COYOTE NETWORK SYSTEMS INC
8-K, 1999-07-06
TELEPHONE & TELEGRAPH APPARATUS
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 8-K


                                 CURRENT REPORT

                       Pursuant to Section 13 or 15(d) of
                     the Securities and Exchange Act of 1934


                Date of Report (Date of Earliest Event Reported):
                                  May 24, 1999



                          COYOTE NETWORK SYSTEMS, INC.
- --------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


         Delaware                         1-5486                 36-2448698
- -------------------------------   ---------------------      ---------------
(State or other jurisdiction of   (Commission File Number)     (IRS Employer
         incorporation)                                      Identification No.)



                             4360 Park Terrace Drive
                           Westlake Village, CA 91361
- --------------------------------------------------------------------------------
                     Address of principal executive offices


                                 (818) 735-7600
- --------------------------------------------------------------------------------
                         Registrant's Telephone Number,
                               Including area code






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<PAGE>

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.


Item 7.  Financial Statements and Exhibits

         (c)      Exhibits

                  4.1      Form of Warrant Agreement




<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.


Dated:        July 2, 1999                COYOTE NETWORK SYSTEMS, INC.


                                    By:   /s/ Brian A. Robson
                                          -------------------------------------
                                          Brian A. Robson
                                          Executive Vice President,
                                          Chief Financial Officer and Secretary




<PAGE>






                              WARRANT AGREEMENT OF

                          COYOTE NETWORK SYSTEMS, INC.

                                2,225,000 Shares

                            Dated as of June 30, 1999





                         Common Stock Purchase Warrants


<PAGE>

         WARRANT  AGREEMENT  dated as of June 30, 1999,  between  Coyote Network
Systems,  Inc., a Delaware  corporation  (the  "Company"),  and  American  Stock
Transfer & Trust Company,  as Warrant Agent (the "Warrant  Agent"),  and for the
benefit  of the  registered  holders  from time to time of the  Warrants  issued
hereunder (collectively, the "Warrant Holders" or "Holders").

         Pursuant to the  Stipulation of  Settlement,  executed as of October 6,
1998,  between the Company,  the plaintiffs and others in connection  with In re
The Diana  Corporation  Securities  Litigation,  CV-97-3186-R,  USDC,  CDCA, the
Company  proposes  to  issue  Common  Stock  Purchase  Warrants  as  hereinafter
described  (collectively  the  "Warrants") to purchase an aggregate of 2,225,000
shares of its  Common  Stock,  $1.00 par value per share  (the  shares of Common
Stock  issuable  on  exercise of the  Warrants  being  referred to herein as the
"Warrant  Shares"),  in favor of the  Warrant  Holders.  Capitalized  terms used
herein, if not otherwise defined, are defined in Section 9 hereof.

         The parties hereby agree as follows:

SECTION 1.   Transferability; Notice of Corporate Actions; Form of the Warrants.

         1.1  Registration.   The  Warrants  shall  be  numbered  and  shall  be
registered  on the books of the Company  maintained  by the Warrant Agent at its
office at 40 Wall Street,  48th Floor,  New York,  New York 10005 ("the  Warrant
Register").  The Company  and the  Warrant  Agent shall be entitled to treat the
Holder of any  Warrants as the owner in fact  thereof for all purposes and shall
not be bound to  recognize  any  equitable or other claim to or interest in such
Warrants on the part of any other Person.

         1.2 Transferability.  The Warrants are freely transferable,  subject to
applicable  securities  laws  restrictions.  The new Holder of any  Warrants  so
transferred shall continue to be bound by this Agreement.

         1.3 Transfer General.  Subject to the terms hereof,  the Warrants shall
be transferable only on the Warrant Register upon delivery thereof duly endorsed
by  the  Holder  or by  his  duly  authorized  attorney  or  representative,  or
accompanied  by proper  evidence  of  succession,  assignment  or  authority  to
transfer.  In all  cases of  transfer  by an  attorney,  the  original  power of
attorney,  duly approved, or a copy thereof, duly certified,  shall be deposited
and  remain  with  the  Warrant  Agent.   In  case  of  transfer  by  executors,
administrators,  guardians or other legal  representatives,  duly  authenticated
evidence  of  their  authority  shall be  produced,  and may be  required  to be
deposited  and to remain  with the  Warrant  Agent in its  discretion.  Upon any
registration  of transfer,  the Warrant Agent shall  countersign and deliver new
Warrants to the Persons entitled  thereto.  The Company or the Warrant Agent may
require the payment of a sum sufficient to cover any tax or governmental  charge
that may be imposed in connection with any such transfer.

