Total 1,134 5,855 4,237 9,828
------- ------- ------- -------
Selling and administrative expenses 4,594 3,155 8,674 6,095
Engineering, research and development 1,944 2,431 4,164 4,368
------- ------- ------- -------
Total operating expenses 6,538 5,586 12,838 10,463
------- ------- ------- -------
Operating income (loss) (5,404) 269 (8,601) (635)
Interest expense (482) (27) (834) (42)
Non-operating income (expense) 6,287 (721) 6,392 (880)
------- -------- ------- --------
Profit (loss) from continuing operations 401 (479) (3,043) (1,557)
Profit (loss) from discontinued operations (4) (900) (314) (900)
-------- -------- -------- --------
Net profit (loss) $ 397 $(1,379) $(3,357) $(2,457)
======= ======== ======== ========
Profit (loss) per common share (basic & diluted):
Continuing operations $ .03 $ (.05) $ (.25) $ (.17)
Discontinued operations --- (.09) (.03) (.10)
------- -------- --------- --------
Net profit (loss) per common share (basic & diluted) $ .03 $ (.14) $ (.28) $ (.27)
======= ======== ======== ========
Weighted average number of common shares outstanding
- basic 12,704 9,586 11,960 9,125
- diluted 15,601 9,586 11,960 9,125
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
6 MONTHS ENDED
------------------------------
Sept. 30, 1999 Sept. 30, 1998
Operating activities: -------------- --------------
<S> <C> <C>
Net loss $(3,357) $(2,457)
Adjustments to reconcile loss to net cash provided (used) by operating activities:
Depreciation and amortization 1,057 578
Gain on sale of land --- (17)
Gain on sale of Coyote Gateway, LLC (6,209)
Provision for loss on discontinued operations 310 900
Provision for common stock warrants issued 455 485
Net change in discontinued operations (76) (163)
Changes in current assets and liabilities (85) 10,319
-------- -------
Net cash provided (used) by operating activities (7,905) 9,645
-------- -------
Investing activities:
Purchases of property and equipment (1,257) (2,338)
Proceeds from sales of marketable securities --- 16
Proceeds from sale of land --- 67
Change in notes receivable 40 270
Increase in investments in affiliate (383) (400)
Cash investment in INET --- (1,333)
------- --------
Net cash provided (used) by investing activities (1,600) (3,718)
-------- --------
Financing activities:
Repayments of long-term debt and capital lease obligations (309) (71)
Common stock issued, net of expenses 11,332 306
Redemption of preferred stock (4,000)
Increase in note payable 2,417 ---
Decrease in borrowing on line of credit (124) ---
Preference stock issued net of expenses --- 6,345
Preference stock dividends paid --- (29)
------- --------
Net cash provided by financing activities 9,316 6,551
------- -------
Increase (decrease) in cash and cash equivalents (189) 12,478
Cash and cash equivalents:
At beginning of the period 1,225 3,746
------- -------
At end of the period $ 1,036 $16,224
======= =======
Non-cash transactions:
Issuance of common stock warrants 455 485
Conversion of convertible notes and interest into common stock --- 3,407
Discount granted for investment in affiliate --- 900
Issuance of common stock for INET acquisition --- 1,686
Conversion of Class B Units into common stock 330 ---
Gain on sale of Coyote Gateway, LLC 6,209 ---
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
- -----------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain prior year balances have been changed to conform to the
current period presentation. Operating results for the three months ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2000. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended March 31,
1999.
The computation of profit or loss per common share is determined by using the
weighted average number of shares of common stock outstanding during each
period.
NOTE 2 DISPOSITION OF ASSETS
- ------------------------------------------
On October 27, 1999, pursuant to a Purchase Agreement, dated September 30, 1999,
among the Company, American Gateway Telecommunications, Inc. ("AGTI"), Coyote
Gateway, LLC d/b/a American Gateway Telecommunications, ("AGT"), Prinvest Corp.
("PVC"), Prinvest Financial Corp. ("PFC"; together with PVC, "Prinvest") and
Arnold A. Salinas ("Salinas"), the Company sold its approximately 80% membership
interest in AGT to AGT's remaining member, AGTI, which previously held an
approximately 20% membership interest in AGT (the "Sale").
In consideration for the Sale, the Company will receive, for the next 18 months,
a monthly margin participation payment from AGT equal to $0.0025 per minute of
telecommunications traffic switched or routed by AGT through AGT's
telecommunications network. Pursuant to the terms of the Agreement, AGT will
remain directly liable for its $10.2 million credit facility (the "Credit
Facility") with Prinvest, whose affiliate owns 53.75% of AGTI. The Company will
be relieved of its obligations under its pledge agreement with Prinvest which
secured the Credit Facility and, in connection therewith, Prinvest will return
to the Company the 708,692 treasury shares of the Company's common stock which
had been pledged by the Company as collateral for the Credit Facility. In
addition, as a result of the Sale, the Company will no longer be required to
reflect the Credit Facility on its consolidated financial statements and,
accordingly, the Company has recognized a gain of $6,209,000 from the Sale. The
Company will not receive any immediate cash payments as a result of the Sale.
In addition, for the next 18 months, the Company shall be the exclusive supplier
of telecommunications switches to AGT; AGT shall receive a fifty percent
purchase discount on all Company-manufactured switches it purchases from the
Company during this time period. Coyote Communications Services, LLC, an
affiliate of the Company, shall continue to provide maintenance and technical
support services to AGT on a month-to-month renewable basis, pursuant to the
parties' existing maintenance and servicing agreement.
5
<PAGE>
NOTE 3 BUSINESS SEGMENT INFORMATION
- ------------------------------------------
In addition to operating the telecom switching equipment business segment, in
fiscal 1999, the Company acquired Coyote Gateway (April 1998) and INET
Interactive Network System, Inc. (September 1998) and through these subsidiaries
operates an international long distance services business segment. The
accounting policies are the same for all segments; however, the Company
evaluates performance based on operating income. The telecom switching equipment
business segment consists solely of the operations of Coyote Technologies, LLC.
Information by industry segment is as follows (in thousands):
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
------------------------------- -------------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- --------------- --------------
Net Sales:
<S> <C> <C> <C> <C>
Switching equipment $ 5,069 $14,444 $13,615 $21,508
Long distance services 2,449 720 4,308 849
------- ------- ------- -------
$ 7,518 $15,164 $17,923 $22,357
======= ======= ======= =======
Operating Profit (Loss):
Switching equipment (2,988) 1,133 (4,439) 1,084
Long distance services (1,778) (632) (2,881) (947)
Corporate (638) (232) (1,281) (772)
-------- -------- -------- --------
$(5,404) $ 269 $(8,601) $ (635)
======== ======= ======== ========
Depreciation and amortization:
Switching equipment 271 249 571 510
Long distance services 271 3 381 15
Corporate 50 50 105 53
------- ------- ------- -------
$ 592 $ 302 $ 1,057 $ 578
======= ======= ======= =======
Capital expenditures:
Switching equipment 106 358 137 900
Long distance services 214 484 710 650
Corporate 1 11 6 25
------- ------- ------- -------
$ 321 $ 853 $ 853 $ 1,575
======= ======= ======= =======
Identifiable assets:
Switching equipment 27,104 20,784
Long distance services 8,559 13,510
Discontinued operations --- 172
Corporate 8,925 13,038
------- -------
$44,188 $47,504
======= =======
</TABLE>
Effective September 30, 1999, the Company sold its interest in Coyote Gateway
(See Note 2 above). Sales, operating losses, depreciation and capital
expenditures of $425, $1,602, $59 and $346, respectively, of Coyote Gateway are
included in the Company's long distance services business segment information of
Coyote Gateway. The identifiable assets as at September 30, 1999, however,
exclude the assets of Coyote Gateway.
6
<PAGE>
NOTE 4 SHAREHOLDERS' EQUITY
- -------------------------------------------
Options and Warrants
- ---------------------------------
In September 1999, the Board of Directors approved an amendment to the Coyote
Technologies, LLC Employees Non-Qualified Stock Option Plan, increasing the
number of underlying shares of the Company common stock available to be granted
under the plan from 2,100,000 to 4,000,000.
During the quarter ended on September 30, 1999, the Board of Directors granted
options to purchase a total of 608,750 shares of the Company's common stock to
certain employees.
During the quarter ended on September 30, 1999, in consideration for
administrative consulting services, the Board of Directors granted options to
purchase a total of 302,500 shares of the Company's common stock to certain
outside consultants. A fair market value of $355,000 was recorded as
administrative expense for these options. The fair market value was determined
using the Black Scholes model.
In September 1999, an officer converted 174 Class B Units into 95,813 shares of
the Company's common stock in accordance with the terms of conversion available
to the holder.
In September 1999, an officer exercised warrants to acquire 75,075 shares of the
Company's common stock at an exercise price of $2.86 per share.
During the quarter ended September 30, 1999, a total of 195,566 vested options
were exercised in accordance with the terms of the Coyote Technologies Employees
Non-Qualified Stock Option Plan and Company common stock was issued for that
number of common shares.
NOTE 5 RELATED PARTY TRANSACTIONS
- ---------------------------------------------
In September 1999, Mr. James J. Fiedler, the Company's Chairman and Chief
Executive Officer, exercised warrants to acquire 75,075 shares of Company common
stock at an exercise price of $2.86 per share.
In September 1999, Mr. Daniel W. Latham, the Company's President and Chief
Operating Officer, converted 174 Class B Units into 95,813 shares of Company
common stock. This conversion was made in accordance with the conversion terms
available to holders of Class B Units.
Since August 1999, the Company has completed and received funding under a series
of two demand loans. The first loan for a total amount of $600,000 was provided
to the Company by Mr. Fiedler in the amount of $175,000, by Mr. Latham in the
amount of $75,000 and by Mr. Alan J. Andreini, an affiliate shareholder of the
Company, in the amount of $350,000. This loan bears interest at bank's prime
rate plus 1% per year, is repayable on demand and is secured against the
Company's investment in Systeam, S.p.A.
The second loan for a total amount of $1,225,000 was provided to the Company by
Mr. Richard L. Haydon, an affiliate shareholder of the Company, in the amount of
$500,000, by Mr. Alan J. Andreini in the amount of $225,000 and by three
non-affiliate shareholders in a combined total amount of $500,000. This loan
bears interest at the rate of 17.5% per year and is repayable, on demand by the
lenders, no earlier than March 31, 2000. The maximum term of the loan is three
years to November 2002. This loan is secured by shares of the common stock of
INET Interactive Network System, Inc., a wholly owned subsidiary of the Company.
Under the terms of this loan, the lenders have been granted, pro-rata, a
combined total of 73,500 three-year warrants to purchase shares of common stock
of the Company at an exercise price of $4.50 per share. The warrants will result
in a non-cash interest expense charge of $0.3 million to be recognized over the
term of the debt.
Of the above funding, $475,000 was received by the Company during to the quarter
ended September 30, 1999 and $1,350,000 was received by the Company during
October and November 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations for the Quarter Ended September 30, 1999
- --------------------------------------------------------------
For the second quarter of fiscal year 2000, we had revenues of $7.5 million,
representing a $7.6 million, or a 50% decrease from the second quarter of the
prior fiscal year and a 28% decrease from the previous quarter. Shipments of DSS
Switches and related product services were $5.1 million compared to $14.4
million in the prior year and $8.6 million in the previous quarter. The
international long distance service subsidiaries that were acquired during the
prior fiscal year generated revenues of $2.4 million, representing an increase
of 33% over the prior quarter and an increase of 288% over the corresponding
quarter of the prior year. Total revenues for the fiscal year to date are $17.9
million, representing a decrease of 20% from the first six months of the prior
fiscal year.
Shipments of switching equipment were supplied under contracts to two customers
during the quarter, representing $4.7 million of the switching equipment
revenues. We have granted extended payment terms to these customers while they
are in the process of seeking lease financing for their capital purchases. In
view of the extended payment terms and the comparatively short operating history
of these customers, we have deferred recognition of all of the profit ($3.3
million) attributable to these shipments until payment is received or all
contingencies are removed.
The revenue generated from switching equipment is $5.1 million in the quarter
with a gross margin of 15%. If the gross margin for the switching equipment was
not impacted by the $3.3 million profit deferral described above, the gross
margin on revenue of $5.1 million would be 80% compared to 42% in the second
fiscal quarter of the prior year. The international long distance service
subsidiaries that were acquired during the prior fiscal year generated a gross
margin of $0.4 million or 14% of long distance service revenues during the
quarter ended September 30, 1999. The total gross margin for all lines of
business for the second fiscal quarter is $1.1 million, or 15% of total
revenues, as compared to $5.9 million or 41% of total revenues for the second
quarter of the prior fiscal year. The total gross margin for the fiscal year to
date is $4.2 million or 24% of total revenues, as compared to $9.8 million or
46% of total revenues for the first six months of the prior fiscal year.
Selling and general administrative expenses for the second fiscal quarter were
$4.6 million compared to $3.2 million for the second quarter of the prior fiscal
year. The increase is primarily related to the additional operating expenses
incurred by the long distance service providers acquired in fiscal 1999. As a
proportion of total revenues, the selling and general administrative expenses
increased to 61% from 39% in the prior quarter and from 22% in the second
quarter of the prior fiscal year.
Engineering, research and development expenses for the second quarter of fiscal
2000 were $1.9 million, or 26% of sales, as compared with $2.2 million, or 21%
of sales, for the first quarter and $2.4 million, or 16% of sales, for the
second quarter of the prior fiscal year. We have continued to enhance product
offerings to meet current and anticipated customer demand, including further
refinement of our client/server architecture on our switch and the development
of voice over Internet Protocol.
The operating loss for the second quarter is $5.4 million versus a loss of $3.2
million in the first quarter and an operating income of $0.3 million in the
second quarter of the prior fiscal year. The operating loss for the fiscal year
to date is $8.6 million, an increase of $8.0 million over the operating loss for
the first six months of the prior fiscal year. The increase in the operating
loss is primarily the result of the lower equipment sales and the lower gross
margin due to the profit deferrals referred to above as well as the increased
operating expenses incurred in support of the long distance service
subsidiaries.
Interest expense for the quarter is $0.5 million versus $0.02 million for the
second quarter of the prior fiscal year. The increased expense is comprised
entirely of financing costs related to the operations of the international long
distance service subsidiaries.
8
<PAGE>
Non-operating income for the quarter of $6.3 million includes a $6.2 million
non-cash gain recorded on the Company's sale of its long distance service
subsidiary Coyote Gateway. An affiliate of one of our sources of lease financing
owns a majority of the buyer, AGTI, and was owed the debt which was assumed by
AGTI in the sale.
The net income from continuing operations for the second quarter of fiscal 2000
is $0.4 million versus a net loss of $0.5 million for the corresponding quarter
of the prior year. The income represents a basic and fully diluted earnings per
common share of $0.03 versus a loss of $0.05 for the corresponding quarter of
the prior year. The net loss for the six months of fiscal 2000 is $3.4 million
or $0.28 per common share compared to a net loss of $2.5 million or $0.27 per
common share for the corresponding six-month period of the prior year.
Liquidity and Capital Resources
- -------------------------------------------
We used cash from operating activities of $3.6 million during the second quarter
of fiscal 2000, compared to providing $8.7 million during the second quarter of
fiscal 1999. During the first six months of fiscal 2000 we used $7.9 million
compared to providing $9.6 million during the first six months of fiscal 1999.
This decline in operating cash flow is due primarily to the increase in the
operating loss and the increase in working capital required to support the
extended payment terms granted to our customers while they are in the process of
obtaining lease financing.