         1.4 Notices of  Corporate  Actions.  In the event of: (a) any taking by
the  Company of a record of the  holders of the Common  Stock for the purpose of
determining  the holders  thereof who are entitled to receive any  extraordinary
dividend or  distribution  (other than cash  dividends  representing  a dividend
payment  on an  annualized  basis of not more  than 8% of the  Company's  market
capitalization  at the time of such  dividend)  or any right to  subscribe  for,
purchase or  otherwise  acquire any shares of capital  stock of any class or any
other  securities,   (b)  any  capital   reorganization  of  the  Company,   any
reclassification  or recapitalization of the capital stock of the Company or any
consolidation  or merger  involving  the  Company  and any  other  Person or any
transfer  or other  disposition  of all or  substantially  all the assets of the
Company to another  Person;  or (c) any  voluntary or  involuntary  dissolution,
liquidation or winding-up of the Company, the Company shall mail to each Warrant
Holder  in  accordance  with  the  provisions  of  Section  14  hereof  a notice
specifying (i) the date or expected date on which any such record is to be taken


                                       1
<PAGE>

for the  purpose of such  dividend,  distribution  or right,  and the amount and
character of such dividend,  distribution or right and (ii) the date or expected
date on  which  any  such  reorganization,  reclassification,  recapitalization,
consolidation,  merger,  transfer,  disposition,   dissolution,  liquidation  or
winding-up is to take place,  the time,  if any such time is to be fixed,  as of
which the holders of record of Common Stock shall be entitled to exchange  their
shares of Common Stock for the  securities or Other  Property  deliverable  upon
such reorganization, reclassification,  recapitalization, consolidation, merger,
transfer, disposition,  dissolution, liquidation or winding-up and a description
in  reasonable  detail of the  transaction.  Such notice  shall be mailed to the
extent  practicable  at least  thirty  (30),  but not more than ninety (90) days
prior to the date therein specified. No defect in any such notice, or failure to
make  such  notice,  shall  affect  the  validity  of any  corporate  action  as
aforesaid.

         1.5 Form of the  Warrants.  The text of the Warrants and of the form of
election to purchase Warrant Shares (the "Purchase Form") shall be substantially
as set forth  respectively  in Exhibits A and B attached  hereto.  The price per
Warrant Share (the "Exercise  Price") and the number of Warrant Shares  issuable
upon exercise of each Warrant are subject to adjustment  upon the  occurrence of
certain  events,  all as hereinafter  provided.  The Warrants shall be executed,
manually or by facsimile, on behalf of the Company by its Chairman of the Board,
its Chief Executive Officer, President or one of its Vice Presidents.

                  The Warrants shall be dated as of the date of countersignature
thereof by the Warrant Agent either upon initial issuance or upon transfer.

SECTION 2.  Term of the Warrants; Exercise of the Warrants; Exercise Price, Etc.

         2.1 Term of the Warrants.  Subject to the terms of this Agreement,  the
Holder shall have the right,  which may be exercised from time to time, from and
through the dates set forth in the  Warrants,  to purchase  from the Company the
number of fully paid and  nonassessable  Warrant  Shares which the Holder may at
the time be entitled to  purchase on exercise of such  Warrant.  If the last day
for the exercise of the Warrants  shall not be a Business  Day, then the Warrant
may be exercised on the next succeeding Business Day.

         2.2 Vesting of the Warrants.  The Warrants shall  immediately  vest and
may be exercised on or after the original  issuance date thereof (the  "Issuance
Date"),  which is scheduled to be on or about _______,  1999, in accordance with
the terms of this Agreement and the Warrant Certificate.

         2.3  Exercise of the  Warrants.  The  Warrants  may be  exercised  upon
surrender to the Company, at the office of the Warrant Agent, of the certificate
evidencing the Warrant to be exercised,  together with the Purchase Form, in the
form of Exhibit B hereto, on the reverse thereof duly filled in and signed,  and
upon payment to the Company,  of the Exercise Price (as determined in accordance
with the  provisions  of  Sections  2 and 6  hereof),  for the number of Warrant
Shares  in  respect  of which  such  Warrant  is then  exercised.  Upon  partial
exercise,  a Warrant  Certificate for the unexercised portion shall be delivered
to the Holder.  Payment of the aggregate Exercise Price shall be payable in cash
or by certified or official bank check or wire transfer.