We used cash for investing activities of $1.6 million during the first six
months of fiscal 2000 compared to $3.7 million used for investing activities in
the corresponding period of fiscal 1999. Capital expenditures on equipment
purchases and software of $1.3 million in the first six months of fiscal 2000
represented a reduction of $1.0 million from the corresponding period of the
prior fiscal year. Purchases were primarily for additional switching equipment
required to support the expansion of the international long distance services
segment of the business and software for certain Internet Protocol and
compression capabilities. Net cash used in investing activities in fiscal 2000
also included cash paid in connection with increases in investment in affiliates
of $0.4 million.
Financing activities during the second quarter of fiscal 2000 provided $3.0
million, including $1.1 million from the exercises of stock options and
warrants, $1.7 million from increases in notes payable and a $0.2 million
increase in borrowings under a line of credit.
In connection with the sale of our approximately 80% membership interest in
Coyote Gateway on September 30, 1999, the Coyote Gateway liability for notes
payable of $10.2 million was assumed by the buyer, AGTI.
We have a $2.2 million revolving line of credit secured against certain trade
receivables. As at September 30, 1999, $1.0 million has been drawn against the
line representing the maximum amount available at that time. This line of credit
bears interest at the bank's prime rate plus 4%. The line of credit expires on
February 29, 2000. We have a long-term obligation in the amount of $1.6 million
in connection with principal and interest due on subordinated debentures, which
bear interest of 11.25% per year. The debentures mature in the year 2002 and
interest only is due until such time.
At September 30, 1999, we have a negative working capital of $3.2 million and we
are currently exploring means of raising additional capital through debt and
equity financing to fund our immediate working capital needs. As part of this
activity, we have recently completed and received $1.8 million in funding on two
demand loans. The first loan, which is for a total amount of $0.6 million, bears
interest at the bank's prime rate plus 1% per year, is repayable on demand and
is secured by our investment in Systeam, S.p.A. The second loan, which is for a
total amount of $1.2 million, bears interest at the rate of 17.5% per year and
is repayable on demand after March 31, 2000. The maximum term of this loan is
three years to November 2002 and is secured by our investment in our wholly
owned subsidiary INET Interactive Network System, Inc. Under the terms of this
second loan, the lenders, certain of whom are affiliates of ours, have also been
granted three-year warrants to purchase a combined total of 73,500 shares of our
common stock at an exercise price of $4.50 per share.
9
<PAGE>
We believe that we will be able to continue to fund our operations and
acquisitions by obtaining additional outside financing; however, there can be no
assurance that we will be able to obtain the necessary financing when needed on
acceptable terms or at all.
Forward Looking Statements
- -----------------------------------
All statements other than historical statements contained in this Report on Form
10-Q constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limitation, these forward
looking statements include statements regarding new products to be introduced by
the Company in the future, statements about the Company's business strategy and
plans, statements about the adequacy of the Company's working capital and other
financial resources, and in general statements herein that are not of a
historical nature. Any Form 10-K, Annual and Quarterly Reports to Shareholders,
Form 10-Q, Form 8-K or press release of the Company may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new contract signings, and industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: risks associated with recent
operating losses, no assurance of profitability, the need to increase sales,
liquidity deficiency and, in general, the other risk factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
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.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------
Please see Note 7 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999,
for information on various legal proceedings. There are no material developments
to report at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
c) Issuances of equity securities not registered under the Securities Act of
1933 are described in Note 5 of the Condensed Consolidated Financial
Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
- ---------------------------------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------------
a) Exhibits:
3.01 Restated Certificate of Incorporation, as amended September 1, 1992
(incorporated herein by reference to Exhibit 4.1 of Registrant's
Registration Statement on Form S-8 Reg. No. 333-63017).
3.02 By-Laws of the Company incorporated herein by reference to Exhibit 3.2
of the Company's Form 10-K for the year ended March 31, 1997.
4.01 Form of Demand Loan Agreement between the Company and certain
affiliate and non-affiliate shareholders dated November 1, 1999.
4.02 Form of Pledge Agreement between the Company and certain
affiliate and non-affiliate shareholders dated November 1, 1999.
4.03 Form of Common Stock Purchase Warrant Certificate between the Company
and certain affiliate and non-affiliate shareholders dated November 1,
1999.
27 Financial Data Schedule
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b) Reports on Form 8-K:
(1) A Form 8-K was filed by the Company on July 2, 1999, which covered:
Item 5. Other Events
At a hearing on May 24, 1999, the district court granted final
approval to the settlement of the stockholder class action litigation
against the Company and certain of its officers and directors. The
settlement consisted of $8,000,000 in cash, all of which will be
provided by the Company's insurance carriers and three-year warrants
to purchase up to 2,225,000 shares of common stock at (i) $9.00 per
share during the first year, (ii) $10.00 per share during the second
year and (iii) $11.00 per share during the last year prior to
expiration.
Certain charges with respect to the issuance of warrants were fully
reserved for in the Company's financial statements for the fiscal year
ended March 31, 1998.
(2) A Form 8-K was filed by the Company on November 12, 1999, which
covered:
Item 2. Acquisition or Disposition of Assets
Pursuant to the Purchase Agreement dated September 30, 1999, on
October 27, 1999, the Company completed the sale of its approximately
80% membership interest in Coyote Gateway to AGTI.
12
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SIGNATURES
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COYOTE NETWORK SYSTEMS, INC.
Date: November 15, 1999 By: /s/ James J. Fiedler
------------------------------
James J. Fiedler
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ Brian A. Robson
------------------------------
Brian A. Robson
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
13
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Demand Loan Agreement
This Agreement, dated as of November 1, 1999, is by and between Coyote
Network Systems, Inc. ("CNS") and ____________________________ ("Lender"):
1. Term Loan. Lender agrees to loan CNS $__________ (the "Loan"), and CNS
agrees to repay the Loan, under the following terms and conditions:
(a) The principle balance of the Loan shall bear interest at the rate
of 17.5 % per annum, payable in quarterly installments of interest only.
(b) The full principal balance and any accrued interest on the Loan
shall be due and payable on the third anniversary of this Agreement (the
"Due Date") or thirty (30) days following CNS' receipt of written demand by
the Lender for repayment ("Demand Date"), provided, however that the Lender
agrees not to issue such demand before March 1, 2000.
(c) CNS may prepay the Loan, or any part of it, at any time prior to
the Due Date without premium or penalty.
2. Security. The Loan shall be secured by CNS's pledge of _________ shares
of the common stock of INET Interactive System, Inc., in accordance with the
Stock Pledge Agreement attached as Exhibit A hereto and incorporated herein by
reference.
3. Default. If CNS fails to make a quarterly interest payment within 15 day
of the date upon which it is due, or if CNS fails to make full payment on the
Due Date or Demand Date, Lender shall have the right to declare a default,
accelerate the full balance outstanding, and to pursue its rights under this
Agreement and the stock pledge. Following default, any amounts due and owing
shall bear interest at 18% per annum.
4. Warrants. As an additional inducement to the Lender, CNS has granted
Lender _________ warrants to purchase shares of CNS common stock at an exercise
price of $4.50 per share, pursuant to the warrant agreement attached as Exhibit
B.
5. CNS Representations and Warranties. CNS represents and warrants as
follows:
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(a) It is a Delaware Corporation in good standing;
(b) The INET shares pledged hereunder are duly issued, validly
authorized and free and clear of any other liens or encumbrances;
(c) The CNS shares that are the subject of Section 4 will be duly
issued, validly authorized, and will be free and clear of any liens and
encumbrances upon exercise of the warrants referenced in Section 4; and
(d) This Agreement has been duly authorized by CNS, constitutes a
valid and binding obligation of CNS, and the execution and performance of
this Agreement does not conflict with any other material obligations of
CNS.