         Subject to Section 3 hereof,  upon such  surrender  of the Warrants and
payment of the Exercise Price as aforesaid, the Company shall issue and cause to
be delivered  with all  reasonable  dispatch to or upon the written order of the
Holder and in such name or names as the Holder may  designate,  a certificate or
certificates  for the  number  of full  Warrant  Shares  so  purchased  upon the
exercise of such Warrant,  together with cash, as provided in Section 10 hereof,
in  respect  of any  fractional  Warrant  Shares  otherwise  issuable  upon such
exercise.  Such certificate or certificates  shall be deemed to have been issued


                                       2
<PAGE>

and any Person so  designated to be named therein shall be deemed to have become
a holder of record of such  Warrant  Shares as of the date of the  surrender  of
such Warrant and payment of the Exercise Price, as aforesaid; provided, however,
that if, at the date of surrender  of such Warrant and payment of such  Exercise
Price,  the  transfer  books  for the  Warrant  Shares  or other  class of stock
purchasable upon the exercise of such Warrant shall be closed,  the certificates
for the Warrant Shares in respect of which such Warrant are then exercised shall
be  issuable  as of the date on which such books  shall next be opened  (whether
before or after the  Expiration  Date) and until such date the Company  shall be
under no duty to deliver any  certificate  for such  Warrant  Shares;  provided,
further,  that the transfer books of record,  unless otherwise  required by law,
shall not be closed at any one time for a period longer than 20 calendar days.

         2.4  Exercise  Price.  The Exercise  Price shall be: (i) $9.00,  if the
Warrant is exercised within one year from the Issuance Date, (ii) $10.00, if the
Warrant is exercised  after one year but within two years from the Issuance Date
and (iii) $11.00,  if the Warrant is exercised after two years from the Issuance
Date, provided, however, that such Exercise Price shall be subject to adjustment
pursuant to Section 6 hereof.

SECTION 3.  Payment of Taxes and Indemnification.

         3.1 Payment of Taxes. The Company will pay all documentary stamp taxes,
if any,  attributable  to the issuance of Warrants  and Warrant  Shares upon the
exercise of the Warrants; provided, however, the Company may require the payment
of a sum sufficient to cover any tax or governmental  charge that may be imposed
in connection with any transfer of a Warrant or a Warrant Share, or any issuance
of a  Warrant  Share to a person  who was not the  Holder of the  Warrant  being
exercised.

         3.2 Indemnification. Warrant Holder hereby agrees to indemnify and hold
the  Company  harmless  from any and all taxes on the  Warrant  Holder  that may
result from the  issuance  of the  Warrants  or any  subsequent  exercise of the
Warrants and issuance of the Warrant Shares.

SECTION  4.  Mutilated  or  Missing  Warrants.  In case  the  Warrants  shall be
mutilated,  lost,  stolen or  destroyed,  the Company shall issue and deliver in
exchange and substitution for and upon  cancellation of the mutilated  Warrants,
or in lieu of and substitution for the Warrants lost, stolen or destroyed, a new
Warrant  certificate  of like  tenor and  representing  an  equivalent  right or
interest;  but only upon  receipt of  evidence  reasonably  satisfactory  to the
Company of such loss,  theft or  destruction  of such  Warrant  certificate  and
indemnity or bond, if requested, also reasonably satisfactory to the Company and
the Warrant Agent. An applicant for such substitute  Warrant  certificate  shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.

SECTION 5.    Reservation of Warrant Shares.

         5.1  Reservation of Warrant Shares.  There have been reserved,  and the
Company shall at all times keep reserved, out of its authorized shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants.  The transfer
agent for the Common Stock ("Transfer  Agent"),  and every  subsequent  transfer
agent for any shares of the Company's  capital stock  issuable upon the exercise
of any of the rights of purchase  aforesaid  will be and are hereby  irrevocably
authorized and directed at all times until the  Expiration  Date to reserve such
number of authorized shares as shall be requisite for such purpose.  The Company
will  keep a copy of this  Agreement  on file with the  Transfer  Agent and with
every  subsequent  transfer agent for any shares of the Company's  capital stock
issuable  upon  the  exercise  of the  rights  of  purchase  represented  by the
Warrants. The Company covenants that all Warrant Shares which may be issued upon


                                       3
<PAGE>

exercise of Warrants will,  upon issue,  be fully paid,  nonassessable,  free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue  thereof.  The Company will supply such Transfer Agent
and any subsequent transfer agent with duly executed stock certificates for such
purpose and will itself  provide or otherwise  make available any cash which may
be payable as provided in Section 10 of this Agreement. The Company will furnish
to such Transfer  Agent a copy of all notices of  adjustments  applicable to the
Warrants.  The  Warrants  surrendered  in the  exercise  of the  rights  thereby
evidenced shall be canceled by the Warrant Agent and/or the Transfer Agent.

         5.2  Cancellation  of the  Warrants.  In the  event the  Company  shall
purchase or  otherwise  acquire  any  Warrants,  the same shall be canceled  and
retired.

SECTION 6. Adjustment of Exercise Price and Number of Warrant Shares. The number
and kind of  securities  purchasable  upon the  exercise of the Warrants and the
Exercise  Price  shall be  subject  to  adjustment  from  time to time  upon the
happening of certain events, as hereinafter defined.

         6.1 Stock Dividends,  Subdivisions and Combinations. If at any time the
Company shall:

(i)  take a record  of the  holders  of its  Common  Stock  for the  purpose  of
entitling  them to  receive a dividend  payable  in, or other  distribution  of,
additional shares of Common Stock,

                   (ii) subdivide its shares of Common Stock  Outstanding into a
larger number of shares of such Common Stock, or

                  (iii)  combine its shares of Common Stock  Outstanding  into a
smaller number of shares of such Common Stock,

then the  Exercise  Price shall be adjusted to equal the product of the Exercise
Price in effect  immediately  prior to such event  multiplied  by a fraction the
numerator of which is equal to the number of shares of Common Stock  Outstanding
immediately  prior to the event requiring such adjustment and the denominator of
which is equal to the number of shares of Common Stock  Outstanding  immediately
after giving effect to such event.

         6.2 Adjustment of Number of Shares Purchasable. Upon any adjustment of
the Exercise Price as provided in Section 6.1 hereof,  each Warrant Holder shall
thereafter  be entitled to purchase  upon the exercise of the  Warrants,  at the
Exercise Price  resulting from such  adjustment,  the number of shares of Common
Stock (calculated to the nearest 1/100th of a share) obtained by multiplying the
Exercise Price in effect  immediately  prior to such adjustment by the number of
shares of Common Stock  issuable on the exercise  thereof  immediately  prior to
such adjustment and dividing the product thereof by the Exercise Price resulting
from such adjustment.

         6.3  Reorganization,   Reclassification,   Merger,   Consolidation  or
Disposition  of  Assets.  In case the  Company  shall  reorganize  its  capital,
reclassify  its  capital  stock,  consolidate  or  merge  with or  into  another
corporation  (where the Company is not the surviving  corporation or where there
is any change  whatsoever in, or  distribution  with respect to, the Outstanding
Common Stock of the Company),  or sell,  transfer or otherwise dispose of all or
substantially  all of its  property,  assets or business to another  corporation


                                       4
<PAGE>

and,  pursuant to the terms of such  reorganization,  reclassification,  merger,
consolidation  or  disposition  of  assets,  (i)  shares of common  stock of the
successor or  acquiring  corporation  or of the Company (if it is the  surviving
corporation) or (ii) any cash,  shares of stock or other  securities or property
of any nature whatsoever  (including  warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the  successor or acquiring
corporation  ("Other  Property")  are to be  received by or  distributed  to the
holders of Common Stock of the Company who are holders immediately prior to such
transaction, then the Warrant Holder shall have the right thereafter to receive,
upon  exercise  of the  Warrants,  the  number of shares of common  stock of the
successor or acquiring  corporation  or of the Company,  if it is the  surviving
corporation,  and  Other  Property  receivable  upon  or  as a  result  of  such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common  Stock for which the  Warrants are
exercisable  immediately  prior to such  event.  In such  event,  the  aggregate
Exercise  Price  otherwise  payable for the shares of Common Stock issuable upon
exercise of the Warrants shall be allocated among the shares of common stock and
Other Property receivable as a result of such reorganization,  reclassification,
merger,  consolidation  or disposition of assets in proportion to the respective
fair  market  values  of such  shares of common  stock  and  Other  Property  as
determined  in good faith by the Board of Directors  of the Company.  In case of
any such reorganization,  reclassification, merger, consolidation or disposition
of assets,  the successor or acquiring  corporation  (if other than the Company)
shall expressly  assume the due and punctual  observance and performance of each
and every  covenant and condition of this Agreement to be performed and observed
by the Company and all the  obligations and  liabilities  hereunder,  subject to
such  modifications  as may be reasonably  deemed  appropriate (as determined by
resolution  of the Board of  Directors  of the  Company) in order to provide for
adjustments  of any shares of the common  stock of such  successor  or acquiring
corporation for which the Warrants thus become exercisable,  which modifications
shall be as equivalent as  practicable to the  adjustments  provided for in this
Section 6. For purposes of this Section 6.3,  "common  stock of the successor or
acquiring corporation" shall include stock of such corporation of any class that
is not preferred as to dividends or assets over any other class of stock of such
corporation  and that is not subject to  redemption  and shall also  include any
evidences  of  indebtedness,  shares  of  stock  or  other  securities  that are
convertible into or exchangeable for any such stock,  either immediately or upon
the arrival of a specified  date or the  happening of a specified  event and any
warrants  or other  rights to  subscribe  for or purchase  any such  stock.  The
foregoing  provisions  of this Section 6.3 shall  similarly  apply to successive
reorganizations,  reclassification,  mergers,  consolidations  or disposition of
assets.