6. Lender Representations and Warranties. Lender represents and warrants as
follows:
(a) Lender represents that it is an "accredited investor" within the
meaning of Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"), and is a sophisticated financial or institutional
investor that makes loans and purchases equity securities in the ordinary
course of business. Lender is making the Loan and acquiring the warrants
referenced in Section 4 for investment purposes only, for its own account,
and not with a view to the distribution thereof, other than pursuant to
Rule 144 under the Securities Act or other exemption from or registration
under the Securities Act. Lender understands that the offer and sale of
this Agreement, the warrants referenced in Section 4 or any of the CNS
shares that are the subject of Section 4 to Lender has not been registered
under the Securities Act or under state securities laws and, accordingly,
may not be transferred unless so registered or exemptions from such
registration are available.
(b) Lender has reviewed CNS's public filings as the date hereof,
including Form 10-K for the year ended March 31, 1999, its Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 and Current Reports on
Form 8-K filed since the date of the March 31, 1999 Form 10-K, the contents
of which are incorporated herein by reference.
(c) Lender acknowledges that it has, independently and without
reliance upon CNS or any agent, employee or representative of CNS, or any
other investor, made its own investment analysis and decision to enter into
this Agreement based solely on the public filings listed above, the
information disclosed herein and such other documents and information as it
has deemed appropriate. Lender is not relying upon any statements of CNS or
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<PAGE>
any agent, employee or representative of CNS, express or implied, oral or
written, regarding past, present or future conditions of CNS.
(d) Lender understands and acknowledges that the making of the Loan
and an investment in the warrants referenced in Section 4 or any of the CNS
shares that are the subject of Section 4 are speculative and involve a high
degree of risk.
7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and all prior agreements, discussions and understandings of
the parties are merged and made a part of this Agreement.
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
9. Notice. Any notice required or permitted to be given or made by either
party to the other hereunder shall be deemed delivered if hand delivered, five
days after being mailed postage prepaid, one business day after being sent
prepaid by overnight courier or delivery service, or after being sent by
facsimile transmission and received by receiving equipment to the parties at
their respective addresses set forth opposite the signatures hereto or to such
changed address as either party shall designate by proper notice to the other.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of State of California without regard to the principles
of conflicts of law thereunder.
LENDER:
_______________________________
_______________________________
Name: _______________________________
BORROWER:
COYOTE NETWORK SYSTEMS, INC.
BY /s/ James J. Fiedler
-------------------------------
Its Chairman of the Board and
Chief Executive Officer
3
<PAGE>
Exhibit A
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, dated as of November 1, 1999, is by and between
COYOTE NETWORK SYSTEMS, INC., a Delaware corporation ("CNS"), and
_____________________ ("Lender").
RECITALS
CNS and Lender acknowledge the following:
A. Lender has agreed to provide a loan to CNS in the principal amount of
$_______ pursuant to the Term Loan Agreement dated even date herewith (the "Term
Loan Agreement") between Lender and CNS.
B. Lender requires, as a condition to making the Loan that CNS execute and
deliver this Pledge Agreement.
AGREEMENTS
In consideration of the Recitals and in order to induce Lender to extend
credit to CNS, CNS hereby agrees with Lender as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall have
the meanings assigned to them in the Term Loan Agreement. All terms defined in
the California Uniform Commercial Code (the "UCC") and used herein shall have
the meanings assigned in the UCC.
2. Pledge. To secure the payment and performance by CNS of all of its
obligations, debts and liabilities to Lender under the Term Loan Agreement (the
"Secured Obligations"), CNS hereby pledges to Lender for the benefit of Lender
and grants to Lender for the benefit of Lender a first priority security
interest in all its right, title and interest in and to the collateral described
in section 3 below (the "Pledged Collateral").
3. Description of Pledged Collateral. The Pledged Collateral consists of:
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(a) ________ shares of common stock (the "Shares") of INET
Acquisition, Inc. (n/k/a INET Interactive Network System, Inc.), a
California corporation ("INET"); and
(b) All right, title and interest of CNS in and to all present and
future payments, proceeds, dividends, distributions, instruments,
compensation, property, assets, interests and rights, and all monies, due
or to become due and payable to CNS in connection with the Pledged
Collateral or otherwise paid, issued or distributed from time to time in
respect of or in exchange therefor, and any certificate, instrument or
other document evidencing or representing the same (including all proceeds
of dissolution or liquidation).
4. Delivery of Pledged Collateral. CNS shall deliver to Lender or its
designated agent:
(a) The Shares on or before the date hereof; and
(b) Any other original shares of stock, certificates, instruments or
other documents constituting Pledged Collateral within five days after
CNS's receipt thereof.
All Pledged Collateral which are certificated securities shall be in
bearer form and accompanied by blank stock powers, duly executed by CNS, in
the name of Lender.
5. Representations, Warranties and Covenants of CNS. CNS hereby represents,
warrants and covenants that:
(a) Pledged Collateral. Set forth on Schedule I is a complete and
accurate list and description of all Pledged Collateral as of the date of
this Agreement. The Shares are unregistered and have endorsed thereon a
restricted legend relating thereto.
(b) Due Authorization, Etc., of Shares. The Shares have been duly
authorized and validly issued and are fully paid and nonassessable and
constitute ___% of the authorized, issued and outstanding shares of common
stock of INET.
(c) Sale or Other Disposition of Pledged Collateral. CNS will not
assign (by operation of law or otherwise), sell, lease, transfer, pledge or
grant a security interest in or otherwise dispose of or abandon any Pledged
2
<PAGE>
Collateral, and the inclusion of "proceeds" of the Pledged Collateral under
the security interest granted herein shall not be deemed a consent by
Lender to any sale or other disposition of any Pledged Collateral except as
expressly permitted herein.
(d) Required Consents. Except for any consents as may be required in
connection with any disposition of any portion of the Pledged Collateral by
laws affecting the offering and sale of securities generally, no consent of
any other person or entity (including stockholders and creditors of CNS) is
required in connection with (i) the execution, delivery, performance,
validity or enforceability of this Pledge Agreement; (ii) the perfection or
maintenance of the security interest created hereby (including the first
priority nature of such security interest); or (iii) the exercise by Lender
of the voting or other rights provided for in this Pledge Agreement.
(e) Nature of Security Interest. When the Pledged Collateral are
delivered to Lender, Lender will obtain a valid and perfected first
security interest in such Pledged Collateral for the benefit of Lender as
security for the repayment of the Secured Obligations, prior to all other
liens and encumbrances thereon and security interests therein.
(f) Action Impairing Value of Pledged Collateral. CNS has not and will
not, without the prior written consent of Lender, execute any document or
instrument or take any other action in connection with any of the Pledged
Collateral which would impair the value of the interest or rights of CNS or
Lender therein. None of the Pledged Collateral is subject to an option to
purchase or similar right of any person or entity.
(g) Further Assurances. CNS will, at its sole cost and expense,
perform all acts and execute all documents requested by Lender from time to
time to evidence, perfect, maintain or enforce Lender's first priority
security interest in the Pledged Collateral or otherwise in furtherance of
the provisions of this Pledge Agreement.
6. Remedies.
(a) If CNS shall fail to pay its obligations under the Term Loan
Agreement when due, Lender may exercise in respect of the Pledged
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party
3
<PAGE>
on default under the UCC (whether or not applicable to the affected Pledged
Collateral) and may also, without obligation to resort to other security,
at any time and from time to time sell, resell, assign and deliver, in its
discretion, all or any of the Pledged Collateral, in one or more parcels at
the same or different times, and all right, title and interest, claim and
demand therein and right of redemption thereof, on any securities exchange
on which any Pledged Collateral or any of them may be listed, or at public
or private sale, for cash, upon credit or for future delivery, and in
connection therewith Lender may grant options, CNS hereby waiving and
releasing any and all equity or right of redemption.