         6.4 Other Provisions Applicable to Adjustments Under this Section. The
following  provisions  shall  be  applicable  to the  adjustments  provided  for
pursuant to this Section 6:

                  (a) When  Adjustments To Be Made. The adjustments  required by
this  Section 6 shall be made during the period from the date of this  Agreement
and until the  Expiration  Date,  whenever and as often as any  specified  event
requiring  such  an  adjustment  shall  occur.  For  the  purpose  of  any  such
adjustment, any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.

                  (b) Fractional Interests.  In computing adjustments under this
Section 6,  fractional  interests in Common Stock shall be taken into account to
the nearest 1/100th of a share.

                  (c) When Adjustment Not Required.  If the Company shall take a
record of the holders of its Common Stock for the purpose of  entitling  them to
receive a dividend or  distribution  to which the  provisions of Section 6 would
apply,  but  shall,  thereafter  and  before the  distribution  to  stockholders
thereof,   legally  abandon  its  plan  to  pay  or  deliver  such  dividend  or
distribution,  then thereafter no adjustment  shall be required by reason of the
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.

                                       5
<PAGE>

                  (d) Certain  Limitations.  Notwithstanding  anything herein to
the  contrary,  the Company  agrees not to enter into any  transaction  that, by
reason  of any  adjustment  under  the  foregoing  provisions,  would  cause the
Exercise Price to be less than the par value of the Common Stock, if any, unless
the Company  first reduces the par value of the Common Stock to be less than the
Exercise Price that would result from such transaction.

                  (e) Notice of  Adjustments.  Whenever  the number of shares of
Common Stock for which the Warrants are  exercisable or the Exercise Price shall
be adjusted  pursuant to this Section 6, the Company shall  forthwith  prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable  detail,  the event requiring the adjustment and the method
by which such  adjustment  was  calculated,  specifying  the number of shares of
Common Stock for which the Warrants are  exercisable and (if such adjustment was
made pursuant to Section 6.3) describing the number and kind of any other shares
of stock or Other  Property  for which the  Warrants  are  exercisable,  and any
related change in the Exercise Price,  after giving effect to such adjustment or
change. The Company shall promptly cause a signed copy of such certificate to be
delivered to each Holder in  accordance  with Section 14. The Company shall keep
at its principal office copies of all such certificates and cause the same to be
available for  inspection at said office  during  normal  business  hours by any
Holder or any  prospective  transferee  of any Warrants  designated  by a Holder
thereof.

                  (f)  Independent  Application.  Except as  otherwise  provided
herein, all subsections of this Section 6 are intended to operate  independently
of one another (but without  duplication).  If an event occurs that requires the
application of more than one  subsection,  all applicable  subsections  shall be
given independent effect without duplication.

SECTION 7.  Company  Registration.  To the extent  required by law,  the Company
shall register the Warrant Shares under the Securities Act and under  applicable
state securities laws for issuance upon exercise of the Warrants.

SECTION 8.  Representations, Warranties and Covenants of the Company.

                  (a) Due  Authority.  The execution and delivery by the Company
of this Warrant  Agreement and the performance of all obligations of the Company
hereunder,  including  the  issuance  to the  Warrant  Holders  of the  Warrants
representing the right to acquire the Warrant Shares,  have been duly authorized
by all necessary  corporate action on the part of the Company,  and this Warrant
Agreement is not  inconsistent  with the Company's  Charter or Bylaws,  does not
contravene any law of governmental  rule,  regulation or order applicable to it,
does not and will not  contravene  any  provision  of, or  constitute  a default
under,  any indenture,  mortgage,  contract or other instrument to which it is a
party or by which it is bound, and this Warrant  Agreement  constitutes a legal,
valid and binding  agreement of the Company,  enforceable in accordance with its
terms.

                  (b) Consents and Approvals.  No consent or approval of, giving
of notice to, registration with, or taking of any other action in respect of any
state,  Federal  or other  governmental  authority  or agency is  required  with
respect  to the  execution,  delivery  and  performance  by the  Company  of its
obligations  under this Warrant  Agreement,  except for the  registration of the
Warrant Shares under the  Securities  Act and any filing  required by applicable
state  securities  law,  which  filings will be  effective by the time  required
thereby.

                                       6
<PAGE>

SECTION 9.   Certain Definitions.

     As used in this  Warrant  Agreement,  the  following  terms  shall have the
following respective meanings:

     Business Day shall mean any day that is not a  Saturday  or Sunday or a day
          on which banks are required or permitted to be closed in the States of
          California or New York.

     Commission means the Securities and Exchange Commission.

     Common Stock  means the Common  Stock of the  Company,  par value $1.00 per
          share, as constituted on the date of this  Agreement,  and any capital
          stock into which such Common  Stock may  thereafter  be  changed,  and
          shall also include (i) capital stock of the Company of any other class
          (regardless of how denominated) issued to the holders of shares of any
          Common  Stock  upon  any  reclassification  thereof  which is also not
          preferred as to dividends or liquidation over any other class of stock
          of the Company and which is not subject to redemption  and (ii) shares
          of common stock of any successor or acquiring  corporation (as defined
          in Section 6.3 hereof)  received by or  distributed  to the holders of
          Common  Stock of the  Company  in the  circumstances  contemplated  by
          Section 6.3 hereof.

     Exercise Price  shall  mean,  in respect of a share of Common  Stock at any
          date herein  specified,  the initial  Exercise Price set forth in this
          Agreement as adjusted from time to time pursuant to Section 6 hereof.

     Expiration Date means the third  anniversary of the Issuance Date,  subject
          to the last sentence of Section 2.1.

     Issuance Date shall have the meaning provided in Section 2.2.

     Other Property shall have the meaning provided in Section 6.3.

     Outstanding shall mean,  when used with  reference to Common Stock,  at any
          date as of which the number of shares thereof is to be determined, all
          issued shares of Common Stock,  except shares then owned or held by or
          for the account of the Company or any  subsidiary  thereof,  and shall
          include  all shares  issuable in respect of  outstanding  scrip or any
          certificates  representing  fractional  interests  in shares of Common
          Stock.

     Person shall mean any individual, sole proprietorship, partnership, limited
          liability company, joint venture,  trust,  incorporated  organization,
          association,  corporation,  institution,  public benefit  corporation,
          entity or government (whether federal,  state, county, city, municipal
          or otherwise,  including,  without  limitation,  any  instrumentality,
          division, agency, body or department thereof).

     Securities  Act  means  the  Securities  Act of 1933,  as  amended,  or any
          successor act thereto, and the rules and regulations of the Commission
          promulgated  thereunder,  all as the same  shall be in  effect  at the
          time.

SECTION 10.  Fractional  Interests.  The Company  shall not be required to issue
fractional Warrant Shares on the exercise of the Warrants.  If any fraction of a
Warrant Share would,  except for the  provisions of this Section 10, be issuable


                                       7
<PAGE>

on the exercise of the  Warrants (or  specified  portion  thereof),  the Company
shall  pay an  amount in cash  equal to the  closing  price for one share of the
Common Stock on the trading day immediately  preceding the date the Warrants are
presented for exercise, multiplied by such fraction.

SECTION 11. No Rights as Stockholder;  Notices to Holder.  Nothing  contained in
this  Agreement or in the Warrants  shall be  construed as  conferring  upon any
Holder or any transferees  thereof the right to vote or to receive  dividends or
to consent to or receive  notice as a  stockholder  in respect of any meeting of
stockholders  for the election of directors of the Company or any other  matter,
or any rights whatsoever as a stockholder of the Company.

SECTION 12.  Inspection of Warrant  Agreement.  The Company shall keep copies of
this  Agreement  and any  notices  given or  received  hereunder  available  for
inspection by the Holder during normal business hours at its principal office.

SECTION  13.  Identity  of  Transfer  and  Warrant  Agent.  Forthwith  upon  the
appointment  of any subsequent  transfer  agent for the Common Stock,  or of any
other shares of the Company's  capital  stock  issuable upon the exercise of the
Warrants,  or upon the appointment of any successor  Warrant Agent,  the Company
will  notify the  Holders of the name and  address of such  subsequent  transfer
agent or successor Warrant Agent.