(b) If any of the Pledged Collateral is sold by Lender upon credit or
for future delivery, Lender shall not be liable for the failure of the
purchaser to purchase or pay for the same and, in the event of any such
failure, Lender may resell such Pledged Collateral. In no event shall any
part of the proceeds of sale of any Pledged Collateral be credited against
the Secured Obligations until the payment therefor has actually been
received by Lender.
(c) Lender may apply the cash proceeds actually received from any sale
or other disposition of the Pledged Collateral to the Secured Obligations
in any order or manner which Lender may determine, and CNS shall remain
liable and will pay Lender on demand any deficiency remaining.
(d) CNS recognizes that Lender may be unable to effect a public sale
of the Pledged Collateral consisting of securities by reason of certain
prohibitions contained in the Securities Act, or in applicable Blue Sky or
other state securities laws, as now or hereafter in effect, but may be
compelled to resort to one or more private sales to a restricted group of
purchasers who will be obliged to agree, among other things, to acquire
such securities for their own account, for investment and not with a view
to the distribution or resale thereof. CNS agrees that any such Collateral
sold at any such private sale may be sold at a price and upon other terms
less favorable to the seller than if sold at public sale and that each such
private sale shall be deemed to have been made in a commercially reasonable
manner. Lender shall have no obligation to delay sale of any such
securities for the period of time necessary to permit CNS, even if CNS
would agree, to register such securities for public sale under the
Securities Act. CNS agrees that private sales made under the foregoing
circumstances shall be deemed to have been made in a commercially
reasonable manner.
(e) Lender shall give CNS thirty days' prior notice of the time and
place that any sale or other disposition is to be made, which notice CNS
4
<PAGE>
agrees is reasonable, all other demands, advertisements and notices being
hereby waived. Within such 30 day period, Lender and Lender agree that CNS
may repurchase or cause another to purchase the Shares at a price equal to
or better than the price set forth in the above-referenced notice.
(f) Unless CNS exercises its right to repurchase the Shares set forth
in subsection (e) above, Lender shall not be obligated to make any sale of
Pledged Collateral if it shall determine not to do so, regardless of the
fact that notice of sale may have been given. Lender may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and
place to which the same was so adjourned.
(g) The remedies provided herein in favor of Lender shall not be
exclusive, but shall be cumulative and in addition to all other remedies in
favor of Lender existing at law or in equity.
7. Lender Appointed Attorney-in-Fact.
(a) To effectuate the terms and provisions hereof, CNS hereby appoints
Lender as CNS's attorney-in-fact upon the occurrence and during the
continuance of a default under the Term Loan Agreement for the purpose of
carrying out the provisions of this Pledge Agreement and taking any action
and executing any instrument which Lender may deem necessary or advisable
to accomplish the purposes hereof. Without limiting the generality of the
foregoing, Lender shall have the right and power to:
(i) receive, endorse and collect all checks and other orders for
the payment of money made payable to CNS representing any interest or
dividend or other distribution or amount payable in respect of the
Pledged Collateral or any part thereof and to give full discharge for
the same; and
(ii) execute endorsements, assignments or other instruments of
conveyance or transfer with respect to all or any of the Pledged
Collateral.
(b) Other than any action which constitutes gross negligence or
willful misconduct, all acts done under the foregoing authorization are
hereby ratified and approved and neither Lender nor any designee or Lender
5
<PAGE>
thereof shall be liable for any act or omission, for any error of judgment
or for any mistake of fact or law.
(c) This power of attorney, being coupled with an interest, is
irrevocable while any Secured Obligations remain unpaid or unperformed.
8. Lender's Duties; Reasonable Care.
(a) Lender shall have the duty to exercise reasonable care in the
custody and preservation of any Pledged Collateral in its possession, which
duty shall be fully satisfied if Lender maintains safe custody of such
Pledged Collateral.
(b) Lender shall have no further obligation to ascertain the
occurrence of, or to notify CNS with respect to, any events and shall not
be deemed to assume any such further obligation as a result of the
establishment by Lender of any internal procedures with respect to any
securities in its possession, nor shall Lender shall not be deemed to
assume any other responsibility for, or obligation or duty with respect to,
any Pledged Collateral, or its use, of any nature or kind, or any matter or
proceedings arising out of or relating thereto, including any obligation or
duty to take any action to collect, preserve or protect its or CNS's rights
in the Pledged Collateral or against any prior parties thereto, but the
same shall be at CNS's sole risk and responsibility at all times.
(c) CNS hereby releases Lender, Lender, and their respective officers,
directors, employees and agents, from any claims, causes of action and
demands at any time arising out of or with respect to this Pledge
Agreement, the Pledged Collateral and/or any actions taken or omitted to be
taken by Lender with respect thereto (except, in the case of Lender, such
claims, causes of action and demands arising from the gross negligence or
willful misconduct of Lender), and CNS hereby agrees to hold Lender, Lender
and their respective officers, directors, employees and agents harmless
from and with respect to any and all such claims, causes of action and
demands (except such claims, causes of action and demands arising from the
gross negligence or willful misconduct of Lender).
9. Governing Law. This Agreement is being delivered in and shall be deemed
to be a contract governed by the laws of the State of California and shall be
interpreted and enforced in accordance with the laws of that state without
regard to the principles of conflicts of laws.
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<PAGE>
10. Admissibility of Pledge Agreement. CNS agrees that a copy of this
Pledge Agreement signed by CNS and transmitted by facsimile for delivery to
Lender shall be admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence.
11. Notices. All notices provided herein shall be in writing and shall be
(a) delivered; (b) sent by express or first class mail; or (c) sent by facsimile
transmission and confirmed in writing provided to the recipient in a manner
described in (a) or (b), and, if to CNS, addressed to it at 4630 Park Terrace
Drive, Westlake Village, California, 91361, Facsimile No. 818-878-7633 and if to
Lender, addressed to it at ____________________________________________________,
Facsimile No. _______________, or to such other address with respect to either
party as such party shall notify the other in writing; such notices shall be
deemed given when so delivered, mailed or transmitted.
12. Entire Agreement; Amendments and Modification. This Pledge Agreement is
the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior understandings and agreements. No provision of this
Agreement shall be amended or modified except by a written instrument executed
by CNS and Lender.
13. Continuing Pledge Agreement.
(a) This Pledge Agreement shall create a continuing security interest
in the Pledged Collateral and shall be binding upon CNS and its successors
and assigns and inure to the benefit of, and be enforceable by, Lender,
Lender and their respective successors, transferees and assigns.
(b) Upon the payment in full of the Loan and all other amounts payable
under this Pledge Agreement, the security interest granted hereby shall
terminate and all rights to the Pledged Collateral shall revert to CNS.
Upon any such termination, Lender will, at CNS's expense and without
representation or warranty of any nature whatsoever and wholly without
recourse, return to CNS such of the Pledged Collateral as shall not have
been sold or otherwise applied pursuant to the terms hereof and execute and
deliver to CNS such documents as CNS shall reasonably request to evidence
such termination.
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14. Captions; Separability. The captions of the sections and subsections of
this Pledge Agreement have been inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Pledge
Agreement. If any term of this Pledge Agreement shall be held to be invalid,
illegal or unenforceable, the validity of all other terms hereof shall in no way
be affected thereby.
BORROWER:
COYOTE NETWORK SYSTEMS, INC.
BY /s/ James J. Fiedler
------------------------------
Its Chairman of the Board and
Chief Executive Officer
LENDER:
____________________________________
Name: ____________________________
8
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SCHEDULE I
Pledged Collateral
- ---------------------------- ------------------------------ --------------------
Owner Description Certificate No(s).
- ---------------------------- ------------------------------ --------------------
Coyote Network Systems, Inc. _________ shares of common _______
stock of INET Acquisition, Inc.
(n/k/a INET Interactive Network
System, Inc.), a California
corporation
- ---------------------------- ------------------------------ --------------------
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EXHIBIT B
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
Dated: November 1, 1999
To Purchase _________ Shares of Common Stock of
COYOTE NETWORK SYSTEMS, INC.
COYOTE NETWORK SYSTEMS, INC. a Delaware corporation ("CNS"), hereby
certifies that _____________________________ , its permissible transferees,
designees, successors and assigns (collectively, the "Holder"), for value
received, is entitled to purchase from CNS at any time before November 1, 2002
up to ________ shares (each a "Share" and collectively the "Shares") of CNS's
common stock, $1.00 par value per share (the "Common Stock"), at an exercise
price (the "Exercise Price") of $4.50 per Share. This Certificate shall be valid
for a period of three years from the date hereof. The number of Shares
purchasable hereunder and the Exercise Price are subject to adjustment as
provided in Section 5 hereof.
1. Condition Precedent. The warrants represented by this Common Stock
Purchase Warrant Certificate (the "Warrant Certificate" or "Certificate") shall
not be eligible for exercise and CNS shall be under no obligation to honor any
attempted exercise until CNS has received a countersigned original of this
Certificate.
2. Exercise of Warrants. Upon presentation and surrender of this Warrant
Certificate, or a lost certificate affidavit in form reasonably
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acceptable to CNS, accompanied by a completed Election to Purchase in the form
attached hereto as Exhibit A (the "Election to Purchase") duly executed, at the
office of CNS at 4360 Park Terrace Drive, Westlake Village, CA 91361, Attn:
President, together with a check payable to CNS in the amount of the Exercise
Price multiplied by the number of Shares being purchased, CNS or CNS's Transfer
Agent as the case may be, shall, within three (3) Trading Days (as defined
below) of receipt of the foregoing, deliver to the Holder hereof, certificates
of fully paid and non-assessable Common Stock which in the aggregate represent
the number of Shares being purchased. The certificates so delivered shall be in
such denominations as may be reasonably requested by the Holder and shall be
registered in the name of the Holder, or such other name as shall be designated
by the Holder (provided that the Holder supplies CNS with a legal opinion of
counsel, acceptable to CNS and its counsel, that the issuance of the certificate
to other than the Holder is permitted under applicable federal and state
securities laws and does not affect the exemption from registration relied upon
by CNS in this offering). All or less than all of the Warrants represented by
this Certificate may be exercised and, in case of the exercise of less than all,
CNS, upon receipt of this Warrant Certificate, will at CNS's expense deliver to
the Holder, a new Warrant Certificate or Certificates (in such denominations as
may be requested by the Holder) of like tenor, containing the same terms as this
Warrant Certificate and dated the date hereof entitling the Holder to purchase
the number of Shares represented by this Certificate which have not been
exercised.
3. Exchange, Transfer and Replacement.
(a) Exchange. At any time prior to the exercise hereof, this Certificate
may be exchanged upon presentation and surrender to CNS, alone or with other
Certificates of like tenor of different denominations registered in the name of
the same Holder, for another Certificate or Certificates of like tenor,
containing the same terms as the Warrant Certificate, in the name of such
Holder, exercisable for the aggregate number of Shares as provided in the
Certificate or Certificates surrendered.
(b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably
satisfactory to CNS of the loss, theft, destruction, or mutilation of this
Warrant Certificate and, in the case of any such loss, theft, or destruction,
upon delivery of an indemnity agreement reasonably satisfactory in form and
amount to CNS, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant Certificate, CNS, at its expense, will execute and
deliver in lieu thereof, a new Warrant Certificate of like tenor and containing
the same terms and conditions as this Warrant Certificate.
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(c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
Certificate to CNS in connection with any transfer, exchange or replacement as
provided in this Section 3, this Warrant Certificate shall be promptly canceled
by CNS. CNS shall pay all taxes (other than securities transfer taxes and the
Holder's income taxes) and all other expenses (other than legal expenses, if
any, incurred by the Holder as any transferees) and charges payable in
connection with the preparation, execution and delivery of Warrant Certificates
pursuant to this Section 3.
(d) Warrant Register. CNS shall maintain, at its principal executive
offices (or at the offices of the transfer agent for the Warrant Certificate or
such other office or agency of CNS as it may designate by notice to the holder
hereof), a register for this Warrant Certificate (the "Warrant Register"), in
which CNS shall record the name and address of the entity in whose name this
Warrant Certificate has been issued, as well as the name and address of each
permitted transferee and each prior owner of this Warrant Certificate.
4. Rights and Obligations of Holders of this Certificate. The Holder of
this Certificate shall not, by virtue hereof, be entitled to any rights of a
stockholder in CNS, either at law or in equity; provided, however, that in the
event any certificate representing shares of Common Stock or other securities is
issued to the Holder hereof upon exercise of some or all of the Warrants, such
Holder shall, for all purposes, be deemed to have become the holder of record of
such Common Stock on the date on which this Certificate, together with a duly
executed Purchase Form, was surrendered and payment of the aggregate Exercise
Price was made, irrespective of the date of delivery of such share certificate.
5. Adjustments.
(a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the
event CNS: (i) pays a dividend in Common Stock or makes a distribution in Common
Stock, (ii) subdivides its outstanding Common Stock into a greater number of
shares, (iii) combines its outstanding Common Stock into a smaller number of
shares or (iv) increases or decreases the number of shares of Common Stock
outstanding by reclassification of its Common Stock (including a
recapitalization in connection with a consolidation or merger in which CNS is
the continuing corporation), then (1) the Exercise Price on the record date of
such division or distribution or the effective date of such action shall be
adjusted by multiplying such Exercise Price by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately before
such event and the denominator of which is the number of shares of Common Stock
outstanding immediately after such event, and (2) the number of shares of Common
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Stock for which this Warrant Certificate may be exercised immediately before
such event shall be adjusted by multiplying such number by a fraction, the
numerator of which is the Exercise Price immediately before such event and the
denominator of which is the Exercise Price immediately after such event.
(b) Cash Dividends and Other Distributions. In the event that at any time
or from time to time CNS shall distribute to all holders of Common Stock (i) any
dividend or other distribution of cash, evidences of its indebtedness, shares of
its capital stock or any other properties or securities or (ii) any options,
warrants or other rights to subscribe for or purchase any of the foregoing
(other than in each case, (w) the issuance of any rights under a shareholder
rights plan, (x) any dividend or distribution described in Section 5(a), (y) any
rights, options, warrants or securities described in Section 5(c) and (z) any
cash dividends or other cash distributions from current earnings), then the
number of shares of Common Stock issuable upon the exercise of each Warrant
Certificate shall be increased to a number determined by multiplying the number
of shares of Common Stock issuable upon the exercise of such Warrant Certificate
immediately prior to the record date for any such dividend or distribution by a
fraction, the numerator of which shall be such Current Market Value (as
hereinafter defined) per share of Common Stock on the record date for such
dividend or distribution, and the denominator of which shall be such Current
Market Value per share of Common Stock on the record date for such dividend or
distribution less the sum of (x) the amount of cash, if any, distributed per
share of Common Stock and (y) the fair value (as determined in good faith by the
Board of Directors of CNS, whose determination shall be evidenced by a board
resolution, a copy of which will be sent to the Holders upon request) of the
portion, if any, of the distribution applicable to one share of Common Stock
consisting of evidences of indebtedness, shares of stock, securities, other
property, warrants, options or subscription or purchase rights; and the Exercise
Price shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such record date by the above fraction. Such adjustments
shall be made whenever any distribution is made and shall become effective as of
the date of distribution, retroactive to the record date for any such
distribution. No adjustment shall be made pursuant to this Section 5(b) which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant Certificate or increasing the Exercise
Price.