SECTION 14. Notices.  Any notice pursuant to this Agreement by any Holder to the
Company or the  Warrant  Agent,  shall be in writing  and shall be mailed  first
class,  postage  prepaid,  or  delivered  to:  (i) in the case of notices to the
Company,  the Company at its office at 4360 Westlake Village,  California 91361,
Attention:  Chief  Financial  Officer  and  (ii) in the case of  notices  to the
Warrant  Agent,  the Warrant Agent at its office at 40 Wall Street,  48th Floor,
New York, New York 10005, Attention: Herbert Lemmer.

                  Each party  hereto may from time to time change the address to
which notices to it are to be delivered or mailed hereunder by notice in writing
to the other party.  Any notice mailed pursuant to this Agreement by the Company
or the  Warrant  Agent to the  Holders  shall be in writing  and shall be mailed
first class,  postage prepaid, or delivered to each Holder at his address on the
Warrant Register maintained by the Warrant Agent.

SECTION 15.  Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE  WITH THE LAWS OF THE STATE OF  CALIFORNIA,  WITHOUT GIVING EFFECT TO
PRINCIPLES  OF  CONFLICT  OF LAWS.  THE  PARTIES  HERETO  AGREE TO SUBMIT TO THE
JURISDICTION  OF THE  COURTS  OF THE  STATE  OF  CALIFORNIA  IN  ANY  ACTION  OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.

SECTION 16.  Supplements and  Amendments.  The Company and the Warrant Agent may
from  time to time  supplement  or  amend  this  Agreement  in order to cure any
ambiguity or to correct or supplement any provision  contained  herein which may
be defective or  inconsistent  with any other provision  herein,  or to make any
other provisions in regard to matters or questions  arising  hereunder which the
Company and the Warrant  Agent may deem  necessary or desirable  and which shall
not be  inconsistent  with the  provisions  of the  Warrants and which shall not
adversely affect the interests of the Holders.

SECTION 17. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company, the Warrant Agent or the Holders of the Warrants
shall bind and inure to the benefit of their  respective  successors and assigns
hereunder.

                                       8
<PAGE>

SECTION 18.  Merger or  Consolidation  of the  Company.  So long as the Warrants
remain  outstanding,  the Company will not merge or consolidate with or into, or
sell,  transfer or lease all or substantially  all of its property to, any other
corporation unless the successor or purchasing  corporation,  as the case may be
(if not the Company), shall expressly assume, by supplemental agreement, the due
and punctual performance and observance of each and every covenant and condition
of this Agreement to be performed and observed by the Company.

SECTION  19.  Benefits of this  Agreement.  Nothing in this  Agreement  shall be
construed to give to any Person other than the  Company,  the Warrant  Agent and
the Holders of the Warrants, any legal or equitable right, remedy or claim under
this Agreement,  but this Agreement shall be for the sole and exclusive  benefit
of the Company, the Warrant Agent and the Holders.

SECTION 20.  Captions.  The captions of the Sections of this Agreement have been
inserted for convenience only and shall have no substantive effect.

SECTION  21.  Counterparts.  This  Agreement  may be  executed  in any number of
counterparts  each of which so executed  shall be deemed to be an original;  but
such counterparts together shall constitute but one and the same instrument.

         IN WITNESS WHEREOF,  the Company and the Warrant Agent have caused this
Agreement to be duly executed as of the day, month and year first above written.

                          THE COMPANY:

                          COYOTE NETWORK SYSTEMS, INC.,
                          a Delaware corporation


                           By:
                           Name:
                           Title:

                           THE WARRANT AGENT:

                           AMERICAN STOCK TRANSFER & TRUST COMPANY


                           By:
                           Name:
                           Title:



                                       9
<PAGE>


                                    EXHIBIT A

                           Form of Warrant Certificate

No. ___                                                          _______ Shares


                          COMMON STOCK PURCHASE WARRANT

                              Void After 5:00 P.M.
                  at New York, New York on _____________, 2002


         THIS CERTIFIES THAT, for value received,  _____________, the registered
holder (the "Holder") of this Common Stock Purchase  Warrant (the  "Warrant") or
registered assigns, is entitled to purchase from Coyote Network Systems, Inc., a
Delaware  corporation (the "Company"),  at any time until 5:00 p.m. at New York,
New York on _______,  2002 (the  "Expiration  Date"),  at the Exercise  Price of
$9.00 per share, if purchased on or prior to _____,  2000,  $10.00 per share, if
purchased  thereafter and on or prior to ______,  2001, or $11.00 per share,  if
purchased  thereafter and on or prior to ________,  2002 (the "Exercise Price"),
________________  shares  (____  shares) of the Common Stock of the Company (the
"Common Stock").  The number of shares purchasable upon exercise of this Warrant
and the  Exercise  Price per share shall be subject to  adjustment  from time to
time as set forth in the Warrant Agreement referred to below.