(c) Rights Issue. In the event that at any time or from time to time CNS
shall issue rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock to all holders of Common Stock
(other than in connection with the adoption or implementation of a shareholder
4
<PAGE>
rights plan by CNS or in connection with existing or future employee stock
option plans approved by the Board of Directors of CNS) without any charge,
entitling such holders to subscribe for or purchase shares of Common Stock at a
price per share that as of the record date for such issuance is less than the
then Current Market Value per share of Common Stock, the number of shares of
Common Stock issuable upon the exercise of each Warrant Certificate shall be
increased to a number determined by multiplying the number of shares of Common
Stock theretofore issuable upon exercise of each Warrant Certificate by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options, warrant or
securities plus the number of additional shares of Common Stock offered for
subscription or purchase or into or for which such securities that are issued
are convertible, exchangeable or exercisable, and the denominator of which shall
be the number of shares of Common Stock outstanding on the date of issuance of
such rights, option, warrants or securities plus the total number of shares of
Common Stock which the aggregate consideration expected to be received by CNS
(assuming the exercise or conversion of all such rights, options, warrants or
securities) would purchase at the then Current Market Value per share of Common
Stock. In the event of any such adjustment, the Exercise Price shall be adjusted
to a number determined by dividing the Exercise price immediately prior to such
date of issuance by the aforementioned fraction. Such adjustment shall be made
immediately after such rights, options or warrants are issued and shall become
effective, retroactive to the record date for the determination of stockholders
entitled to receive such rights, options, warrants or securities. No adjustment
shall be made pursuant to this Section 5(c) which shall have the effect of
decreasing the number of shares of Common Stock purchasable upon exercise of
each Warrant Certificate or of increasing the Exercise Price.
(d) Combination; Liquidation.
(i) Except as provided in Section 5(d)(ii) below, in the event of a
Combination (as defined below), each Holder shall have the right to receive upon
exercise of the Warrant Certificates the kind and amount of shares of capital
stock or other securities or property which such Holder would have been entitled
to receive upon or as a result of such Combination had such Warrant Certificate
been exercised immediately prior to such event (subject to further adjustment in
accordance with the terms hereof). Unless paragraph (ii) is applicable to a
Combination, CNS shall provide that the surviving or acquiring Person (the
"Successor Company") in such Combination, if it is other than CNS, will assume
by written instrument the obligations under this Warrant Certificate and the
obligation to deliver to the Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the Holder may be entitled to
acquire. The provisions of this Section 5(d)(i)
5
<PAGE>
shall similarly apply to successive Combinations involving any Successor
Company. "Combination" means an event in which CNS consolidates with, mergers
with or into, or sells all or substantially all of its assets to another Person,
where "Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
(ii) In the event of (x) a Combination where consideration to the
holders of Common Stock in exchange for their shares is payable solely in cash
or (y) the dissolution, liquidation or winding-up of CNS, the Holder shall be
entitled to receive, upon surrender of this Warrant Certificate, distributions
on an equal basis with the holders of Common Stock or other securities issuable
upon exercise of the Warrant Certificates, as if the Warrant Certificates had
been exercised immediately prior to such event, less the Exercise Price. In case
of any Combination described in this Section 5(d)(ii), the surviving or
acquiring Person and, in the event of any dissolution, liquidation or winding-up
of CNS, CNS, shall deposit promptly following the consummation of such
combination or at the time of such dissolution, liquidation or winding-up with
an agent or trustee for the benefit of the Holder, the funds, if any, necessary
to pay to the Holder the amounts to which it is entitled as described above.
After such funds and the surrendered Warrant Certificate is received, CNS is
required to deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Person or Persons as it may be directed in writing by the Holder
surrendering the Warrant Certificate.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of
shares of Common Stock and other property, if any, issuable upon exercise of the
Warrant Certificate is adjusted, as provided in this Section 5, CNS shall
deliver to the Holder of the Warrant Certificate in accordance with Section 10,
a certificate of CNS's Chief Financial Officer setting forth, in reasonable
detail, the event requiring the adjustment and the method by which such
adjustment was calculated (including a description of the basis on which (i) the
Board of Directors determined the fair value of any evidences of indebtedness,
other securities or property or warrants, options or other subscription or
purchase rights and (ii) the Current Market Value of the common Stock was
determined, if either of such determinations were required), and specifying the
Exercise Price and number of shares of Common Stock issuable upon exercise of
Warrant Certificate after giving effect to such adjustment.
(f) Notice of Certain Transactions. In the event that CNS shall propose (a)
to pay any dividend payable in securities of any class to the
6
<PAGE>
holders of its Common Stock or to make any other non-cash dividend or
distribution to the holders of its Common Stock, (b) to offer the holders of its
Common Stock rights to subscribe for or to purchase any securities convertible
into shares of Common Stock or shares of stock of any class or any other
securities, rights or options, (c) to effect any capital reorganization,
reclassification, consolidation or merger affecting the class of Common Stock,
as a whole, or (d) to effect the voluntary or involuntary dissolution,
liquidation or winding-up of CNS, CNS shall, within the time limits specified
below, send to the Holder a notice of such proposed action or offer. Such notice
shall be mailed to the Holder at the address as it appears in the Warrant
Register (as defined in Section 3(d)), which notice shall specify the record
date for and the purposes of such dividend, distribution or rights, or the date
such issuance or event is to take place and the date of participation therein by
the holders of Common Stock, if any such date is to be fixed, and shall briefly
indicate the effect of such action on the number of shares of Common Stock and
on the number and kind of any other shares of stock and on other property, if
any, and the number of shares of Common Stock and other property, if any,
issuable upon exercise of this Warrant Certificate and the Exercise Price after
giving effect to any adjustment pursuant to Section 5 which will be required as
a result of such action. Such notice shall be given as promptly as possible and
(x) in the case of any action covered by clause (a) or (b) above, at least 10
days prior to the record date for determining holders of the Common Stock for
purposes of such action or (y) in the case of any other such action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier.
(g) Current Market Value. "Current Market Value" per share of Common Stock
or any other security at any date means (i) if the security is not registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
value of the security, determined in good faith by the Board of Directors of CNS
or (ii) if the security is registered under the Exchange Act, the average of the
daily closing bid prices (or the equivalent in an over-the-counter market) for
each day on which the Common Stock is traded for any period on the principal
securities exchange or other securities market on which the common Stock is
being traded (each, a "Trading Day") during the period commencing ten (10)
Trading Days before such date and ending on the date one (1) Trading Day prior
to such date, or if the security has been registered under the Exchange Act for
less than ten (10) consecutive Trading Days before such date, the average of the
daily closing bid prices (or such equivalent) for all of the Trading Days before
such date for which daily closing bid prices are available; provided, however,
that if the closing bid price is not determinable for at least five (5) Trading
Days in such period, the "Current Market Value" of the
7
<PAGE>
security shall be determined as if the security were not registered under the
Exchange Act.
(h) No Impairment of Holder's Rights. CNS will not, by amendment of its
certificate of incorporation or bylaws or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, except as contemplated hereby, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant
Certificate, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all action as may be necessary or
appropriate in order to protect the rights of the Holder against dilution or
other impairment.
6. Registration Rights. CNS agrees to use its best efforts to file for
registration of the Common Stock available upon exercise of the Warrants as soon
as practicable. Moreover, if, at any time while this Warrant Certificate is
exercisable or the Holder owns any shares of CNS's Common Stock received upon
exercise of this Warrant Certificate and such shares are not tradable pursuant
to the provisions of Rule 144 under the Securities Act of 1933, as amended, CNS
decides to register any of its securities for its own account or for the account
of others (excluding registrations relating to equity securities to be issued
solely in connection with an acquisition of any entity or business or in
connection with stock option or other employee benefit plans), CNS will promptly
give the Holder written notice thereof, and will use its best efforts to include
in such registration all or any part of the shares which may be received (or
have previously been received) upon exercise of this Warrant Certificate so
requested by such Holder (excluding any Registrable Securities previously
included in a Registration Statement). The Holder's request for registration
must be given to CNS in writing within ten (10) days after receipt of the notice
from CNS. If the registration for which CNS gives notice is a public offering
involving an underwriting, CNS will so advise the Holder as part of the
above-described written notice. In such event, if the managing underwriter(s) of
the public offering impose a limitation on the number of shares of Common Stock
which may be included in the registration statement because, in such
underwriter(s)' judgment, such limitation would be necessary to effect an
orderly public distribution, then CNS will be obligated to include only such
limited portion, if any, of the shares requested by the Holder which the
managing underwriter(s) deems appropriate giving first preference to the shares
to be sold by CNS.
7. Issuance of Certificates. Within three (3) Trading Days of receipt of a
duly completed Election to Purchase form, together with this Certificate and
payment of the Exercise Price, CNS, at its expense, will cause to be issued
8
<PAGE>
in the name of and delivered to the Holder of this Warrant Certificate, a
certificate or certificates for the number of fully paid and non-assessable
shares of Common Stock to which that holder shall be entitled on such exercise.
In lieu of issuance of a fractional share upon any exercise hereunder, CNS will
pay the cash value of that fractional share, calculated on the basis of the
Exercise Price. Prior to registration of the resale of the shares of Common
Stock underlying this Warrant Certificate, all such certificates shall bear a
restrictive legend to the effect that the Shares represented by such certificate
have not been registered under the 1933 Act, and that the Shares may not be sold
or transferred in the absence of such registration or an exemption therefrom,
such legend to be substantially in the form of the bold-face language appearing
at the top of Page 1 of this Warrant Certificate.
8. Disposition of Warrants or Shares. The Holder of this Warrant
Certificate, each transferee hereof and any holder and transferee of any Shares,
by his or its acceptance thereof, agrees that no public distribution of Warrants
or Shares will be made in violation of the provisions of the 1933 Act.
Furthermore, it shall be a condition to the transfer of this Warrant Certificate
that any transferee thereof deliver to CNS his or its written agreement to
accept and be bound by all of the relevant terms and conditions contained in
this Warrant Certificate.
9. Merger or Consolidation. CNS will not merge or consolidate with or into
any other corporation, or sell or otherwise transfer its property, assets and
business substantially as an entirety to another corporation, unless the
corporation resulting from such merger or consolidation (if not CNS), or such
transferee corporation, as the case may be, shall expressly assume, by
supplemental agreement reasonably satisfactory in form and substance to the
Holder, the due and punctual performance and observance of each and every
covenant and condition of this Warrant Certificate to be performed and observed
by CNS.
10. Notices. Except as otherwise specified herein to the contrary, all
notices, requests, demands and other communications required or desired to be
given hereunder shall only be effective if given in writing by certified or
registered U.S. mail with return receipt requested and postage prepaid; by
private overnight delivery service (e.g. Federal Express); by facsimile
transmission (if no original documents or instruments must accompany the
notice); or by personal delivery. Any such notice shall be deemed to have been
given (a) on the business day immediately following the mailing thereof, if
mailed by certified or registered U.S. mail as specified above; (b) on the
business day immediately following deposit with a private overnight delivery
service if sent by said service; (c) upon receipt of confirmation of
transmission if sent by facsimile transmission; or (d) upon personal delivery of
the notice. All such notices shall be sent to the following addresses (or to
such other address or addresses as a party may have advised the other in the
manner provided in this Section 10):
9
<PAGE>
If to CNS:
Coyote Network Systems, Inc.
4360 Park Terrace Drive
Westlake Village, CA 91361
Attention: President
with a copy to:
Reinhart, Boerner, Van Deuren, et al.
1700 Lincoln Street, Suite 3725
Denver, CO 80203
Attention: Timothy G. Atkinson, Esq.
If to Holder:
------------------------------
------------------------------
------------------------------
------------------------------
(Social Security or Tax Identification Number)
With a copy to:
------------------------------
------------------------------
------------------------------
Notwithstanding the time of effectiveness of notices set forth in this Section,
an Election to Purchase shall not be deemed effectively given until it has been
duly completed and submitted to CNS together with the original Warrant
Certificate to be exercised and payment of the Exercise Price in the manner set
forth in this Warrant Certificate.
11. Successors and Assigns. This Warrant Certificate shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
10
<PAGE>
12. Headings. The headings of various sections of this Warrant Certificate
have been inserted for reference only and shall not affect the meaning or
construction of any of the provisions hereof.
13. Severability. If any provision of this Warrant Certificate is held to
be unenforceable under applicable law, such provision shall be excluded from
this Warrant Certificate, and the balance hereof shall be interpreted as if such
provision were so excluded.
14. No Short Sales. Holder agrees that so long as it possesses Warrant
under this Warrant Certificate, it will not engage in any short sales of CNS's
Common Stock, "short sales against the box," or any similar hedged trading of
CNS's Common Stock.
15. Modification and Waiver. This Warrant Certificate and any provision
hereof may be amended, waived, discharged or terminated only by an instrument in
writing signed by CNS and the Holder.
16. Specific Enforcement. CNS and the Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Warrant Certificate were not performed in accordance with their specific terms
or were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent or cure breaches of the
provisions of this Warrant Certificate and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which either of
them may be entitled by law or equity.
17. Assignment. This Warrant Certificate may not be transferred or
assigned, in whole or in part, without the prior written consent of CNS.
11
<PAGE>
IN WITNESS WHEREOF, CNS has caused this Warrant Certificate to be duly
executed, manually or by facsimile, by one of its officers thereunto duly
authorized.
COYOTE NETWORK SYSTEMS, INC.
Date: November 1, 1999 By: /s/James J. Fiedler
------------------------------------
Name: James J. Fiedler
Title: Chairman of the Board and
Chief Executive Officer
--------------------------------------
By:____________________________________
Name:
Title:
12
<PAGE>
EXHIBIT A
ELECTION TO PURCHASE
To Be Executed by the Holder
in Order to Exercise the Common Stock
Purchase Warrant Certificate
The undersigned Holder hereby elects to exercise _______ of the
Warrants represented by the attached Common Stock Purchase Warrant Certificate,
and to purchase the shares of Common Stock issuable upon the exercise of such
Warrants, and requests that certificates for securities be issued in the name
of:
----------------------------------------------------------
----------------------------------------------------------
(Please type or print name and address)
----------------------------------------------------------
(Social Security or Tax Identification Number)
and delivered to:______________________________________________________________
_________________________________________________________________ .
(Please type or print name and address if different from above)
If such number of Warrants being exercised hereby shall not be all the Warrants
evidenced by the attached Common Stock Purchase Warrant Certificate, a new
Common Stock Purchase Warrant Certificate for the balance of such Warrants shall
be registered in the name of, and delivered to, the Holder at the address set
forth below.
In full payment of the Exercise Price with respect to the Warrants
exercised and transfer taxes, if any, the undersigned hereby tenders payment of
$__________ by check, money order or wire transfer payable in United States
currency to the order of Coyote Network Systems, Inc.
HOLDER:
Dated:___________________ By:___________________________________
Name:
Title:
Address:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF COYOTE NETWORKS SYSTEMS, INC. AS
OF AND FOR THE QUARTER ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1036
<SECURITIES> 0
<RECEIVABLES> 19969
<ALLOWANCES> (522)
<INVENTORY> 2392
<CURRENT-ASSETS> 24775
<PP&E> 9691
<DEPRECIATION> (2751)
<TOTAL-ASSETS> 44188
<CURRENT-LIABILITIES> 27975
<BONDS> 1464
0
6000
<COMMON> 13678
<OTHER-SE> (3191)
<TOTAL-LIABILITY-AND-EQUITY> 44188
<SALES> 7518
<TOTAL-REVENUES> 7518
<CGS> 6384
<TOTAL-COSTS> 6384
<OTHER-EXPENSES> 6538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 482
<INCOME-PRETAX> 397
<INCOME-TAX> 0
<INCOME-CONTINUING> 401
<DISCONTINUED> (4)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