         This  Warrant  is  issued  under  and  in  accordance  with  a  Warrant
Agreement,  dated as of June 30, 1999, between the Company and the Warrant Agent
and for the  benefit  of the  Warrant  Holders  and is  subject to the terms and
provisions  contained  in the Warrant  Agreement,  to all of which the Holder of
this Warrant by acceptance hereof consents.  A copy of the Warrant Agreement may
be obtained for  inspection  by the Holder  hereof upon  written  request to the
Company.

         This Warrant may be exercised  in whole or in part by  presentation  of
this Warrant with the Purchase Form on the reverse side hereof duly executed and
simultaneous  payment of the  Exercise  Price  (subject  to  adjustment)  at the
principal  office of American  Stock  Transfer & Trust  Company,  as the Warrant
Agent,  in New York,  New York.  Payment of such  price  shall be payable at the
option of the Holder  hereof in cash or by certified  or official  bank check or
wire  transfer.  Terms  relating  to  exercise of the Warrant are set forth more
fully in the Warrant Agreement.

         This  Warrant  may be  exercised  in  whole or in  part.  Upon  partial
exercise,  a Warrant  Certificate for the unexercised portion shall be delivered
to the Holder.  No  fractional  shares will be issued upon the  exercise of this
Warrant  but the  Company  shall  pay the cash  value of any  fraction  upon the
exercise of the  Warrant.  This  Warrant is  transferable  as  described  in the
Warrant  Agreement at the office of the Warrant Agent, in the manner and subject
to the limitations set forth in the Warrant Agreement.


<PAGE>

         The Holder hereof may be treated by the Company,  the Warrant Agent and
all other Persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby, or
to the transfer hereof on the Warrant  Register  maintained by the Warrant Agent
for the  Company.  Any notice to the  contrary  notwithstanding,  and until such
transfer on such Warrant  Register,  the Company and the Warrant Agent may treat
the Holder hereof as the owner for all purposes.

         This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.

         This Warrant shall not be valid for any purpose until  countersigned by
the Warrant Agent by manual signature of one of its authorized officers below.


                                   COYOTE NETWORK SYSTEMS, INC.



                                   By:
                                   Name:
                                   Title:


COUNTERSIGNED AND DATED:


DATED:                             AMERICAN STOCK TRANSFER & TRUST COMPANY,
                                   as Warrant Agent


                                   By:
                                        Authorized Officer


<PAGE>

                                 TRANSFER NOTICE


(To  transfer  or assign the  foregoing  Warrant,  execute  this form and supply
required information. Do not use this form to purchase shares.)

         FOR  VALUE  RECEIVED,  the  foregoing  Warrant  (or a  portion  thereof
corresponding to _________  Warrant Shares) and all rights evidenced thereby are
hereby transferred and assigned to


(Please Print, and include social security or tax ID no.)

whose address is





and the undersigned does hereby irrevocably constitute and appoint

________________________________________________________________ Attorney

to transfer the said Warrant or portion thereof on the books of the within named

Company with full power of substitution in the premises.


                                    Dated:

                                    Holder's Signature:
                                    Holder's Address:

Signature Guaranteed:





NOTE: The signature on this Transfer  Notice must correspond with the name as it
appears on the face of the Warrant,  without  altercation  or enlargement or any
change  whatever.  Officers of  corporations  and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.


<PAGE>


                                    Exhibit B

                                  PURCHASE FORM

         The  undersigned  hereby  irrevocably  elects to exercise  the right of
purchase  represented  by the within  Warrant for,  and to purchase  thereunder,
_______________  shares of the stock provided for therein,  and tenders herewith
payment of the Exercise Price in full in the form of cash or by cashier's  check
in the amount of $______________,  or as otherwise provided in the Warrant.  (In
the case of any partial  exercise of this Warrant,  the exercise  shall be for a
whole number of Warrant Shares only.)

         The undersigned requests that certificates for such shares be issued in
the name of:

==============================================================================
- ------------------------------------------------------------------------------
              (Please Print Name, Address and Social Security No.)

DATED:

Name of Warrant Holder or Permitted Assignee:
- ------------------------------------------------------------------------------

Address:
==============================================================================
Signature:


Note:    The above  signature must  correspond with the name as written upon the
         face  of  this  Warrant   Certificate  in  every  particular,   without
         alteration or enlargement or any change whatever.

Signature Guaranteed by: ____________________________________________________





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